Filed Pursuant to Rule 424(b)(3)
Registration No. 333-31933
NOR'WESTER BREWING COMPANY, INC.
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
AVIATOR ALES, INC.
BAYHAWK ALES, INC.
MILE HIGH BREWING COMPANY
July 24, 1997
Dear Stockholder:
An Annual Meeting of Stockholders of Nor'Wester Brewing Company, Inc.
("Nor'Wester"), Willamette Valley, Inc. Microbreweries Across America ("WVI"),
Aviator Ales, Inc. ("Aviator"), Bayhawk Ales, Inc. ("Bayhawk") and Mile High
Brewing Company ("Mile High") will be held at the places and times set forth in
the accompanying Notices of Annual Meeting of Stockholders for your respective
company.
At the Annual Meetings you will be asked to consider and vote upon a
proposal (the "Consolidation Proposal") to approve and adopt an Agreement and
Plan of Merger (the "Merger Agreement") providing for the merger of wholly-owned
subsidiaries of United Craft Brewers, Inc. ("UCB") with and into Nor'Wester,
Aviator, Bayhawk and Mile High, respectively, and the merger of WVI with and
into UCB (each a "Merger", and collectively, the "Consolidation"), pursuant to
which, among other things, (a) each share of common stock, no par value, of
Nor'Wester ("Nor'Wester Common Stock"), each share of common stock, par value
$.01 per share, of WVI ("WVI Common Stock"), each share of common stock, par
value $.001 per share of Aviator ("Aviator Common Stock"), each share of common
stock, par value $.001 per share, of Bayhawk ("Bayhawk Common Stock") and each
share of common stock, par value $.001 per share, of Mile High ("Mile High
Common Stock") outstanding at the effective time of each Merger (other than
shares of Aviator Common Stock, Bayhawk Common Stock and Mile High Common Stock
owned by WVI) will be converted into the right to receive 0.3333333, 0.0785714,
0.0523809, 0.0785714, and 0.0523809 shares, respectively, of common stock, par
value $.001 per share, of UCB ("UCB Common Stock"); (b) all outstanding options
and warrants to purchase shares of Nor'Wester Common Stock, WVI Common Stock,
Aviator Common Stock, Bayhawk Common Stock and Mile High Common Stock will be
assumed by UCB and become options and warrants to purchase UCB Common Stock; and
(c) Nor'Wester, Aviator, Bayhawk and Mile High will become wholly-owned
subsidiaries of UCB and WVI will merge with and into UCB with UCB being the
surviving entity. United Breweries of America, Inc. ("UBA") has agreed upon the
terms and conditions set forth in the Investment Agreement, as amended (the
"Investment Agreement") attached as Annex A to the Proxy Statement/Prospectus,
upon consummation of the Consolidation to (i) purchase 1,047,619 shares of UCB
Common Stock for $5,500,000 and (ii) receive 83,109 shares of UCB Common Stock
from Mr. James Bernau as partial consideration for entering into the Investment
Agreement. The investment by UBA in UCB (the "Investment") is more fully
described in the Investment Agreement.
Your Board of Directors unanimously approved the Consolidation and the
transactions related thereto, including the Investment, and has determined that
they are in the best interests of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High, respectively, and its stockholders. After careful consideration, your
Board of Directors unanimously recommends that stockholders vote FOR the
Consolidation Proposal.
In addition, you will be asked to elect persons to serve as directors of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High until the next annual meeting of
stockholders of each respective company or until their successors are elected
and qualified, and to ratify the appointment of Price Waterhouse LLP as
independent public accountants of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High for the fiscal year ending December 31, 1997. If the Consolidation Proposal
is approved and the Consolidation is consummated, however, the persons elected
to serve as directors of Nor'Wester, WVI, Aviator, Bayhawk and Mile High will
serve the respective companies only until the effective time of the
Consolidation. Your Board of Directors unanimously recommends that stockholders
vote FOR the election of the directors named in the
Proxy Statement/Prospectus and the selection of Price Waterhouse LLP as the
independent public accountants.
In the materials accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the actions to
be taken by you at the Annual Meeting and a proxy card. The Proxy
Statement/Prospectus more fully describes the proposed Consolidation.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. HOW-
EVER, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE
ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED
AND VOTED AT THE ANNUAL MEETING.
Sincerely,
James W. Bernau
Chairman of the Board and President
Nor'Wester Brewing Company, Inc.
Willamette Valley, Inc. Microbreweries
Across
America
Aviator Ales, Inc.
Bayhawk Ales, Inc.
Mile High Brewing Company
2
NOR'WESTER BREWING COMPANY, INC.
66 S.E. MORRISON STREET
PORTLAND, OREGON 97214
(503) 232-9771
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, AUGUST 25, 1997
---------------------
Notice is hereby given that an Annual Meeting of Stockholders of Nor'Wester
Brewing Company, Inc. ("Nor'Wester") will be held on Monday, August 25, 1997, at
9:00 a.m., local time, at the Portland Conference Center located at 300
Multnomah Street, Portland, Oregon, for the following purposes:
(1) To consider and vote upon a proposal (the "Consolidation Proposal") to
approve and adopt an Agreement and Plan of Merger, dated as of May 14,
1997 (the "Merger Agreement"), among Nor'Wester, Willamette Valley, Inc.
Microbreweries Across America, Aviator Ales, Inc., Bayhawk Ales, Inc.,
Mile High Brewing Company, and United Craft Brewers, Inc. ("UCB"), and
Nor'Wester Acquisition Sub, Inc. ("Merger Sub1"), Aviator Acquisition
Sub, Inc., Bayhawk Acquisition Sub, Inc. and Mile High Acquisition Sub,
Inc., each a wholly owned subsidiary of UCB, and the transactions
contemplated thereby, pursuant to which Merger Agreement, among other
things, (i) Merger Sub1 will be merged with and into Nor'Wester,
following which Nor'Wester will become a wholly owned subsidiary of UCB
(the "Merger"), (ii) as a result of the Merger, each share of common
stock, no par value, of Nor'Wester ("Nor'Wester Common Stock")
outstanding at the effective time of the Merger will be converted into
the right to receive 0.3333333 shares of common stock, par value $.001
per share of UCB ("UCB Common Stock"); and (iii) all outstanding options
and warrants to purchase Nor'Wester Common Stock will be assumed by UCB
and become options and warrants to purchase UCB Common Stock;
(2) To elect five directors to the Board of Directors to serve until the
next annual meeting of stockholders or until their successors are elected
and qualified; provided, however, that if the Merger Agreement is
approved and the Merger is consummated, such persons will serve as
directors only until the Merger is consummated;
(3) To ratify the appointment of Price Waterhouse LLP as Nor'Wester's
independent public accountants for the fiscal year ending December 31,
1997; and
(4) To transact such other business that may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on July 21, 1997 are
entitled to notice of and to vote at the Annual Meeting, or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of Nor'Wester Common Stock is required for the approval
of the Merger. Directors shall be elected by a plurality of votes present in
person or represented by proxy at the Annual Meeting and entitled to vote on the
election of directors.
Under the Oregon Business Corporation Act, stockholders of Nor'Wester will
not have the right to assert dissenters' rights of appraisal in connection with
the proposed Merger. See "Appraisal Rights" in the Proxy Statement/Prospectus
accompanying this notice.
A complete list of stockholders entitled to vote at the Annual Meeting will
be available for examination at Nor'Wester's principal executive offices, for
any purposes germane to the Annual Meeting, during ordinary business hours, for
a period of at least 10 days prior to the Annual Meeting.
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF NOR'WESTER
COMMON STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL
MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN
WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT
ANY TIME BEFORE IT IS VOTED.
July 24, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James W. Bernau
Chairman of the Board and President
Nor'Wester Brewing Company, Inc.
PLEASE DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
2
WILLAMETTE VALLEY, INC. MICROBREWERIES
ACROSS AMERICA
66 S.E. MORRISON STREET
PORTLAND, OREGON 97214
(503) 231-7616
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, AUGUST 25, 1997
---------------------
Notice is hereby given that an Annual Meeting of Stockholders of Willamette
Valley, Inc. Microbreweries Across America ("WVI") will be held on Monday,
August 25, 1997, at 11:00 a.m., local time, at the Portland Conference Center
located at 300 Multnomah Street, Portland, Oregon, for the following purposes:
(1) To consider and vote upon a proposal (the "Consolidation Proposal") to
approve and adopt an Agreement and Plan of Merger, dated as of May 14,
1997 (the "Merger Agreement"), among Nor'Wester Brewing Company, Inc.,
WVI, Aviator Ales, Inc., Bayhawk Ales, Inc., Mile High Brewing Company
and United Craft Brewers, Inc. ("UCB"), and Nor'Wester Acquisition Sub,
Inc., Aviator Acquisition Sub, Inc., Bayhawk Acquisition Sub, Inc. and
Mile High Acquisition Sub, Inc., each a wholly owned subsidiary of UCB,
and the transactions contemplated thereby, pursuant to which Merger
Agreement, among other things, (i) WVI will be merged with and into UCB,
with UCB being the surviving corporation (the "Merger"), (ii) as a result
of the Merger, each share of common stock, par value $.01 per share, of
WVI ("WVI Common Stock") outstanding at the effective time of the Merger
will be converted into the right to receive 0.0785714 shares of common
stock, par value $.001 per share of UCB ("UCB Common Stock"); (iii) all
outstanding options and warrants to purchase WVI Common Stock will be
assumed by UCB and become options and warrants to purchase UCB Common
Stock; and (iv) the shares of WVI Common Stock owned by James W. Bernau
and James F. Hensel will be released from an escrow agreement with the
Department of Consumer and Business Affairs of the State of Oregon.
(2) To elect six directors to the Board of Directors to serve until the next
annual meeting of stockholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved
and the Merger is consummated, such persons will serve as directors only
until the Merger is consummated;
(3) To ratify the appointment of Price Waterhouse LLP as WVI's independent
public accountants for the fiscal year ending December 31, 1997; and
(4) To transact such other business that may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on July 21, 1997 are
entitled to notice of and to vote at the Annual Meeting, or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of WVI Common Stock is required for the approval of the
Merger. Directors shall be elected by a plurality of votes present in person or
represented by proxy at the Annual Meeting and entitled to vote on the election
of directors. In addition, the affirmative vote of a majority of the shares of
WVI Common Stock not held by James W. Bernau and James F. Hensel will be
required to release the shares of WVI Common Stock held by Messrs. Bernau and
Hensel which are subject to escrow or transfer restrictions.
Under the Oregon Business Corporation Act, stockholders of WVI will have the
right to assert dissenters' rights of appraisal in connection with the proposed
Merger. See "Appraisal Rights" in the Proxy Statement/Prospectus accompanying
this notice.
A complete list of stockholders entitled to vote at the Annual Meeting will
be available for examination at WVI's principal executive offices, for any
purposes germane to the Annual Meeting, during ordinary business hours, for a
period of at least 10 days prior to the Annual Meeting.
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF WVI COMMON
STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN
PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT
DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED
IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW
YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
July 24, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James W. Bernau
Chairman of the Board and President
Willamette Valley, Inc. Microbreweries
Across
America
PLEASE DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
2
AVIATOR ALES, INC.
66 S.E. MORRISON STREET
PORTLAND, OREGON 97214
(503) 231-7616
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, AUGUST 25, 1997
------------------------
Notice is hereby given that an Annual Meeting of Stockholders of Aviator
Ales, Inc. ("Aviator") will be held on Monday, August 25, 1997, at 1:00 p.m.,
local time, at the Portland Conference Center located at 300 Multnomah Street,
Portland, Oregon, for the following purposes:
(1) To consider and vote upon a proposal (the "Consolidation Proposal") to
approve and adopt an Agreement and Plan of Merger, dated as of May 14,
1997 (the "Merger Agreement"), among Nor'Wester Brewing Company, Inc.,
Willamette Valley, Inc. Microbreweries Across America ("WVI"), Aviator,
Bayhawk Ales, Inc., Mile High Brewing Company and United Craft Brewers,
Inc. ("UCB"), and Nor'Wester Acquisition Sub, Inc., Aviator Acquisition
Sub, Inc. ("Merger Sub2"), Bayhawk Acquisition Sub, Inc. and Mile High
Acquisition Sub, Inc., each a wholly owned subsidiary of UCB, and the
transactions contemplated thereby, pursuant to which Merger Agreement,
among other things, (i) Merger Sub2 will be merged with and into Aviator,
following which Aviator will become a wholly owned subsidiary of UCB (the
"Merger"), (ii) as a result of the Merger, each share of common stock,
par value $.001 per share, of Aviator ("Aviator Common Stock")
outstanding at the effective time of the Merger (except for shares of
Aviator Common Stock owned by WVI, which will be cancelled) will be
converted into the right to receive 0.0523809 shares of common stock, par
value $.001 per share of UCB ("UCB Common Stock"); and (iii) all
outstanding options and warrants to purchase Aviator Common Stock will be
assumed by UCB and become options and warrants to purchase UCB Common
Stock;
(2) To elect six directors to the Board of Directors to serve until the next
annual meeting of stockholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved
and the Merger is consummated, such persons will serve as directors only
until the Merger is consummated;
(3) To ratify the appointment of Price Waterhouse LLP as Aviator's
independent public accountants for the fiscal year ending December 31,
1997; and
(4) To transact such other business that may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on July 21 , 1997 are
entitled to notice of and to vote at the Annual Meeting, or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of Aviator Common Stock is required for the approval of
the Merger. Directors shall be elected by a plurality of votes present in person
or represented by proxy at the Annual Meeting and entitled to vote on the
election of directors.
Under the Delaware General Corporation Law, stockholders of Aviator will
have not have the right to assert dissenters' rights of appraisal in connection
with the proposed Merger. See "Appraisal Rights" in the Proxy
Statement/Prospectus accompanying this notice.
A complete list of stockholders entitled to vote at the Annual Meeting will
be available for examination at Aviator's principal executive offices, for any
purposes germane to the Annual Meeting, during ordinary business hours, for a
period of at least 10 days prior to the Annual Meeting.
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF AVIATOR COMMON
STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN
PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT
DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED
IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW
YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
July 24, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James W. Bernau
Chairman of the Board and President
Aviator Ales, Inc.
PLEASE DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
2
BAYHAWK ALES, INC.
66 S.E. MORRISON STREET
PORTLAND, OREGON 97214
(503) 232-9771
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, AUGUST 25, 1997
------------------------
Notice is hereby given that an Annual Meeting of Stockholders of Bayhawk
Ales, Inc. ("Bayhawk") will be held on Monday, August 25, 1997, at 2:00 p.m.,
local time, at the Portland Conference Center located at 300 Multnomah Street,
Portland, Oregon, for the following purposes:
(1) To consider and vote upon a proposal (the "Consolidation Proposal") to
approve and adopt an Agreement and Plan of Merger, dated as of May 14,
1997 (the "Merger Agreement"), among Nor'Wester Brewing Company, Inc.,
Willamette Valley, Inc. Microbreweries Across America ("WVI"), Aviator
Ales, Inc., Bayhawk, Mile High Brewing Company and United Craft Brewers,
Inc. ("UCB"), and Nor'Wester Acquisition Sub, Inc., Aviator Acquisition
Sub, Inc., Bayhawk Acquisition Sub, Inc. ("Merger Sub3"), and Mile High
Acquisition Sub, Inc., each a wholly owned subsidiary of UCB, and the
transactions contemplated thereby, pursuant to which Merger Agreement,
among other things, (i) Merger Sub3 will be merged with and into Bayhawk,
following which Bayhawk will become a wholly owned subsidiary of UCB (the
"Merger"), (ii) as a result of the Merger, each share of common stock,
par value $.001 per share, of Bayhawk ("Bayhawk Common Stock")
outstanding at the effective time of the Merger (except for shares of
Bayhawk Common Stock owned by WVI, which will be cancelled) will be
converted into the right to receive 0.0785714 shares of common stock, par
value $.001 per share of UCB ("UCB Common Stock"); and (iii) all
outstanding options and warrants to purchase Bayhawk Common Stock will be
assumed by UCB and become options and warrants to purchase UCB Common
Stock;
(2) To elect seven directors to the Board of Directors to serve until the
next annual meeting of stockholders or until their successors are elected
and qualified; provided, however, that if the Merger Agreement is
approved and the Merger is consummated, such persons will serve as
directors only until the Merger is consummated;
(3) To ratify the appointment of Price Waterhouse LLP as Bayhawk's
independent public accountants for the fiscal year ending December 31,
1997; and
(4) To transact such other business that may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on July 21, 1997 are
entitled to notice of and to vote at the Annual Meeting, or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of Bayhawk Common Stock is required for the approval of
the Merger. Directors shall be elected by a plurality of votes present in person
or represented by proxy at the Annual Meeting and entitled to vote on the
election of directors.
Under the Delaware General Corporation Law, stockholders of Bayhawk will
have the right to assert dissenters' rights of appraisal in connection with the
proposed Merger. See "Appraisal Rights" in the Proxy Statement/Prospectus
accompanying this notice.
A complete list of stockholders entitled to vote at the Annual Meeting will
be available for examination at Bayhawk's principal executive offices, for any
purposes germane to the Annual Meeting, during ordinary business hours, for a
period of at least 10 days prior to the Annual Meeting.
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF BAYHAWK COMMON
STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN
PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT
DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED
IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN WITHDRAW
YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
July 24, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James W. Bernau
Chairman of the Board and President
Bayhawk Ales, Inc.
PLEASE DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
2
MILE HIGH BREWING COMPANY
66 S.E. MORRISON STREET
PORTLAND, OREGON 97214
(503) 232-9771
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, AUGUST 25, 1997
------------------------
Notice is hereby given that an Annual Meeting of Stockholders of Mile High
Brewing Company ("Mile High") will be held on Monday, August 25, 1997, at 3:00
p.m., local time, at the Portland Conference Center located at 300 Multnomah
Street, Portland, Oregon, for the following purposes:
(1) To consider and vote upon a proposal (the "Consolidation Proposal") to
approve and adopt an Agreement and Plan of Merger, dated as of May 14,
1997 (the "Merger Agreement"), among Nor'Wester Brewing Company, Inc.,
Willamette Valley, Inc. Microbreweries Across America ("WVI"), Aviator
Ales, Inc., Bayhawk Ales, Inc., Mile High, and United Craft Brewers, Inc.
("UCB"), and Nor'Wester Acquisition Sub, Inc., Aviator Acquisition Sub,
Inc., Bayhawk Acquisition Sub, Inc. and Mile High Acquisition Sub, Inc.
("Merger Sub4"), each a wholly owned subsidiary of UCB, and the
transactions contemplated thereby, pursuant to which Merger Agreement,
among other things, (i) Merger Sub4 will be merged with and into Mile
High, following which Mile High will become a wholly owned subsidiary of
UCB (the "Merger"), (ii) as a result of the Merger, each share of common
stock, par value $.001 per share, of Mile High ("Mile High Common Stock")
outstanding at the effective time of the Merger (except for shares of
Mile High Common Stock owned by WVI, which will be cancelled) will be
converted into the right to receive 0.0523809 shares of common stock, par
value $.001 per share of UCB ("UCB Common Stock"); and (iii) all
outstanding options and warrants to purchase Mile High Common Stock will
be assumed by UCB and become options and warrants to purchase UCB Common
Stock;
(2) To elect one director to the Board of Directors to serve until the next
annual meeting of stockholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved
and the Merger is consummated, such persons will serve as directors only
until the Merger is consummated;
(3) To ratify the appointment of Price Waterhouse LLP as Mile High's
independent public accountants for the fiscal year ending December 31,
1997; and
(4) To transact such other business that may properly come before the Annual
Meeting or any postponements or adjournments thereof.
Only stockholders of record at the close of business on July 21, 1997 are
entitled to notice of and to vote at the Annual Meeting, or at any postponements
or adjournments thereof. The affirmative vote of the holders of a majority of
the outstanding shares of Mile High Common Stock is required for the approval of
the Merger. Directors shall be elected by a plurality of votes present in person
or represented by proxy at the Annual Meeting and entitled to vote on the
election of directors.
Under the Delaware General Corporation Law, stockholders of Mile High will
not have the right to assert dissenters' rights of appraisal in connection with
the proposed Merger. See "Appraisal Rights" in the Proxy Statement/Prospectus
accompanying this notice.
A complete list of stockholders entitled to vote at the Annual Meeting will
be available for examination at Mile High's principal executive offices, for any
purposes germane to the Annual Meeting, during ordinary business hours, for a
period of at least 10 days prior to the Annual Meeting.
IMPORTANT
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF MILE HIGH
COMMON STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL
MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY THEN
WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT
ANY TIME BEFORE IT IS VOTED.
July 24, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James W. Bernau
Chairman of the Board and President
Mile High Brewing Company
PLEASE DO NOT SEND IN ANY
STOCK CERTIFICATES AT THIS TIME.
2
NOR'WESTER BREWING COMPANY, INC.
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
AVIATOR ALES, INC.
BAYHAWK ALES, INC.
MILE HIGH BREWING COMPANY
PROXY STATEMENT
------------------
UNITED CRAFT BREWERS, INC.
PROSPECTUS
1,951,301 SHARES OF COMMON STOCK
---------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, no par value ("Nor'Wester Common Stock"), of Nor'Wester Brewing Company,
Inc., an Oregon corporation ("Nor'Wester"), holders of common stock, par value
$.01 per share ("WVI Common Stock"), of Willamette Valley, Inc. Microbreweries
Across America, an Oregon corporation ("WVI"), holders of common stock, par
value $.001 per share ("Aviator Common Stock"), of Aviator Ales, Inc., a
Delaware corporation ("Aviator"), holders of common stock, par value $.001 per
share ("Bayhawk Common Stock"), of Bayhawk Ales, Inc., a Delaware corporation
("Bayhawk"), and holders of common stock, par value $.001 per share ("Mile High
Common Stock"), of Mile High Brewing Company, a Delaware corporation ("Mile
High"), in connection with the solicitation of proxies by the Boards of
Directors of Nor'Wester (the "Nor'Wester Board"), WVI (the "WVI Board"), Aviator
(the "Aviator Board"), Bayhawk (the "Bayhawk Board") and Mile High (the "Mile
High Board") for use at (i) the annual meeting of the stockholders of Nor'Wester
(the "Nor'Wester Annual Meeting") to be held at 9:00 a.m., local time, on
Monday, August 25, 1997, or at any adjournments or postponements thereof, (ii)
the annual meeting of the stockholders of WVI (the "WVI Annual Meeting") to be
held at 11:00 a.m., local time, on Monday, August 25, 1997, or at any
adjournments or postponements thereof, (iii) the annual meeting of the
stockholders of Aviator (the "Aviator Annual Meeting") to be held at 1:00 p.m.,
local time, on Monday, August 25, 1997, or at any adjournments or postponements
thereof, (iv) the annual meeting of the stockholders of Bayhawk (the "Bayhawk
Annual Meeting") to be held at 2:00 p.m., local time, on Monday, August 25,
1997, or at any adjournments or postponements thereof, and (v) the annual
meeting of the stockholders of Mile High (the "Mile High Annual Meeting") to be
held at 3:00 p.m., local time, on Monday, August 25, 1997, or at any
adjournments or postponements thereof, for the purposes set forth herein and in
the accompanying Notices of Annual Meeting of Stockholders. The Nor'Wester
Annual Meeting will be held at the Portland Conference Center, 300 Multnomah
Street, Portland, Oregon. The WVI Annual Meeting will be held at the Portland
Conference Center, 300 Multnomah Street, Portland, Oregon. The Aviator Annual
Meeting will be held at the Portland Conference Center, 300 Multnomah Street,
Portland, Oregon. The Bayhawk Annual Meeting will be held at the Portland
Conference Center, 300 Multnomah Street, Portland, Oregon. The Mile High Annual
Meeting will be held at the Portland Conference Center, 300 Multnomah Street,
Portland, Oregon.
This Proxy Statement/Prospectus constitutes a prospectus of United Craft
Brewers, Inc. ("UCB") with respect to up to 1,951,301 shares of UCB common
stock, par value $.001 per share ("UCB Common Stock"), to be issued in
connection with the merger of Nor'Wester Acquisition Sub, Inc. ("Merger Sub1"),
Aviator Acquisition Sub, Inc. ("Merger Sub2"), Bayhawk Acquisition Sub, Inc.
("Merger Sub3") and Mile High Acquisition Sub, Inc. ("Merger Sub4"), with and
into Nor'Wester, Aviator, Bayhawk and Mile High, respectively, and the merger of
WVI with and into UCB (each a "Merger", and collectively, the "Consolidation"),
pursuant to the Agreement and Plan of Merger, dated as of April 21, 1997 (the
"Merger Agreement"), among Nor'Wester, WVI, Aviator, Bayhawk, Mile High, UCB and
Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4. Application has been made
to have UCB Common Stock listed on the Nasdaq Small Cap Market, subject to
official notice of issuance.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THE PROXY STATEMENT/PROSPECTUS.
HOLDERS OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH COMMON STOCK ARE
STRONGLY URGED TO READ AND CAREFULLY CONSIDER THIS PROXY STATEMENT/PROSPECTUS IN
ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 23.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
on or about August 1, 1997.
The date of this Proxy Statement/Prospectus is July 24, 1997.
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION...................................................................................... 2
NO AUTHORIZATION........................................................................................... 2
FORWARD-LOOKING STATEMENTS................................................................................. 3
SUMMARY.................................................................................................... 4
RISK FACTORS............................................................................................... 23
Consolidation Strategy................................................................................... 23
Recent Losses............................................................................................ 23
Failure to Realize Anticipated Economies of Scale........................................................ 24
Acquisition Risks........................................................................................ 24
Capital Requirements..................................................................................... 25
Merger Expenses and Consolidation Charges................................................................ 25
Tax Risks................................................................................................ 26
Risks Relating to Failure to Approve the Merger Agreement and Consolidation.............................. 26
Dependence Upon Bridge Loans and Investment from United Breweries of America, Inc........................ 26
Amounts Past Due to Contractors, Suppliers and Equipment Vendors......................................... 27
Risks of Debt and Default on Bank Loans by Nor'Wester.................................................... 27
Maturing Markets......................................................................................... 27
Variability of Margins and Operating Results............................................................. 28
Conflicts of Interest.................................................................................... 28
Increasing Competition................................................................................... 28
Dependence on Third-Party Distributors................................................................... 29
Dependence on Certain Suppliers.......................................................................... 29
Dependence on Key Personnel.............................................................................. 30
Operating Hazards........................................................................................ 30
Public Attitudes......................................................................................... 30
Dram Shop Liability...................................................................................... 30
Government Regulation; Taxation.......................................................................... 31
Control by Stockholders.................................................................................. 31
Uncertainty of Market Value of UCB Common Stock.......................................................... 31
Trading Market for UCB Common Stock; Possible Volatility of UCB Common Stock Price....................... 31
Effect of Certain Anti-Takeover Provisions; Potential Issuance of Preferred Stock........................ 32
Absence of Dividends..................................................................................... 32
THE ANNUAL MEETINGS........................................................................................ 33
Time, Place and Date of the Annual Meetings.............................................................. 33
Purposes of the Annual Meetings.......................................................................... 33
Record Date; Voting Rights............................................................................... 33
Proxies; Revocation of Proxies........................................................................... 37
UNITED CRAFT BREWERS, INC.................................................................................. 37
THE CONSOLIDATION AND INVESTMENT BY UBA.................................................................... 39
General.................................................................................................. 39
Background of the Consolidation and Investment by UBA.................................................... 39
Nor'Wester's Reasons for the Consolidation; Recommendations of the Board of Directors of Nor'Wester...... 45
WVI's Reasons for the Consolidation; Recommendations of the Board of Directors of WVI.................... 48
Aviator's Reasons for the Consolidation; Recommendations of the Board of Directors of Aviator............ 50
i
PAGE
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Bayhawk's Reasons for the Consolidation; Recommendations of the Board of Directors of Bayhawk............ 53
Mile High's Reasons for the Consolidation; Recommendations of the Board of Directors of Mile High........ 55
Failure to Approve the Consolidation..................................................................... 57
Opinion of Needham & Company, Inc........................................................................ 58
Opinions of Black & Company.............................................................................. 61
Interests of Certain Persons in the Consolidation and the Investment..................................... 65
Accounting Treatment..................................................................................... 68
Certain Federal Income Tax Considerations................................................................ 68
Regulatory Approvals..................................................................................... 70
Federal Securities Law Consequences...................................................................... 71
The Nasdaq Small Cap Market.............................................................................. 71
INVESTMENT AGREEMENT AND MERGER AGREEMENT.................................................................. 72
Investment by UBA........................................................................................ 72
Effective Time of Merger................................................................................. 72
Conversion of Shares..................................................................................... 72
Treatment of Stock Options and Warrants.................................................................. 73
Business of Nor'Wester, WVI, Aviator, Bayhawk and Mile High Pending the Consolidation and Investment..... 73
Solicitation of Other Proposals.......................................................................... 75
Corporate Structure and Related Matters After the Merger................................................. 75
Conditions to the Consolidation and Investment by UBA.................................................... 75
Termination; Amendment................................................................................... 76
Fees and Expenses........................................................................................ 76
ANCILLARY AGREEMENTS....................................................................................... 77
Bernau Employment Agreement.............................................................................. 77
Registration Rights Agreement............................................................................ 77
Security Agreement....................................................................................... 77
Mallya Employment Agreement.............................................................................. 78
Stockholder's Agreement.................................................................................. 79
Brewing Agreement........................................................................................ 80
APPRAISAL RIGHTS........................................................................................... 81
UNITED CRAFT BREWERS, INC.:
MANAGEMENT............................................................................................... 86
PRINCIPAL SHAREHOLDERS................................................................................... 88
PRO FORMA COMBINED FINANCIAL INFORMATION................................................................. 89
GENERAL DESCRIPTION OF THE CRAFT BREWING INDUSTRY AND THE BUSINESSES OF THE CONSTITUENT CORPORATIONS..... 95
NOR'WESTER:
SELECTED FINANCIAL INFORMATION........................................................................... 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 100
BUSINESS................................................................................................. 104
MARKET PRICE OF AND DIVIDENDS ON NOR'WESTER COMMON STOCK................................................. 107
MANAGEMENT............................................................................................... 108
EXECUTIVE COMPENSATION................................................................................... 111
CERTAIN TRANSACTIONS..................................................................................... 112
ELECTION OF NOR'WESTER DIRECTORS......................................................................... 116
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 116
ii
PAGE
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WVI:
SELECTED FINANCIAL INFORMATION........................................................................... 117
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 118
BUSINESS................................................................................................. 122
MARKET PRICE OF AND DIVIDENDS ON WVI COMMON STOCK........................................................ 125
MANAGEMENT............................................................................................... 125
EXECUTIVE COMPENSATION................................................................................... 129
CERTAIN TRANSACTIONS..................................................................................... 130
PRINCIPAL SHAREHOLDERS................................................................................... 133
ELECTION OF WVI DIRECTORS................................................................................ 134
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 134
AVIATOR:
SELECTED FINANCIAL INFORMATION........................................................................... 135
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 136
BUSINESS................................................................................................. 139
MARKET PRICE OF AND DIVIDENDS ON AVIATOR COMMON STOCK.................................................... 141
MANAGEMENT............................................................................................... 141
EXECUTIVE COMPENSATION................................................................................... 144
CERTAIN TRANSACTIONS..................................................................................... 145
PRINCIPAL STOCKHOLDERS................................................................................... 146
ELECTION OF AVIATOR DIRECTORS............................................................................ 148
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 148
BAYHAWK:
SELECTED FINANCIAL INFORMATION........................................................................... 149
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 150
BUSINESS................................................................................................. 153
MARKET PRICE OF AND DIVIDENDS ON BAYHAWK COMMON STOCK.................................................... 154
MANAGEMENT............................................................................................... 155
EXECUTIVE COMPENSATION................................................................................... 157
CERTAIN TRANSACTIONS..................................................................................... 158
PRINCIPAL STOCKHOLDERS................................................................................... 159
ELECTION OF BAYHAWK DIRECTORS............................................................................ 160
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 160
MILE HIGH:
SELECTED FINANCIAL INFORMATION........................................................................... 161
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 162
BUSINESS................................................................................................. 165
MARKET PRICE OF AND DIVIDENDS ON MILE HIGH COMMON STOCK.................................................. 166
MANAGEMENT............................................................................................... 167
EXECUTIVE COMPENSATION................................................................................... 168
CERTAIN TRANSACTIONS..................................................................................... 169
PRINCIPAL STOCKHOLDERS................................................................................... 170
ELECTION OF MILE HIGH DIRECTORS.......................................................................... 171
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 171
DESCRIPTION OF UCB CAPITAL STOCK........................................................................... 172
Common Stock............................................................................................. 172
iii
PAGE
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Preferred Stock.......................................................................................... 172
Section 203 of the Delaware General Corporation Law...................................................... 172
Certain Other Provisions of the Certificate of Incorporation and By-Laws................................. 173
Transfer Agent and Registrar............................................................................. 173
COMPARISON OF THE RIGHTS OF HOLDERS OF UCB COMMON STOCK AND NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH
COMMON STOCK............................................................................................. 174
LEGAL MATTERS.............................................................................................. 181
EXPERTS.................................................................................................... 181
OTHER MATTERS.............................................................................................. 181
STOCKHOLDER PROPOSALS...................................................................................... 181
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
ANNEX A INVESTMENT AGREEMENT
ANNEX B AGREEMENT AND PLAN OF MERGER
ANNEX C OPINION OF NEEDHAM & COMPANY, INC.
ANNEX D OPINION OF BLACK & COMPANY
ANNEX E UCB CERTIFICATE OF INCORPORATION
ANNEX F OREGON BUSINESS CORPORATION ACT SECTIONS 60.551-60.594
ANNEX G DELAWARE GENERAL CORPORATION LAW SECTION 262
iv
AVAILABLE INFORMATION
Nor'Wester, WVI, Aviator, Bayhawk and Mile High (sometimes referred to
herein collectively as the "Constituent Corporations") are each subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, Washington, D.C. 20549 at prescribed rates. The Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. In addition,
Nor'Wester Common Stock is traded on the Nasdaq National Market under the symbol
"ALES" and material filed by Nor'Wester can be inspected at the offices of the
National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
All disclosures contained in this Proxy Statement/Prospectus regarding
Nor'Wester, WVI, Aviator, Bayhawk and Mile High including the information
derived from the publicly available documents described in the preceding
paragraph, has been provided by such corporations. Neither UCB nor UBA makes any
representation that such information or any other publicly available information
regarding Nor'Wester, WVI, Aviator, Bayhawk or Mile High is accurate or
complete.
UCB has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Proxy Statement/Prospectus or in any
document incorporated by reference in this Proxy Statement/Prospectus as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement and the exhibits and schedules
thereto may be obtained, upon payment of the fee prescribed by the Commission,
or may be examined without charge at the Commission's principal office in
Washington, D.C.
THIS PROXY STATEMENT/PROSPECTUS ALSO SERVES AS THE 1996 ANNUAL REPORT TO THE
SHAREHOLDERS OF EACH OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH.
SHAREHOLDERS OF EACH CONSTITUENT CORPORATION MAY REQUEST AND RECEIVE A COPY OF
THE ANNUAL REPORT FOR THEIR RESPECTIVE CONSTITUENT CORPORATION AS FILED WITH THE
COMMISSION ON FORM 10-KSB, INCLUDING THE FINANCIAL STATEMENTS FOR SUCH
CORPORATION. THE ANNUAL REPORT WILL BE MAILED AT NO CHARGE UPON REQUEST.
REQUESTS SHOULD BE SENT TO "INVESTOR RELATIONS, 66 S.E. MORRISON STREET,
PORTLAND, OREGON 97214." ANY REQUEST SHOULD STATE THE NAME OF THE CONSTITUENT
CORPORATION FOR WHICH THE ANNUAL REPORT IS REQUESTED AND THE NAME AND MAILING
ADDRESS OF THE SHAREHOLDER MAKING THE REQUEST.
NO AUTHORIZATION
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY UCB, NOR'WESTER, WVI, AVIATOR, BAYHAWK,
MILE HIGH OR ANY OTHER PERSON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
2
BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF UCB, NOR'WESTER, WVI, AVIATOR, BAYHAWK OR MILE HIGH SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains certain forward-looking statements
within the meaning of the Securities Act and the Exchange Act with respect to
the financial condition, results of operations and business of UCB following the
consummation of the Consolidation, including statements relating to the
restructuring charges expected to be incurred in connection with the
Consolidation. See "UCB Pro Forma Combined Selected Financial Information."
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward looking statements include, among others, matters
discussed herein under "Risk Factors" as well as the following possibilities:
(1) expected cost savings and synergies from the Consolidation cannot be fully
realized; (2) competitive pressure in the craft brewing industry increasing
significantly; (3) costs or difficulties related to the integration of the
businesses of UCB, Nor'Wester, WVI, Aviator, Bayhawk and Mile High being greater
than expected; (4) expected costs associated with future acquisitions, if any,
being greater than expected or expected benefits associated with any such future
acquisitions being lower than expected; (5) the Constituent Corporations are
unable to resolve payment obligations to their contractors, suppliers and
vendors on terms that are acceptable to the Constituent Corporations or
resolving such obligations takes greater time or involves greater expense than
anticipated; and (6) general economic conditions, either nationally or in the
states in which the combined company will be doing business, being less
favorable than expected.
3
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED, OR
INCORPORATED BY REFERENCE, IN THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES
HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY
HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH
STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES
HERETO IN THEIR ENTIRETY. SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY THE STOCKHOLDERS OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE
HIGH.
SUMMARY BUSINESS DESCRIPTIONS
UCB..................... UCB was incorporated in Delaware in April 1997 as a
wholly owned subsidiary of UBA for the purpose of
effecting the Consolidation. United Breweries of
America, Inc. ("UBA") is a newly formed Delaware
corporation, whose chairman is Vijay Mallya. Upon
consummation of the Consolidation and the investment
by UBA, UCB will be a holding company with wholly
owned subsidiaries consisting of Nor'Wester, Aviator,
Bayhawk and Mile High. See "United Craft Brewers,
Inc." The principal executive offices of UCB are
located at Three Harbor Drive, Suite 115, Sausalito,
California 94965, and its telephone number is (415)
289-0390. The chart below depicts the organization and
ownership of UCB on a pro forma basis if the
Consolidation is consummated and the Investment made:
GRAPH
Nor'Wester.............. Nor'Wester has been a brewer of fresh, high quality,
full-flavored premium beers, generally known as craft
beers, since November 1993. Nor'Wester's leading brews
include its Hefe Weizen, Raspberry Weizen and White
Forest Scottish Ale. Nor'Wester's initial brewery,
built in a leased industrial building in Portland,
Oregon (the "Portland Brewery"), began producing and
selling beer in November 1993. The Portland Brewery
has a current and maximum annual production capacity
of approximately 41,000 barrels. Nor'Wester is the
sole owner of North Country Joint Venture, LLC ("North
Country LLC"), which owns and operates a brewery in
Saratoga Springs, New York (the "Saratoga Springs
Brewery"). The Saratoga Springs Brewery began
producing and selling beer in October 1996. It
currently has an annual production capacity of 30,000
barrels and was constructed with sufficient leasehold
improvements to enable it to grow to a maximum annual
brewing
4
capacity of 200,000 barrels. The principal executive
offices of Nor'Wester are located at 66 S.E. Morrison
Street, Portland, Oregon 97214, and its telephone
number is (503) 232-9771.
WVI..................... WVI was organized in 1993 to establish a series of
microbreweries throughout the United States using a
consumer owned capitalization plan and certain
marketing strategies and other trade secrets developed
by James W. Bernau, its founder, President and
Chairperson of its Board of Directors. As of December
31, 1996, WVI had established and capitalized three
separate operating subsidiaries: Aviator, Bayhawk and
Mile High. Aviator and Bayhawk have constructed and
are now operating their own microbrewery. Mile High
had constructed and operated a microbrewery, but it is
currently operating on a limited contract brewing
basis and its assets are held for sale. Each
microbrewery is designed to produce and sell high
quality ales and/or lager beers marketed under a
locally based brand name developed specifically for
that microbrewery's target market. The principal
executive offices of WVI are located at 66 S.E.
Morrison Street, Portland, Oregon 97214, and its
telephone number is (503) 232-9771.
Aviator................. Aviator was formed in February 1994 for the purpose of
developing and operating one or more breweries in
Washington for the production of high quality,
handcrafted ales for sale in bottles and draft.
Aviator has built a brewery (the "Seattle Brewery") in
a leased industrial building in Woodinville,
Washington. The Seattle Brewery began producing and
selling beer in September 1995. It currently has an
annual production capacity of 57,000 barrels and was
constructed with sufficient leasehold improvements to
enable it to grow to a maximum annual brewing capacity
of 125,000 barrels. The principal executive offices of
Aviator are located at 66 S.E. Morrison Street,
Portland, Oregon 97214, and its telephone number is
(503) 232-9771.
Bayhawk................. Bayhawk was formed in February 1994 for the purpose of
developing and operating one or more breweries in
California for the production of high quality,
handcrafted ales for sale in bottle and draft. Bayhawk
has built a showcase brewery (the "Southern California
Brewery") in a leased building next to McCormick &
Schmick's Seafood Restaurant in Irvine, California.
The Southern California Brewery began brewing beer in
January 1995. The Southern California Brewery has a
current and maximum annual production capacity of
10,000 barrels. The principal executive offices of
Bayhawk are located at 66 S.E. Morrison Street,
Portland, Oregon 97214, and its telephone number is
(503) 232-9771.
Mile High............... Mile High was organized in June 1994 for the purpose
of developing and operating one or more breweries in
Colorado for the production of high quality,
handcrafted ales for sale in bottle and draft. Mile
High has built a brewery (the "Denver Brewery") in a
leased industrial building in downtown Denver,
Colorado near Coors Field. The Denver Brewery, which
began producing and selling beer in August 1995, has a
current annual production capacity of 39,000 barrels
and a maximum capacity of 60,000 barrels. In November
1996, Mile High ceased brewing its own beer and is
currently exploring alternatives for selling its
existing assets or finding contract brewing
opportunities. To date, Mile High has
5
engaged in preliminary negotiations with several
groups interested in acquiring the Denver Brewery.
Until its assets are sold Mile High may lease the
Denver Brewery to third parties or brew beer under
limited contract brewing agreements. The principal
executive offices of Mile High are located at 66 S.E.
Morrison Street, Portland, Oregon 97214, and its
telephone number is (503) 232-9771.
Merger Subs............. Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4
(the "Merger Subs") were recently organized by UCB for
the purpose of effecting the acquisition of
Nor'Wester, Aviator, Bayhawk and Mile High. The Merger
Subs have no material assets and have not engaged in
any activities except in connection with the proposed
Consolidation. The principal executive offices of the
Merger Subs are located at One Harbor Drive, Suite
102, Sausalito, California 94965, and their telephone
number is (415) 289-1400.
THE ANNUAL MEETINGS
TIME, PLACE AND DATE
The Nor'Wester Annual Meeting will be held at 9:00 a.m., local time, August
25, 1997, at the Portland Conference Center, 300 Multnomah Street, Portland,
Oregon.
The WVI Annual Meeting will be held at 11:00 a.m., local time, August 25,
1997, at the Portland Conference Center, 300 Multnomah Street, Portland, Oregon.
The Aviator Annual Meeting will be held at 1:00 p.m., local time, August 25,
1997, at the Portland Conference Center, 300 Multnomah Street, Portland, Oregon.
The Bayhawk Annual Meeting will be held at 2:00 p.m., local time, August 25,
1997, at the Portland Conference Center, 300 Multnomah Street, Portland, Oregon.
The Mile High Annual Meeting will be held at 3:00 p.m., local time, August
25, 1997, at the Portland Conference Center, 300 Multnomah Street, Portland,
Oregon.
PURPOSES
At the Annual Meetings, the stockholders of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High will consider and vote upon a proposal to adopt and
approve the Merger Agreement and the transactions contemplated thereby,
including the Mergers or the Consolidation. A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as Annex B and is incorporated
herein by reference. If the Consolidation is approved and consummated, each
share of Nor'Wester Common Stock, each share of WVI Common Stock, each share of
Aviator Common Stock, each share of Bayhawk Common Stock and each share of Mile
High Common Stock outstanding at the Effective Time of the Consolidation (other
than shares of Aviator Common Stock, Bayhawk Common Stock and Mile High Common
Stock owned by WVI, which will be cancelled) will be converted into the right to
receive 0.3333333, 0.0785714, 0.0523809, 0.0785714, and 0.0523809 shares,
respectively, of UCB Common Stock. Furthermore, if the Consolidation is approved
by a majority of the shares of the WVI Common Stock held by disinterested
stockholders, all of the shares of WVI Common Stock owned by WVI's founders,
James W. Bernau and James F. Hensel, prior to the Consolidation will be released
from an escrow agreement with the Department of Consumer and Business Affairs of
the State of Oregon. In addition, the stockholders will elect directors of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High until the next annual meeting of
stockholders of each respective company or until their successors are elected
and qualified, and ratify the appointment of independent public accountants for
Nor'Wester, WVI, Aviator, Bayhawk and Mile High for the fiscal year ending
December 31, 1997. If the Consolidation is approved and is consummated, however,
the persons
6
elected to serve as directors of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
will serve the respective companies only until the Effective Time of the
Consolidation.
RECORD DATE; VOTING RIGHTS
Stockholders of record at the close of business on July 21, 1997 (the
"Record Date") will be entitled to notice of and to vote at the Nor'Wester, WVI,
Aviator, Bayhawk and Mile High Annual Meetings and at any adjournment or
postponement thereof. There were issued and outstanding: (i) 3,711,097 shares of
Nor'Wester Common Stock as of the Record Date, held by approximately 4,383
stockholders of record; (ii) 4,860,966 shares of WVI Common Stock as of the
Record Date, held by approximately 1,923 stockholders of record; (iii) 5,331,855
shares of Aviator Common Stock as of the Record Date, held by approximately
3,826 stockholders of record; (iv) 2,200,814 shares of Bayhawk Common Stock as
of the Record Date, held by approximately 1,320 stockholders of record; and (v)
4,693,787 shares of Mile High Common Stock as of the Record Date, held by
approximately 2,704 stockholders of record.
Under the Oregon Business Corporation Act ("OBCA"), the adoption and
approval of the Merger Agreement by the stockholders requires the affirmative
vote of the holders of at least a majority of the outstanding shares of
Nor'Wester Common Stock and WVI Common Stock. Under the Delaware General
Corporation Law ("DGCL"), the adoption and approval of the Merger Agreement by
the stockholders requires the affirmative vote of the holders of at least a
majority of the outstanding shares of Aviator Common Stock, Bayhawk Common Stock
and Mile High Common Stock. In determining whether the approval of the Merger
Agreement has received the requisite number of affirmative votes, abstentions,
broker non-votes and shares not represented at the Annual Meetings will have the
same effect as a vote against any such proposal.
A majority of the shares of Nor'Wester Common Stock, WVI Common Stock,
Aviator Common Stock, Bayhawk Common Stock and Mile High Common Stock entitled
to vote at each of the respective Annual Meetings is required to ratify the
selection of the independent public accountants. The five candidates for
director receiving the highest number of affirmative votes cast at the
Nor'Wester Annual Meeting will be elected as directors of Nor'Wester. The six
candidates for director receiving the highest number of affirmative votes cast
at the WVI Annual Meeting will be elected as directors of WVI. The six
candidates for director receiving the highest number of affirmative votes cast
at the Aviator Annual Meeting will be elected as directors of Aviator. The seven
candidates for director receiving the highest number of affirmative votes cast
at the Bayhawk Annual Meeting will be elected as directors of Bayhawk. The
candidate for director receiving the highest number of affirmative votes cast at
the Mile High Annual Meeting will be elected as the sole director of Mile High.
Holders of a majority of the shares entitled to vote at the respective Annual
Meetings, represented in person or by proxy, will constitute a quorum. At the
respective Annual Meetings, each holder will be entitled to cast one vote for
each share of Common Stock of such Constituent Corporation held by such holder.
James W. Bernau has agreed to vote, or cause to be voted, 910,618 shares of
Nor'Wester Common Stock, 3,018,444 shares of WVI Common Stock, 2,715,504 shares
of Aviator Common Stock, 1,249,811 shares of Bayhawk Common Stock and 2,391,985
shares of Mile High Common Stock in favor of the Consolidation. In addition,
Black & Company and certain officers and directors of Black & Company have
agreed to vote, or cause to be voted, 541,874 shares of Nor'Wester Common Stock
in favor of the Consolidation. Accordingly, the affirmative vote of holders of
an additional 403,057 shares of Nor'Wester Common Stock would be required to
approve the Merger Agreement and the transactions contemplated thereby. When the
shares of WVI Common Stock, Aviator Common Stock, Bayhawk Common Stock and Mile
High Common Stock described above are voted at the WVI, Aviator, Bayhawk and
Mile High Annual Meetings in favor of the adoption and approval of the Merger
Agreement and the transactions contemplated thereby, the affirmative vote of
additional shares of WVI Common Stock, Aviator Common Stock, Bayhawk Common
Stock or Mile High Common Stock will not be required to so adopt and approve the
Merger Agreement and the transactions contemplated thereby. However, the
affirmative vote of a
7
majority of the shares of WVI Common Stock not held by Mr. Bernau or James F.
Hensel will be required to release the shares of WVI Common Stock held by
Messrs. Bernau and Hensel which are subject to escrow or transfer restrictions.
Failure to obtain the release of the shares from escrow or transfer restrictions
will not prevent consummation of the Consolidation.
As of the Record Date, (i) 922,828 shares of Nor'Wester Common Stock
(approximately 24.9% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Nor'Wester, (ii) 3,042,494 shares of WVI Common Stock
(approximately 62.6% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of WVI, (iii) 2,720,034 shares of Aviator Common Stock
(approximately 51.0% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Aviator, (iv) 1,269,006 shares of Bayhawk Common Stock
(approximately 57.7% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Bayhawk and (v) 2,391,985 shares of Mile High Common Stock
(approximately 51.0% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Mile High.
THE CONSOLIDATION AND INVESTMENT
REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors of each of the Constituent Corporations believes that
the terms of the Consolidation are fair to and in the best interests of the
respective Constituent Corporation and its stockholders. ACCORDINGLY, THE BOARD
OF DIRECTORS OF EACH OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH HAS
UNANIMOUSLY APPROVED THE INVESTMENT AGREEMENT AND THE MERGER AGREEMENT AND
RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY BY THE VOTING STOCKHOLDERS OF EACH OF
NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH. For a discussion of the factors
considered by the Boards of Directors of the Constituent Corporations in
reaching their decisions to approve the Merger Agreement and the transactions
contemplated thereby and recommending that the Constituent Corporations'
respective stockholders vote FOR the proposal to adopt and approve the Merger
Agreement and the transactions contemplated thereby, see "The Consolidation and
Investment by UBA--Nor'Wester's Reasons for the Consolidation; Recommendations
of the Board of Directors of Nor'Wester," "The Consolidation and Investment by
UBA--WVI's Reasons for the Consolidation; Recommendations of the Board of
Directors of WVI," "The Consolidation and Investment--Aviator's Reasons for the
Consolidation; Recommendations of the Board of Directors of Aviator," "The
Consolidation and Investment by UBA--Bayhawk's Reasons for the Consolidation;
Recommendations of the Board of Directors of Bayhawk," and "The Consolidation
and Investment by UBA--Mile High's Reasons for the Consolidation;
Recommendations of the Board of Directors of Mile High."
OPINION OF NEEDHAM & COMPANY, INC.
Needham & Company, Inc. ("Needham"), has acted as a financial advisor to
Nor'Wester and WVI in connection with the Consolidation and the investment by
UBA and has delivered its written opinion to the Nor'Wester Board of Directors
dated May 12, 1997, to the effect that, as of such date and subject to certain
assumptions and other matters described therein, the consideration to be
received by the shareholders of Nor'Wester (other than James W. Bernau) pursuant
to the Merger Agreement and the Investment Agreement was fair to such
shareholders from a financial point of view. The full text of Needham's opinion,
which sets forth the assumptions made, matters considered, and limitations on
and scope of the review undertaken, is attached hereto as Annex C. Needham's
opinion is directed only to the fairness to the Nor'Wester shareholders (other
than Mr. Bernau), from a financial point of view, of the consideration
8
to be received by such shareholders pursuant to the Merger Agreement and the
Investment Agreement, does not address any other aspect of the Consolidation or
the investment by UBA, and does not constitute a recommendation to any
shareholder of Nor'Wester or any other Constituent Corporation as to how such
shareholder should vote at the Nor'Wester Annual Meeting or any other Annual
Meeting of any Constituent Corporation. See "The Consolidation and Investment by
UBA--Opinion of Needham & Company, Inc."
OPINIONS OF BLACK & COMPANY, INC.
Black & Company, Inc. ("Black") has acted as a financial advisor to
Nor'Wester and WVI in connection with the Consolidation and the investment by
UBA and has delivered its written opinion dated May 12, 1997 to the Board of
Directors of each of WVI, Aviator, Bayhawk and Mile High to the effect that, as
of such date and subject to certain assumptions and other matters described
therein, the consideration to be received by the shareholders of each of WVI,
Aviator, Bayhawk and Mile High (other than James W. Bernau) pursuant to the
Merger Agreement and the Investment Agreement was fair to such shareholders from
a financial point of view. The full text of Black's opinion, which sets forth
the assumptions made, matters considered, and limitations on and scope of the
review undertaken, is attached hereto as Annex D. Black's opinion is directed
only to the fairness to the shareholders of each of WVI, Aviator, Bayhawk and
Mile High (other than James W. Bernau), from a financial point of view, of the
consideration to be received by such shareholders pursuant to the Merger
Agreement and the Investment Agreement, does not address any other aspect of the
Consolidation of the Investment, and does not constitute a recommendation to any
shareholder of WVI, Aviator, Bayhawk, Mile High or Nor'Wester as to how such
shareholder should vote at any Annual Meeting of any Constituent Corporation.
See "The Consolidation and Investment by UBA--Opinions of Black & Company."
INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND THE INVESTMENT
In considering the recommendation of the various boards of directors to
approve and adopt the Merger Agreement, the Consolidation and the Investment,
stockholders should be aware that James W. Bernau, a director and executive
officer of Nor'Wester, WVI, Aviator, Bayhawk and Mile High, as well as the
respective investment bankers for Nor'Wester and WVI have interests in the
Consolidation and the Investment that are in addition to the interests of the
stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High generally, and
that Mr. Bernau, as a member of the Nor'Wester Board, WVI Board, Aviator Board,
Bayhawk Board and Mile High Board, participated in the discussion, deliberation
and voting of such boards with respect to the Consolidation and the Investment.
Furthermore, stockholders should be aware that certain directors and executive
officers of UCB have interests in the Investment that are in addition to the
interests of stockholders of UCB generally. These interests are described as
follows:
BERNAU EMPLOYMENT AGREEMENT. The Investment Agreement requires UCB to enter
into an employment agreement with Mr. Bernau. The employment agreement will
provide, among other things, that Mr. Bernau shall serve as President of UCB at
an annual salary of $125,000, that he will be eligible for bonuses at the
discretion of the Board of Directors of UCB and that he will receive the same
standard benefits as other senior executives of UCB. The employment agreement
will have a term of two years from the date of closing of the investment from
UBA. The employment agreement will provide that Mr. Bernau will receive options
to purchase shares of Common Stock of UCB in an amount equal to 4% of the total
number of shares of UCB Common Stock outstanding on a fully diluted basis. The
options will have an exercise price of $5.25 per share and 25% of the options
will be immediately exercisable, with the remaining options vesting ratably over
the next three years. All of the options will be immediately exercisable if Mr.
Bernau's employment is terminated by UCB without cause. The options will be
exercisable for a period of five years after Mr. Bernau ceases being an employee
of UCB. In addition, the employment agreement will provide that if Mr. Bernau is
required to relocate to California, he shall receive a $50,000 relocation fee.
Under the employment agreement, if Mr. Bernau's employment is
9
terminated without cause, he may, at his option, agree not to compete in the
craft brewing industry for one year, in which case he will continue to receive
his base salary for one year after termination. If Mr. Bernau's employment is
terminated with cause, UCB may, at its option, continue to pay Mr. Bernau his
base salary for one year after termination, in which case Mr. Bernau will agree
not to compete in the craft brewing industry for one year.
MALLYA EMPLOYMENT AGREEMENT. The Investment Agreement requires UCB to enter
into an employment agreement with Vijay Mallya providing for Mr. Mallya to serve
as Chairman and Chief Execuitve Officer of UCB with full power to manage and
conduct the business of UCB subject to the general direction of UCB's Board of
Directors. The employment agreement will have a one year term from the date of
closing of the Investment and thereafter will continue on a month-to-month basis
terminable by either party. Mr. Mallya will receive an annual base salary of
$126,000, will be eligible to participate in all UCB employee benefit programs
and will be entitled to receive periodic bonuses as determined by the Board. The
employment agreement will provide that Mr. Mallya will receive options to
purchase shares of Common Stock of UCB in an amount equal to 4% of the total
number of shares of UCB Common Stock outstanding on a fully-diluted basis. The
options will have an exercise price of $5.25 per share and 25% of the options
will be immediately exercisable, with the remaining options vesting ratably over
the ensuing three years. All of the options will be immediately exercisable if
Mr. Mallya's employment is terminated by UCB without cause, and the options will
be exercisable for a period of five years after Mr. Mallya ceases being an
employee of UCB.
MERCHANT FINDER'S AGREEMENT. Pursuant to a Finder's Agreement with Jerome
Merchant, a director of UCB, in connection with the Consolidation and Investment
UBA will be required to pay Mr. Merchant a finder's fee of $110,000, which is
equal to 2% of the investment by UBA in UCB. This amount is only payable if the
Consolidation is approved and the Investment made and is due upon the closing of
the Investment.
FINANCIAL ADVISORS. Pursuant to their engagement letter with Needham and
Black and assuming the investment from UBA is completed, Nor'Wester and WVI have
agreed to pay each of Needham and Black a fee of $142,500 as consideration for
their services in providing financial advisory services to Nor'Wester and WVI.
In accordance with the terms of their engagement letter, Needham and Black each
have agreed that 50% of their fees may be paid in Common Stock of UCB issued at
$5.25 per share resulting in 13,572 shares of UCB Common Stock to be received by
each of Needham and Black. Nor'Wester and WVI have also agreed to indemnify
Needham and Black for certain liabilities that may arise from their respective
roles as financial advisors and out of the rendering of the foregoing fairness
opinions. Black and its Chairman Emeritus, Lawrence S. Black, hold warrants to
purchase up to 103,500 shares of Nor'Wester Common Stock at $3.25 per share. At
the Effective Time of the Consolidation, these warrants will be exchanged for
warrants to purchase up to 34,500 shares of UCB Common Stock at $9.75 per share.
Black acted as the managing underwriter in connection with the initial public
offering of Nor'Wester's Common Stock in January 1996 and approximately 309,982
shares of Nor'Wester Common Stock are owned direcly by Black, 141,100 shares of
Nor'Wester Common Stock are owned by two officers of Black and 476,025 shares of
Nor'Wester Common Stock are beneficially owned by clients of Black but held in
accounts over which Black has investment and/or voting power.
REPAYMENT OF NOTE FROM PROCEEDS OF INVESTMENT. Nor'Wester will use part of
the proceeds from the investment by UBA to repay a loan from James W. Bernau in
the amount of $250,000 plus accrued interest, which was used to finance
operations.
RELEASE FROM GUARANTEES. James W. Bernau has provided personal guarantees
to third parties in connection with various loans, leases and other obligations
of Nor'Wester, WVI, Aviator, Bayhawk and Mile High which obligations totalled
$820,708 at March 31, 1997. As part of the Investment Agreement, UCB has agreed
to use its best efforts to cause Mr. Bernau to be released and UCB substituted
as guarantor for the obligations set forth above; provided, however, that the
obligee does not seek additional
10
security and that there is not any cost implication to UCB. It is uncertain
whether Mr. Bernau will be released from any of such guarantees. If UCB is
unable to remove Mr. Bernau as a guarantor for these obligations, UCB will
provide Mr. Bernau with security in case Mr. Bernau is required to satisfy any
of these obligations.
RELEASE OF ESCROWED SHARES. The shares in WVI held by James W. Bernau are
subject to a Founder's Escrow Agreement dated February 22, 1994 with the
Department of Consumer and Business Affairs of the State of Oregon, which was
entered into in connection with the initial public offering of WVI Common Stock.
If the Consolidation is approved by a majority of the disinterested holders of
WVI Common Stock, these shares will be released from the escrow and converted
into shares of UCB Common Stock at the exchange ratio of 1:0.0785714.
BREWING AGREEMENT. In connection with the closing of the Investment
Agreement, UCB will enter into a brewing agreement with UBA, an entity
controlled by Vijay Mallya, whereby UBA will grant UCB the exclusive right to
manufacture, label and package all Kingfisher brand beer (pursuant to the
specifications provided by UBA) which is brewed outside India for sale in North
America. In order to brew the Kingfisher products, UCB will have to make certain
modifications to existing equipment and purchase new equipment. The price to be
paid for the products brewed under the brewing agreement will be agreed upon by
the parties after such improvements have been made. See "Ancillary
Agreements--Brewing Agreement."
SUMMARY. As a result of the Consolidation and Investment, the value (to the
extent ascertainable) of the benefits to be received by Mr. Bernau and Black,
insiders of the Constituent Corporations, and Mr. Bernau, Mr. Mallya and Mr.
Merchant, insiders of UCB, aggregates approximately $928,404. These benefits may
be summarized as follows: Mr. Bernau--$550,000 (including $300,000 in salary and
possible relocation fees payable under his proposed two-year employment
agreement with UCB and repayment of his $250,000 loan to Nor'Wester);
Black--$142,500 in investment banking fees; Mr. Mallya--$126,000 under his
proposed one-year employment agreement with UCB; and Mr. Merchant--$110,000
under his finder's agreement. In addition to the above-described benefits, Mr.
Bernau could be released from one or more of the personal guarantees he has
given to third parties for obligations of the Constituent Corporations which
totalled $820,708 at March 31, 1997.
No director or executive officer of any Constituent Corporation will receive
any separation or similar payment in connection with the Consolidation or
Investment. UCB currently contemplates that each named executive officer and
significant employee of each Constituent Corporation will continue his
employment with his respective Constituent Corporation. See "The Consolidation
and Investment by UBA--Interests of Certain Persons in the Consolidation and the
Investment."
ACCOUNTING TREATMENT
The Consolidation will be accounted for by UCB as the purchase by Nor'Wester
of WVI, Bayhawk, Mile High and Aviator. The purchase price will be allocated to
assets acquired and liabilities assumed based on their estimated fair values,
net of applicable income tax effects, at the Effective Time. Results of
operations for UCB for the period prior to the Consolidation will include only
the results of Nor'Wester as the accounting acquirer and not income (or loss)
from WVI, Aviator, Bayhawk or Mile High.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
TAX CONSEQUENCES TO HOLDERS OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE
HIGH COMMON STOCK. The Consolidation is intended to qualify as a transfer to a
controlled corporation and each of the Mergers is intended to constitute a
reorganization so that no gain or loss would be recognized by a holder of
Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock with respect to the
receipt of UCB Common Stock in exchange for such Nor'Wester, WVI, Aviator,
Bayhawk or Mile High Common Stock
11
pursuant to the Consolidation (except with respect to any cash received in lieu
of fractional shares of UCB Common Stock). Payment received by holders of
Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock in lieu of
fractional shares of UCB Common Stock will be treated as payment in redemption
of such fractional shares and, provided that the redeemed interest is held as a
capital asset at the Effective Time, will generally result in the recognition of
capital gain or loss by such holders measured by the difference between the
amount received and the tax basis allocable to such fractional shares.
Irrespective of the federal income tax status of the Mergers or the
Consolidation, a recipient of shares of UCB Common Stock will recognize income
if and to the extent any such shares are considered to be received in exchange
for services or property (other than Nor'Wester, WVI, Aviator, Bayhawk or Mile
High Common Stock). All or a portion of such income may be taxable as ordinary
income. The IRS may take the position that a portion of the shares of UCB Common
Stock received by a shareholder of Nor'wester, WVI, Aviator, Bayhawk or Mile
High is deemed received from James W. Bernau (and not in exchange for the shares
transferred by such shareholder), as a result of Mr. Bernau's transfer of shares
to UBA in connection with the Consolidation. Such a deemed transfer could result
in taxable ordinary income to a shareholder. Counsel has advised UCB that
although the matter is not free from doubt, the Consolidation should not result
in any such taxable deemed transfer. Gain also will be recognized if and to the
extent a Nor'Wester, WVI, Aviator, Bayhawk or Mile High stockholder is treated
as receiving (directly or indirectly) consideration other than UCB Common Stock
in exchange for his or her Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common
Stock.
TAX CONSEQUENCES TO UCB, NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE
HIGH. No gain or loss should be recognized currently by UCB, Nor'Wester, WVI,
Aviator, Bayhawk, Mile High, Merger Sub1, Merger Sub2, Merger Sub3 or Merger
Sub4 as a result of the Consolidation. The Consolidation will not have any tax
consequences for UCB stockholders.
For a further discussion of certain of the federal income tax consequences
of the Consolidation, including a discussion of the impact of the Consolidation
on net operating losses of the Constituent Corporations, see "The Consolidation
and Investment by UBA--Certain Federal Income Tax Considerations."
INVESTMENT AGREEMENT AND MERGER AGREEMENT
GENERAL
The description of the material terms and conditions of the Investment
Agreement and the Merger Agreement and any related documents in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the copies of
the Investment Agreement and the Merger Agreement attached hereto as Annex A and
B, respectively. Stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
are urged to read the Investment Agreement and the Merger Agreement in their
entirety for a more complete description of the terms of such agreements.
INVESTMENT BY UBA
Upon satisfaction of all the terms and conditions set forth in the
Investment Agreement, including but not limited to the consummation of the
Consolidation on terms satisfactory to UBA, (i) UBA has agreed to purchase from
UCB 1,047,619 shares of UCB Common Stock for $5,500,000 and (ii) James W. Bernau
has agreed to transfer to UBA 83,109 shares of UCB Common Stock and to transfer
to UCB for cancellation 174,912 shares of UCB Common Stock (such transactions
are hereinafter referred to as the "Investment"). The purchase price of
$5,500,000 will be offset by the aggregate principal amount outstanding at the
Closing Date, if any, under the Bridge Loans from UBA to Nor'Wester. After
giving effect to the Consolidation, the investment by UBA and the transfer of
shares by Mr. Bernau, UBA will own 40% of the outstanding UCB Common Stock on a
diluted basis and Mr. Bernau will own 10% of the outstanding UCB Common Stock on
a diluted basis.
12
CONVERSION OF SHARES
At the Effective Time, each outstanding share of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High Common Stock (other than shares of Aviator, Bayhawk and
Mile High Common Stock owned by WVI, which shall be cancelled, and except to the
extent that the holders of shares of WVI Common Stock and Bayhawk Common Stock
duly elect to exercise their dissenters' rights under Sections 60.551 through
60.594 of the OBCA and holders of shares of Bayhawk Common Stock duly elect to
exercise their appraisal rights pursuant to Section 262 of the DGCL) will be
converted into the right to receive a fraction of a share of UCB Common Stock
(the "Exchange Ratios") equal to (i) in the case of Nor'Wester Common Stock,
0.3333333 shares of UCB Common Stock, (ii) in the case of WVI and Bayhawk Common
Stock, 0.0785714 shares of UCB Common Stock, and (iii) in the case of Aviator
and Mile High Common Stock, 0.0523809 shares of UCB Common Stock. Fractional
shares of UCB Common Stock will not be issued. In lieu of fractional shares,
stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High will receive
cash equal to the product of (i) such fraction multiplied by (ii) $5.25.
Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4 will merge with and
into Nor'wester, Aviator, Bayhawk and Mile High, respectively, and WVI will
merge with and into UCB, with Nor'wester, Aviator, Bayhawk, Mile High and UCB
being the surviving corporations of the Consolidation (the "Surviving
Corporations"). Each share of Merger Sub1, Merger Sub2, Merger Sub3 and Merger
Sub4 common stock issued and outstanding immediately prior to the Effective Time
will be converted into one share of common stock of Nor'Wester, Aviator, Bayhawk
and Mile High, respectively.
CONDITIONS TO THE CONSOLIDATION
Consummation of the Consolidation and the Investment is subject to the
satisfaction of various conditions, including but not limited to (i) the
approval and adoption of the Merger Agreement and the Consolidation by the
requisite vote of the stockholders of each of Nor'Wester, WVI, Aviator, Bayhawk
and Mile High; (ii) the receipt of opinions of counsel by UCB and UBA, (iii) the
receipt by each of UCB and UBA of the executed Ancillary Agreements, (iv) the
receipt of an officer's certificate by UBA from each of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High to the effect that all of the representations and
warranties made by the respective party are true and correct on and as of the
Effective Time and that the respective party has performed or complied with all
agreements and covenants required by the Investment Agreement to be performed or
complied with by such party on or prior to the Effective Time, (v) the receipt
of evidence by UBA and UCB, respectively, from the other party that all
licenses, permits, consents, waivers, approvals, authorizations, qualifications
or orders required for the consummation of the Consolidation and the investment
have been obtained, (vi) the absence of any restrictive court orders or any
other legal restraints or prohibitions, and of any governmental proceedings,
preventing the consummation of the Consolidation and investment, and the absence
of any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Consolidation and investment which makes
the consummation of the Consolidation and investment illegal, (vii) there shall
have been no changes which have had a material adverse effect on Nor'Wester,
WVI, Aviator, Bayhawk and Mile High, taken as a whole, (viii) the Consolidation
shall have been completed on terms reasonably satisfactory to UBA, (ix) Mr.
Bernau shall have transferred certain of his shares in UCB to UBA, (x) the line
of credit provided by Bank of America to Nor'Wester shall have been extended and
any loan covenants shall have not been violated, or if violated, have been
waived, (xi) a majority of the stockholders of WVI shall have voted in favor of
releasing certain shares of WVI Common Stock held in escrow pursuant to an
escrow agreement with the Department of Consumer and Business Affairs of the
State of Oregon and such escrowed shares were in fact released from escrow,
(xii) the stockholders of UCB shall have approved the sales of shares to UBA,
and (xiii) each of Nor'Wester, WVI, Aviator, Bayhawk and Mile High shall have
received fairness opinions from their respective investment bankers (which
condition has been satisfied). See "Investment Agreement and Merger
Agreement--Conditions to the Investment."
13
TERMINATION; AMENDMENT
The Investment Agreement may be terminated and the Consolidation may be
abandoned prior to the Effective Time either before or after its approval by the
stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High, under the
circumstances specified therein, including (i) by mutual written consent of UBA
and Nor'Wester; (ii) by either Nor'Wester or UBA, if the Consolidation and
Investment shall not have been consummated by August 31, 1997 and if the
terminating party has not caused the failure of the Consolidation and Investment
to be consummated on or before such date by its own willful failure to fulfill
any of its material obligations under the Investment Agreement; (iii) by UBA at
any time prior to the Closing Date in the event that any of Mr. Bernau,
Nor'Wester, WVI, Aviator, Bayhawk or Mile High has breached any covenant in
material respects or has breached any representation or warranty contained in
the Investment Agreement or any document relating to the Consolidation and
Investment, and such breach has not been promptly cured after notice has been
given; or (iv) by Nor'Wester at any time prior to the Closing Date in the event
that UBA has breached any covenant in material respects or has breached any
representation or warranty contained in the Investment Agreement, and such
breach has not been promptly cured after notice has been given to UBA.
The Investment Agreement may be amended by an agreement in writing among the
parties thereto at any time prior to the Closing Date.
FEES AND EXPENSES
Each of the parties to the Investment Agreement will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with the
Investment Agreement; PROVIDED, HOWEVER, that Nor'Wester has paid the costs and
expenses (including reasonable legal fees and expenses) incurred by UBA in
connection with the Bridge Loans. All fees and expenses incurred by UCB or UBA
relating to the Consolidation (the "Costs") will be borne by Nor'Wester.
Nor'Wester will reimburse these Costs upon request. Alternatively, UCB or UBA
may use Bridge Loan funds to pay the Costs. If the Investment Agreement is
terminated prior to the closing of the Investment, all Costs not previously
reimbursed by Nor'Wester or funded through the Bridge Loans will be added to the
principal amount of the Bridge Loans. In addition, all costs and expenses
incurred by UBA relating to the possible acquisition of other companies or other
investment opportunities shall be reimbursed if the closing of the Investment
occurs and UCB is the acquiring company or the company making the investment.
SURRENDER OF CERTIFICATES
As promptly as practicable after the Effective Time, the Surviving
Corporations will send to each stockholder of record of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High as of the Effective Time a Letter of Transmittal
and other transmittal materials for use in exchanging certificates of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock for certificates of
UCB Common Stock and cash in payment for any fractional shares resulting from
the exchange. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF
TRANSMITTAL IS RECEIVED.
ANCILLARY AGREEMENTS
UBA BRIDGE LOAN CREDIT AGREEMENT AND RELATED DOCUMENTS
Pursuant to the terms of the Investment Agreement, UBA is obligated to
provide Nor'Wester with up to $2.75 million in bridge loans as interim financing
to the Constituent Corporations (the "Bridge Loan"). Advances under the Bridge
Loan have been and will continue to be used to cover operating expenses and pay
existing creditors of the Constituent Corporations until closing of the
Investment. Of the $2.75 million, $2.537 million has been advanced as of July
21, 1997. All Bridge Loan amounts are advanced by UBA to Nor'Wester pursuant to
the terms of the Credit Agreement. See "Ancillary Agreements--UBA Bridge Loan
Credit Agreement and Related Documents."
14
EMPLOYMENT AGREEMENT
The Investment Agreement requires UCB to enter into an employment agreement
with Mr. Bernau. For a description of the Employment Agreement between UCB and
Mr. Bernau see "Interests of Certain Persons in the Consolidation--Bernau
Employment Agreement."
MALLYA EMPLOYMENT AGREEMENT
At the closing of the Investment, UCB will enter into an Executive
Employment Agreement with Vijay Mallya providing for Mr. Mallya to serve as
Chairman and Chief Executive Officer of UCB. During the term of the agreement,
Mr. Mallya will have full power and authority to manage and conduct the business
of UCB subject to the general direction of UCB's Board of Directors. Mr. Mallya
will receive an annual base salary of $126,000 and will be eligible for a salary
increase after the first year of the term of the agreement. Mr. Mallya will
agree in the Executive Employment Agreement to use his best efforts to cause UBA
to present certain opportunities that UBA develops or becomes aware of to UCB
for pursuit exclusively by UCB and to cause UBA to cooperate with UCB in the
pursuit of such opportunities. UCB will acknowledge in the agreement that Mr.
Mallya is a shareholder, director, officer and employee of, and has significant
responsibilities to, other companies and business activities, including
companies that produce, distribute and sell beer and other alcoholic beverages
in the United States, the United Kingdom, India and other countries. The
agreement will also provide that, except as set forth above, to the maximum
extent permitted by law, Mr. Mallya's position as a shareholder, director,
officer and employee of UCB will not be deemed to present a conflict of interest
or impose any restriction on his activities for other companies and business
activities nor impose any obligation on Mr. Mallya to present business
opportunities to UCB. Mr. Mallya will agree in the agreement to indemnify UCB
and its shareholders, affiliates, directors, officers, employees, agents and
attorneys against any claims arising out of a breach of the employment agreement
or from his ownership interests in other business entities.
The employment agreement with Mr. Mallya will provide that he will receive
options to purchase shares of Common Stock of UCB in an amount equal to 4% of
the total number of shares of UCB Common Stock outstanding on a fully diluted
basis. The options will have an exercise price of $5.25 per share and 25% of the
options will be immediately exercisable, with the remaining options vesting
ratably over the next three years. All of the options will be immediately
exercisable if Mr. Mallya's employment is terminated by UCB without cause. The
options will be exercisable for a period of five years after Mr. Mallya ceases
being an employee of UCB.
STOCKHOLDER'S AGREEMENT
The Stockholder's Agreement provides, among other things, that, at the
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Annual Meetings, James Bernau
and Black and certain officers and directors of Black (the "Stockholders") shall
vote (or cause to be voted) the shares of Nor'Wester, WVI, Aviator, Bayhawk or
Mile High Common Stock, as the case may be, held of record or beneficially by
the Stockholders, including, but not limited to, causing WVI to vote the shares
held of record by it in Aviator, Bayhawk and Mile High, (a) in favor of the
Consolidation, the execution and delivery by each of them of the Investment
Agreement and the approval of the terms thereof and each of the other actions
contemplated by the Investment Agreement and the Stockholder's Agreement and any
actions required in furtherance thereof; (b) against any action or agreement
that would result in a breach in any material respect of any covenant,
representation or warranty or any other obligation or agreement of each of
Nor'Wester, WVI, Aviator, Bayhawk or Mile High under the Investment Agreement or
the Stockholder's Agreement; (c) except as otherwise agreed to in writing in
advance by UBA or permitted pursuant to the Investment Agreement, against
certain changes in the structure, capitalization, business or governance of any
of the Constituent Corporations or (d) any other action which is intended or
could reasonably be
15
expected, to impede, interfere with, delay, postpone, discourage or materially
adversely affect the contemplated economic benefits to UBA of the Consolidation
or the transactions contemplated by the Investment Agreement or the
Stockholder's Agreement.
In addition, the Stockholders have granted to, and appointed, UBA and
certain officers of UBA as such Stockholders' irrevocable proxy and
attorney-in-fact (with full power of substitution) to vote the shares of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock held by the
Stockholders as indicated in the Stockholder's Agreement.
The Stockholders have agreed to certain covenants including that, except
with regard to Mile High and Bayhawk, no such Stockholder shall (i) solicit or
respond to any inquiries or the making of any proposal by any person (other than
UBA or any affiliate of UBA) with respect to any of Nor'Wester, WVI, Aviator,
Bayhawk or Mile High that constitutes or could reasonably be expected to lead to
a proposal to acquire an interest in any of such companies or (ii) except in
certain circumstances, sell, encumber, or otherwise dispose of, any or all of
their shares of Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock or
any interest therein. See "Ancillary Agreements--The Stockholder's Agreement."
The Stockholders also waived any rights of appraisal or rights to dissent from
the Consolidation that they may have.
The Stockholder's Agreement terminates upon, among other things, the first
to occur of (a) termination of the Investment Agreement in accordance with its
terms or (b) the closing of the investment from UBA. Under certain
circumstances, the Stockholders may be required to reimburse UBA for reasonable
fees and expenses incurred if the Stockholder's Agreement is terminated.
BREWING AGREEMENT
UCB will enter into a brewing agreement with UBA, whereby UBA will grant UCB
the exclusive right to manufacture, label and package all Kingfisher brand beer
(pursuant to the specifications provided by UBA) which is brewed outside India
for sale in North America. The price to be paid for the products brewed under
the brewing agreement will be agreed upon by the parties after certain required
improvements have been made by UCB. UBA will provide to UCB, on a monthly basis,
a rolling forecast of UBA's requirements of Kingfisher products for the
following three months, which shall be in reasonable commercial lot size
amounts. Forecasts made in respect of any month may not thereafter be revised by
more than 20% in either direction. The Brewing Agreement will be in effect
beginning on the closing date of the investment and continuing until terminated
by either party with six months notice.
REGISTRATION RIGHTS AGREEMENT
UCB, Mr. Bernau and UBA will enter into a Registration Rights Agreement,
whereby UCB will grant certain registration rights to Mr. Bernau and UBA. UCB
will agree to file a shelf registration statement with respect to all of the
shares of UCB Common Stock owned or acquired by UBA. In addition, UCB will grant
certain demand registration rights to UBA. UCB will also grant Mr. Bernau and
UBA certain piggyback registration rights should UCB file a registration
statement for public sale of its Common Stock.
SECURITY AGREEMENT
Mr. Bernau and UBA will enter into a Security Agreement whereby Mr. Bernau's
indemnity obligations under the Investment Agreement will be secured by a pledge
of the shares of UCB Common Stock held by Mr. Bernau after the Consolidation,
but excluding any shares of UCB Common Stock received by Mr. Bernau through the
exercise of options to purchase UCB Common Stock granted to Mr. Bernau pursuant
to his employment agreement with UCB.
16
APPRAISAL RIGHTS
If the Consolidation is consummated, holders of shares of Nor'Wester Common
Stock, Aviator Common Stock and Mile High Common Stock will not be entitled to
appraisal or dissenters' rights. However, if the Consolidation is consummated
holders of shares of WVI Common Stock will be entitled to dissenters' rights
under the OBCA, provided that they comply with the conditions of Sections 60.551
through 60.594 of the OBCA, and holders of shares of Bayhawk Common Stock would
be entitled to appraisal rights under Section 262 of the DGCL, provided that
they comply with the conditions of Section 262 of the DGCL. Those shareholders
of WVI who elect to exercise their dissenters' rights and who properly and
timely perfect such rights will be entitled to receive the "fair value" in cash
for their shares of WVI Stock. Pursuant to Section 60.551(4) of the OBCA, such
"fair value" means the value of the shares immediately before the effectuation
of the Merger, excluding any appreciation or depreciation in anticipation of the
Merger, unless such exclusion would be inequitable. A record holder of shares of
Bayhawk Common Stock who makes the demand described below with respect to such
shares, who continuously is the record holder of such shares through the
Effective Time, and who otherwise complies with the statutory requirements of
Section 262 will be entitled to an appraisal by the Delaware Court of the "fair
value" of his or her shares of Bayhawk Common Stock (exclusive of any element of
value arising from the accomplishment or expectation of the Consolidation). Such
"fair value" for Bayhawk Common Stock would be determined in judicial
proceedings, the result of which cannot be predicted and, consequently, may be
higher than, the same as or lower than the value of the UCB Common Stock to be
received by the holders of Bayhawk Common Stock in connection with the
Consolidation. In order to exercise their dissenters' and appraisal rights the
holders of WVI Common Stock and Bayhawk Common Stock must comply with the
procedural requirements of Sections 60.551 through 60.594 of the OBCA and
Section 262 of the DGCL, respectively, a description of which is provided in
"Appraisal Rights" and the full text of which is attached to this Proxy
Statement/Prospectus as Annex F and Annex G, respectively and each of which is
incorporated by reference herein. Failure to comply with any of the steps
required under Sections 60.551 through 60.594 of the OBCA or Section 262 of the
DGCL, as the case may be, on a timely basis may result in the loss of
dissenters' rights or appraisal rights, as the case may be.
MANAGEMENT OF UCB AFTER THE CONSOLIDATION AND INVESTMENT BY UBA
After the Consolidation and Investment, the Board of Directors of UCB will
consist of seven persons. Vijay Mallya, O'Neil Nalavadi and Jerome Merchant, who
are currently members of the Board of Directors of UCB, will remain as
Directors. James Bernau will be appointed to the Board of Directors, as will one
other appointee of UBA and two independent directors who are mutually
satisfactory to both Mr. Bernau and UBA. Vijay Mallya will continue to be the
Chairman of the Board and Chief Executive Officer and Mr. Bernau will continue
to be the President of UCB. See "UCB Management."
COMPARISON OF STOCKHOLDER RIGHTS
As a consequence of the Consolidation, the stockholders of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High will become stockholders of UCB. There will be
significant differences between the rights of stockholders of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High prior to the Consolidation and the rights of UCB
stockholders after the Consolidation. See "Comparison of the Rights of Holders
of UCB Common Stock and Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common
Stock" for a summary of the material differences between the rights of holders
of UCB Common Stock and Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common
Stock.
PROPOSED NASDAQ SMALLCAP MARKET LISTING
Application has been made to have the shares of UCB Common Stock listed on
The Nasdaq SmallCap Market under the symbol "ALES," subject to official notice
of issuance.
17
RECENT DEVELOPMENTS
As part of its consolidation strategy, the UB Group entered into Letters of
Intent on May 2, 1997, with Mendocino Brewing Company, Inc. ("Mendocino") and
Humboldt Brewing Company ('Humboldt") for possible transactions involving, among
other things, the merger of each of Mendocino and Humboldt with subsidiaries of
UCB. Although no definitive agreements have been signed, the UB Group continues
to be in discussion with Mendocino and Humboldt and is currently conducting its
due diligence investigations.
Mendocino and Humboldt are Northern California craft brewers who sold 17,000
and 18,000 barrels of beer, respectively, in 1996, generating total sales
revenue of $4 million and $3 million, respectively. Completion of these proposed
transactions is subject to satisfactory completion of due diligence
investigations, the preparation and execution of definitive agreements, approval
by the respective Boards of Directors and Shareholders, as well as other
customary conditions. There can be no assurance that such conditions will be
met. See "United Craft Brewers, Inc.--Recent Developments."
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information should be read in
conjunction with the financial statements of Nor'Wester, WVI, Aviator, Bayhawk
and Mile High and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High included elsewhere in this Proxy Statement/Prospectus. The
summary historical financial information presented below has been derived from
the financial statements of Nor'Wester, WVI, Aviator, Bayhawk and Mile High. The
above-mentioned financial statements as of and for the year ended December 31,
1996 have been audited by Price Waterhouse LLP, independent accountants, whose
reports are included elsewhere herein. The summary historical financial
information for the three month period ended March 31, 1997 is included herein
and has not been audited.
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
WVI
AVIATOR BAYHAWK MILE HIGH CONSOLIDATED NOR'WESTER
------------ ---------- ------------ --------------- ----------------
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 1,824,077 $ 419,938 $ 1,515,489 $ 3,869,304 $ 6,524,082
Gross margin (deficit)............... (54,985) 55,488 (389,846) (389,343) 1,364,193
Loss from operations................. (1,156,208) (284,278) (2,411,438) (4,099,209) (3,181,366)
Loss before minority interest........ (1,157,706) (291,542) (2,432,272) (4,317,326)(1) (2,974,423)(2)
Net loss............................. (1,157,706) (291,542) (2,432,272) (2,464,231)(1) (2,751,926)(2)
Net loss per share................... $ (0.20) $ (0.13) $ (0.52) $ (0.51) $ (0.74)
Weighted average shares
outstanding........................ 5,685,642 2,200,814 4,691,810 4,852,513 3,696,041
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit) $ (1,145,814) $ (235,508) $ (2,662,424) $ (2,914,247) $ (3,216,897)
Total assets......................... 2,665,317 931,793 2,123,690 5,784,356 15,788,533
Long-term debt and capital lease
obligations........................ 57,664 0 241,224 298,888 11,405
Retained earnings (deficit).......... (1,603,074) (862,893) (3,160,616) (3,944,520) (2,284,311)
Shareholders' equity................. 984,811 567,290 (903,648) 1,557,802 8,780,169
- --------------------------
(1) 46%, 43%, 49% of the losses of Aviator, Bayhawk and Mile High, respectively,
are not included in the consolidated net loss of WVI because the minority
shareholders of Aviator, Bayhawk and Mile High owned the above percentages
of the outstanding shares of these entities from January 1, 1996 to March
31, 1997.
(2) 39% of the losses incurred by North Country Joint Venture, LLC for the first
nine months of 1996 are not included in the consolidated net losses of
Nor'Wester because the minority shareholder (WVI) owned 39% of North Country
Joint Venture, LLC for the first nine months of 1996.
18
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------------------
WVI
AVIATOR BAYHAWK MILE HIGH CONSOLIDATED NOR'WESTER
------------ ---------- ------------ --------------- ----------------
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 283,146 $ 87,201 $ 15,069 $ 385,416 $ 1,253,847
Gross margin (deficit)............... (11,679) (909) (65,878) (78,466) 273,438
Loss from operations................. (122,316) (61,507) (157,301) (406,383) (305,400)
Loss before minority interest........ (124,411) (61,300) (157,301) (416,900)(1) (423,997)
Net loss............................. (124,411) (61,300) (157,301) (253,260)(1) (423,997)
Net loss per share................... $ (0.02) $ (0.03) $ (0.03) $ (0.05) $ (0.11)
Weighted average shares
outstanding........................ 5,331,775 2,200,814 4,693,787 4,860,996 3,711,097
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit) $ (1,227,381) $ (283,995) $ (2,818,339) $ (3,264,741) $ (3,485,922)
Total assets......................... 2,731,327 901,979 2,009,522 5,717,070 15,804,816
Long-term debt and capital lease
obligations........................ 56,262 0 217,446 273,708 10,825
Retained earnings (deficit).......... (1,727,485) (924,193) (3,317,917) (4,197,780) (2,708,308)
Shareholders' equity................. 860,400 505,990 (1,060,949) 1,304,542 8,356,172
- ------------------------
(1) 46%, 43%, 49% of the losses of Aviator, Bayhawk and Mile High, respectively,
are not included in the consolidated net loss of WVI because the minority
shareholders of Aviator, Bayhawk and Mile High owned the above percentages
of the outstanding shares of these entities from January 1, 1996 to March
31, 1997.
19
SUMMARY PRO FORMA FINANCIAL INFORMATION
The summary unaudited pro forma combined condensed financial information as
of December 31, 1996 and March 31, 1997 gives effect to (i) the Consolidation as
described in this Proxy Statement/ Prospectus and the estimated adjustments
caused by the Consolidation, (ii) the subsequent sale of 1,047,619 shares to UBA
in the Investment and (iii) the probable acquisition of Mendocino Brewing
Company ("Mendocino") by UCB, all as described in the "Notes to Unaudited Pro
Forma Combined Financial Statements." Stockholders are urged to read this
document and the "Notes to Unaudited Pro Forma Combined Financial Statements"
carefully. The Unaudited Pro Forma Combined Financial Information is not
necessarily indicative of the financial position or results that would have
occurred had the events referred to above been consummated on the dates for
which the consummation of such events is being given effect, nor it is
necessarily indicative of the future financial position or results of the
proposed entity. See "UCB Pro Forma Combined Financial Information (unaudited)."
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1997
PRO FORMA -----------------------------------------------
CONSTITUENT UCB CONSTITUENT PRO FORMA
CORPORATIONS COMBINED PRO FORMA CORPORATIONS UCB PRO FORMA
PRO FORMA BEFORE UCB PRO FORMA COMBINED UCB
COMBINED MENDOCINO COMBINED COMBINED BEFORE MENDOCINO COMBINED
---------------- ----------------- ---------------- --------------- ---------------- ------------
STATEMENT OF OPERATIONS
DATA: (1)
Net revenues........... $ 8,927,189 $ 8,927,189 $ 12,766,889 $ 1,639,263 $ 1,639,263 $ 2,643,836
Gross margin........... 974,850 974,850 2,904,850 194,972 194,972 623,305
Loss from operations... (7,280,575) (7,280,575) (8,050,443) (711,783) (711,783) (990,836)
Loss before minority
interest............. (7,069,252)(2) (7,069,252)(2) (7,790,520) (840,897)(2) (840,897)(2) (1,113,494)
Net loss............... (5,216,157)(2) (5,216,157)(2) (5,937,425) (677,257)(2) (677,257)(2) (949,854)
Net loss per share..... $ (2.94)(3) $ (1.85)(4) $ (1.11) $ (0.38)(3) $ (0.24)(4) $ (0.18)
Weighted average shares
outstanding.......... 1,776,389 2,824,008 5,352,579 1,776,389 2,824,008 5,352,579
BALANCE SHEET DATA (AT
PERIOD END): (5)
Working capital (deficit)..................................................... $ (6,750,663) $ (2,650,663) $ (4,129,098)
Total assets.................................................................. 19,613,989 22,813,989 47,627,714
Long-term debt (including current portion).................................... 4,049,194 3,149,194 8,636,737
Retained earnings (deficit)................................................... (6,906,088) (2,708,308) (2,708,308)
Shareholders' equity.......................................................... 9,660,714 13,760,714 30,535,714
- ------------------------------
(1) The pro forma statements of operations data are presented assuming the
Consolidation and Investment and the probable acquisition of Mendocino
occurred at the beginning of the periods presented.
(2) 46%, 43%, 49% of the losses of Aviator, Bayhawk and Mile High, respectively,
are not included in the combined net loss of the Constituent Corporations
and UCB because the minority shareholders of Aviator, Bayhawk and Mile High
owned the above percentages of the outstanding shares of these entities from
January 1, 1996 to March 31, 1997.
(3) Reflects the conversion of the Constitutent Corporations' shares into UCB
shares.
(4) Reflects (i) the conversion of the Constituent Corporations' shares into UCB
shares and (ii) the sale of additional shares to UBA as of January 1, 1996.
(5) The March 31, 1997 pro forma balance sheet data are presented assuming the
Consolidation and Investment and the probable acquisition of Mendocino
occurred on March 31, 1997.
20
COMPARATIVE PER SHARE DATA
Set forth below are unaudited pro forma combined loss from continuing
operations and book value per common share of UCB after giving effect to the
Consolidation of the Constituent Corporations and UCB, the Investment and the
probable acquisition of Mendocino. Pro forma combined loss per share from
continuing operations is derived from the pro forma combined information
presented elsewhere herein, which gives effect to the Consolidation under the
purchase method of accounting as if it had occurred at the beginning of the
periods presented. Pro forma combined book value per share is based upon
outstanding common shares, adjusted to include the shares of UCB Common Stock to
be issued in the Consolidation, and assumes that the Consolidation had been
effective at the end of the periods presented. In addition, the following
information sets forth the historical loss from continuing operations and book
value per common share of Nor'Wester, WVI, Aviator, Bayhawk, Mile High and
Mendocino and the loss from continuing operations and book value per common
share of each of the Constituent Corporations and Mendocino on an unaudited per
share equivalent pro forma combined basis, which is calculated by multiplying
their respective Exchange Ratios by the pro forma combined per share amounts for
UCB. For purposes of these pro forma calculations only, the Mendocino exchange
ratio is calculated by dividing the number of UCB shares assumed to be issued
for pro forma adjustment purposes by the total number of Mendocino common and
preferred shares outstanding at March 31, 1997. The information set forth below
should be read in conjunction with the financial statements and the "UCB Pro
Forma Combined Financial Information (unaudited)" included elsewhere in this
Proxy Statement/Prospectus, in each case including the notes thereto. The pro
forma information presented herein is for illustrative purposes only.
COMPARATIVE PER SHARE DATA AS OF AND
FOR THE YEAR ENDED DECEMBER 31, 1996
UCB PRO FORMA COMBINED BEFORE MENDOCINO:
Loss from continuing operations.................... $ (1.85)
Book value......................................... $ 5.11
UCB PRO FORMA COMBINED:
Loss from continuing operations.................... $ (1.11)
Book value......................................... $ 5.83
NOR'WESTER WVI AVIATOR BAYHAWK MILE HIGH MENDOCINO
----------- ----------- ----------- ----------- ----------- -----------
Historical:
Loss from continuing
operations................... $ (0.74) $ (0.51) $ (0.20) $ (0.13) $ (0.52) $ (0.05)
Book value..................... $ 2.37 $ 0.32 $ 0.18 $ 0.26 $ (0.19) $ 1.85
Exchange Ratio................... 0.3333333 0.0785714 0.0523809 0.0785714 0.0523809 0.9854834
EQUIVALENT PRO FORMA COMBINED
BEFORE MENDOCINO:
Loss from continuing
operations................... $ (0.62) $ (0.15) $ (0.10) $ (0.15) $ (0.10)
Book value..................... $ 1.70 $ 0.40 $ 0.27 $ 0.40 $ 0.27
EQUIVALENT PRO FORMA COMBINED:
Loss from continuing
operations................... $ (0.37) $ (0.09) $ (0.06) $ (0.09) $ (0.06) $ (1.07)
Book value..................... $ 1.94 $ 0.46 $ 0.31 $ 0.46 $ 0.31 $ 5.75
21
COMPARATIVE PER SHARE DATA AS OF AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997
UCB PRO FORMA COMBINED BEFORE MENDOCINO:
Loss from continuing operations.................... $ (0.24)
Book value......................................... $ 4.87
UCB PRO FORMA COMBINED:
Loss from continuing operations.................... $ (0.18)
Book value......................................... $ 5.70
NOR'WESTER WVI AVIATOR BAYHAWK MILE HIGH MENDOCINO
----------- ----------- ----------- ----------- ----------- -----------
Historical:
Loss from continuing
operations................... $ (0.11) $ (0.05) $ (0.02) $ (0.03) $ (0.03) $ (0.05)
Book value..................... $ 2.25 $ 0.27 $ 0.16 $ 0.23 $ (0.23) $ 1.84
Exchange Ratio................... 0.3333333 0.0785714 0.0523809 0.0785714 0.0523809 0.9854834
EQUIVALENT PRO FORMA COMBINED
BEFORE MENDOCINO:
Loss from continuing
operations................... $ (0.08) $ (0.02) $ (0.01) $ (0.02) $ (0.01)
Book value..................... $ 1.62 $ 0.38 $ 0.26 $ 0.38 $ 0.26
EQUIVALENT PRO FORMA COMBINED:
Loss from continuing
operations................... $ (0.06) $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.18)
Book value..................... $ 1.90 $ 0.45 $ 0.30 $ 0.45 $ 0.30 $ 5.62
COMPARATIVE MARKET PRICE DATA
Nor'Wester's Common Stock is traded on the Nasdaq National Market under the
symbol "ALES." The following table sets forth the high and low sales prices as
reported by the Nasdaq National Market for the periods indicated. Nor'Wester's
Common Stock commenced trading on January 18, 1996.
YEAR ENDING DECEMBER 31, 1997 HIGH LOW
- --------------------------------------------------------------------------------------- --------- ---------
Quarter 2 (through June 20, 1997)...................................................... $ 2.75 $ 1.75
Quarter 1.............................................................................. 3.13 2.00
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- --------------------------------------------------------------------------------------- --------- ---------
Quarter 4.............................................................................. $ 6.75 $ 2.50
Quarter 3.............................................................................. 6.75 3.63
Quarter 2.............................................................................. 7.00 4.88
Quarter 1 (from January 18, 1996)...................................................... 9.50 6.00
There is no public trading market for WVI's Common Stock, Aviator's Common
Stock, Bayhawk's Common Stock or Mile High's Common Stock. On January 29, 1997,
the last full trading day prior to the execution and delivery of the Investment
Agreement and the public announcement thereof, the closing price of Nor'Wester
Common Stock was $2.50 per share. The equivalent market price per share of
Nor'Wester Common Stock as of January 29, 1997, based upon an exchange ratio of
0.3333333, would have been $7.50.
The approximate number of shareholders of record on December 31, 1996 was
(i) 4,403 for Nor'Wester, (ii) 1,783 for WVI, (iii) 3,494 for Aviator, (iv)
1,268 for Bayhawk and (v) 2,594 for Mile High. There were no cash dividends
declared or paid in fiscal years 1996 or 1995 by any of the Constituent
Corporations and UCB does not anticipate declaring such dividends in the
foreseeable future.
22
RISK FACTORS
The following risk factors should be considered carefully by the holders of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock in evaluating
whether to approve and adopt the Merger Agreement and the transactions
contemplated thereby, including the Consolidation, and thereby become holders of
UCB Common Stock. These factors should be considered in conjunction with the
other information included in this Proxy Statement/Prospectus.
CONSOLIDATION STRATEGY
The successful implementation of UCB's consolidation strategy will depend
largely on its ability to (i) increase distribution of craft beer in markets
currently served by the Constituent Corporations and develop distribution
arrangements in new markets, (ii) manage and control costs, (iii) increase
utilization of production capacity, (iv) realize economies of scale, (v)
implement effective internal management, operational and financial controls, and
(vi) identify and acquire new breweries in strategic markets.
The consolidation of the business operations of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High will present difficult challenges for UCB's management due
to the increased time and resources required in management's effort. The
integration of certain operations following the Consolidation will require the
attention of management resources which would be otherwise devoted to the
day-to-day business of UCB. Following the Consolidation, among other things, UCB
will need to successfully integrate and streamline overlapping functions of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High. UCB's ability to successfully
integrate the businesses and operations of these companies is dependent upon a
number of factors, including retaining existing personnel and attracting new
personnel, recognizing economies of scale in both purchasing raw materials and
distributing its products, integrating production and distribution facilities,
implementing new information and other operational systems and retaining
existing Nor'Wester, WVI, Aviator, Bayhawk and Mile High consumers and
attracting new consumers. The difficulties of such integration may be increased
by the necessity of coordinating geographically separated organizations. The
process of integrating operations could cause an interruption of, or loss in
momentum in, the activities of the Constituent Corporations. The success of the
Consolidation will further depend on UCB's ability to utilize the production
facilities of the Constituent Corporations at high rates to spread fixed
production costs across higher units of production. In light of the foregoing
factors and uncertainties, there can be no assurance that UCB will be able to
successfully integrate the businesses and operations of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High or achieve higher production utilization rates.
Any difficulties encountered in connection with the Consolidation and the
integration of the operations of the Constituent Corporations could have an
adverse effect on the business, results of operations or financial condition of
UCB or one or all of the Constituent Corporations.
RECENT LOSSES
During 1996 and the first quarter of 1997, the Constituent Corporations
incurred significant losses associated with efforts to increase production and
distribution of their products through the Cooperative Brewing Agreements (as
described herein) of the Alliance (as described herein). In addition, Nor'Wester
was required to make a significantly greater investment in the construction and
start-up of its Saratoga Springs Brewery due to the inability of Nor'Wester's
joint venture partner, North Country Brewing Company, Inc., to make its $2.55
million capital contribution to the joint venture. Furthermore, as a result of
the entry of a significant competitor in the bottled Hefe Weizen market in the
second quarter of 1996, Nor'Wester experienced a significant reduction in the
sale of its flagship Hefe Weizen beer styles in the Pacific Northwest market. As
a consequence, the Constituent Corporations experienced high production,
marketing, general and administrative, and one-time expenses which resulted in
combined pro forma losses before losses related to minority interests of
$840,897, $7,069,252 and $1,532,234 in the first quarter of 1997 and in 1996 and
1995, respectively. The Constituent Corporations had combined accumulated
deficits of $6,906,088 and $6,228,831, at March 31, 1997 and December 31, 1996,
respectively. UCB expects
23
that the Constituent Corporations will continue to experience operating losses
on a combined basis until utilization rates at the brewing facilities increase
so as to reduce unit costs to cover operating expenses. Although UCB intends to
increase utilization rates through increased sales of the Constituent
Corporations' products and by providing contract brewing services to other
brewers, there can be no assurance that either of these objectives can be
achieved. UCB may also need to reduce its production capacity to increase
utilization to acceptable levels. Any such action would require a write-off of
some or all of the value of the eliminated assets. In addition, UCB believes
that the lack of adequate operational, financial and management resources in the
Constituent Corporations has led in part to increased costs and lower than
anticipated sales. Specifically, the decision to enter into the Alliance and the
Cooperative Brewing Agreements among the Constituent Corporations to expand the
distribution of Nor'Wester beer outside its principal Pacific Northwest market
proved costly. While the Constituent Corporations believed that the decision
would result in increased sales and production efficiencies, it instead led to
significant problems and reduced sales as Alliance members struggled to produce
Nor'Wester beer to specification and introduce the beer into new markets.
Further, the Constituent Corporations' inability to retain highly qualified
management personnel resulted in increased costs as the the Constituent
Corporations found it necessary to rely on the services of external consultants.
In addition, the Constituent Corporations' experienced increased costs and lower
than anticipated sales due to their inability to (i) timely anticipate demand
for their products in new markets as well as fluctuations in demand in existing
markets, (ii) establish reasonable budgets and effectively manage performance
against budget and (iii) fully realize the advantages of centralized purchasing
or engage in aggressive bidding for vendor and supplier services. UCB believes
it has identified these problems and begun to implement plans to address them by
terminating cooperative brewing among Alliance members, hiring experienced
production, sales and financial management personnel and through establishing
bidding and spending policies, forecasting procedures and management information
and financial reporting systems. There can be no assurance that such plans will
effectively reduce losses and ultimately establish profitability. Furthermore,
there can be no assurance that the Constituent Corporations as a whole will be
successful and operate on a profitable basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" for each of the Constituent Corporations.
FAILURE TO REALIZE ANTICIPATED ECONOMIES OF SCALE
The Consolidation involves the integration of the business operations of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High. Among the factors considered by
the UCB Board and the Boards of the Constituent Corporations in connection with
their approval of the Merger Agreement were the opportunities for operating
efficiencies that they expect will ultimately result from the Consolidation.
Although UCB believes that through the Consolidation it can leverage its buying
power and distribution network so as to reduce costs, there can be no assurance
that such strategy will be successful or that the benefits expected from such
integration will be realized.
ACQUISITION RISKS
UCB expects that in addition to internal development, it will continue to
seek to expand its presence in the craft brewing industry in part through
acquisitions or strategic alliances with other craft brewers operating in
selected geographic markets. UCB's strategy is to acquire other craft brewers
whose products are complementary to the Constituent Corporations' products and
who are located in certain strategic markets with the objective that the
operations of these entities can be consolidated with existing operations
resulting in reduced costs and increased market share. See "United Craft
Brewers, Inc." There can be no assurance that UCB will be successful in
identifying, acquiring and integrating other craft brewers. Acquisitions involve
a number of special risks, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
incorporation of acquired products into existing product lines, adverse
short-term effects on reported operating results, the amortization of acquired
intangible assets, the loss of key employees of the acquired company or business
and the
24
difficulty of presenting a unified corporate image. No assurance can be given
that any acquisition by UCB will or will not occur, that if an acquisition does
occur it will not materially and adversely effect UCB or that any such
acquisition will be successful in enhancing UCB's business. In addition, there
can be no assurance that UCB will be able to maintain and develop a system of
business management to support future growth. If the operations of the acquired
company do not meet expectations, UCB may be required to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business. In addition, future acquisitions may result in potentially
dilutive issuances of equity securities and the incurrence of additional debt by
UCB. Further, newly acquired craft breweries may not have been financially
successful under prior management, and there is no assurance that UCB will be
able to improve the performance of such breweries to make them profitable. See
"United Craft Brewers, Inc.--Recent Developments" for a discussion of the status
of UCB's acquisition strategy.
CAPITAL REQUIREMENTS
To finance ongoing operations and successfully implement its strategy, UCB
will need to raise capital through the incurrence of long-term or short-term
indebtedness (which would result in increased interest and amortization expense)
or the issuance of equity securities in private or public transactions (which
would result in dilution of the equity positions of then-current UCB
shareholders). Currently, the Constituent Corporations are highly dependent upon
the receipt of bridge loans from UBA to fund their working capital requirements.
In addition, the Constituent Corporations are past due on a number of their
accounts payables and it is estimated that there will be approximately $1.3
million in fees and expenses incurred in connection with the Consolidation.
Nor'Wester's bank is currently seeking repayment on Nor'Wester's line of credit
within 10 days of the closing of the Investment and is seeking to shorten the
maturity of the term loan to September 30, 1997. Also, UCB's consolidation and
growth strategies require substantial capital investment, not only for the
acquisition of craft breweries, but also for the effective integration,
operation and expansion of brewing production capacity and operations,
information systems maintenance and improvements, and the retirement of existing
debt at acquired craft breweries. Management of UCB believes that, because of
the cash requirements set forth above, the bridge loans and investment by UBA
will not be adequate to satisfy UCB's cash needs going forward and additional
financing will need to be obtained. There can be no assurance that acceptable
financing for current and future capital requirements can be obtained. The
failure of UCB to obtain acceptable financing could have a material adverse
impact on UCB's business, financial condition and results of operations.
MERGER EXPENSES AND CONSOLIDATION CHARGES
Transaction costs relating to the negotiation of, preparation for and
consummation of the Consolidation and investment by UBA, together with charges
associated with the integration of the businesses and operations of Nor'Wester,
WVI, Aviator, Bayhawk and Mile High, are expected to result in a one-time charge
to UCB's earnings in the quarter ending September 30, 1997. The management of
UCB currently estimates that this charge will be $1.4 million, before taxes,
although such amount may be increased by unanticipated additional expenses and
charges incurred in connection with the Consolidation. See "UCB Pro Forma
Combined Selected Financial Information." This estimated charge is expected to
include $55,000 in severance and employee relocation expenses; $770,000 in
professional fees and expenses of investment bankers, legal counsel and
accountants for the Constituent Corporations; $365,000 in fees and expenses of
legal counsel for UCB; $166,000 in printing, mailing and other miscellaneous
costs; and $55,000 in contractual obligations and other related restructuring
activities incurred to eliminate duplicate management information systems,
facilities and operations and excess capacity in the combined operations. While
the exact timing of this charge cannot be determined at this time, management of
UCB currently anticipates that this charge to earnings will be recorded
primarily in the quarter in which the Consolidation is consummated. In addition,
there can be no assurance that UCB will not incur additional charges in
subsequent quarters as a result of the Consolidation.
25
TAX RISKS
The transactions composing the Consolidation have been structured so as to
qualify under Section 351(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and as reorganizations under Section 368(a) of the Code. Assuming
the transactions qualify under one or both of these provisions, no gain or loss
will be recognized by the Constituent Corporations or by their shareholders on
the exchange of stock in a Constituent Corporation for shares of UCB. However,
no ruling from the Internal Revenue Service ("IRS") nor opinion of counsel has
been obtained, and there can be no assurance that the IRS will agree. In
addition, even if the transactions so qualify, the IRS could contend that
shareholders of the Constituent Corporations must recognize income as a result
of Mr. Bernau's transfer of UCB shares to UCB and UBA in connection with the
Consolidation. Shareholders of the Constituent Corporations should consult their
own tax advisors concerning the federal, state and local tax consequences to
them of the Consolidation. See "Certain Federal Income Tax Considerations."
RISKS RELATING TO FAILURE TO APPROVE THE MERGER AGREEMENT AND CONSOLIDATION
The Constituent Corporations have incurred and are expected to further incur
substantial costs, in an aggregate amount estimated to be approximately $1.3
million in connection with the analysis, planning, documentation, negotiation
and approval process related to the Consolidation and Investment. In the event
the shareholders of each of the Constituent Corporations do not approve the
proposed Consolidation, a large portion of such costs will be shared pro rata by
the companies according to the respective interests which they would have
received in UCB had the Consolidation occurred.
In addition, if the shareholders of the Constituent Corporations do not
approve the Consolidation, then no further advances will be made by UBA under
the Bridge Loan, Nor'Wester will be forced to repay the entire principal and
interest of the Bridge Loan within 60 days following disapproval of the
Consolidation, all of the Constituent Corporations will be forced to seek
operating funds from third parties and if unable to obtain such funds will be
forced to cease their business operations. Since October 1996 through July 21,
1997, UBA has provided $2.537 million in advances under the $2.75 million Bridge
Loan facility. Should Nor'Wester be forced to repay the Bridge Loan to UBA, each
of the other Constituent Corporations will be required to pay Nor'Wester that
portion of the Bridge Loan funds which was utilized by such company.
Another risk of failure to approve the Merger Agreement and Consolidation is
that the Constituent Corporations would remain in their current difficult
financial condition, which include the circumstances that led the respective
board of directors of each Constituent Corporation to recommend the
Consolidation and the independent accountants to qualify their reports with
respect to each Constituent Corporation as to such Constituent Corporation's
ability to continue as a going concern. See "Reasons for the Consolidation;
Recommendation of the Board of Directors," "Selected Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for each of the Constituent Corporations and "The Consolidation and
Investment by UBA--Failure to Approve the Transaction."
DEPENDENCE UPON BRIDGE LOANS AND INVESTMENT FROM UNITED BREWERIES OF AMERICA,
INC.
The Constituent Corporations have been and continue to be highly dependent
upon the receipt of bridge loans and investment funds from UBA to pay creditors
and sustain the Constituent Corporations' operations during the expected periods
of loss until profitability can be achieved. The receipt of additional advances
under the credit facility and closing of the investment is subject to the
Constituent Corporations' compliance with certain covenants and conditions set
forth in the Investment Agreement and Credit Agreement, including the condition
that no "material adverse effect" occurs in the businesses of the Constituent
Corporations as a whole. See "Ancillary Agreements--UBA Bridge Loan Credit
Agreement and Related Documents." While the Constituent Corporations are
dependent upon the receipt of further bridge loans under the Credit Agreement
and closing of the UBA investment, there can be no assurance
26
that one or more of the Constituent Corporations will not violate one or more
covenants in the Investment Agreement or that a closing condition will not be
met. In addition, there can be no assurance that UBA will fund additional bridge
loans or make the investment even if the Constituent Corporations perform and
satisfy the covenants and conditions set forth in the Investment Agreement.
Accordingly, there can be no assurance that the Constituent Corporations 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, even if the
Consolidation is approved.
AMOUNTS PAST DUE TO CONTRACTORS, SUPPLIERS AND EQUIPMENT VENDORS
At March 31, 1997 the Constituent Corporations were past due on
approximately $3.4 million of their accounts payable. The Constituent
Corporations have communicated with their creditors and are negotiating
acceptable payment terms to be funded primarily through the bridge loans and
investment from UBA. If the Constituent Corporations do not have the cash needed
to pay the amounts due and are not able to work out satisfactory alternative
payment arrangements, these contractors, suppliers and vendors may seek to
exercise their remedies, including the filing of liens against assets of one or
more of the Constituent Corporations. As of the date of this Proxy
Statement/Prospectus, management is aware of three creditors who have filed
liens against North Country Joint Venture, LLC, to secure an aggregate of
$414,103 owed to contractors and equipment suppliers of the Saratoga Springs
Brewery. While UCB believes that at the closing of the investment by UBA
adequate arrangements have been made to satisfy creditors owed past due amounts,
there can be no assurance that this will be the case. If for any reason, UCB or
the Constituent Corporations are unable to pay past due creditors and finance
working capital requirements through the planned investment by UBA, alternative
methods of financing would have to be obtained. No assurance can be given that
alternative methods of financing would be available on terms acceptable to UCB
or the Constituent Corporations, 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 UCB or the Constituent
Corporations to obtain additional capital would adversely affect the Constituent
Corporations' business and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for each of the
Constituent Corporations. Resolving the Constituent Corporations' payment
obligations to its contractors, suppliers and vendors may distract management
from its other duties, involve additional expense, and result in production
delays which in turn could have a material adverse impact on UCB's business,
financial condition, and results of operations.
RISKS OF DEBT AND DEFAULT ON BANK LOANS BY NOR'WESTER
As of June 1, 1997, Nor'Wester had incurred approximately $5.1 million in
debt to finance operations of its Portland Brewery and Saratoga Springs Brewery,
including $2.1 million of bridge loans from UBA. The ratio of Nor'Wester's debt
to equity as of March 31, 1997, is .57 to 1. See "Nor'Wester Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Loan and lease payments for
Nor'Wester's facilities must be paid regardless of Nor'Wester's revenue. In
addition, Nor'Wester is in default on its $1.0 million bank line of credit
facility which was due on December 31, 1996 and is not in compliance with
certain loan covenants relating to both its $1.0 million line of credit facility
and $2.0 million term loan with the bank. These loans are secured by
substantially all of Nor'Wester's assets, except the assets of the Saratoga
Springs Brewery. The bank has notified Nor'Wester that the $2.0 million term
loan will become due and payable immediately unless an acceptable amendment to
the bank's loan agreements is executed. Nor'Wester is involved in discussions
with the bank in order to (i) extend the $1.0 million line of credit facility to
mature on the earlier of September 30, 1997, or 10 days following closing of the
Investment, (ii) renew the term loan and (iii) waive the loan covenants
associated with these loans so long as the Constituent Corporations remain in
compliance with all terms of the Investment Agreement and achieve reasonable
progress toward closing the Investment. However, final approval of the amendment
to the bank's loan agreements has not yet been received. If final approval is
27
not received or if received but the Constituent Corporations subsequently
violate the terms of the amendment, then Nor'Wester would be in default of its
loans which could lead to foreclosure and sale of all or an important part of
its assets. Such an event would have a material adverse impact on Nor'Wester's
business, financial condition, and results of operations.
MATURING MARKETS
Most of the Constituent Corporations' 1996 sales were in the states of
Washington and Oregon. Nor'Wester and Aviator Ales believe that craft beer sales
in 1996 accounted for approximately 12 percent of total beer sales in those
states, compared to approximately 2 percent nationwide. Craft beer sales in the
states of Washington and Oregon increased by 30 percent from 1994 to 1995, but
have been estimated by UCB to have increased at a much slower pace from 1995 to
1996. No assurance can be given that the sales increases in the market will
continue or even be maintained. UCB anticipates that as the craft beer market
matures, craft brewers may begin more aggressive pricing as a means of
maintaining market share, which could adversely affect the Constituent
Corporations' margins.
VARIABILITY OF MARGINS AND OPERATING RESULTS
UCB anticipates that the operating margins of the Constituent Corporations
will fluctuate and may decline as a result of many factors, including (i)
disproportionately high operating costs when one or more of the Constituent
Corporations' breweries are producing below maximum designed production
capacity, which typically occurs upon commencing operations at a new facility
such as the Saratoga Springs Brewery, (ii) increasing sales and marketing costs
as a Constituent Corporation seeks to penetrate new markets and Nor'Wester
regains market share lost in the Pacific Northwest market, (iii) changes in
product sales mix, including, for example, beers which contain costly fruit
concentrates, or beer requiring longer conditioning time, or an increase in the
percentage of sales derived from 12 ounce bottles, which have a much lower gross
margin than 22 ounce bottles or kegs; (iv) increased shipping costs, including
where products must be shipped a substantial distance to supply a particular
market; (v) further decreases in a Constituent Corporation's market share due to
increased competition, and (vi) the possible need to lower prices for a
Constituent Corporation's products to meet competition. Many other factors could
cause the Constituent Corporations' profit margins to decline, including,
declining sales prices due to increasing competition, possible increases in the
cost of packaging materials and brewing ingredients, potential increases in
federal or state excise taxes and the impact of an increasing average federal
excise tax rate as production levels increase. In addition, the Constituent
Corporations have historically operated with little or no sales backlog, and
their ability to predict sales for an upcoming quarter is limited. Significant
fluctuations in the Constituent Corporations' quarterly results of operations
may also result from the timing of expansion into new markets, new product
introductions, seasonality of demand, increased competition and general economic
conditions.
CONFLICTS OF INTEREST
Although the Constituent Corporations are not under common control, certain
relationships between the Constituent Corporations could result in conflicts of
interest. Due to the relationships between and among UCB and the Constituent
Corporations both contractually and as a result of Mr. Bernau's common ownership
interests in, and management positions with, these companies, conflicts of
interest exist. In addition, upon consummation of the Consolidation Mr. Bernau
will enter into an employment agreement with UCB, will receive repayment of a
loan to Nor'Wester and UCB will agree to use its best efforts to have Mr. Bernau
released as a personal guarantor on certain obligations of the Constituent
Corporations. Because of Mr. Bernau's interest in these companies and the
contracts he will enter into with UCB, he has an inherent conflict of interest
in negotiating the terms of any contractual arrangements between the companies,
including those relating to the Consolidation and investment by UBA. All
agreements relating to the Consolidation and Investment have been approved by a
majority of the disinterested members of each of the Constituent Corporations'
Board of Directors, except for Mile High for which Mr. Bernau is
28
the sole director. In addition, the financial advisor to WVI in the
Consolidation is a significant shareholder of Nor'Wester. See "Interests of
Certain Persons in the Consolidation."
INCREASING COMPETITION
The domestic market in which the Constituent Corporations compete is highly
competitive due to the continuing proliferation of new craft brewers, efforts by
regional craft brewers to expand their production capabilities and distribution,
the introduction of fuller-flavored products by certain major national brewers,
and underutilized domestic brewing capacity, which facilitates expansion by
existing contract brewers and the entry of new contract brewers. Although it is
difficult to predict, UCB anticipates that intensifying competition and
increased capacity in the craft beer segment may cause pressure on the
Constituent Corporations to reduce their prices in certain areas. In addition,
the larger national brewers have developed or are developing beer styles and
brands to compete directly with craft beers. These national competitors and many
of the Constituent Corporations' other craft beer competitors have significant
advantages such as lower production costs, larger marketing budgets, greater
financial and other resources and more developed and extensive distribution
networks than the Constituent Corporations. There can be no assurance that the
Constituent Corporations will be able to maintain their selling prices, shelf
space or tap handles in existing markets or their selling prices as they enter
new markets.
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
Like most craft brewers, the Constituent Corporations rely heavily on third
party distributors for the sale of their products to retailers. The loss of a
significant distributor could have a material adverse effect on the Constituent
Corporations' business, financial condition and results of operations. The
Constituent Corporations' distributors often represent competing specialty beer
brands, as well as national beer brands, and are to varying degrees influenced
by their continued business relationships with other brewers. The Constituent
Corporations' independent distributors may be influenced by a large brewer if
they rely on that brewer for a significant portion of their sales. While UCB
believes that the relationships between the Constituent Corporations and their
distributors are generally good, many of these relationships are relatively new
and untested and there can be no assurance that the Constituent Corporations'
distributors will continue to effectively market and distribute the Constituent
Corporations' beer. The loss of any distributor or the inability to replace a
poorly performing distributor in a timely fashion could have a material adverse
effect on the business, financial condition and results of operations of one or
more of the Constituent Corporations. Furthermore, no assurance can be given
that the Constituent Corporations will successfully attract new distributors as
they increase their presence in their existing markets or expand into new
markets. In addition, one of the Constituent Corporations' major competitors,
Redhook Ale Brewery ("Redhook"), established a distribution alliance with
Anheuser-Busch, Incorporated in October 1994. Anheuser-Busch is Redhook's single
largest shareholder owning an interest of approximately 25%. This alliance
purports to give Redhook access to Anheuser-Busch's domestic network of over 700
wholesale distributors. Many of the Constituent Corporations' distributors are
part of Anheuser-Busch's network of distributors. UCB is unable to predict
whether the Anheuser-Busch/Redhook alliance represents a market trend and no
assurance can be given that this or other such arrangements may not have a
material adverse effect on the business, financial condition and results of
operations of the Constituent Corporations and UCB or result in a distributor's
refusal to carry the Constituent Corporations' products.
DEPENDENCE ON CERTAIN SUPPLIERS
Each of the Constituent Corporations relies upon a limited number of
suppliers of raw materials used to make and package the respective Constituent
Corporation's beer. Although to date each Constituent Corporation has been able
to obtain adequate supplies of these ingredients and other raw materials in a
timely manner from existing sources, if a particular Constituent Corporation
were unable to obtain sufficient quantities of ingredients or other raw
materials, delays or reductions in product shipments could occur which would
have a material adverse effect on the business, financial condition and results
of
29
operations of the Constituent Corporations and UCB. As with most agricultural
products, the supply and price of raw materials used to produce the Constituent
Corporations' beers can be affected by a number of factors beyond the
Constituent Corporations' control, such as frosts, droughts, other weather
conditions, economic factors affecting growing decisions, various plant diseases
and pests. If any of the foregoing were to occur, no assurance can be given that
such condition would not have a material adverse effect on the business,
financial condition and results of operations of the Constituent Corporations
and UCB. In addition, the results of operations of the Constituent Corporations
and UCB are dependent upon their ability to accurately forecast their
requirements of raw materials. Any failure by a Constituent Corporation or UCB
to accurately forecast its demand for raw materials could result in an inability
to meet higher than anticipated demand for product or producing excess
inventory, either of which may adversely affect results of operations of the
Constituent Corporations and UCB.
DEPENDENCE ON KEY PERSONNEL
Management of UCB's business is substantially dependent on the services of
Vijay Mallya, UCB's Chairman and Chief Executive Officer, and of James W.
Bernau, UCB's President, and other key management employees. Loss of the
services of Mr. Mallya or Mr. Bernau or any other key management employee could
have a material adverse effect on UCB's business, financial condition and
results of operations. UCB does not maintain a key man life insurance policy on
Mr. Mallya, but does maintain such a policy on Mr. Bernau.
OPERATING HAZARDS
The Constituent Corporations' operations are subject to certain hazards and
liability risks faced by all brewers, such as potential contamination of
ingredients or products by bacteria or other external agents that may be
wrongfully or accidentally introduced into products or packaging. The
Constituent Corporations' products are not pasteurized. While the Constituent
Corporations have never experienced a contamination problem in their products,
the occurrence of such a problem could result in a costly product recall and
serious damage to the reputation of the Constituent Corporations and UCB for
product quality. The Constituent Corporations' operations also subject employees
and others to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and other equipment. Although the
Constituent Corporations maintain insurance against certain risks under various
general liability and product liability insurance policies, no assurance can be
given that the Constituent Corporations' insurance will be adequate to fully
cover any incidents of product contamination or injuries resulting from brewery
operations.
PUBLIC ATTITUDES
The alcoholic beverage industry has become the subject of considerable
societal and political attention in recent years due to increasing public
concern over alcohol-related social problems including drunk driving, underage
drinking and health consequences from the misuse of alcohol, including
alcoholism. As an outgrowth of these concerns, the possibility exists that
advertising by beer producers would be restricted, that additional cautionary
labeling or packaging requirements might be imposed or that there may be renewed
efforts to impose increased excise or other taxes on beer sold in the United
States. No assurance can be given that any decrease in beer consumption,
particularly in the craft beer segment, or increase in governmental regulations
relating to the domestic beer industry would not have a material adverse effect
on the business, financial condition and results of operations of the
Constituent Corporations and UCB.
DRAM SHOP LIABILITY
The serving of alcoholic beverages to a person known to be intoxicated may,
under certain circumstances, result in the server being held liable to third
parties for injuries caused by the intoxicated customer. Nor'Wester serves beer
and wine to its customers at its pub located adjacent to the Nor'Wester
30
Brewery in Portland, Oregon (the "Nor'Wester Public House"). In addition, the
Constituent Corporations sell beer and wine for take out at their respective
breweries. If an intoxicated person is served or sold beer or wine and
subsequently commits a tort such as causing an automobile accident, the
Constituent Corporation which served or sold the beer or wine may be held liable
for damages to the injured persons or property. Each of the Constituent
Corporations has obtained host liquor liability insurance coverage and will
continue such coverage if available at a reasonable cost. Even though such
coverage is now available at a reasonable cost, no assurance can be given that
future increases in premiums will not make it prohibitive to maintain adequate
insurance coverage. Furthermore, a large damage award against a Constituent
Corporation, not adequately covered by insurance, could have a material adverse
effect on the business, financial condition and results of operations of the
Constituent Corporations and UCB.
GOVERNMENT REGULATION; TAXATION
The manufacture and sale of alcoholic beverages is a business that is highly
regulated and taxed at the federal, state and local levels. The Constituent
Corporations' operations may be subject to more restrictive regulations and
increased taxation by federal, state and local governmental agencies than are
those of non-alcohol related businesses. For instance, operation of each of the
Constituent Corporations' breweries and the Nor'Wester Public House requires
various federal, state and local licenses, permits and approvals. The loss or
revocation of any existing licenses, permits or approvals, failure to obtain any
additional or new licenses, permits or approvals or the failure to obtain
approval for the transfer of any existing permits or licenses could have a
material adverse effect on the ability of the respective Constituent Corporation
to conduct its business. Certain states have laws restricting or forbidding a
combined pub and brewery. Furthermore, U.S. Treasury Department, Bureau of
Alcohol, Tobacco and Firearms ("BATF") regulations prohibit, among other things,
the payment of beer slotting allowances to retailers. These regulations have the
effect of preventing competitors with greater financial resources from excluding
smaller brewers from retailers. Any repeal or substantial modification of these
regulations could have a material adverse effect on the business, financial
condition and results of operations of the Constituent Corporations and UCB.
Federal and state "tied-house" laws and regulations prevent or restrict, to
varying degrees, ownership or partial ownership by brewers of beer retailers. If
these laws or regulations were repealed or substantially modified, there would
likely be a material adverse effect on the business, financial condition and
results of operations of the Constituent Corporations and UCB. In addition, if
federal or state excise taxes are increased, product prices may have to be
raised to maintain present profit margins. UCB does not believe that a price
increase due to increased taxes will necessarily result in reduced unit sales,
but the actual effect will depend on the amount of any increase, general
economic conditions and other factors. However, there can be no assurance that
higher taxes will not reduce overall demand for beer, thus negatively impacting
sales of the Constituent Corporations' products.
CONTROL BY STOCKHOLDERS
Immediately after consummation of the Consolidation and the transactions
contemplated by the Investment Agreement, UBA will beneficially own
approximately 40% of the outstanding UCB Common Stock and James W. Bernau, the
President of UCB, will beneficially own approximately 10% of the outstanding UCB
Common Stock. As a result, UBA will retain substantial power to elect all of the
directors of UCB and, in general, to determine the outcome of any matter
submitted to a vote of UCB's stockholders for approval, including mergers,
consolidations or the sale of all or substantially all of UCB's assets. Due to
their significant ownership positions, UBA and Mr. Bernau may be able, in
concert with each other, to prevent or cause a change in control of UCB.
UNCERTAINTY OF MARKET VALUE OF UCB COMMON STOCK
Upon consummation of the Consolidation, each outstanding share of the
Constituent Corporations' Common Stock will be converted into a fraction of a
share of UCB Common Stock as determined pursuant to the exchange ratios set
forth herein. There can be no assurance that the value of the UCB Common
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Stock received in the Consolidation by holders of Common Stock of the
Constituent Corporations will be equal to or greater than the market value of
the respective shares of each Constituent Corporation that are converted into
UCB Common Stock at the Effective Time or at any time thereafter.
TRADING MARKET FOR UCB COMMON STOCK; POSSIBLE VOLATILITY OF UCB COMMON STOCK
PRICE
Prior to consummation of the Consolidation, there has been no public trading
market for the Common Stock of UCB. The Common Stock of Nor'Wester has been
listed on the Nasdaq National Market and the Common Stock of each of WVI,
Aviator, Bayhawk and Mile High have traded only on an informal basis. Although
UCB intends to apply for listing of its Common Stock on The Nasdaq SmallCap
Market effective on or before the Effective Time, there can be no assurance that
approval for such listing will be received or, if received, that UCB Common
Stock will continue to be listed on The Nasdaq SmallCap Market in the future.
Stockholders of Nor'Wester may experience adverse effects on the liquidity of
their shares of Nor'Wester Common Stock because they will now hold shares of UCB
Common Stock traded on The Nasdaq SmallCap Market instead of the Nasdaq National
Market.
The Exchange Ratios were determined by negotiations among UBA, Nor'Wester,
WVI, Aviator, Bayhawk and Mile High, and may not be indicative of the market
price for UCB's Common Stock in the future. There can be no assurance that an
active trading market for UCB Common Stock will be sustained after the
Consolidation. The market price for Nor'Wester's Common Stock has fluctuated
significantly in the past. UCB believes that such fluctuations have been caused
by poor operating performance and changes in the condition of the craft beer
industry due to increased competition. This volatility has had a substantial
effect on the market price of Nor'Wester's Common Stock and the stock of other
craft brewing companies. UCB anticipates that the market price for its Common
Stock may be volatile following the Consolidation. In addition, the number of
shares of UCB Common Stock issuable in connection with the Consolidation is
fixed and will not be adjusted based on changes in the relative trading price of
Nor'Wester or based on the performance of the other Constituent Corporations.
The trading price of Nor'Wester Common Stock at the Effective Time may vary from
the trading price of Nor'Wester Common Stock as of the date hereof as a result
of changes in the business, operations, financial results and prospects of
Nor'Wester, market assessments of the likelihood that the Consolidation will be
consummated and the timing thereof, general market and economic conditions, and
other factors.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS; POTENTIAL ISSUANCE OF PREFERRED
STOCK
Certain provisions of the UCB Certificate of Incorporation, the UCB Bylaws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of UCB and limit the price that
certain investors might pay in the future for shares of UCB Common Stock. These
provisions include a staggered board of directors, the inability of the
stockholders to call special meetings, advance notice provisions and authority
of the UCB Board to authorize the issuance, without further shareholder
approval, of Preferred Stock with rights and privileges senior to UCB Common
Stock. UCB also is subject to Section 203 of the General Corporation Law of the
State of Delaware ("DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. These
provisions may have the effect of lengthening the time required for a person to
acquire control of UCB through a proxy contest or the election of a majority of
the Board of Directors of UCB and may deter efforts to obtain control of UCB.
UCB is authorized to issue up to 2,000,000 shares of Preferred Stock, and
the UCB Board of Directors may fix the preferences, limitations and relative
rights of those shares without any vote or action by the shareholders. The
potential issuance of Preferred Stock may delay, deter or prevent a change in
control of UCB, may discourage bids for UCB Common Stock at a premium over the
market price of UCB Common Stock and may adversely affect the market price of,
and the voting and other rights of the holders of, UCB Common Stock. UCB has no
plans to issue shares of Preferred Stock. See "UCB Description of Capital
Stock--Preferred Stock" and "--Delaware Business Combination Statute."
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ABSENCE OF DIVIDENDS
UCB has not declared or paid cash dividends on its Common Stock. Further,
UCB does not anticipate paying cash dividends with respect to the Common Stock
in the foreseeable future.
THE ANNUAL MEETINGS
TIME, PLACE AND DATE OF THE ANNUAL MEETINGS
NOR'WESTER
The Nor'Wester Annual Meeting will be held at 9:00 a.m., local time, on
August 25, 1997, at the Portland Conference Center, 300 Multnomah Street,
Portland, Oregon.
WVI
The WVI Annual Meeting will be held at 11:00 a.m., local time, on August 25,
1997, at the Portland Conference Center, 300 Multnomah Street, Portland, Oregon.
AVIATOR
The Aviator Annual Meeting will be held at 1:00 p.m., local time, on August
25, 1997, at the Portland Conference Center, 300 Multnomah Street, Portland,
Oregon.
BAYHAWK
The Bayhawk Annual Meeting will be held at 2:00 p.m., local time, on August
25, 1997, at the Portland Conference Center, 300 Multnomah Street, Portland,
Oregon.
MILE HIGH
The Mile High Annual Meeting will be held at 3:00 p.m., local time, on
August 25, 1997, at the Portland Conference Center, 300 Multnomah Street,
Portland, Oregon.
PURPOSES OF THE ANNUAL MEETINGS
At the Annual Meetings, the stockholders of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High will consider and vote upon a proposal to adopt and
approve the Merger Agreement and the transactions contemplated thereby,
including the Mergers or the Consolidation. A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as Annex B and is incorporated
herein by reference. If the Consolidation is approved and consummated, each
share of Nor'Wester Common Stock, each share of WVI Common Stock, each share of
Aviator Common Stock, each share of Bayhawk Common Stock and each share of Mile
High Common Stock outstanding at the effective time of the Consolidation (other
than shares of Aviator Common Stock, Bayhawk Common Stock and Mile High Common
Stock owned by WVI) will be converted into the right to receive 0.3333333,
0.0785714, 0.0523809, 0.0785714, and 0.0523809 shares, respectively, of UCB
Common Stock. Furthermore, if the Consolidation is approved, all of the shares
of WVI Common Stock owned by WVI's founders, James W. Bernau and James F.
Hensel, prior to the Consolidation will be released from an escrow agreement
with the Department of Consumer and Business Affairs of the State of Oregon and
all of the shares of Aviator Common Stock, Bayhawk Common Stock and Mile High
Common Stock held by WVI will be cancelled. In addition, the stockholders will
elect directors of Nor'Wester, WVI, Aviator, Bayhawk and Mile High until the
next annual meeting of stockholders of each respective company or until their
successors are elected and qualified, and ratify the appointment of independent
public accountants for Nor'Wester, WVI, Aviator, Bayhawk and Mile High for the
fiscal year ending December 31, 1997. If the Consolidation is approved and is
consummated, however, the persons elected to serve as directors of Nor'Wester,
WVI, Aviator, Bayhawk and Mile High will serve the respective companies only
until the Effective Time of the Consolidation.
RECORD DATE; VOTING RIGHTS
NOR'WESTER
Stockholders of record at the close of business on July 21, 1997 (the
"Record Date") will be entitled to notice of and to vote at the Nor'Wester
Annual Meeting and at any adjournment or postponement thereof. There were issued
and outstanding 3,711,079 shares of Nor'Wester Common Stock as of the Record
Date, held by approximately 4,383 stockholders of record.
Under the Oregon Business Corporation Act ("OBCA"), the adoption and
approval of the Merger Agreement by the stockholders requires the affirmative
vote of the holders of at least a majority of the outstanding shares of
Nor'Wester Common Stock. In determining whether the approval of the Merger
Agreement has received the requisite number of affirmative votes, abstentions,
broker non-votes and shares not represented at the Annual Meeting will have the
same effect as a vote against any such proposal. As of the Record Date, 922,828
shares of Nor'Wester Common Stock (approximately 24.9% of the shares outstanding
as of the Record Date) were outstanding and entitled to be voted by the
directors and officers, and their affiliates, of Nor'Wester.
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The principal stockholders of Nor'Wester, James W. Bernau, Black and certain
officers and directors of Black, have entered into a Stockholder's Agreement
pursuant to which Mr. Bernau and Black and certain officers and directors of
Black have agreed to vote their Nor'Wester Common Stock in favor of the Merger.
See "Ancillary Agreements--Stockholder's Agreement." Mr. Bernau beneficially
owned as of the Record Date an aggregate of 910,618 shares of Nor'Wester Common
Stock, constituting approximately 24.5% of the shares of Nor'Wester Common Stock
outstanding on the Record Date. Black and certain officers and directors of
Black have agreed to vote 541,874 of the shares beneficially owned, by them or
which they had the power to vote, as of the Record Date, constituting
approximately 14.6% of the shares of Nor'Wester Common Stock outstanding on the
Record Date.
A majority of the shares of Nor'Wester Common Stock entitled to vote at the
Nor'Wester Annual Meeting is required to ratify the selection of the independent
public accountants, and the five candidates for director receiving the highest
number of affirmative votes cast at the Nor'Wester Annual Meeting will be
elected as directors of Nor'Wester. Holders of a majority of the shares entitled
to vote at the Nor'Wester Annual Meeting, represented in person or by proxy,
will constitute a quorum. Each holder will be entitled to cast one vote for each
share of Nor'Wester Common Stock held.
WVI
Stockholders of record at the close of business on the Record Date will be
entitled to notice of and to vote at the WVI Annual Meeting and at any
adjournment or postponement thereof. There were issued and outstanding 4,860,966
shares of WVI Common Stock as of the Record Date, held by approximately 1,923
stockholders of record.
Under Oregon law, the adoption and approval of the Merger Agreement by the
stockholders requires the affirmative vote of the holders of at least a majority
of the outstanding shares of WVI Common Stock. In determining whether the
approval of the Merger Agreement has received the requisite number of
affirmative votes, abstentions, broker non-votes and shares not represented at
the Annual Meeting will have the same effect as a vote against any such
proposal. As of the Record Date, 3,042,494 shares of WVI Common Stock
(approximately 62.6% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of WVI.
The principal stockholder of WVI, James W. Bernau, the Chairman of the Board
and President of WVI, has entered into a Stockholder's Agreement pursuant to
which Mr. Bernau has agreed to vote his WVI Common Stock in favor of the Merger.
See "Ancillary Agreements--Stockholder's Agreement." Mr. Bernau beneficially
owned as of the Record Date an aggregate of 3,018,444 shares of WVI Common
Stock, constituting approximately 62.1% of the shares of WVI Common Stock
outstanding on the Record Date. When these shares of WVI Common Stock are voted
at the WVI Annual Meeting in favor of the adoption and approval of the Merger
Agreement and the transactions contemplated thereby, the affirmative vote of
additional shares of WVI Common Stock will not be required to so adopt and
approve the Merger Agreement and the transactions contemplated thereby. However,
the affirmative vote of a majority of the shares of WVI Common Stock not held by
Mr. Bernau or James F. Hensel will be required to release the shares of WVI
Common Stock held by Messrs. Bernau and Hensel which are subject to escrow or
transfer restrictions. Failure to obtain the release of the shares from escrow
or transfer restrictions will not prevent consummation of the Consolidation.
A majority of the shares of WVI Common Stock entitled to vote at the WVI
Annual Meeting is required to ratify the selection of the independent public
accountants, and the six candidates for director receiving the highest number of
affirmative votes cast at the WVI Annual Meeting will be elected as directors of
WVI. Holders of a majority of the shares entitled to vote at the WVI Annual
Meeting, represented in person or by proxy, will constitute a quorum. Each
holder will be entitled to cast one vote for each share of WVI Common Stock
held.
34
Holders of WVI Common Stock will be entitled to dissenters' rights under
Oregon law as a result of the Consolidation. See "Appraisal Rights--WVI
Dissenters' Rights."
AVIATOR
Stockholders of record at the close of business on the Record Date will be
entitled to notice of and to vote at the Aviator Annual Meeting and at any
adjournment or postponement thereof. There were issued and outstanding 5,331,855
shares of Aviator Common Stock as of the Record Date, held by approximately
3,826 stockholders of record.
Under the Delaware General Corporation Law ("DGCL"), the adoption and
approval of the Merger Agreement by the stockholders requires the affirmative
vote of the holders of at least a majority of the outstanding shares of Aviator
Common Stock. In determining whether the approval of the Merger Agreement has
received the requisite number of affirmative votes, abstentions, broker
non-votes and shares not represented at the Annual Meeting will have the same
effect as a vote against any such proposal. As of the Record Date, 2,720,034
shares of Aviator Common Stock (approximately 51.0% of the shares outstanding as
of the Record Date) were outstanding and entitled to be voted by the directors
and officers, and their affiliates, of Aviator.
WVI is the principal stockholder of Aviator. The principal shareholder of
WVI, James W. Bernau, the Chairman of the Board and President of Aviator, has
entered into a Stockholder's Agreement pursuant to which Mr. Bernau has agreed
to cause WVI to vote the shares of Aviator Common Stock held by WVI in favor of
the Merger. See "Ancillary Agreements--Stockholder's Agreement." WVI
beneficially owned as of the Record Date an aggregate of 2,715,584 shares of
Aviator Common Stock, constituting approximately 50.9% of the shares of Aviator
Common Stock outstanding on the Record Date. When these shares of Aviator Common
Stock are voted at the Aviator Annual Meeting in favor of the adoption and
approval of the Merger Agreement and the transactions contemplated thereby, the
affirmative vote of additional shares of Aviator Common Stock will not be
required to so adopt and approve the Merger Agreement and the transactions
contemplated thereby.
A majority of the shares of Aviator Common Stock entitled to vote at the
Aviator Annual Meeting is required to ratify the selection of the independent
public accountants, and the six candidates for director receiving the highest
number of affirmative votes cast at the Aviator Annual Meeting will be elected
as directors of Aviator. Holders of a majority of the shares entitled to vote at
the Aviator Annual Meeting, represented in person or by proxy, will constitute a
quorum. Each holder will be entitled to cast one vote for each share of Aviator
Common Stock held.
BAYHAWK
Stockholders of record at the close of business on the Record Date will be
entitled to notice of and to vote at the Bayhawk Annual Meeting and at any
adjournment or postponement thereof. There were issued and outstanding 2,200,814
shares of Bayhawk Common Stock as of the Record Date, held by approximately
1,320 stockholders of record.
Under Delaware Law, the adoption and approval of the Merger Agreement by the
stockholders requires the affirmative vote of the holders of at least a majority
of the outstanding shares of Bayhawk Common Stock. In determining whether the
approval of the Merger Agreement has received the requisite number of
affirmative votes, abstentions, broker non-votes and shares not represented at
the Annual Meeting will have the same effect as a vote against any such
proposal. As of the Record Date, 1,269,006 shares of Bayhawk Common Stock
(approximately 57.7% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Bayhawk.
35
WVI is the principal stockholder of Bayhawk. The principal shareholder of
WVI, James W. Bernau, the Chairman of the Board and President of Bayhawk, has
entered into a Stockholder's Agreement pursuant to which Mr. Bernau has agreed
to cause WVI to vote the shares of Bayhawk Common Stock held by WVI in favor of
the Merger. See "Ancillary Agreements--Stockholder's Agreement." WVI
beneficially owned as of the Record Date an aggregate of 1,249,811 shares of
Bayhawk Common Stock, constituting approximately 56.8% of the shares of Bayhawk
Common Stock outstanding on the Record Date. When these shares of Bayhawk Common
Stock are voted at the Bayhawk Annual Meeting in favor of the adoption and
approval of the Merger Agreement and the transactions contemplated thereby, the
affirmative vote of additional shares of Bayhawk Common Stock will not be
required to so adopt and approve the Merger Agreement and the transactions
contemplated thereby.
A majority of the shares of Bayhawk Common Stock entitled to vote at the
Bayhawk Annual Meeting is required to ratify the selection of the independent
public accountants, and the seven candidates for director receiving the highest
number of affirmative votes cast at the Bayhawk Annual Meeting will be elected
as directors of Bayhawk. Holders of a majority of the shares entitled to vote at
the Bayhawk Annual Meeting, represented in person or by proxy, will constitute a
quorum. Each holder will be entitled to cast one vote for each share of Bayhawk
Common Stock held.
Holders of Bayhawk Common Stock will be entitled to appraisal rights under
Delaware Law as a result of the Consolidation. See "Appraisal Rights--Bayhawk
Appraisal Rights."
MILE HIGH
Stockholders of record at the close of business on the Record Date will be
entitled to notice of and to vote at the Mile High Annual Meeting and at any
adjournment or postponement thereof. There were issued and outstanding 4,693,787
shares of Mile High Common Stock as of the Record Date, held by approximately
2,704 stockholders of record.
Under Delaware Law, the adoption and approval of the Merger Agreement by the
stockholders requires the affirmative vote of the holders of at least a majority
of the outstanding shares of Mile High Common Stock. In determining whether the
approval of the Merger Agreement has received the requisite number of
affirmative votes, abstentions, broker non-votes and shares not represented at
the Annual Meeting will have the same effect as a vote against any such
proposal. As of the Record Date, 2,391,985 shares of Mile High Common Stock
(approximately 51.0% of the shares outstanding as of the Record Date) were
outstanding and entitled to be voted by the directors and officers, and their
affiliates, of Mile High.
WVI is the principal stockholder of Mile High. The principal shareholder of
WVI, James W. Bernau, the Chairman of the Board and President of Mile High, has
entered into a Stockholder's Agreement pursuant to which Mr. Bernau has agreed
to cause WVI to vote the shares of Mile High Common Stock held by WVI in favor
of the Merger. See "Ancillary Agreements--Stockholder's Agreement." WVI
beneficially owned as of the Record Date an aggregate of 2,391,985 shares of
Mile High Common Stock, constituting approximately 51.0% of the shares of Mile
High Common Stock outstanding on the Record Date. When these shares of Mile High
Common Stock are voted at the Mile High Annual Meeting in favor of the adoption
and approval of the Merger Agreement and the transactions contemplated thereby,
the affirmative vote of additional shares of Mile High Common Stock will not be
required to so adopt and approve the Merger Agreement and the transactions
contemplated thereby.
A majority of the shares of Mile High Common Stock entitled to vote at the
Mile High Annual Meeting is required to ratify the selection of the independent
public accountants, and the candidate for director receiving the highest number
of affirmative votes cast at the Mile High Annual Meeting will be elected as the
sole director of Mile High. Holders of a majority of the shares entitled to vote
at the Mile High Annual Meeting, represented in person or by proxy, will
constitute a quorum. Each holder will be entitled to cast one vote for each
share of Mile High Common Stock held.
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PROXIES; REVOCATION OF PROXIES
Shares of Nor'Wester Common Stock, WVI Common Stock, Aviator Common Stock,
Bayhawk Common Stock and Mile High Common Stock represented by properly executed
and unrevoked proxies will be voted at the Nor'Wester Annual Meeting, WVI Annual
Meeting, Aviator Annual Meeting, Bayhawk Annual Meeting and Mile High Annual
Meeting, respectively, in accordance with the directions contained therein. If
no direction is made in a properly executed and unrevoked proxy, the shares of
Nor'Wester Common Stock, WVI Common Stock, Aviator Common Stock, Bayhawk Common
Stock and Mile High Common Stock represented by such proxy will be voted FOR the
adoption and approval of the Merger Agreement, and the transactions contemplated
thereby, FOR the election of the respective nominees for director and FOR
ratification of the selection of Price Waterhouse LLP as independent public
accountants for the fiscal year ending December 31, 1997. Any Nor'Wester, WVI,
Aviator, Bayhawk or Mile High stockholder is empowered to revoke a proxy at any
time before its exercise. A proxy may be revoked by filing with the Secretary of
the respective company a written revocation or a duly executed proxy bearing a
later date. Any written notice revoking a proxy should be sent to: (i) in the
case of Nor'Wester, Nor'Wester Brewing Company, Inc., 66 S.E. Morrison Street,
Portland, Oregon 97214, Attention: Secretary, or hand delivered to the Secretary
at or before the taking of the vote at the Nor'Wester Annual Meeting; (ii) in
the case of WVI, Willamette Valley, Inc. Microbreweries Across America, 66 S.E.
Morrison Street, Portland, Oregon 97214, Attention: Secretary, or hand delivered
to the Secretary at or before the taking of the vote at the WVI Annual Meeting;
(iii) in the case of Aviator, Aviator Ales, Inc., 66 S.E. Morrison Street,
Portland, Oregon 97214, Attention: Secretary, or hand delivered to the Secretary
at or before the taking of the vote at the Aviator Annual Meeting; (iv) in the
case of Bayhawk, Bayhawk Ales, Inc., 66 S.E. Morrison Street, Portland, Oregon
97214, Attention: Secretary, or hand delivered to the Secretary at or before the
taking of the vote at the Bayhawk Annual Meeting; or (v) in the case of Mile
High, Mile High Brewing Company, 66 S.E. Morrison Street, Portland, Oregon
97214, Attention: Secretary, or hand delivered to the Secretary at or before the
taking of the vote at the Mile High Annual Meeting.
Nor'Wester, WVI, Aviator, Bayhawk and Mile High will bear the costs of
soliciting proxies from their respective stockholders. In addition to soliciting
proxies by mail, directors, officers and employees of each of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High may solicit proxies by telephone, by courier
service, by telegram or in person. Such directors, officers and employees will
not be additionally compensated for such solicitation but may be reimbursed for
their out-of-pocket expenses incurred in connection therewith. Arrangements may
also be made with banks, brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of common stock held of record by such persons, and upon request, Nor'Wester,
WVI, Aviator, Bayhawk or Mile High will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in connection therewith.
In addition, Nor'Wester may engage the services of third parties to solicit
proxies on behalf of Nor'Wester. Such third parties, if engaged, will receive a
fee plus reasonable out-of-pocket expenses.
UNITED CRAFT BREWERS, INC.
UCB was incorporated in Delaware in April 1997 as a wholly owned subsidiary
of UBA for the purpose of effecting the Consolidation. UBA is a newly formed
Delaware corporation whose Chairman is Vijay Mallya. UBA is owned by a foreign
corporation, the shares of which are controlled by fiduciaries who may exercise
discretion in Mr. Mallya's favor amongst others. Mr. Mallya is also the Chairman
of The UB Group, an international group of companies that manufacture and sell,
among other products, over 35 million cases of beer and spirits annually. Mr.
Mallya together with members of his family holds a controlling interest in The
UB Group. Prior to the Consolidation, UBA provided bridge loan financing in the
amount of $2,750,000 to Nor'Wester, and Yashpal Singh, the Executive Vice
President of Operations for UCB and a former employee of The UB Group, became
Nor'Wester's Executive Vice President of
37
Operations in March 1997. See "The Consolidation and Investment by
UBA--Background of the Consolidation and Investment by UBA--The UB Group." Upon
consummation of the Consolidation and the Investment, UCB will be a holding
company with wholly owned subsidiaries consisting of Nor'Wester, Aviator,
Bayhawk and Mile High.
UCB believes that significant opportunities exist in the craft brewing
segment of the domestic beer industry. UCB expects there to be substantial
consolidation within the industry as local craft breweries position themselves
to compete for limited shelf space and brand recognition. UCB believes that by
building a network of strategically located breweries, which produce locally
styled craft beers sold under localized brand names, and using breweries
operating at high utilization rates and a reduced cost structure, it can compete
more successfully in the craft beer market than the individual Constituent
Corporations. If the Consolidation is consummated and UBA's investment in UCB
completed, UCB's immediate objective will be to consolidate the management and
operations of the Constituent Corporations so as to improve internal financial
and operational controls and leverage the increased buying power of the larger
organization to achieve economies of scale in purchasing raw materials. UCB
believes that it can achieve cost savings by eliminating redundant functions and
centralizing management. Potential areas of cost savings include: (i) purchasing
of supplies (brewing ingredients and packaging materials); (ii) marketing
expenses (efficient use of marketing personnel and resources); (iii) business
insurance (including host liquor and legal liquor liability, business and
property liability and casualty insurance); (iv) employee insurance (health,
life and disability); (v) consolidation of existing long and short-term debts;
and (vi) elimination of the cost of maintaining five public companies. The
Constituent Corporations incurred significant losses in 1996 for the reasons
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for each of the Constituent Corporations. UCB believes it
can improve operating performance by implementing its consolidation strategy.
UCB intends to increase utilization of the brewing facilities by increasing
product sales and providing contract brewing services for third parties, as well
as brewing Kingfisher brand products for UBA in North America. UCB may also
eliminate some of its brewing capacity to increase utilization levels. UCB
believes that increased utilization of capacity could lower per unit costs and
improve operating results. UCB has also identified weaknesses in operational,
management and financial resources within the Constituent Corporations and
believes that these weaknesses have begun to be corrected by changes in
personnel and implementation of new policies, procedures and reporting systems.
Lastly, UCB intends to acquire other breweries in strategic markets in order to
continue to consolidate operations in a manner which reduces costs and increases
market share. UCB will consider all acquisition possibilities, including ones
with related entities of UCB or its affiliates, and examine them in the context
of whether they are fair to UCB and its shareholders.
RECENT DEVELOPMENTS
As part of this strategy, The UB Group entered into a Letter of Intent on
May 2, 1997, with Mendocino Brewing Company, Inc. ("Mendocino") for a possible
transaction involving an initial investment by The UB Group in Mendocino
followed by the merger of Mendocino with a subsidiary of UCB. In addition, The
UB Group entered into a Letter of Intent on May 2, 1997 with the Humboldt
Brewing Company ("Humboldt") for a possible transaction involving the merger of
Humboldt with a subsidiary of UCB. Although no definitive agreements have been
signed, The UB Group continues to be in discussions with Mendocino and Humboldt
and is currently conducting its due diligence investigations.
Mendocino is a Northern California craft brewer which sold 17,000 barrels of
beer in 1996, generating approximately $4 million of total sales revenue.
Humboldt is a Northern California craft brewer which sold approximately 18,000
barrels of beer in 1996, generating approximately $3 million of total sales
revenue.
Completion of these proposed transactions is subject to satisfactory
completion of due diligence investigations and the negotiation and execution of
definitive agreements, as well as approval by the respective Boards of Directors
and shareholders, as well as other customary conditions. There can be no
assurance that such conditions will be met.
38
In addition, as part of its strategy UCB will continue to pursue acquisition
possibilities with other craft brewers. In particular, UCB has held discussions
with two other craft brewers about possible acquisitions. These craft brewers
are about the same size as or smaller than Humboldt. However, except as set
forth above, with respect to Mendocino and Humboldt, there are no letters of
intent, agreements or understandings regarding any possible acquisitions.
Shares of UCB Common Stock issued in any proposed transaction would dilute
the UCB stock ownership positions of the Constituent Corporations' stockholders.
Completion of the proposed transactions is not subject to approval by the
Constituent Corporations' stockholders.
THE CONSOLIDATION AND INVESTMENT BY UBA
GENERAL
The following is a brief summary of certain aspects of the Consolidation and
Investment. This summary does not purport to be complete and is qualified in its
entirety by reference to the Investment Agreement and the Merger Agreement,
copies of which are attached to this Proxy Statement/Prospectus as Annexes A and
B, respectively, and are incorporated herein by reference.
BACKGROUND OF THE CONSOLIDATION AND INVESTMENT BY UBA
CONDITION OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH. In January
1996, Nor'Wester, WVI, Aviator, Bayhawk and Mile High jointly established a
strategic alliance to develop a national market for Nor'Wester's beer and
utilize excess brewing capacity at Aviator, Bayhawk and Mile High. The national
roll-out of Nor'Wester products did not achieve projected levels of sales.
Problems with the cooperative brewing arrangement between Nor'Wester and its
affiliates, Aviator and Mile High, resulted in product write downs that
adversely affected the profitability of each of these companies.
Throughout 1996, competition in the craft brewing industry intensified,
especially in the Northwestern United States, the primary market for Nor'Wester
and Aviator products. The entry of bottled products of a major competitor
seriously eroded the market share for Nor'Wester's bottled products in the
Northwest.
At the same time, Nor'Wester and North Country Brewing Company, a subsidiary
of WVI, were engaged in a joint venture to construct and operate a brewery in
Saratoga Springs, New York. Nor'Wester was required to make a significantly
greater investment in the construction and start-up of the Saratoga Springs
Brewery due to the inability of North Country Brewing Company to make its $2.55
million capital contribution to the joint venture and the joint venture's
inability to obtain planned debt financing. The failure of Nor'Wester to meet
projected growth in sales due to intense competition in its home markets and a
general failure of its national brand strategy coupled with the capital
requirements to establish the Saratoga Springs Brewery created significant
liquidity problems at Nor'Wester.
Meanwhile, WVI had advanced significant sums to its subsidiary, Mile High,
which were to be repaid, in part, by the proceeds of Mile High's second direct
public stock offering projected to raise $1,948,050 in gross proceeds. The
offering, which commenced in May 1996, did not attract sufficient investor
interest necessary to reach the minimum of $750,000 in subscriptions prior to
commencement of the negotiations with The UB Group described hereafter. Mile
High eventually abandoned the offering because of the lack of investor interest
and management's concern that the offering could interfere with the transaction
contemplated with The UB Group. At the same time, Mile High's products failed to
penetrate its target market in Colorado and surrounding states in volumes
sufficient to sustain operations within the time expected by management and
before depletion of working capital.
Mile High was unable to repay the sums advanced to it by WVI. As a
consequence, WVI was unable to continue its plan of establishing microbreweries
in certain target markets across the United States. Further, WVI could not
provide financial or other assistance to its subsidiaries because of its lack of
cash.
39
Since commencement of beer sales in September 1995, sale of Aviator's
products did not grow to sufficient volumes to sustain operations. In addition,
local competitive pressures frustrated management's efforts to achieve a stable
cash flow position and profitability. Aviator commenced its second direct public
stock offering in June 1996 projected to raise $1,517,000 in gross proceeds. The
offering did not attract sufficient investor interest necessary to reach the
minimum of $650,000 in subscriptions prior to commencement of the negotiations
with The UB Group described hereafter. Aviator ceased active sales efforts for
the offering because of the lack of investor interest and management's concern
that the offering could interfere with the transaction contemplated with The UB
Group.
During 1996 Bayhawk continued to suffer a slow erosion of its working
capital as it struggled to achieve break even in the face of difficult market
conditions. Particularly, Bayhawk suffered because of a lack of adequate
distribution of its products. Bayhawk also lost an opportunity to provide
contract brewing services when Nor'Wester's national roll-out failed.
For a more complete description of the financial condition of each of the
companies, see the respective sections titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for each company.
THE UB GROUP. The UB Group ("UB"), is one of Asia's leading spirits and
beer companies. In the summer of 1996, UB was looking for opportunities to
expand its presence in North America, particularly in the craft beer industry.
UB started with five small breweries in South India, the oldest of which, Castle
Breweries, dated back to 1857. The five original breweries were combined to form
United Breweries Limited in 1915. The controlling position in United Breweries
Limited was purchased by the Mallya family in 1947. Since that time, UB has
grown into an international group of companies that manufacture and sell, among
other products, over 35 million cases of beer and spirits annually and has
annual sales of over $1 billion in revenues. Among UB's brands are its flagship
"Kingfisher" brand lager beer, judged the best light lager at the Stockholm Beer
Festival in 1995 and 1996.
UB saw significant opportunity in the growing craft beer segment of the
North American beer market. UB considered that the craft beer market is the
fastest growing segment of the North American beer market. Its products,
specifically Kingfisher, could be positioned in the North American market as a
premium import beer and complement a line of regional craft brews.
UB also wanted to reduce the costs associated with delivery and distribution
of Kingfisher in North America. Kingfisher is sold in Indian food restaurants
throughout the United States and Canada. Kingfisher sold in North America is
brewed in Great Britain and transported to North America. UB wanted to align
itself with a group of regional craft beers with excess brewing capacity. UB
would then utilize the excess capacity to brew Kingfisher closer to its North
American markets.
It was with these considerations in mind that UB had its first
communications with Nor'Wester and WVI.
THE NEGOTIATIONS. Negotiations between UB and management of Nor'Wester and
WVI began in August 1996. In preparation, Nor'Wester and WVI requested that
Needham and Black act as Nor'Wester's and WVI's financial advisors. On August
15, 1996, representatives of the Constituent Corporations and UB, including
James W. Bernau, Chairman of the Board and President of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High and Vijay Mallya, Chairman of the Board of UB,
met at Nor'Wester's brewery in Portland, Oregon. Mr. Bernau made a presentation
to Mr. Mallya and other officers of UB concerning the operations of Nor'Wester,
WVI, Aviator, Bayhawk and Mile High, including the status of the Saratoga
Springs Brewery then under construction. Mr. Bernau and Mr. Mallya shared a
common view that the best method to capture a significant portion of the North
American craft beer market was by operating small, regional craft breweries
throughout the country, supported by a unified management and purchasing
structure.
40
Representatives of UB toured the facilities of Aviator, Mile High and the
Saratoga Springs Brewery during August and September 1996. Meanwhile, informal
discussions continued between the parties and their representatives about a
potential alliance between Nor'Wester, WVI, Aviator, Bayhawk, Mile High and UB.
Negotiations intensified during September 1996. On September 18, 1996
management of the parties agreed to the terms of a letter of intent. The
principal terms of the letter of intent were:
1. The Consolidation of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
into a single entity. The consolidation would be effected such that Jim
Bernau would hold a 26% interest in the consolidated companies after the UB
investment. Public shareholders of the various companies would hold a 48%
interest in the consolidated companies.
2. The sale to a UB company of 26% of the outstanding common stock in
the consolidated company in consideration of: (i) $9 million in cash payable
at closing; (ii) $2 million in equity or warrants in Kingfisher North
America, a company to be formed by UB to produce, market and sell certain UB
brands in North America; (iii) the exclusive right to produce for Kingfisher
North America, on a contract basis, certain UB brand beers brewed outside
India for consumption in North America; and (iv) consultation services to be
provided by The UB Group to the consolidated companies.
3. UB would loan to Nor'Wester up to $500,000 for use during the
consolidation period. The loan would be secured by $700,000 in assets owned
by James W. Bernau.
4. The transaction would be documented by an Investment Agreement to be
negotiated between the parties, but which was to contain certain covenants
and conditions.
5. The consolidated companies, after the UB investment, were valued at
$46.15 million.
The letter of intent was an expression of intention between the parties and
was not enforceable except for a covenant prohibiting the sale of securities by
the Constituent Corporations a "No Shop" clause and certain other covenants and
conditions not now material.
The letter of intent was presented to the Boards of Directors of Nor'Wester
and WVI on September 22, 1996. The Boards of Directors approved the proposed
letter of intent on September 22, 1996, and it was executed on behalf of each
company on that date.
Nor'Wester needed additional capital for operations prior to receipt of the
bridge loan funds from UB. Accordingly, Mr. Bernau loaned Nor'Wester $250,000 of
his personal funds in October 1996 to meet that need.
The parties' due diligence commenced and negotiations between
representatives of Nor'Wester, WVI, Aviator, Bayhawk, Mile High and UB continued
and intensified after execution of the letter of intent. Conditions in the
primary markets of Nor'Wester, Aviator, Bayhawk and Mile High, and conditions in
the craft beer industry in general, deteriorated throughout the late summer and
fall of 1996. The deterioration was marked by a steady erosion of the stock
price of major craft brewers traded on public exchanges and a general failure of
Nor'Wester, Aviator, Bayhawk and Mile High to meet performance expectations of
management and UB. Mile High, in particular, failed to penetrate its primary
market with its products in sufficient volume to sustain operations before its
working capital was exhausted and was suffering significant unanticipated
losses. Management and UB concluded that the amount of the $500,000 bridge loan
negotiated with UB would be insufficient to sustain the operations of the
Constituent Corporations through Consolidation. Management of Nor'Wester, WVI,
Aviator, Bayhawk, Mile High, and UB further concluded that the terms of the
letter of intent could no longer be supported given the economic difficulties
faced by the existing brewery businesses.
The Constituent Corporations and UB began renegotiation of terms of the
transaction, including a new bridge loan amount. Management and UB agreed that
current operating conditions were unlikely to
41
result in profitability at Mile High. Accordingly, Mile High substantially
reduced its operations in November 1996 and currently provides limited contract
brewing services.
The renegotiation continued through January 1997, and UB continued to
advance bridge loan funds, exceeding the $500,000 limit in the letter of intent.
In January 1997, the parties completed renegotiations and documented terms of
the Consolidation and Investment. The resulting Investment Agreement provided
generally, as follows:
1. Nor'Wester, WVI, Aviator, Bayhawk and Mile High would consolidate
into UCB. In the Consolidation, Nor'Wester would be valued at approximately
$2.63 per share, its twenty-day trailing trading average on January 31,
1997, the effective date of the Investment Agreement. WVI, Aviator, Bayhawk
and Mile High would each be valued at 80% of their initial public offering
share price. UCB would be valued at approximately $34.23 million after the
Consolidation and UBA's investment.
2. Prior to consolidation, UB, through UBA, a newly formed Delaware
corporation, would provide bridge loan financing to Nor'Wester in an amount
not to exceed $2.75 million. The bridge loan financing would bear interest
at the rate of 11.25% per annum and be secured by the assets of the Saratoga
Springs Brewery.
3. After consolidation, UBA would invest $5,882,653 for 2,237,681
shares of the common stock of UCB (a purchase price of approximately $2.63
per share). UBA would also convert its bridge loan of $2,750,000 into
2,497,184 shares of common stock of UCB (a conversion price of approximately
$1.10 per share). Mr. Bernau would then transfer to UBA 1,124,195 shares of
common stock of UCB (representing approximately 46% of the UCB shares
received by Mr. Bernau in the Consolidation). After UBA's investment,
conversion of its bridge loan, and the transfer of Mr. Bernau's shares to
UBA, UBA would hold a 45% interest in UCB. After his transfer of shares to
UBA, Mr. Bernau would hold a 10% share in UCB. (Except for the transfer of
shares by Mr. Bernau to UBA, Mr. Bernau would have held approximately 18.6%
of the shares in UCB following the Consolidation and investment by UBA.)
4. Mr. Bernau would be employed by UCB after the Consolidation and, as
a part of his employment agreement, would receive an option to purchase
common stock of UCB equal to 5% of the outstanding common stock of UCB at
the transaction price of approximately $2.63 per share. Mr. Bernau would
personally guarantee all bridge loan funds until the Consolidation was
completed and the investment made. Mr. Bernau would also indemnify UBA for
damages resulting from the breach of any covenant, representation or
warranty given by the Constituent Corporations or Mr. Bernau in the
Investment Agreement. Mr. Bernau's indemnity obligation would be secured by
all UCB common stock he receives in the Consolidation (except the shares to
be transferred to UBA).
The Investment Agreement contains a number of covenants, representations and
warranties by and between the various parties, on several subjects including
financial performance of Nor'Wester, WVI, Aviator, Bayhawk and Mile High on a
combined basis.
The Investment Agreement was presented to the combined Boards of Directors
of Nor'Wester and WVI on January 24, 1997. After considerable discussion of the
financial and operating conditions of Nor'Wester, WVI and WVI's subsidiaries,
both the Nor'Wester Board of Directors and the WVI Board of Directors
unanimously voted to approve the Investment Agreement, subject to the receipt
and approval of written fairness opinions from Nor'Wester's and WVI's respective
financial advisors. The Investment Agreement was presented to the Boards of
Directors of Aviator and Bayhawk in separate telephonic meetings of the Boards
of Directors on January 25, 1997. After careful consideration of the financial
and operating conditions then existing at Aviator and Bayhawk, respectively,
both Boards of Directors unanimously approved the Investment Agreement, subject
to the receipt and approval of written fairness opinions from Aviator's and
Bayhawk's respective financial advisors. The sole director of Mile High approved
the Investment Agreement on January 25, 1997, subject to the receipt and
approval of a written fairness opinion from Mile High's financial advisor. The
Investment Agreement was executed by Nor'Wester, WVI, Aviator, Bayhawk, Mile
High and UBA on January 30, 1997.
42
On March 14, 1997, a meeting was held between representatives of the various
parties to the Investment Agreement to negotiate an amendment of the Investment
Agreement. Renegotiations occurred because of continued deterioration in the
craft beer industry in general, and at Nor'Wester, WVI, Aviator and Bayhawk in
particular. It became apparent to the parties that Nor'Wester, WVI, Aviator,
Bayhawk and Mile High were unlikely to meet the financial performance conditions
contained in the executed Investment Agreement. It also became apparent that the
value of the consolidated enterprise established in the Investment Agreement
could not be sustained in light of an industry wide slump in the price of
publicly traded craft beer common stocks.
The parties also considered that the timing of the Consolidation and
Investment might prevent pursuit of other acquisition opportunities by UCB. UBA
expected that approximately $3 million of its investment in UCB would be used to
acquire additional craft brewers to strengthen the product mix and increase the
production volumes of UCB. However, UCB's efforts to acquire additional craft
brewers would potentially delay the Consolidation. Accordingly, UBA negotiated
to retain approximately $3 million of its planned investment and separately
pursue other acquisition opportunities.
These negotiations continued over a period of several weeks. By April 7,
1997, all parties agreed that an amendment (the "Amendment") of the Investment
Agreement was appropriate under the circumstances. Under the Amendment, the
Investment Agreement changed in six principal ways:
1. The amount to be invested in UCB by UBA would go down from
$8,632,653 to $5,500,000. The percentage ownership in UCB by UBA after
consolidation would go down from 45% to 40%. Shares of UCB would be sold at
$5.25 per share (representing a 1-for-3 reverse split of the Common Stock of
each of the Constituent Corporations). UBA would receive a credit on the
purchase price equal to the unpaid principal due under the bridge loan. Mr.
Bernau would transfer 83,109 shares of UCB he obtained in the Consolidation
to UBA. Mr. Bernau would transfer 174,912 shares of UCB he obtained in the
Consolidation to UCB, effectively cancelling those shares. After the
transfers, Mr. Bernau would own 10% of the outstanding shares of UCB.
2. The valuation of each of WVI, Aviator, Mile High and Bayhawk was
significantly reduced. The value of the shares of these companies' Common
Stock was set at 25% of the original offering price in their respective
direct public stock offerings. The value of Nor'wester was reduced to $1.75
per share--25% of the price in its initial public offering completed on
January 17, 1996. The Nor'Wester shareholders would receive 0.3333333 shares
of UCB Common Stock for each share of Nor'Wester Common Stock held at the
time of Consolidation. As a result, the public shareholders (excluding Mr.
Bernau) of the Constituent Corporations would hold approximately 50% of the
common stock of UCB, broken down approximately as follows:
Nor'Wester--33.1%; WVI--5.1%; Aviator--4.8%; Bayhawk--2.7%; Mile High--4.3%.
3. The requirement of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
to meet certain closing conditions related to income statement financial
performance was eliminated.
4. UBA was free to pursue any craft beer opportunity presented to it
during the Consolidation period without having to present the opportunity to
UCB. Following Consolidation and closing of UBA's investment, all craft beer
opportunities must first be offered to UCB before UBA can exploit the
opportunity.
5. All costs incurred by UBA in connection with the Consolidation (but
not the investment) are charged against the bridge loan and will be the
responsibility of Nor'Wester.
6. The number of Mr. Bernau's options was reduced from 5% to 4% of the
outstanding common stock of UCB, post Consolidation and Investment, and the
option exercise price was reduced from approximately $2.63 to $1.75 per
share ($5.25 per share as a result of the 1-for-3 reverse split of the
Common Stock of the Constituent Corporations). Vijay Mallya would become CEO
of UCB and was given an option to purchase UCB Common Stock in the same
number and on the same terms as
43
Mr. Bernau. Mr. Bernau would continue to personally guarantee all bridge
loans from UCB until Consolidation and Investment. Mr. Bernau's 10% interest
in UCB would continue to act as security for his indemnity obligation to UBA
relating to the covenants, representations and warranties of the Constituent
Corporations in the Investment Agreement.
The effect of the Amendment was to reduce the valuation of UCB, after
Consolidation and UBA's investment from $34.23 million to $14.84 million.
The Amendment, together with the proposed form of Agreement and Plan of
Merger, was presented to a meeting of the combined Boards of Directors of
Nor'Wester and WVI on April 9, 1997. At the meeting, the financial advisors for
each of the Boards of Directors presented their preliminary financial analyses
relating to the Consolidation and Investment. Based on a review of the terms of
the Amendment and the Agreement and Plan of Merger, and subject to receipt of
written fairness opinions from their respective financial advisors, the Boards
of Directors of Nor'Wester and WVI unanimously approved the terms of the
Investment Agreement, as amended, and the terms of the Agreement and Plan of
Merger. On April 10, 1997, the Board of Directors of Mile High executed a
unanimous resolution to approve the Investment Agreement, as amended, and the
Agreement and Plan of Merger, subject to receipt of a written fairness opinion
from its financial advisor. On April 10, 1997, the Bayhawk Board of Directors
met by telephone conference call to discuss the terms of the Amendment and the
Agreement and Plan of Merger. At the meeting, the financial advisor for Bayhawk
presented its preliminary financial analysis relating to the Consolidation and
Investment. Based on a review of the terms of the Amendment and the terms of the
Agreement and Plan of Merger, and subject to receipt of a written fairness
opinion from its financial advisor, the Board of Directors of Bayhawk
unanimously approved the Investment Agreement, as amended, and the Agreement and
Plan of Merger. On April 15, 1997, the Aviator Board of Directors met by
telephone conference call to discuss the terms of the Amendment and the
Agreement and Plan of Merger. At the meeting, the financial advisor for Aviator
presented its preliminary financial analysis relating to the Consolidation and
Investment. Based on the review of the terms of the Amendment and the Agreement
and Plan of Merger, and subject to receipt of a written fairness opinion from
its financial advisor, the Board of Directors of Aviator unanimously approved
the Investment Agreement, as amended, and the Agreement and Plan of Merger.
On May 12, 1997, the Boards of Directors of Nor'Wester and WVI met in a
joint telephone conference call to review the written fairness opinions prepared
by their respective financial advisors, Needham on behalf of Nor'Wester and
Black on behalf of WVI. Although each of the fairness opinions concluded that,
as of such date and subject to certain assumptions and other matters described
therein, the consideration to be received by the public shareholders of
Nor'Wester and WVI pursuant to the Merger Agreement and the Investment Agreement
was fair to such shareholders from a financial point of view, the fairness
opinions included analysis and information that had not previously been
presented to the Boards at their April 9, 1997 joint meeting. The Boards of
Directors of Nor'Wester and WVI, after review of the opinion of their respective
financial advisors, including a review of the underlying financial analysis used
to formulate the opinions, voted unanimously to accept the fairness opinions and
to reaffirm their previous approval of the Investment Agreement, as amended, and
the Merger Agreement. On May 12, 1997, the Board of Directors of Bayhawk met in
a telephone conference call to review the written fairness opinion prepared by
Black. Although the fairness opinion concluded that, as of such date and subject
to certain assumptions and other matters described therein, the consideration to
be received by the public shareholders of Bayhawk pursuant to the Merger
Agreement and the Investment Agreement was fair to such shareholders from a
financial point of view, the fairness opinion included analysis and information
that had not previously been presented to the Board at its April 10, 1997
meeting. The Board of Directors of Bayhawk, after review of the fairness
opinion, including a review of the underlying financial analysis used to
formulate the opinion, voted unanimously to accept the fairness opinion and to
reaffirm its previous approval of the Investment Agreement, as amended, and the
Merger Agreement. On May 12, 1997, the Board of Directors of Mile High received
and reviewed the fairness opinion of Black. Although the
44
fairness opinion concluded that, as of such date and subject to certain
assumptions and other matters described therein, the consideration to be
received by the public shareholders of Mile High pursuant to the Merger
Agreement and the Investment Agreement was fair to the public shareholders of
Mile High from a financial point of view, the fairness opinion included analysis
and information that had not previously been presented to the Board. The Mile
High Board of Directors then executed a unanimous resolution to accept the
fairness opinion and to reaffirm its previous approval of the Investment
Agreement, as amended, and the Merger Agreement. On May 13, 1997, the Board of
Directors of Aviator met in a telephone conference call to review the written
fairness opinion prepared by Black. Although the fairness opinion concluded
that, as of such date and subject to certain assumptions and other matters
described therein, the consideration to be received by the public shareholders
of Aviator pursuant to the Merger Agreement and the Investment Agreement was
fair to such shareholders from a financial point of view, the fairness opinion
included analysis and information that had not previously been presented to the
Board at its April 15, 1997 meeting. The Board of Directors of Aviator, after
review of the fairness opinion, including a review of the underlying financial
analysis used to formulate the opinion, voted unanimously to accept the fairness
opinion and to reaffirm its previous approval of the Investment Agreement, as
amended, and the Merger Agreement. The Amendment and the Merger Agreement were
entered into as of May 14, 1997.
NOR'WESTER'S REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS
OF THE BOARD OF DIRECTORS OF NOR'WESTER
The Nor'Wester Board believes that the shareholders of Nor'Wester should
vote FOR approval and adoption of the Merger Agreement and the Consolidation.
The following are the reasons considered by the Nor'Wester Board to be material
in its decision to approve and adopt the Investment Agreement, the Merger
Agreement and the Consolidation.
DIRE NEED FOR IMMEDIATE OPERATING CAPITAL. The Nor'Wester Board considered
Nor'Wester's dire need for significant capital necessary to pay its creditors
and fund its current operations. Recently, Nor'Wester has experienced increasing
net losses of $282,000, $870,000 and $1,663,000 in the quarters ended June 30,
September 30, and December 31, 1996, respectively. In addition, Nor'Wester was
required to make a significantly greater cash investment in the construction and
start-up of the Saratoga Springs Brewery due to the inability of Nor'Wester's
joint venture partner to make its $2.55 million capital contribution to the
joint venture and the joint venture's inability to obtain planned debt
financing. As a result of these operating losses and the increased investment in
the joint venture, Nor'Wester has insufficient capital to fund current
operations at its Portland and Saratoga Springs breweries. Further, at March 31,
1997 Nor'Wester was past due on approximately $2.1 million owed to its trade
creditors and construction contractors, was in default on its $1.0 million bank
line of credit and $2.0 million term loan and had borrowed $1.5 million of
bridge loans under its Credit Agreement with UBA, portions of which have been
loaned to the other Constituent Corporations to fund their working capital
requirements. Nor'Wester is currently dependent on receiving additional bridge
loans from UBA under the Credit Agreement and will be dependent upon the funds
from UBA's investment, assuming the Investment closes, to support its operations
until profitability can be restored. Completion of the Consolidation on terms
acceptable to UBA is a condition to closing on UBA's investment. The Nor'Wester
Board considered the likelihood that Nor'Wester would experience a general
business failure due to its poor financial condition if the Merger Agreement and
Consolidation were not approved and the Investment received. See "Failure to
Approve Merger Agreement and Consolidation."
ALTERNATIVE FINANCING STRATEGIES; FUTURE ACCESS TO CAPITAL. Given the
generally poor performance of the craft beer industry over the past three
calendar quarters, there is a strong reluctance or refusal by lenders and equity
investors to provide capital to craft breweries in general and, given
Nor'Wester's poor operating performance and the increased competition in
Nor'Wester's principal Pacific Northwest market, to Nor'Wester in particular.
The Nor'Wester Board considered that it has few, if any, financing alternatives.
During the period of extended negotiations with UBA which began in August 1996,
Nor'Wester has
45
received few expressions of interest from potential debt or equity investors
directly or through its investment banker, Needham. The Nor'Wester Board
believes that the UBA bridge loan and Investment represents the only viable
financing alternative currently available to Nor'Wester. The Nor'Wester Board
also considered the alternative of Nor'Wester to remain as an independent
company but concluded that Nor'Wester had no viable "go-it-alone" strategy.
Following completion of the Consolidation and closing of the Investment, the
Nor'Wester Board believes that the Investment will allow Nor'Wester to sustain
its operations, pay its past due creditors and renew its growth and
competitiveness in the highly fragmented craft beer industry. The Board further
believes that by combining the brewing operations of the Constituent
Corporations with the financial strength of UBA, UCB will be better able to
access private and public debt and equity capital than is available to
Nor'Wester alone.
INDUSTRY CONSOLIDATION. Nor'Wester's Board believes that the craft brewing
segment of the domestic beer industry may enter a significant consolidation
phase as breweries position themselves to compete for limited shelf space and
brand recognition. The craft brewing industry has recently experienced a sharp
fall in stock prices for publicly-owned craft brewing companies and a
significant reduction in the rate of growth in craft beer sales in the Pacific
Northwest, Nor'Wester's principal market. It is Nor'Wester's belief that an
association of adequately capitalized and managed regional craft breweries which
produce locally styled craft beers sold under localized brand names through
strong distribution networks and strong marketing plans will be better able to
compete in this market. Following the Consolidation and Investment, Nor'Wester
believes that UCB's strengthened financial position, centralized management, and
multiple breweries located in strategic geographic markets will help Nor'Wester
and the Constituent Corporations to better market their products.
INCREASED MANAGEMENT EXPERTISE. Nor Wester's Board believes that following
the Consolidation and Investment, UCB will receive more extensive management
oversight and assistance through directors, officers and key employees
experienced in running large brewing operations, consolidating and managing the
operations of several breweries across a large geographic region, marketing to
consumers with a more diverse taste preference, and effectively dealing with
suppliers and distributors. Some of these directors, officers and key employees
are currently serving UCB, others have yet to be identified, recruited and
retained. In addition, the Nor'Wester Board believes that following the
Consolidation and Investment, UCB, by virtue of its size, strategic position and
access to capital, would be able to attract significantly better management and
brewing personnel than Nor'Wester can alone.
FINANCIAL PRESENTATION BY NOR'WESTER'S INVESTMENT BANKER. In approving the
terms of the Consolidation and Investment, the Nor'Wester Board relied on the
financial presentation by Needham, including Needham's analysis of the fairness
of the consideration to be received by Nor'Wester's shareholders (other than
James W. Bernau) pursuant to the Merger Agreement and the Investment Agreement
from a financial point of view. See "Opinion of Needham & Company, Inc."
WILLINGNESS OF MR. BERNAU TO TRANSFER AND CANCEL SHARES. Nor'Wester's Board
considered the beneficial effect to the Nor'Wester shareholders of the
willingness of James W. Bernau, holder of 24.5% of Nor'Wester's shares, to
transfer certain UCB shares he receives in the Consolidation to UBA and transfer
other shares to UCB for cancellation following the Consolidation in
consideration of (i) forestalling any potential lawsuits from current
shareholders of the Constituent Corporations and thus supporting the financial
viability of UCB on an ongoing basis, (ii) inducing the investment by UBA in
UCB, thus protecting Bernau's remaining investment in the Constituent
Corporations; and (iii) protecting Mr. Bernau's goodwill and general business
reputation.
OPERATING SYNERGIES. UCB may be able to realize production, marketing, new
product development and distribution efficiencies through greater economies of
scale and the elimination of redundancies. Nor'Wester's Board is of the view
that, with competition increasing and the possibility that pricing
46
pressures may become more acute, an effective way to achieve profitability and
more favorable operating margins is through realization of cost savings,
elimination of redundancy and economies of scale. The Nor'Wester Board has
identified the following areas of potential cost savings resulting from the
proposed Consolidation (though such cost savings have not been quantified): (i)
purchasing of supplies (brewing ingredients and packaging materials); (ii)
marketing expenses (through more efficient use of marketing personnel and
resources); (iii) business insurance (including host liquor and legal liquor
liability, business and property liability and casualty insurance); (iv)
employee insurance (health, life and disability); (v) consolidation of existing
long and short-term debts; and (vi) elimination of the cost of maintaining five
public companies. The Board also recognized that any initial cost savings from
operating synergies could be offset, in whole or in part, by the costs
associated with the negotiation and consummation of the Consolidation.
CANCELLATION OF DEBT OWED BY AFFILIATES. On December 31, 1996, Nor'Wester
was owed $1,798,350 by affiliated companies, primarily WVI, Aviator, Bayhawk and
Mile High. The Nor'Wester Board considered the fact that the affiliates
currently have no funds with which to repay the affiliated debt and are not
likely to have sufficient funds to repay the debt in the foreseeable future or
at all. The Board considered the possible defenses the affiliates could assert
to avoid payment of the debt and the probable legal costs which Nor'Wester would
incur with any dispute over payment of debts by affiliates. The Board also
considered that as a part of the Consolidation, the affiliated debt would be
eliminated.
OTHER CONSIDERATIONS. In the course of its deliberations, the Nor'Wester
Board also reviewed a number of additional factors relevant to the Consolidation
and Investment. In particular, the Nor'Wester Board considered, among other
matters, (i) the strategic importance of the Consolidation and the value
expected to be achieved through combining the operations of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High; (ii) the impact of various strategic
alternatives available to Nor'Wester if the Consolidation and investment by UBA
were not consummated, including a recapitalization of Nor'Wester combined with
operational restructuring; (iii) information concerning Nor'Wester's, WVI's,
Aviator's, Bayhawk's and Mile High's respective businesses, prospects, financial
performances and conditions, operations, managements and competitive positions;
and (iv) the current financial market conditions and historical market prices,
volatility and trading information of publicly-traded craft beer stocks
generally and Nor'Wester's Common Stock in particular. The Nor'Wester Board was
aware of certain interests that certain of its directors, officers and
stockholders had in the Consolidation, especially Mr. Bernau, but did not
consider them to be significant or of a nature that would affect the objectivity
of any director's determination that the Consolidation was in the best interests
of the stockholders of Nor'Wester. See "Interests of Certain Persons in the
Consolidation and the Investment" for a description of those interests.
The Nor'Wester Board also considered a number of potentially negative
factors which would arise if the Consolidation is approved, including (i) the
loss of control of future operations of Nor'Wester after the Consolidation and
Investment; (ii) the risk prior to consummation of the Consolidation that the
trading price of Nor'Wester may increase above its level at the time the
Consolidation was negotiated; (iii) the risk that benefits sought to be achieved
in the Consolidation will not be achieved; (iv) the risk that the investment
from UBA may not be completed; (v) the cost expected to be incurred in
connection with the Consolidation, including transaction costs and the costs of
integrating the businesses of the Constituent Corporations; and (vi) the other
risks described above under "Risk Factors."
The principal factors considered by the Nor'Wester Board in the
determination of the exchange ratio for the Consolidation were (i) the stock
price trading history of Nor'Wester; (ii) an analysis of the implied value of
UCB Common Stock to be received per share of Nor'Wester Common Stock based on
the exchange ratio; (iii) financial results for and current financial condition
of Nor'Wester; (iv) advice from Needham; (v) the likelihood of liquidation and
the consequences of liquidation if the Consolidation is not complete and the
investment from UBA received; and (vi) the terms and conditions of the
Investment Agreement and the Merger Agreement.
47
After taking into consideration all of the factors set forth above, the
Nor'Wester Board unanimously determined that the Consolidation was in the best
interests of Nor'Wester and its shareholders and that Nor'Wester should proceed
with the Consolidation at this time.
WVI'S REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
OF WVI
The WVI Board believes that the stockholders of WVI should vote FOR approval
and adoption of the Merger Agreement and the Consolidation. The following are
the reasons considered by the WVI Board to be material in its decision to
approve and adopt the Investment Agreement and the Consolidation.
NEED FOR OPERATING CAPITAL AT WVI AND ITS AFFILIATES. The WVI Board
considered the recent history of significant operating losses by its affiliates:
Aviator, Bayhawk and Mile High (collectively the "Affiliates"). WVI holds as its
assets (i) a majority of the common stock of the Affiliates, and (ii) sums owed
to WVI by its Affiliates. The WVI Board considered that the value of WVI was
highly dependent on (i) the ability of the Affiliates to repay the debts due WVI
and (ii) the ability of the Affiliates to perform in a manner which would make
the Affiliates' common stock valuable.
The WVI Board considered that Aviator had suffered continuing and growing
losses since it began its brewing operations in August 1995. Aviator suffered
losses of $394,640 and $1,157,706, respectively, in calendar years 1995 and
1996. The losses have seriously eroded Aviator's cash position. Cash and cash
equivalents decreased $207,183 to $19,218 at December 31, 1996 from $226,401 at
December 31, 1995. Between December 31, 1995 and December 31, 1996, Aviator's
accounts payable increased $405,258 to $607,570. The past due portion of
Aviator's debt increased from $343,394 to $583,653 between December 31, 1996 and
March 31, 1997, indicating further weakening of Aviator's financial condition in
1997.
The WVI Board considered that Bayhawk had suffered continuing losses since
it began its brewing operations in January 1995. Bayhawk suffered losses of
$477,052 and $291,542, respectively, in calendar years 1995 and 1996. Cash and
cash equivalents decreased $261,293 to $40,954 at December 31, 1996 from
$302,247 at December 31, 1995.
The WVI Board considered that Mile High had suffered continuing losses since
it began its brewing operations in August 1995. Mile High suffered losses of
$668,481 and $2,432,272, respectively, in calendar years 1995 and 1996. Mile
High substantially reduced its brewing operations in November 1996 and is
currently providing limited contract brewing services while looking for
potential buyers of its assets or other contract brewing opportunities. The 1996
loss figure included a $1,018,879 write down of operating assets. The losses
have seriously eroded Mile High's cash position. Cash and cash equivalents
decreased $349,371 to $30,320 at December 31, 1996 from $379,691 at December 31,
1995. Between December 31, 1995, and December 31, 1996, Mile High's accounts
payable increased $672,914 to $816,664. At December 31, 1996, the bulk of Mile
High's accounts payable were past due.
The WVI Board also considered that both Aviator and Mile High had undertaken
public stock offerings in 1996 to raise additional working capital. Neither
offering was successfully completed.
The WVI Board considered that the current financial condition of the
subsidiaries materially adversely affected the value of the subsidiaries' common
stock held by WVI and materially adversely affected the ability of the
subsidiaries, and each of them, to repay the sums owed to WVI. The WVI Board
also considered the probable value of WVI's common stock in the subsidiaries and
the collectability of the sums owed by the subsidiaries to WVI in the event of a
failure of one or more of the subsidiaries. The WVI Board considered the
likelihood of a failure of one or more the subsidiaries if the Merger Agreement
was not approved and the Consolidation carried out. See "Failure to Approve
Merger and Consolidation". The WVI Board considered the likelihood that the
shares received by its public shareholders from UCB in exchange for WVI shares
will be more valuable than the cumulative value of WVI's assets if the Merger
Agreement is not approved, the Consolidation is not consummated, and the
Investment is not made.
48
FINANCIAL PRESENTATION BY BLACK & COMPANY. The WVI Board approved the terms
of the Merger Agreement and Consolidation in reliance on the financial
presentation by Black, including Black's analysis of the fairness of the
consideration to be received by WVI's shareholders (other the Mr. Bernau)
pursuant to the Merger Agreement and the Investment Agreement from a financial
point of view. See "Opinions of Black & Company."
OWNERSHIP IN COMBINED COMPANIES. Approval of the Merger Agreement and
Consolidation will result in the exchange of all WVI Common Stock for Common
Stock of UCB. The WVI Board believes that UCB Common Stock will be approved for
trading on The Nasdaq SmallCap Market which will make the UCB Common Stock
considerably more liquid than the WVI Common Stock currently held by the
shareholders. The WVI Board considered the prospects for greater liquidity for
the holders of WVI Common Stock to be a significant positive aspect of the
Consolidation.
INDUSTRY CONDITIONS AND ALTERNATIVE FINANCING STRATEGIES. The WVI Board has
considered, among other factors, industry conditions and alternatives to the
Consolidation and Investment. In general, the WVI Board considered that WVI and
its subsidiaries are all thinly capitalized at a time of shakeout in the
microbrew industry. The WVI Board considered the impacts of the shakeout,
including: (i) a sharp fall in the stock prices for all major microbrewery
stocks; (ii) a sharp reduction in the rate of growth in microbrew beer sales in
the subsidiaries' major markets; (iii) the substantial reduction of Mile High's
brewing operations; and (iv) a general reluctance or refusal by lenders or
equity investors to provide capital for the industry in general and WVI and the
subsidiaries in particular.
The WVI Board considered the perilous cash positions of each of WVI and the
subsidiaries. Operating results are not sufficient to allow continued brewery
operations by the subsidiaries without additional sources of capital.
The Board concluded that WVI must take some action to avoid total loss due
to lack of available capital to solve existing cash flow and operational
challenges of the subsidiaries. Current market conditions and the cash positions
of WVI and the subsidiaries makes finding a source of cash imperative. WVI has
few, if any, alternatives. WVI has received few unsolicited expressions of
interest during the negotiations with UBA, even though the negotiations extended
over several months. WVI's investment bankers have given the Board little hope
of finding alternative sources of capital to meet the operating needs of WVI or
its subsidiaries.
WILLINGNESS OF FOUNDER TO TRANSFER AND CANCEL SHARES. The WVI Board has
considered the beneficial effect to the WVI shareholders of James W. Bernau's
willingness to transfer certain shares to UBA and transfer other shares to UCB
following Consolidation in consideration of (i) forestalling any potential
lawsuits from current shareholders of the Constituent Corporations and thus
supporting the financial viability of UCB on an ongoing basis; (ii) inducing the
investment by UBA in UCB, thus protecting Mr. Bernau's investment in the
Constituent Corporations; and (iii) protecting Mr. Bernau's goodwill and general
business reputation.
INCREASED MANAGEMENT EXPERTISE. The WVI Board believes that following the
Consolidation and subsequent investment by UBA, UCB will receive more extensive
management oversight and assistance through directors, officers and key
employees experienced in running large brewing operations, consolidating and
managing the operations of several breweries across a large geographic region,
marketing to consumers with a more diverse taste preference, and effectively
dealing with suppliers and distributors. Some of these directors, officers and
key employees are currently serving UCB, others have yet to be identified,
recruited and retained. In addition, the WVI Board believes that following the
Consolidation and Investment, UCB, by virtue of its size, strategic position and
access to capital, would be able to attract significantly better management and
brewing personnel than WVI can alone.
CANCELLATION OF DEBT OWED BY AFFILIATES. On December 31, 1996, WVI was owed
$1,535,669 by affiliated companies, primarily Aviator, Bayhawk and Mile High.
WVI considered the fact that the affiliates
49
currently have no funds with which to repay the affiliated debt and the
likelihood sufficient funds would be available to the affiliates in the future
to repay the debt. The Board considered the possible defenses the affiliates
would assert to avoid payment of the debt and the probable legal costs
associated with any dispute over payment of debts by affiliates. The Board also
considered that as part of the Consolidation, the affiliated debt would be
eliminated.
OTHER CONSIDERATIONS. In the course of its deliberations, the WVI Board
reviewed a number of additional factors relevant to the Consolidation and
Investment.
In particular, the WVI Board considered, among other matters, (i) the
strategic importance of the Consolidation and the value expected to be achieved
through the combination of Nor'Wester, WVI, Aviator, Bayhawk and Mile High; (ii)
the apparent lack of strategic alternatives available to WVI if the
Consolidation and Investment were not consummated; and (iii) information
concerning the business of Nor'Wester, WVI, Aviator, Bayhawk and Mile High,
including the prospects, financial performances and conditions, operations,
managements and competitive positions of each company. The WVI Board was aware
of certain interests that certain directors, officers and stockholders had in
the Consolidation, especially Mr. Bernau, but did not consider them to be
significant or of a nature that would affect the objectivity of any director's
determination that the Consolidation was in the best interests of the
stockholders of WVI. See "Interests of Certain Persons in the Consolidation and
the Investment" for a discussion of those interests.
The WVI Board also considered a number of potentially negative factors in
its deliberations concerning the Consolidation, including (i) the loss of
control of future operations of WVI after the Consolidation and Investment; (ii)
the risk prior to or following consummation of the Consolidation that the
trading price of WVI may increase above its level at the time the Consolidation
was negotiated; (iii) the risk that benefits sought to be achieved in the
Consolidation will not be achieved; (iv) and the other risks described above
under "Risk Factors."
The principal factors considered by the WVI Board in the determination of
the exchange ratio for the Merger were (i) the stock price trading history of
WVI and other companies in the industry, including the Affiliates and
Nor'Wester; (ii) an analysis of the implied value of UCB Common Stock to be
received per share of WVI Common Stock based on the exchange ratio; (iii)
financial results for and current financial condition of WVI; (iv) advice from
Black; (v) the likelihood of liquidation and the consequences of liquidation if
the Consolidation is not completed or the Investment is not consummated; and
(vi) the terms and conditions of the Investment Agreement and the Merger
Agreement.
In light of the current condition of WVI and the Affiliates, the condition
of the craft beer industry in general, the need for additional capital, the lack
of other alternatives, the potential benefits of the consolidation, and the
strengths brought to the organization by UBA, the Board unanimously recommends
approval of the transaction.
AVIATOR'S REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS OF THE BOARD OF
DIRECTORS OF AVIATOR
The Aviator Board believes that the stockholders of Aviator should vote FOR
approval and adoption of the Merger Agreement and the Consolidation. The
following are the reasons considered by the Aviator Board to be material in its
decision to approve and adopt the Investment Agreement and the Consolidation.
NEED FOR OPERATING CAPITAL AT AVIATOR. The Aviator Board considered that
the company had suffered continuing and growing losses since it began its
brewing operations in August 1995. Aviator suffered losses of $394,640 and
$1,157,706, respectively, in calendar years 1995 and 1996. The losses have
seriously eroded Aviator's cash position. Cash and cash equivalents decreased
$207,183 to $19,218 at December 31, 1996 from $226,401 at December 31, 1995.
Between December 31, 1995 and December 31, 1996 Aviator's accounts payable
increased $405,258 to $607,570. The past due portion of Aviator's debt increased
from
50
$343,394 to $583,653 between December 31, 1996 and March 31, 1997, indicating
further weakening of Aviator's financial condition in 1997.
The Aviator Board considered the operating losses to materially adversely
affect the value of the Aviator common stock and to materially adversely affect
the ability of Aviator to continue operations. The Aviator Board also considered
the probable value of Aviator's common stock in the event Aviator could no
longer continue business operations. The Aviator Board considered the likelihood
of a general business failure if the Merger Agreement was not approved, the
Consolidation completed and the Investment made. The Aviator Board considered
the likelihood that the shares received by its public shareholders from UCB in
exchange for the Aviator shares will be more valuable than the cumulative value
of Aviator's assets if the Merger Agreement is not approved, the Consolidation
completed, and the Investment made.
FINANCIAL PRESENTATION BY BLACK & COMPANY. The Aviator Board approved the
terms of the Merger Agreement and Consolidation in reliance on the financial
presentation by Black, including Black's analysis of the fairness of the
consideration to be received by Aviator's shareholders pursuant to the Merger
Agreement and the Investment Agreement from a financial point of view. See
"Opinions of Black & Company."
OWNERSHIP IN COMBINED COMPANIES. Approval of the Merger Agreement and
Consolidation will result in the exchange of all Aviator Common Stock for Common
Stock of UCB. The Aviator Board believes that UCB Common Stock will be approved
for trading on the Nasdaq Small Cap Market which will make the UCB Common Stock
considerably more liquid than the Aviator Common Stock currently held by the
shareholders. The Aviator Board considered the prospects for greater liquidity
for the holders of Aviator Common Stock to be a significant positive aspect of
the Consolidation.
INDUSTRY CONDITIONS AND ALTERNATIVE FINANCING STRATEGIES. The Aviator Board
has considered, among other factors, industry conditions and alternatives to the
Merger Agreement and Consolidation. In general, the Aviator Board considered
that Aviator is thinly capitalized at a time of shakeout in the microbrew
industry. The Aviator Board considered the impacts of the shakeout, including:
(i) a sharp fall in the stock prices for all major microbrewery stocks; (ii) a
sharp reduction in the rate of growth in microbrew beer sales in Aviator's major
markets; and (iii) a general reluctance or refusal by lenders or equity
investors to provide capital for the industry in general and Aviator in
particular.
The Aviator Board considered the perilous cash position of Aviator.
Operating results are not sufficient to allow continued brewery operations by
Aviator without additional sources of capital.
The Board concluded that Aviator must take some action to avoid total loss
due to lack of available capital to solve existing cash flow and operational
challenges. Current market conditions and the cash positions of Aviator makes
finding a source of cash imperative. Aviator has few, if any, alternatives,
Aviator has received few unsolicited expressions of interest during the
negotiations with UBA, even though the negotiations extended over several
months. The Aviator Board believes, based in large part on information provided
by WVI's financial advisor, Black & Company, that there is little hope of
finding alternative sources of capital to meet the operating needs of the
company.
WILLINGNESS OF FOUNDER TO TRANSFER AND CANCEL SHARES. The Aviator Board has
considered the beneficial effect to the Aviator shareholders of James W.
Bernau's willingness to transfer certain shares to UBA and transfer other shares
to UCB following Consolidation in consideration of: (i) forestalling any
potential lawsuits from current shareholders of the Constituent Corporations and
thus supporting the financial viability of UCB on an ongoing basis; (ii)
inducing the investment by UBA in UCB, thus protecting Mr. Bernau's investment
in the Constituent Corporations; and (iii) protecting Mr. Bernau's goodwill and
general business reputation.
51
INCREASED MANAGEMENT EXPERTISE. The Aviator Board believes, among other
things, that following the Consolidation and subsequent investment by UBA, UCB
will receive more extensive management oversight and assistance through
directors, officers and key employees experienced in running large brewing
operations, consolidating and managing the operations of several breweries
across a large geographic region, marketing to consumers with a more diverse
taste preference, and effectively dealing with suppliers and distributors. Some
of these directors, officers and key employees are currently serving UCB, others
have yet to be identified, recruited and retained. In addition, the Aviator
Board believes that following the Consolidation and investment by UBA, UCB, by
virtue of its size, strategic position and access to capital, would be able to
attract significantly better management and brewing personnel than Aviator can
alone.
CANCELLATION OF DEBT TO AFFILIATES. On December 31, 1996, Aviator owed
$881,012 to affiliated companies, primarily WVI and Nor'Wester. Aviator
currently has no funds with which to repay the affiliated debt. In the event of
liquidation, the Board considered the likelihood that the affiliates would
demand payment, possible defenses to payment, and the possible legal costs
associated with any dispute over payment of debts to affiliates. The Board also
considered that as part of the Consolidation, the affiliated debt would be
eliminated.
OTHER CONSIDERATIONS. In the course of its deliberations, the Aviator Board
reviewed a number of additional factors relevant to the Consolidation and
Investment.
In particular, the Aviator Board considered, among other matters, (i) the
strategic importance of the Consolidation and the value expected to be achieved
through the combination of Nor'Wester, WVI, Aviator, Bayhawk and Mile High; (ii)
the impact of various strategic alternatives available to Aviator if the
Consolidation and Investment were not consummated, including a recapitalization
of Aviator combined with operational restructuring; and (iii) information
concerning the business of Nor'Wester, WVI, Aviator, Bayhawk and Mile High,
including the prospects, financial performances and conditions, operations,
managements and competitive positions of each company. The Aviator Board was
aware of certain interests that certain directors, officers and stockholders had
in the Consolidation, especially Mr. Bernau, but did not consider them to be
significant or of a nature that would affect the objectivity of any director's
determination that the Consolidation was in the best interests of the
stockholders of Aviator. See "Interests of Certain Persons in the Consolidation"
for a discussion of those interests.
The Aviator Board also considered a number of potentially negative factors
in its deliberations concerning the Consolidation, including (i) the loss of
control of future operations of Aviator after the Consolidation and Investment;
(ii) the risk prior to or following consummation of the Consolidation that the
trading price of Aviator may increase above its level at the time the
Consolidation was negotiated; (iii) the risk that benefits sought to be achieved
in the Consolidation will not be achieved; (iv) and the other risks described
above under "Risk Factors."
The principal factors considered by the Aviator Board in the determination
of the exchange ratio for the Merger were (i) the stock price trading history of
Aviator and other companies in the industry, including Nor'Wester; (ii) an
analysis of the implied value of UCB Common Stock to be received per share of
Aviator Common Stock based on the exchange ratio; (iii) financial results for
and current financial condition of Aviator; (iv) advice from Black; (v) the
likelihood of liquidation and the consequences of liquidation if the
Consolidation is not completed and the Investment is not consummated; and (vi)
the terms and conditions of the Investment Agreement and the Merger Agreement.
In light of the current condition of Aviator, the condition of the craft
beer industry in general, the need for additional capital, the lack of other
alternatives, the potential benefits of the Consolidation, and the strengths
brought to the organization by UBA, the Board unanimously recommends approval of
the transaction.
52
BAYHAWK'S REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS OF THE BOARD OF
DIRECTORS OF BAYHAWK
The Bayhawk Board believes that the stockholders of Bayhawk should vote FOR
approval and adoption of the Merger Agreement and the Consolidation. The
following are the reasons considered by the Bayhawk Board to be material in its
decision to approve and adopt the Investment Agreement and the Consolidation.
NEED FOR OPERATING CAPITAL AT BAYHAWK. The Bayhawk Board considered that
the company had suffered continuing losses since it began its brewing operations
in January 1995. Bayhawk suffered losses of $477,052 and $291,542, respectively,
in calendar years 1995 and 1996. Cash and cash equivalents decreased $261,293 to
$40,954 at December 31, 1996 from $302,247 at December 31, 1995.
The Bayhawk Board considered the operating losses to materially adversely
affect the value of the Bayhawk common stock and to materially adversely affect
the ability of Bayhawk to continue operations. The Bayhawk Board also considered
the probable value of Bayhawk's common stock in the event Bayhawk could no
longer continue business operations. The Bayhawk Board considered the likelihood
of a general business failure if the Merger Agreement was not approved, the
Consolidation completed and the Investment made. The Bayhawk Board considered
the likelihood that the shares received by its public shareholders from UCB in
exchange for the Bayhawk shares will be more valuable than the cumulative value
of Bayhawk's assets if the Merger Agreement is not approved, the Consolidation
completed, and the Investment made.
FINANCIAL PRESENTATION BY BLACK & COMPANY. The Bayhawk Board approved the
terms of the Merger Agreement and Consolidation in reliance on the financial
presentation by Black, including Black's analysis of the fairness of the
consideration to be received by Bayhawk's shareholders pursuant to the Merger
Agreement and the Investment Agreement from a financial point of view. See
"Opinions of Black & Company."
OWNERSHIP IN COMBINED COMPANIES. Approval of the Merger Agreement and
Consolidation will result in the exchange of all Bayhawk Common Stock for Common
Stock of UCB. The Bayhawk Board believes that UCB Common Stock will be approved
for trading on the Nasdaq Small Cap Market which will make the UCB Common Stock
considerably more liquid than the Bayhawk Common Stock currently held by the
shareholders. The Bayhawk Board considered the prospects for greater liquidity
for the holders of Bayhawk Common Stock to be a significant positive aspect of
the Merger Agreement and Consolidation.
INDUSTRY CONDITIONS AND ALTERNATIVE FINANCING STRATEGIES. The Bayhawk Board
has considered, among other factors industry conditions and alternatives to the
Merger Agreement and Consolidation. In general, the Bayhawk Board considered
that Bayhawk is thinly capitalized at a time of shakeout in the microbrew
industry. The Bayhawk Board considered the impacts of the shakeout, including:
(i) a sharp fall in the stock prices for all major microbrewery stocks; (ii)
Bayhawk's general inability to penetrate the Southern California market at a
level that would allow sustained operations based on operating results; and
(iii) a general reluctance or refusal by lenders or equity investors to provide
capital for the industry in general and Bayhawk in particular.
The Bayhawk Board considered the perilous cash position of Bayhawk.
Operating results are not sufficient to allow continued brewery operations by
Bayhawk without additional sources of capital.
The Board concluded that Bayhawk must take some action to avoid total loss
due to lack of available capital to solve existing cash flow and operational
challenges. Current market conditions and the cash position of Bayhawk makes
finding a source of cash imperative. Bayhawk has few, if any, alternatives.
Bayhawk has received no unsolicited expressions of interest during the
negotiations with UBA, even though the negotiations extended over several
months. The Bayhawk Board believes, based in large part on information provided
by WVI's financial advisor, Black, that there is little hope of finding
alternative sources of cash to meet the operating needs of the company.
53
WILLINGNESS OF FOUNDER TO TRANSFER AND CANCEL SHARES. The Bayhawk Board has
considered the collateral beneficial effect on the Bayhawk shareholders of James
W. Bernau's willingness to transfer certain shares to UBA and transfer other
shares to UCB following Consolidation in consideration of (i) forestalling any
potential lawsuits from current shareholders of the Constituent Corporations and
thus supporting the financial viability of UCB on an ongoing basis (ii) inducing
the investment by UBA in UCB, thus protecting Bernau's investment in the
Constituent Corporations; and (iii) protecting Bernau's goodwill and general
business reputation.
INCREASED MANAGEMENT EXPERTISE. The Bayhawk Board believes, among other
things, that following the Consolidation and subsequent investment by UBA, UCB
will receive more extensive management oversight and assistance through
directors, officers and key employees experienced in running large brewing
operations, consolidating and managing the operations of several breweries
across a large geographic region, marketing to consumers with a more diverse
taste preference, and effectively dealing with suppliers and distributors. Some
of these directors, officers and key employees are currently serving UCB, others
have yet to be identified, recruited and retained. In addition, the Bayhawk
Board believes that following the Consolidation and investment by UBA, UCB, by
virtue of its size, strategic position and access to capital, would be able to
attract significantly better management and brewing personnel than Bayhawk can
alone.
CANCELLATION OF DEBT TO AFFILIATES. On December 31, 1996, Bayhawk owed
$291,586 to affiliated companies, primarily WVI and Nor'Wester. Bayhawk
currently has no funds with which to repay the affiliated debt. In the event of
liquidation, the Board considered the likelihood that the affiliates would
demand payment, possible defenses to payment, and the possible legal costs
associated with any dispute over payment of debts to affiliates. The Board also
considered that as part of the Consolidation, the affiliated debt would be
eliminated.
OTHER CONSIDERATIONS. In the course of its deliberations, the Bayhawk Board
reviewed a number of additional factors relevant to the Consolidation and
Investment.
In particular, the Bayhawk Board considered, among other matters, (i) the
strategic importance of the Consolidation and the value expected to be achieved
through the combination of Nor'Wester, WVI, Aviator, Bayhawk and Mile High; (ii)
the apparent lack of alternatives available to Bayhawk if the Consolidation and
Investment were not consummated, including a recapitalization of Bayhawk
combined with operational restructuring; and (iii) information concerning the
business of Nor'Wester, WVI, Aviator, Bayhawk and Mile High, including the
prospects, financial performances and conditions, operations, managements and
competitive positions of each company. The Bayhawk Board was aware of certain
interests that certain directors, officers and stockholders had in the
Consolidation, especially Mr. Bernau, but did not consider them to be
significant or of a nature that would affect the objectivity of any director's
determination that the Consolidation was in the best interests of the
stockholders of Bayhawk. See "Interests of Certain Persons in the Consolidation
and the Investment" for a discussion of those interests.
The Bayhawk Board also considered a number of potentially negative factors
in its deliberations concerning the Consolidation, including (i) the loss of
control of future operations of Bayhawk after the Consolidation and Investment;
(ii) the risk prior to or following consummation of the Consolidation that the
trading price of Bayhawk may increase above its level at the time the
Consolidation was negotiated; (iii) the risk that benefits sought to be achieved
in the Consolidation will not be achieved; (iv) and the other risks described
above under "Risk Factors."
The principal factors considered by the Bayhawk Board in the determination
of the exchange ratio for the Merger were (i) the stock price trading history of
Bayhawk and other companies in the industry, including Nor'Wester; (ii) an
analysis of the implied value of UCB Common Stock to be received per share of
Bayhawk Common Stock based on the exchange ratio; (iii) financial results for
and current financial condition of Bayhawk; (iv) advice from Black; (v) the
likelihood of liquidation and the consequences of
54
liquidation if the Consolidation is not completed or the Investment is not
consummated; and (vi) the terms and conditions of the Investment Agreement and
the Merger Agreement.
In light of the current condition of Bayhawk, the condition of the craft
beer industry in general, the need for additional capital, the lack of other
alternatives, the potential benefits of the consolidation, and the strengths
brought to the organization by UBA, the Board unanimously recommends approval of
the transaction.
MILE HIGH'S REASONS FOR THE CONSOLIDATION; RECOMMENDATIONS OF THE BOARD OF
DIRECTORS OF MILE HIGH
The Mile High Board believes that the stockholders of Mile High should vote
FOR approval and adoption of the Merger Agreement and the Consolidation. The
following are the reasons considered by the Mile High Board to be material in
its decision to approve and adopt the Investment Agreement and the
Consolidation.
NEED FOR OPERATING CAPITAL AT MILE HIGH. The Mile High Board considered
that the company had suffered continuing losses since it began its brewing
operations in August 1995. Mile High suffered losses of $668,481 and $2,432,272,
respectively, in calendar years 1995, and 1996. Mile High ceased brewing
operations in November 1996 and began searching for potential buyers of Mile
High's operating assets or for contract brewing opportunities. The 1996 loss
figure included a $1,018,879 write down of operating assets. The losses have
seriously eroded Mile High's cash position. Cash and cash equivalents decreased
$349,371 to $30,320 at December 31, 1996 from $379,691 at December 31, 1995.
Between December 31, 1995 and December 31, 1996 Mile High's accounts payable
increased $672,914 to $816,664. At December 31, 1996, the bulk of Mile High's
accounts payable were past due.
The Mile High Board considered the losses, which resulted in the termination
of its normal operations in November 1996, to materially adversely affect the
value of the Mile High Common Stock. The Mile High Board considered the
likelihood of a general business failure and liquidation if the Merger Agreement
was not approved, the Consolidation completed and the Investment made. The Mile
High Board considered the likelihood that the shares received by its public
shareholders from UCB in exchange for the Mile High shares will be more valuable
than the cumulative value of Mile High's assets if the Merger Agreement is not
approved, the Consolidation completed, and the Investment made.
FINANCIAL PRESENTATION BY BLACK & COMPANY. The Mile High Board approved the
terms of the Merger Agreement and Consolidation in reliance on the financial
presentation by Black, including Black's analysis of the fairness of the
consideration to be received by Mile High's shareholders pursuant to the Merger
Agreement and the Investment Agreement from a financial point of view. See
"Opinions of Black & Company."
OWNERSHIP IN COMBINED COMPANIES. Approval of the Merger Agreement and
Consolidation will result in the exchange of all Mile High Common Stock for
Common Stock of UCB. The Mile High Board believes that UCB Common Stock will be
approved for trading on the Nasdaq Small Cap Market which will make the UCB
Common Stock considerably more liquid than the Mile High Common Stock currently
held by the shareholders. The Mile High Board considered the prospects for
greater liquidity for the holders of Mile High Common Stock to be a significant
positive aspect of the Merger Agreement and Consolidation.
INDUSTRY CONDITIONS AND ALTERNATIVE FINANCING STRATEGIES. The Mile High
Board has considered, among other factors, industry conditions and alternatives
to the Merger Agreement and Consolidation. In general, the Mile High Board
considered that Mile High is without current assets at a time of shakeout in the
microbrew industry. The Mile High Board considered the impacts of the shakeout,
including: (i) a sharp fall in the stock prices for all major microbrewery
stocks; (ii) Mile High`s general inability to penetrate the Colorado market at a
level that would allow sustained operations based on operating results; and
(iii) a
55
general reluctance or refusal by lenders or equity investors to provide capital
for the industry in general and Mile High in particular.
The Mile High Board considered the perilous cash position of Mile High.
Operating results are not sufficient to allow Mile High to preserve assets from
liquidation by unpaid creditors without additional sources of capital.
The Board concluded that Mile High must take some action to avoid total loss
due to lack of available capital to solve existing cash flow problems. Current
market conditions and the cash position of Mile High makes finding a source of
cash imperative. Mile High has few, if any, alternatives. Mile High has received
few unsolicited expressions of interest during the negotiations with UBA, even
though the negotiations extended over several months. The Mile High Board
believes, based in large part on information provided by WVI's financial
advisor, Black & Company, that there is little hope of finding alternative
sources of cash to meet the operating needs of the company.
WILLINGNESS OF FOUNDER TO TRANSFER AND CANCEL SHARES. The Mile High Board
has considered the collateral beneficial effect on the Mile High shareholders of
James W. Bernau's willingness to transfer certain shares to UBA and transfer
other shares to UCB following Consolidation in consideration of: (i)
forestalling any potential lawsuits from current shareholders of the Constituent
Corporations and thus supporting the financial viability of UCB on an ongoing
basis; (ii) inducing the investment by UBA in UCB, thus protecting Bernau's
investment in the Constituent Corporations; and (iii) protecting Bernau's
goodwill and general business reputation.
INCREASED MANAGEMENT EXPERTISE. The Mile High Board believes, among other
things, that following the Consolidation and subsequent investment by UBA, UCB
will receive more extensive management oversight and assistance through
directors, officers and key employees experienced in running large brewing
operations, consolidating and managing the operations of several breweries
across a large geographic region, marketing to consumers with a more diverse
taste preference, and effectively dealing with suppliers and distributors. Some
of these directors, officers and key employees are currently serving UCB, others
have yet to be identified, recruited and retained. In addition, the Mile High
Board believes that following the Consolidation and investment by UBA, UCB, by
virtue of its size, strategic position and access to capital, would be able to
attract significantly better management and brewing personnel than Mile High can
alone.
CANCELLATION OF DEBT TO AFFILIATES. On December 31, 1996, Mile High owed
$1,834,547 to affiliated companies, primarily WVI and Nor'Wester. Mile High
currently has no funds with which to repay the affiliated debt. In the event of
liquidation, the Board considered the likelihood that the affiliates would
demand payment, possible defenses to payment, and the possible legal costs
associated with any dispute over payment of debts to affiliates. The Board also
considered that as part of the Consolidation, the affiliated debt would be
eliminated.
OTHER CONSIDERATIONS. In the course of its deliberations, the Mile High
Board reviewed a number of additional factors relevant to the Consolidation and
Investment.
In particular, the Mile High Board considered, among other matters, (i) the
strategic importance of the Consolidation and the value expected to be achieved
through the combination of Nor'Wester, WVI, Aviator, Bay Hawk and Mile High;
(ii) the apparent lack of strategic alternatives available to Mile High if the
Consolidation and Investment were not consummated; and (iii) information
concerning the business of Nor'Wester, WVI, Aviator, Bay Hawk and Mile High,
including the prospects, financial performances and conditions, operations,
managements and competitive positions of each company. The Mile High Board was
aware of certain interests that certain directors, officers and stockholders had
in the Consolidation, especially Mr. Bernau, but did not consider them to be
significant or of a nature that would affect the objectivity of any director's
determination that the Consolidation was in the best interests of the
56
stockholders of Mile High. See "Interests of Certain Persons in the
Consolidation and the Investment" for a discussion of those interests.
The Mile High Board also considered a number of potentially negative factors
in its deliberations concerning the Consolidation, including (i) the loss of
control of future operations of Mile High after the Consolidation and
Investment; (ii) the risk prior to or following consummation of the
Consolidation that the trading price of Mile High may increase above its level
at the time the Consolidation was negotiated; (iii) the risk that benefits
sought to be achieved in the Consolidation will not be achieved; (iv) and the
other risks described above under "Risk Factors."
The principal factors considered by the Mile High Board in the determination
of the exchange ratio for the Merger were (i) the stock price trading history of
Mile High and other companies in the industry, including Nor'Wester; (ii) an
analysis of the implied value of UCB Common Stock to be received per share of
Mile High Common Stock based on the exchange ratio; (iii) financial results for
and current financial condition of Mile High; (iv) advice from Black; (v) the
likelihood of liquidation and the consequences of liquidation if the
Consolidation is not completed or the investment consummated; and (vi) the terms
and conditions of the Investment Agreement and the Merger Agreement.
In light of the current condition of Mile High, the condition of the craft
beer industry in general, the need for additional capital, the lack of other
alternatives, the potential benefits of the consolidation, and the strengths
brought to the organization by UBA, the Board unanimously recommends approval of
the transaction.
FAILURE TO APPROVE THE CONSOLIDATION
Consolidation of the operations of the Constituent Corporations under UCB
and receipt of the investment from UBA is conditioned upon the approval of the
Merger Agreement by the respective shareholders of each of the Constituent
Corporations. Without consummation of the Consolidation and receipt of the
investment by UBA, the Constituent Corporations believe that one or more of
their businesses would suffer a general failure due to their poor financial
condition.
Moreover, the Constituent Corporations, and their shareholders indirectly,
have incurred and are expected to further incur substantial costs in an amount
estimated to be $1.3 million in connection with the analysis, planning,
documentation and approval process related to the Consolidation and Investment.
In the event that the shareholders of the Constituent Corporations do not
approve the Consolidation, the above-mentioned costs will be shared on a pro
rata basis among the Companies in accordance with an expense sharing arrangement
which provides that each Constituent Corporation will pay its share of the costs
based on the ratio of shares of UCB which its shareholders (other than Jim
Bernau) would have received in the Consolidation to the total shares of UCB
which would have been received by the shareholders of all the Companies
(excluding Jim Bernau). Common costs under the expense sharing arrangement
include, without limitation, payment of fees and costs payable to the investment
bankers, legal counsel and the public accounting firm which have provided
counsel to the Constituent Corporations in connection with the Consolidation and
investment by UBA.
In addition, if the shareholders of the Constituent Corporations do not
approve the Consolidation, then no further monies will be advanced by UBA under
the Bridge Loans, Nor'Wester will be forced to repay the entire amount of Bridge
Loan funds within sixty (60) days following disapproval of the Consolidation,
all of the Constituent Corporations will be forced to seek financing from third
parties to provide cash for continuing operations and if unable to do so, would
be forced to cease business operations. As of July 21, 1997, Nor'Wester had
borrowed $2.537 million of the $2.75 million available from UBA under the Bridge
Loans. Should Nor'Wester be forced to repay to UBA the amounts borrowed, each of
the other Constituent Corporations in turn will be required to pay Nor'Wester a
portion of the bridge loan amount which was utilized by such company.
57
OPINION OF NEEDHAM & COMPANY, INC.
Nor'Wester retained Needham to act as a financial advisor to Nor'Wester in
connection with the proposed Consolidation and Investment. In connection with
this engagement, Nor'Wester requested Needham to render an opinion as to whether
or not the exchange ratio to be provided for in the Merger Agreement with
respect to the shares of UCB to be issued to the shareholders of Nor'Wester
(other than James W. Bernau) pursuant to the Merger Agreement (the "Nor'Wester
Exchange Ratio") and the Investment Agreement are fair to such shareholders from
a financial point of view. Needham was not requested to, and did not, make any
recommendation to the Nor'Wester Board as to the Nor'Wester Exchange Ratio nor
as to the percentage of shares of UCB to be issued to and received by UBA
pursuant to the Investment Agreement, which exchange ratio and percentage were
determined through arm's length negotiations among Nor'Wester, the other
Constituent Corporations, and UBA.
At a telephonic meeting of the Board of Directors of Nor'Wester on May 12,
1997, Needham delivered its written opinion that, as of such date and based upon
and subject to certain assumptions and other matters described in its written
opinion, the consideration to be received by the shareholders of Nor'Wester
(other than Mr. Bernau) pursuant to the Merger Agreement and the Investment
Agreement is fair to such shareholders from a financial point of view. NEEDHAM'S
OPINION IS ADDRESSED TO THE NOR'WESTER BOARD OF DIRECTORS, IS DIRECTED ONLY TO
THE FINANCIAL TERMS OF THE MERGER AGREEMENT AND THE INVESTMENT AGREEMENT, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF NOR'WESTER OR ANY
OTHER CONSTITUENT CORPORATION AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
NOR'WESTER ANNUAL MEETING OR ANY OTHER ANNUAL MEETING OF ANY CONSTITUENT
CORPORATION.
Needham is not expressing any opinion as to what the value of UCB Common
Stock will be when issued to the shareholders of Nor'Wester pursuant to the
Consolidation or the prices at which UCB Common Stock will actually trade at any
time. The complete text of the May 12, 1997 opinion (the "Needham Opinion"),
which sets forth the assumptions made, matters considered, and limitations on
and scope of the review undertaken by Needham, is attached to this Proxy
Statement/Prospectus as Annex C, and the summary of the Needham Opinion set
forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the Needham Opinion. NOR'WESTER SHAREHOLDERS ARE URGED TO READ THE
NEEDHAM OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE
PROCEDURES FOLLOWED, THE FACTORS CONSIDERED, AND THE ASSUMPTIONS MADE BY
NEEDHAM.
In arriving at its opinion, Needham, among other things, (i) reviewed the
Investment Agreement; (ii) reviewed a draft of the Amendment to the Investment
Agreement dated April 16, 1997; (iii) reviewed a draft of the Merger Agreement
dated April 21, 1997; (iv) reviewed certain other documents relating to the
Consolidation and the Investment, including drafts of this Proxy
Statement/Prospectus; (v) reviewed certain publicly available information
concerning Nor'Wester and the other Constituent Corporations and certain other
relevant financial and operating data of Nor'Wester and the other Constituent
Corporations made available from the internal records of Nor'Wester and the
other Constituent Corporations; (vi) reviewed the historical stock prices and
trading volumes of Nor'Wester's and, to the extent available, the other
Constituent Corporations' common stock; (vii) held discussions with members of
senior management of Nor'Wester and the other Constituent Corporations
concerning the current and future business prospects of Nor'Wester and the other
Constituent Corporations, including Nor'Wester's management's views as to the
anticipated adverse effects on Nor'Wester's business, assets, liabilities,
operations and prospects that management believes would occur if Nor'Wester were
not to enter into the Consolidation and the Investment and Nor'Wester's
liquidity and solvency concerns; (viii) held discussions with members of senior
management of UBA concerning the business prospects of UCB, including such
management's views as to the organization of and strategies with respect to UCB;
(ix) reviewed certain financial forecasts and projections of Nor'Wester and the
other Constituent Corporations prepared by the respective managements of
Nor'Wester and the other Constituent Corporations; (x) compared certain publicly
available financial data of companies whose securities are publicly traded,
which Needham deemed generally comparable to the businesses of Nor'Wester and
the other Constituent Corporations, to
58
similar data for Nor'Wester and the other Constituent Corporations; (xi)
reviewed the financial terms of certain other business combinations that Needham
deemed generally relevant; and (xii) performed and/or considered such other
studies, analyses, inquiries and investigations as Needham deemed appropriate.
Needham assumed and relied upon, without independent verification, the
accuracy and completeness of the information it reviewed for purposes of its
opinion. With respect to the financial forecasts of Nor'Wester and the other
Constituent Corporations provided to Needham by the respective managements of
Nor'Wester and the other Constituent Corporations, Needham assumed that such
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of such managements, at the time of
preparation, of the future operating and financial performance of Nor'Wester and
the other Constituent Corporations and that the strategic and operating benefits
anticipated by such managements will be realized from the Consolidation (it
being noted that such managements did not, due to the financial conditions of
the Constituent Corporations, prepare forecasts for each Constituent Corporation
as an independent operating entity assuming the Consolidation and Investment did
not occur). Needham also assumed that there were no material changes in
Nor'Wester's or the other Constituent Corporations' assets, financial condition,
results of operations, business or prospects since the respective dates of their
last financial statements made available to Needham and that all material
liabilities (contingent or otherwise, known or unknown) of the Constituent
Corporations are as set forth in their respective financial statements. In
rendering its opinion, Needham assumed that shareholders of Nor'Wester will not
recognize any gain or loss for federal income tax purposes as a result of the
Consolidation, the Consolidation would be accounted for as a purchase under
generally accepted accounting principles, and that no adjustments will be made
to the respective exchange ratios or the number of shares of UCB Common Stock to
be issued, as set forth in the draft of the Amendment dated April 16, 1997 and
the draft of the Merger Agreement dated April 21, 1997. Needham did not assume
any responsibility for or make or obtain any independent evaluation, appraisal
or physical inspection of the assets or liabilities of Nor'Wester, any of the
other Constituent Corporations, UCB or UBA. The Needham Opinion states that it
was based on economic, monetary and market conditions existing as of the date of
such opinion. Furthermore, Needham expresses no opinion as to what the value of
UCB Common Stock will be when issued to the shareholders of Nor'Wester pursuant
to the Consolidation or the prices at which UCB Common Stock will actually trade
at any time.
Based on this information, Needham performed a variety of financial analyses
of the Consolidation and Investment. The following paragraphs summarize the
significant financial analyses performed by Needham in arriving at its opinion
presented to the Nor'Wester Board of Directors.
CONTRIBUTION ANALYSIS. Needham reviewed and analyzed the pro forma
contribution of Nor'Wester to the pro forma combined operational and financial
information as of and for the twelve months ended December 31, 1996 and for
projected calendar 1997 for all of the Constituent Corporations, assuming no
consolidation adjustments. Needham noted that projected calendar 1997 amounts
for Nor'Wester assumed 100% ownership by Nor'Wester of North Country Joint
Venture, LLC, transfer of cooperative brewing under the Alliance from WVI
facilities to North Country Joint Venture, LLC, and consummation of the
Investment. Needham reviewed, among other things, the pro forma contributions to
net revenues, net loss, and total assets, and reviewed the pro forma
contributions to barrels sold and barrel capacity. Based on this analysis,
Nor'Wester contributed 62.8% of 1996 pro forma combined net revenues, 77.5% of
projected 1997 pro forma combined net revenues, 52.8% of 1996 pro forma combined
net loss, 69.4% of projected 1997 pro forma combined net loss, and 73.2% of pro
forma combined assets as of December 31, 1996. In addition, based on this
analysis, Nor'Wester contributed 71.9% of 1996 barrels sold, 76.1% of projected
1997 barrels sold, and 40.1% of 1996 barrel capacity. Based on the Merger
Agreement, Nor'Wester's shareholders (other than Bernau) will own approximately
66.2% of shares of UCB to be held by the shareholders of the Constituent
Corporations (other than Bernau) after the Consolidation and the Investment. The
results of the contribution analysis are not necessarily indicative of the
contributions that the respective businesses may have in the future.
59
COMPARABLE COMPANY ANALYSIS. Needham compared selected historical and
projected operating and stock market data and operating and financial ratios for
Nor'Wester and for the other Constituent Corporations, on a pro forma combined
basis, to the corresponding data and ratios of certain publicly traded
microbrewery companies which it deemed generally comparable to the Constituent
Corporations. Such data and ratios included total market capitalization to
historical and projected revenue, price per share to historical and projected
earnings per share and market value to historical book value.
Companies deemed to be generally comparable to the Constituent Corporations
included The Boston Beer Company, Inc., The Lion Brewery, Inc., Minnesota
Brewing Company, Pete's Brewing Company, Pyramid Breweries Inc., Redhook Ale
Brewery, Incorporated, and Rock Bottom Restaurants, Inc.
For the comparable companies, the multiples of total market capitalization
to last twelve months ("LTM") revenues ranged from 0.2 to 1.7 with a mean of 0.7
and a median of 0.7; the multiples of market capitalization to projected 1997
revenues ranged from 0.2 to 1.2 with a mean of 0.6 and a median of 0.6; the LTM
price-earnings multiples ranged from 7.3 to 39.8 with a mean of 23.1 and a
median of 23.4; the projected 1997 price-earnings multiples ranged from 5.0 to
22.0 with a mean of 16.1 and a median of 17.0; and the multiples of market value
to historical book value ranged from 0.6 to 2.3 with a mean of 1.2 and a median
of 1.1.
These ratios compared with the following ratios for Nor'Wester, calculated
based on the $1.875 per share closing bid price of Nor'Wester Common Stock on
May 6, 1997: total market capitalization to LTM revenues of 1.7; total market
capitalization to projected 1997 revenues of 1.3; and market value to historical
book value multiple of 0.8. Price-earnings multiples were not deemed meaningful
since Nor'Wester reported a net loss in 1996 and is projected to report a net
loss in 1997.
COMPARABLE TRANSACTION ANALYSIS. Needham also analyzed publicly available
financial information for eleven selected mergers and acquisitions with
aggregate transaction values of between $10 million and $50 million (the
"Comparable Size Transactions"), ten selected mergers and acquisitions of
companies in the beverage industry, and ten selected mergers and acquisitions of
companies in the brewery industry. Needham noted that the Comparable Size
Transactions provided insight into general market conditions but was not
insightful with respect to Nor'Wester's microbrewery marketplace, and that
analysis of the comparable beverage industry and brewery industry transactions
was made difficult due to the lack of detailed publicly available information.
Accordingly, Needham placed relatively less emphasis on this analysis.
LIQUIDATION VALUE ANALYSIS. Needham conducted a liquidation value analysis
of each of the Constituent Corporations (other than WVI, which is a holding
company) to analyze possible scenarios in the event the Consolidation and the
Investment was not consummated and additional sources of liquidity were not
available to such Constituent Corporations. Needham's analysis reviewed the
possible values of such Constituent Corporations' net assets in a liquidation
based upon three possible scenarios. These scenarios were based upon different
assumptions with respect to, among other things, the percentages of the book
value of tangible assets on the respective December 31, 1996 balance sheets that
may be realized upon a liquidation and the amount of transaction expenses as a
percentage of values realized. Needham also noted that at December 31, 1996,
Nor'Wester was in default under its $1.0 million credit facility and was not in
compliance with certain financial covenants under both its $1.0 million credit
facility and $2.0 million term loan. The results of this analysis showed that
the net values estimated to be realized upon liquidation of Nor'Wester's assets,
less its liabilities, were $0.8 million, $4.5 million, and $7.2 million in the
three possible scenarios; the amounts estimated to be received from the sale of
Aviator's assets upon liquidation would be insufficient to cover the book value
of Aviator's liabilities as of December 31, 1996 in the first possible scenario
by $0.1 million and the net values estimated to be realized upon liquidation of
Aviator's assets, less its liabilities, in the other two possible scenarios were
$0.7 million and $1.1 million; the net values estimated to be realized upon
liquidation of Bayhawk's assets, less its liabilities, in the three possible
scenarios were $0.3 million, $0.5 million, and $0.7 million; and the amounts
estimated to be received from
60
the sale of Mile High's assets upon liquidation would be insufficient to cover
the book value of Mile High's liabilities as of December 31, 1996 in two
possible scenarios by $0.9 million and $0.3 million, and the net value estimated
to be realized upon liquidation of Mile High's assets, less its liabilities, in
the third possible scenario, was $0.1 million.
No company or transaction used in any comparable analysis as a comparison is
identical to Nor'Wester, any other Constituent Corporation, UCB, the
Consolidation, or the Investment. Accordingly, these analyses are not simply
mathematical; rather, they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies and transactions to which they are being
compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of Nor'Wester, any of the other Constituent Corporations, UCB
or UBA. Any estimates contained in these analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable as set forth therein. Additionally,
analyses relating to the values of business or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Pursuant to the terms of the engagement letter dated January 27, 1997, as
amended, among Needham, Black, Nor'Wester and WVI, Nor'Wester and WVI have
agreed to pay Needham a fee of $142,500 for services rendered in connection with
the Consolidation and the Investment. One-half of the aggregate fees payable to
Needham ($71,250) will be paid in cash and the remainder will be paid in UCB
stock valued at $5.25 per share (13,572 shares). Nor'Wester and WVI have also
agreed to reimburse Needham for its reasonable out-of-pocket expenses and to
indemnify Needham against certain liabilities relating to or arising out of
services performed by Needham as financial advisor to Nor'Wester and WVI.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the Nor'Wester and WVI
Boards of Directors to act as a financial advisor in connection with the
Consolidation and the Investment based on Needham's experience as a financial
advisor in mergers and acquisitions as well as Needham's familiarity with the
microbrewery industry. In the normal course of its business, Needham may
actively trade the equity securities of Nor'Wester for its own account or for
the account of its customers and, therefore, may at any time hold a long or
short position in such securities.
OPINIONS OF BLACK & COMPANY
Nor'Wester and WVI retained Black to act as financial advisor to Nor'Wester
and WVI in connection with the proposed transaction with UBA. In connection with
this engagement, Black was asked to render an opinion as to whether the
consideration to be received by the shareholders of each of WVI, Aviator,
Bayhawk and Mile High (other than James W. Bernau) pursuant to the Merger
Agreement and the Investment Agreement was fair to such shareholders from a
financial point of view. Black was not requested to, and did not, make any
recommendation to the respective Boards of WVI, Aviator, Bayhawk and Mile High
as to the exchange ratios nor as to the percentage of shares of UCB to be issued
to and received by UBA pursuant to the Investment Agreement, which exchange
ratios and percentage were
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determined through arm's length negotiations among Nor'Wester, the other
Constituent Corporations, and UBA.
At telephonic meetings of the Boards of Directors of WVI and Bayhawk on May
12, 1997 and at a telephonic meeting of the Board of Directors of Aviator on May
13, 1997, Black delivered its written opinion that, as of such date and based
upon and subject to certain assumptions and other matters described in its
written opinion, the consideration to be received by the shareholders of each of
WVI, Aviator, Bayhawk and Mile High (other than Mr. Bernau) pursuant to the
Merger Agreement and the Investment Agreement is fair to such shareholders from
a financial point of view. Black's opinion is addressed to the respective Boards
of Directors of WVI, Aviator, Bayhawk and Mile High, is directed only to the
financial terms of the Merger Agreement and the Investment Agreement, and does
not constitute a recommendation to any shareholder of WVI, Aviator, Bayhawk or
Mile High as to how such shareholder should vote at the Annual Meeting of any
Constituent Corporation.
Black is not expressing any opinion as to what the value of UCB Common Stock
will be when issued pursuant to the Consolidation of the prices at which UCB
Common Stock will trade at any time. The complete text of the May 12, 1997
opinion (the "Black Opinion"), which sets forth the assumptions made, matters
considered, and limitations on and scope of the review undertaken by Black, is
attached to this Proxy Statement/Prospectus as Annex D, and the summary of the
Black Opinion set forth in this Proxy Statement/Prospectus is qualified in its
entirety by reference to the Black Opinion. WVI, Aviator, Bayhawk and Mile High
shareholders are urged to read the Black Opinion carefully and in its entirety
for a description of the procedures followed, the factors considered, and the
assumptions made by Black.
In arriving at its opinion, Black, among other things, (i) reviewed the
Investment Agreement and the Merger Agreement; (ii) reviewed certain other
documents relating to the Merger Agreement and the Investment Agreement,
including drafts of this Proxy Statement/Prospectus; (iii) reviewed certain
publicly available information concerning the Constituent Corporations and
certain other relevant financial and operating data of the Constituent
Corporations made available from the internal records of the Constituent
Corporations; (iv) held discussions with members of senior management of the
Constituent Corporations concerning the current and future business prospects of
the Constituent Corporations, including the views of such managements as to the
anticipated adverse effects on the respective businesses, assets, liabilities,
operations and prospects that would occur if each of the Constituent
Corporations were not to enter into the Consolidation and the Investment and the
liquidity and solvency concerns of the Constituent Corporations; (v) held
discussions with members of senior management of UBA concerning the business
prospects of UCB, including such management's views as to the organization of
and strategies with respect to UCB; (vi) reviewed certain financial forecasts
and projections of the Constituent Corporations prepared by the managements of
each of the Constituent Corporations; (vii) reviewed the recent reported prices
and trading activity for the common stock of certain other companies engaged in
business Black considered comparable to those of the Constituent Corporations
and compared certain publicly available financial data for those comparable
companies to similar data for the Constituent Corporations; (viii) reviewed the
financial terms of certain other merger and acquisition transactions that Black
deemed generally relevant; (ix) analyzed the range of possible outcomes of a
liquidation of each of WVI, Aviator, Bayhawk and Mile High; and (x) performed
and/or considered such other studies, analyses, inquiries and investigations as
Black deemed appropriate.
Black assumed and relied upon, without independent verification, the
accuracy and completeness of the information it reviewed for purposes of its
opinion. With respect to the financial forecasts of the Constituent Corporations
provided to Black by the managements of each of the Constituent Corporations,
Black assumed that such forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of such
managements, at the time of preparation, of the future operating and financial
performance of the Constituent Corporations and that the strategic and operating
benefits anticipated by such managements will be realized from the Consolidation
(it being noted that such managements did not, due to the financial conditions
of the Constituent Corporations, prepare forecasts
62
for each Constituent Corporations as an independent operating entity assuming
the Consolidation and Investment did not occur.) Black also assumed that there
were no material changes in the Constituent Corporations' assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to Black and that all
material liabilities (contingent or other, known or unknown) of the Constituent
Corporations are as set forth in their respective financial statements. Black
did not assume any responsibility for or make or obtain any independent
evaluation, appraisal or physical inspection of the assets or liabilities of any
of the Constituent Corporations, UCB or UBA. The Black Opinion states that it
was based on economic, monetary and market conditions existing as of the date of
such opinion. Furthermore, Black expresses no opinion as to what the value of
UCB Common Stock will be when issued pursuant to the Consolidation or the prices
at which UCB Common Stock will actually trade at any time.
Based on this information, Black performed a variety of financial analyses
of the Consolidation and Investment. The following paragraphs summarize the
significant financial analyses performed by Black in arriving at its opinion
presented to the Board of Directors of each of WVI, Aviator, Bayhawk and Mile
High.
CONTRIBUTION ANALYSIS. Black reviewed and analyzed the pro forma
contribution of Nor'Wester to the pro forma combined operational and financial
information as of and for the twelve months ended December 31, 1996 and for
projected calendar 1997 for all of the other Constituent Corporations, assuming
no consolidation adjustments. Black noted that projected calendar 1997 amounts
for Nor'Wester assumed 100 percent ownership by Nor'Wester of North Country
Joint Venture, LLC, transfer of cooperative brewing under the Alliance from WVI
facilities to North Country Joint Venture, LLC, and consummation of the
Investment. Black reviewed, among other things, the pro forma contributions to
net revenues, net loss, and total assets, and reviewed the pro forma
contributions to barrels sold and barrel capacity. Based on this analysis, the
Constituent Corporations other than Nor'Wester contributed 37.2 percent of 1996
pro forma combined net revenues, 22.5 percent of projected 1997 pro forma
combined net revenues, 47.2 percent of 1996 pro forma combined net loss, 30.6
percent of projected 1997 pro forma combined net loss, and 26.8 percent of pro
forma combined assets as of December 31, 1996. In addition, based on this
analysis, the Constituent Corporations other than Nor'Wester contributed 28.1
percent of 1996 barrels sold, 23.9 percent of projected 1997 barrels sold, and
59.9 percent of 1996 barrel capacity. Based on the Merger Agreement,
shareholders of Aviator, Bayhawk and Mile High, (other than WVI), and
shareholders of WVI (other than Bernau) will own approximately 33 percent of
shares of UCB to be held by the shareholders of the Constituent Corporations
(other than Bernau) after the Consolidation and the Investment. The results of
the contribution analysis are not necessarily indicative of the contributions
that the respective businesses may have in the future. Black did not conduct a
contribution analysis with respect to each of WVI, Aviator, Bayhawk and Mile
High individually. Because in Black's view the business of each of Aviator,
Bayhawk and Mile High had not matured, Mile High was no longer conducting
operations and there continued to be substantial doubt as to whether Aviator or
Bayhawk could operate independently as a solvent enterprise, Black did not
consider such an analysis of each of these companies to be meaningful.
COMPARABLE COMPANY ANALYSIS. Black compared selected historical and
projected operating and stock market data and operating and financial ratios for
Nor'Wester and for the other Constituent Corporations, on an individual and a
pro forma combined basis, to the corresponding data and ratios of certain
publicly traded microbrewery companies which it deemed generally comparable to
the Constituent Corporations. Such data and ratios included total market
capitalization to historical and projected revenue, price per share to
historical and projected earnings per share and market value to historical book
value.
Companies deemed to be generally comparable to the Constituent Corporations
included The Boston Beer Company, Inc., The Lion Brewery, Inc., Minnesota
Brewing Company, Pete's Brewing Company, Pyramid Breweries Inc., Redhook Ale
Brewery, Incorporated, and Rock Bottom Restaurants, Inc.
63
For the comparable companies, the multiples of total market capitalization
to last twelve months ("LTM") revenues ranged from 0.2 to 1.7 with a mean of 0.7
and a median of 0.7; the multiples of market capitalization to projected 1997
revenues ranged from 0.2 to 1.2 with a mean of 0.6 and a median of 0.6; the LTM
price-earnings multiples ranged from 7.3 to 39.8 with a mean of 23.1 and a
median of 23.4; the projected 1997 price-earnings multiples ranged from 5.0 to
22.0 with a mean of 16.1 and a median of 17.0; and the multiples of market value
to historical book value ranged from 0.6 to 2.3 with a mean of 1.2 and a median
of 1.1.
These ratios could not be calculated for any of the Constituent Corporations
other than Nor'Wester since there is no public market for the stock of any of
the Constituent Corporations other than Nor'Wester. In addition, price earnings
multiples were not deemed meaningful since each of the Constituent Corporations
reported a net loss in 1996 and is projected to report a net loss in 1997.
COMPARABLE TRANSACTION ANALYSIS. Black also analyzed publicly available
financial information for ten selected mergers and acquisitions of companies in
the beverage industry. Black noted that analysis of the comparable beverage
industry and brewery industry transactions was difficult due to the lack of
detailed publicly available information. Accordingly, Black placed relatively
less emphasis on this analysis.
LIQUIDATION VALUE ANALYSIS. Black conducted a liquidation value analysis of
each of the Constituent Corporations (other than WVI, which is a holding
company) to analyze if the Consolidation and the Investment were not consummated
and additional sources of liquidity were not available to such Constituent
Corporations. Black's analysis reviewed the possible values of such Constituent
Corporations' net assets in a liquidation based upon three possible scenarios.
These scenarios were based upon different assumptions with respect to, among
other things, the percentages of the book value of tangible assets on the
respective December 31, 1996 balance sheets that may be realized upon a
liquidation and the amount of transaction expenses as a percentage of values
realized. Black also noted that at December 31, 1996 Nor'Wester was in default
under its $1.0 million credit facility and was not in compliance with certain
financial covenants under both its $1.0 million credit facility and $2.0 million
term loan. The results of this analysis showed that the net values estimated to
be realized upon liquidation of Nor'Wester's assets, less its liabilities, were
$0.8 million, $4.5 million, and $7.2 million in the three possible scenarios;
the amounts estimated to be received from the sale of Aviator's assets upon
liquidation would be insufficient to cover the book value of Aviator's
liabilities as of December 31, 1996 in the first possible scenario by $0.4
million, and the net values estimated to be realized upon liquidation of
Aviator's assets, less its liabilities, in the other two possible scenarios were
$0.3 million and $0.9 million; the net values estimated to be realized upon
liquidation of Bayhawk's assets, less its liabilities, in the three possible
scenarios were $0.1 million, $0.3 million, and $0.5 million; and the amounts
estimated to be received from the sale of Mile High's assets upon liquidation
would be insufficient to cover the book value of Mile High's liabilities as of
December 31, 1996 in the three possible scenarios by $2.0 million, $1.4 million,
and $1.0 million.
Black noted to the Boards that it understood that WVI had entered into a
Founder's Escrow Agreement with the Oregon Department of Consumer and Business
Services providing that, in the event of a liquidation of Aviator, Bayhawk or
Mile High, WVI will not receive any amounts with respect to the shares of such
corporation that WVI originally acquired prior to the receipt by all of the
public shareholders of that corporation of an amount equal to their purchase
price for their shares. In light of this agreement, Black noted that the only
significant asset of WVI that would have value in a liquidation of all of these
companies was its receivables from Aviator, Bayhawk and Mile High, which if paid
in full would result in assets of WVI upon liquidation at December 31, 1996 of
approximately $1.66 million. Black also noted to the Boards that the treatment
of this affiliated debt might be disputed in a liquidation, since Black was
aware of legal theories under which the indebtedness of Aviator, Bayhawk or Mile
High to WVI and/ or Nor'Wester would be treated as equity in a liquidation of
any of those debtors. Black further noted that the value of this affiliated debt
depended upon the amounts that could be realized by Aviator, Bayhawk and Mile
High on liquidation, whether the liquidation was completed pursuant to the
bankruptcy laws, and other factors.
64
No company or transaction used in any comparable analysis as a comparison is
identical to Nor'Wester, any other Constituent Corporation, UCB, the
Consolidation, or the Investment. Accordingly, these analyses are not simply
mathematical; rather, they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies and transactions to which they are being
compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Black believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Black made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of Nor'Wester, any of the other Constituent Corporations, UCB
or UBA. Any estimates contained in these analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable as set forth therein. Additionally,
analyses relating to the values of business or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Pursuant to the terms of the engagement letter dated January 27, 1997, as
amended, among Needham, Black, Nor'Wester and WVI, Nor'Wester and WVI have
agreed to pay Black a fee of $142,500 for services rendered in connection with
the Consolidation and the Investment. One-half of the aggregate fees payable to
Black ($71,250) will be paid in cash and the remainder will be paid in UCB stock
valued at $5.25 per share (13,572 shares). Nor'Wester and WVI have also agreed
to reimburse Black for its reasonable out-of-pocket expenses and to indemnify
Black against certain liabilities relating to or arising out of services
performed by Black as financial advisor to Nor'Wester and WVI.
Black is a regional investment banking firm based in Portland, Oregon. As
part of its investment banking services, Black regularly is in the business of
advising managements and boards of directors of corporations regarding their
issuance of securities both in the private and public equity and debt markets,
including providing a range of likely market valuations for such securities.
Black has acted as the managing underwriter in connection with the initial
public offering of Nor'Wester in January 1996 and as of May 7, 1997
approximately 476,025 shares of Nor'Wester Common Stock were held in accounts
over which Black has investment discretion and 450,082 shares of Nor'Wester
Common Stock are owned by Black.
INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION
In considering the recommendation of the various boards of directors to
approve and adopt the Merger Agreement, the Consolidation and the Investment,
stockholders should be aware that James W. Bernau, a director and executive
officer of Nor'Wester, WVI, Aviator, Bayhawk and Mile High, as well as the
respective investment bankers for Nor'Wester and WVI have interests in the
Consolidation and the Investment that are in addition to the interests of the
stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High generally, and
that Mr. Bernau, as a member of the Nor'Wester Board, WVI Board, Aviator Board,
Bayhawk Board and Mile High Board participated in the discussion, deliberation
and voting of such boards with respect to the Consolidation and the Investment.
Furthermore, stockholders should be aware that certain directors and executive
officers of UCB have interests in the Investment that are in addition to the
interests of stockholders of UCB generally. These interests are described as
follows:
BERNAU EMPLOYMENT AGREEMENT. The Investment Agreement requires UCB to enter
into an employment agreement with Mr. Bernau. The employment agreement will
provide that Mr. Bernau shall serve as President of UCB reporting directly to
Vijay Mallya, the Chairman of the Board and Chief Executive Officer of UCB, at
an annual salary of $125,000. Under the employment agreement, Mr. Bernau will be
65
eligible for bonuses at the discretion of the Board of Directors of UCB and will
receive the same standard benefits as other senior executives of UCB. The
employment agreement will have a term of two years from the date of closing of
the investment from UBA. The employment agreement will provide that Mr. Bernau
will receive options to purchase shares of Common Stock of UCB in an amount
equal to 4% of the total number of shares of UCB Common Stock outstanding on a
fully diluted basis. The options will have an exercise price of $5.25 per share
and 25% of the options will be immediately exercisable, with the remaining
options vesting ratably over the next three years. All of the options will be
immediately exercisable if Mr. Bernau's employment is terminated by UCB without
cause. The options will be exercisable for a period of five years after Mr.
Bernau ceases being an employee of UCB. In addition, the employment agreement
will provide that Mr. Bernau will have the right to have 50% of his share
holdings (not including the options described above) included in a registration
statement filed by UCB, subject to standard underwriters' cut-back provisions
and a right of first refusal granted to UCB. The employment agreement will
require UCB to use its best efforts to arrange for the substitution of UCB for
Bernau as guarantor under certain obligations. See "--Release from Guarantees."
In addition, the employment agreement will provide that if Mr. Bernau is
required to relocate to California, he shall receive a $50,000 relocation fee.
Under the employment agreement, if Mr. Bernau's employment is terminated without
cause, he may, at his option, agree not to compete in the craft brewing industry
for one year, in which case he will continue to receive his base salary for one
year after termination. If Mr. Bernau's employment is terminated with cause, UCB
may, at its option, continue to pay Mr. Bernau his base salary for one year
after termination, in which case Mr. Bernau will agree not to compete in the
craft brewing industry for one year.
MALLYA EMPLOYMENT AGREEMENT. The Investment Agreement requires UCB to enter
into an employment agreement with Vijay Mallya providing for Mr. Mallya to serve
as Chairman and Chief Executive Officer of UCB with full power to manage and
conduct the business of UCB subject to the general direction of UCB's Board of
Directors. The employment agreement will have a one year term from the date of
closing of the Investment and thereafter will continue on a month-to-month basis
terminable by either party. Mr. Mallya will receive an annual base salary of
$126,000, will be eligible to participate in all UCB employee benefit programs
and will be entitled to receive periodic bonuses as determined by the Board. The
employment agreement will provide that Mr. Mallya will receive options to
purchase shares of Common Stock of UCB in an amount equal to 4% of the total
number of shares of UCB Common Stock outstanding on a fully-diluted basis. The
options will have an exercise price of $5.25 per share and 25% of the options
will be immediately exercisable, with the remaining options vesting ratably over
the ensuing three years. All of the options will be immediately exercisable if
Mr. Mallya's employment is terminated by UCB without cause, and the options will
be exercisable for a period of five years after Mallya ceases being an employee
of UCB.
MERCHANT FINDER'S AGREEMENT. Pursuant to a Finder's Agreement with Jerome
Merchant, a director of UCB, in connection with the Consolidation and Investment
UBA will be required to pay Mr. Merchant a finder's fee of $110,000, which is
equal to 2% of the investment by UBA in UCB. This amount is only payable if the
Consolidation is approved and the Investment made and is due upon the closing of
the Investment.
FINANCIAL ADVISORS. Pursuant to their engagement letter with Needham and
Black and assuming the Investment is completed, Nor'Wester and WVI have agreed
to pay each of Needham and Black a fee of $142,500 as consideration for their
services in providing financial advisory services to Nor'Wester and WVI,
including the rendering of the respective opinions to the Boards of Directors of
Nor'wester in the case of Needham, and WVI, Aviator, Bayhawk and Mile High in
the case of Black. See "Opinion of Needham & Company, Inc." and "Opinions of
Black & Company." In accordance with the terms of their engagement letter,
Needham and Black & Company each have agreed that 50% of their fees may be paid
in stock of UCB issued at $5.25 per share resulting in 13,572 shares of UCB
Common Stock to be received by each of Needham and Black & Company. Nor'Wester
and WVI have also agreed to indemnify
66
Needham and Black & Company for certain liabilities that may arise from their
respective roles as financial advisors and out of the rendering of the foregoing
fairness opinions.
Black and its Chairman, Lawrence S. Black, hold warrants to purchase up to
103,500 shares of Nor'Wester Common Stock at $3.25 per share. These warrants
were originally issued in January 1996 in connection with Nor'Wester's initial
public offering at an exercise price of $8.40 per share. In April 1997, the
exercise price on these warrants was repriced to $1.75 per share. At the
Effective Time of the Consolidation, these warrants will be exchanged for
warrants to purchase up to 34,500 shares of UCB Common Stock at $5.25 per share.
Black acted as the managing underwriter in connection with the initial public
offering of Nor'Wester's Common Stock in January 1996 and approximately 476,025
shares of Nor'Wester Common Stock are currently held in accounts over which
Black has investment and/or voting discretion, approximately 140,100 shares of
Nor'Wester Common Stock are owned by two officers of Black and approximately
309,982 shares of Nor'Wester Common Stock are owned by Black, which represents
approximately 27.0% of the beneficial ownership of Nor'Wester's Common Stock.
REPAYMENT OF NOTE FROM PROCEEDS OF INVESTMENT. To finance ongoing
operations James W. Bernau loaned Nor'Wester $250,000 in October 1996. The loan
bears interest at the rate of 10.5% per annum and is payable on demand by Mr.
Bernau. This loan will be repaid in full with proceeds from the Investment.
RELEASE FROM GUARANTEES. James W. Bernau has provided personal guarantees
to third parties in connection with various loans, leases and other obligations
of Nor'Wester, WVI, Aviator, Bayhawk and Mile High which obligations totalled
$820,708 at March 31, 1997. In particular, Mr. Bernau has provided guarantees in
the following transactions which at March 31, 1997 represented an outstanding
obligation guaranteed by Mr. Bernau in the amount indicated: (i) equipment
finance lease by and between Mile High and CIT Group/Equipment Financing, Inc.
($268,763); (ii) twenty-year industrial real estate lease dated May 10, 1995, by
and between Intrawest Properties Partnership, U.S. and Aviator, guarantee of
lease payments for the first 60 months of the lease ($391,520); (iii)
Industrial/Commercial Lease dated June 17, 1996, by and between Richard C.
Hunsaker, Trustee of the Hunsaker Family Trust and Bayhawk ($11,175); (iv)
Severance Agreement dated August 23, 1996, by and between WVI and Brad Tuski
($9,750); (v) Line of Credit Agreement dated December 13, 1996, by and between
North Country and Adirondak Trust Company ($50,000); and (vi) various license
bonds obtained from the Ohio Casualty Insurance Company in connection with
obtaining state liquor permits ($89,500). As part of the Investment Agreement,
UCB has agreed to use its best efforts to cause Mr. Bernau to be released and
UCB substituted as guarantor for the obligations set forth above; provided,
however, that the obligee does not seek additional security and that there is
not any cost implication to UCB. It is uncertain whether Mr. Bernau will be
released from any of such guarantees. If UCB is unable to remove Mr. Bernau as a
guarantor for these obligations, UCB will provide Mr. Bernau with security in
case Mr. Bernau is required to satisfy any of these obligations.
RELEASE OF ESCROWED SHARES. The shares in WVI held by James W. Bernau are
subject to a Founder's Escrow Agreement dated February 22, 1994 with the
Department of Consumer and Business Affairs of the State of Oregon, which was
entered into in connection with the initial public offering of WVI Common Stock.
If the Consolidation is approved, these shares will be released from the escrow
and converted into shares of UCB Common Stock at the exchange ratio of
1:0.0785714.
BREWING AGREEMENT In connection with the closing of the Investment
Agreement, UCB will enter into a brewing agreement with UBA, an entity
controlled by Vijay Mallya, whereby UBA will grant UCB the exclusive right to
manufacture, label and package all Kingfisher brand beer (pursuant to the
specifications provided by UBA) which is brewed outside India for sale in North
America. In order to brew the Kingfisher products, UCB will have to make certain
modifications to existing equipment and purchase new equipment. The price to be
paid for the products brewed under the brewing agreement will be agreed upon by
the parties after such improvements have been made. See "Ancillary
Agreements--Brewing Agreement."
67
SUMMARY. As a result of the Consolidation and Investment, the value (to the
extent ascertainable) of the benefits to be received by Mr. Bernau and Black,
insiders of the Constituent Corporations, and Mr. Bernau, Mr. Mallya and Mr.
Merchant, insiders of UCB, aggregates approximately $928,404. These benefits may
be summarized as follows: Mr. Bernau--$550,000 (including $300,000 in salary and
possible relocation fees payable under his proposed two-year employment
agreement with UCB and repayment of his $250,000 loan to Nor'Wester);
Black--$142,500 in investment banking fees; Mr. Mallya--$126,000 under his
proposed one-year employment agreement with UCB; and Mr. Merchant--$110,000
under his finder's agreement. In addition to the above-described benefits, Mr.
Bernau could be released from one or more of the personal guarantees he has
given to third parties for obligations of the Constituent Corporations which
totalled $1,612,156 at March 31, 1997.
No director or executive officer of any Constituent Corporation will receive
any separation or similar payment in connection with the Consolidation or
Investment. UCB currently contemplates that each named executive officer and
significant employee of each Constituent Corporation will continue his
employment with his respective Constituent Corporation.
The Nor'Wester, WVI, Aviator, Bayhawk and Mile High Boards were aware of
these interests but did not consider them to be significant or of a nature that
would affect the objectivity of any director's determination that the
Consolidation was in the best interests of the stockholders of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High.
ACCOUNTING TREATMENT
The Consolidation will be accounted for by UCB as the purchase by Nor'
Wester of WVI, Aviator, Bayhawk and Mile High under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended ("APB 16"). Under this method of accounting,
the purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values, net of applicable income tax effects, at
the Effective Time. Results of operations for UCB for the period prior to the
Consolidation will include only the results of Nor' Wester as the accounting
acquirer and not income (or loss) from WVI, Aviator, Bayhawk or Mile High. The
purchase method of accounting is appropriate for the combination of the
Constituent Corporations because, although the entities are related through the
ownership interests of Jim Bernau, the entities are not under common control.
Mr. Bernau controls WVI, Aviator, Bayhawk and Mile High, but he owns only 24.5%
of the outstanding common stock of Nor'Wester, and he does not have any other
contractual or shareholder agreements which give him control of Nor'Wester.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the principal federal income
tax considerations associated with the Consolidation under the Internal Revenue
Code of 1986, as amended (the "Code"), to holders who hold shares of Nor'Wester,
WVI, Aviator, Bayhawk and Mile High Common Stock as capital assets. As it is not
feasible to describe all of the tax consequences associated with the
Consolidation, each stockholder should consult his or her tax advisor with
respect to the tax consequences of the Consolidation applicable to his or her
specific circumstances. In particular, the following discussion does not address
the potential tax consequences applicable to Nor'Wester, WVI, Aviator, Bayhawk
or Mile High stockholders who are dealers in securities, who acquired their
Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock through stock option
or stock purchase programs or other employee plans or otherwise as compensation,
who are subject to special treatment under the Code (such as insurance
companies, tax exempt organizations, financial institutions, nonresident alien
individuals or foreign entities), or who hold shares of Nor'Wester, WVI,
Aviator, Bayhawk or Mile High Common Stock in a hedging transaction or as part
of a straddle or conversion transaction, nor any potential tax consequences
applicable to the holders of options to purchase Nor'Wester, WVI, Aviator,
Bayhawk or Mile Common Stock assumed by UCB in the Consolidation. The following
summary is based on the Code, applicable Treasury Regulations, judicial
68
authority and administrative rulings and practice, all as of the date hereof.
There can be no assurance that future legislative, judicial or administrative
changes or interpretations will not adversely affect the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Consolidation
to Nor'Wester, WVI, Aviator, Bayhawk, Mile High, UCB and their respective
stockholders. Furthermore, the following discussion addresses only certain
federal income tax matters and does not consider any state, local or foreign tax
consequences of the Consolidation or other transactions described in this Proxy
Statement/Prospectus.
Neither UCB nor Nor'Wester, WVI, Aviator, Bayhawk or Mile High has requested
or will request any ruling from the Internal Revenue Service ("IRS") in
connection with the Consolidation. However, the Consolidation has been
structured with the intention that it qualify as a transfer to a controlled
corporation described in Section 351(a) of the Code and that each of the Mergers
qualify as a reorganization under Section 368(a) of the Code.
TAX CONSEQUENCES TO HOLDERS OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE
HIGH COMMON STOCK. Assuming the Consolidation qualifies under Section 351(a) of
the Code or each of the Mergers is treated as a reorganization under the Code,
the following federal income tax consequences, among others, generally will
apply to stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High:
(i) No gain or loss will be recognized by a holder of Nor'Wester, WVI,
Aviator, Bayhawk or Mile High Common Stock with respect to the receipt of
UCB Common Stock in exchange for such Nor'Wester, WVI, Aviator, Bayhawk or
Mile High Common Stock pursuant to the Consolidation (except with respect to
any cash received in lieu of fractional shares of UCB Common Stock).
(ii) The aggregate tax basis of the UCB Common Stock received by each
holder of Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock will
be the same as the aggregate tax basis of the Nor'Wester, WVI, Aviator,
Bayhawk or Mile High Common Stock surrendered in the Consolidation,
decreased by the amount of any tax basis allocable to fractional shares of
UCB Common Stock in lieu of which cash will be paid.
(iii) The holding period of the UCB Common Stock received by each holder
of Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock will include
the period for which the Nor'Wester, WVI, Aviator, Bayhawk or Mile High
Common Stock surrendered in exchange therefor was considered to be held,
provided the Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock so
surrendered is held as a capital asset at the Effective Time.
(iv) Payment received by holders of Nor'Wester, WVI, Aviator, Bayhawk or
Mile High Common Stock in lieu of fractional shares of UCB Common Stock will
be treated as payment in redemption of such fractional shares and, provided
that the redeemed interest is held as a capital asset at the Effective Time,
will generally result in the recognition of capital gain or loss by such
holders measured by the difference between the amount received and the tax
basis allocable to such fractional shares.
Irrespective of the federal income tax status of the Mergers or the
Consolidation, a recipient of shares of UCB Common Stock will recognize income
if and to the extent any such shares are considered to be received in exchange
for services or property (other than Nor'Wester, WVI, Aviator, Bayhawk or Mile
High Common Stock). All or a portion of such income may be taxable as ordinary
income. The IRS may take the position that a portion of the shares of UCB Common
Stock received by a shareholder of Nor'wester, WVI, Aviator, Bayhawk or Mile
High is deemed received from James W. Bernau (and not in exchange for the shares
transferred by such shareholder), as a result of Mr. Bernau's transfer of shares
to UBA in connection with the Consolidation. Such a deemed transfer could result
in taxable ordinary income to a shareholder. Counsel has advised UCB that
although the matter is not free from doubt, the Consolidation should not result
in any such taxable deemed transfer. Gain also will be recognized if and to the
extent a Nor'Wester, WVI, Aviator, Bayhawk or Mile High stockholder is treated
as receiving (directly
69
or indirectly) consideration other than UCB Common Stock in exchange for his or
her Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock.
TAX CONSEQUENCES TO UCB, NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE
HIGH. Assuming each of the Mergers qualify as a reorganization under the Code
or the Consolidation qualifies as a transfer to a controlled corporation
described in Section 351(a) of the Code, generally no gain or loss should be
recognized currently by UCB, Nor'Wester, WVI, Aviator, Bayhawk, Mile High,
Merger Sub1, Merger Sub2, Merger Sub3 or Merger Sub4 as a result of the
Consolidation. The Consolidation will not have any tax consequences for UCB
stockholders.
IMPACT ON NET OPERATING LOSSES ("NOLS"). As of December 31, 1996,
Nor'Wester, WVI, Aviator, Bayhawk, and Mile High, collectively, had NOLs
totalling approximately $10,200,000, which NOLs expire (if not theretofore
utilized) in taxable years ending December 31, 2010 through 2012 and additional
NOLs are expected to be generated prior to the Consolidation. As a result of the
Consolidation, each of these companies will undergo a more than 50% change in
the ownership of their respective stock, within the meaning of Section 382(g) of
the Code, resulting in the limitation of their NOLs under Section 382(a) of the
Code. Under this limitation, Nor'Wester, WVI, Aviator, Bayhawk, and Mile High
generally will be entitled to use their NOLs to offset their consolidated
taxable income for each taxable year (or portion thereof) beginning on and after
the Effective Time of the Consolidation only in an amount equal to the product
of (i) the applicable federal tax-exempt rate in effect on the date of the
ownership change (currently 5.5% for ownership changes occurring in April) times
(ii) the fair market value of the Nor'Wester, WVI, Aviator, Bayhawk, and Mile
High Common Stock immediately before the ownership change, subject to certain
downward adjustments. Based on the estimated current fair market value of each
loss entity, the total combined loss available for carry forward would be
limited to approximately $6,300,000 prior to expiration. Similarly, Section 383
of the Code generally will limit these companies' ability to use their
pre-ownership change alternative minimum tax credits. For the taxable year in
which the ownership change occurs, the limitation applicable to these companies'
pre-ownership change NOLs and alternative minimum tax credits will be pro rated
for the short post-Consolidation portion of its taxable year. Accordingly, it is
anticipated that UCB's ability to use existing NOLs or alternative minimum tax
credits of Nor'Wester, WVI, Aviator, Bayhawk, and Mile High to offset taxable
income of UCB and to reduce its tax liability will be severely limited.
To the extent that Nor'Wester, WVI, Aviator, Bayhawk, and Mile High's
consolidated taxable income for a period exceeds the limitation on the use of
these companies' pre-ownership change NOLs in effect for that period, such
taxable income cannot be reduced by these companies' pre-ownership change NOLs.
To the extent that these companies' consolidated taxable income for a period is
less than the limitation on the use of these companies' pre-ownership change
NOLs in effect for that period the excess limitation is carried forward and
added to the NOL limitation in effect for the next succeeding period.
In addition to limiting Nor'Wester's, WVI's, Aviator's, Bayhawk's, and Mile
High's NOLs from periods ending on or before the date of the ownership change,
if they have a net unrealized built-in loss at the time of the ownership change,
then Section 382 of the Code also limits the deductibility of "built-in losses"
recognized by them during the 5-year period beginning on the date of the
ownership change until the aggregate amount of such recognized built-in losses
equals the group's net unrealized built-in loss at the time of the ownership
change.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT A
COMPLETE DESCRIPTION OF ALL POTENTIAL TAX CONSEQUENCES THAT MAY OCCUR AS A
RESULT OF THE MERGER. STOCKHOLDERS SHOULD THEREFORE CONSULT THEIR TAX ADVISORS
REGARDING THE FEDERAL TAX CONSEQUENCES OF THE CONSOLIDATION, THE HOLDING AND
DISPOSING OF UCB COMMON STOCK RECEIVED IN THE CONSOLIDATION, THE EXERCISE OF ANY
OPTIONS OR WARRANTS TO PURCHASE UCB COMMON STOCK ASSUMED IN THE CONSOLIDATION
AND THE TAX CONSEQUENCES OF
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THE MERGER ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER JURISDICTION.
REGULATORY APPROVALS
Consummation of the Consolidation and Investment is conditioned upon the
receipt of all material governmental licenses, authorizations, consents, orders
and approvals, including state and federal liquor control agencies, subject to
waiver of such conditions, in accordance with the terms of the Investment
Agreement and the Merger Agreement. UCB, Nor'Wester, WVI, Aviator, Bayhawk and
Mile High intend to pursue vigorously all required regulatory approvals.
However, there can be no assurance regarding the timing of such approvals or
that such approvals will, in fact, be obtained. See "The Merger
Agreement--Conditions to the Merger."
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of UCB Common Stock received by Nor'Wester, WVI, Aviator, Bayhawk
and Mile High stockholders in the Consolidation will be freely transferable,
except that shares of UCB Common Stock received by persons who are deemed to be
"affiliates" (as such term is defined under the Securities Act) of Nor'Wester,
WVI, Aviator, Bayhawk and Mile High are restricted as described herein. Rule 145
promulgated under the Securities Act regulates the disposition of securities of
"affiliates" of Nor'Wester, WVI, Aviator, Bayhawk and Mile High in connection
with the Consolidation.
In the Merger Agreement, each of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High have identified all persons who are "affiliates" of such entities for
purposes of Rule 145 under the Securities Act. Each of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High has also agreed to use its commercially reasonable efforts
to cause each such person and each other person who is an "affiliate" at the
time of the Nor'Wester, WVI, Aviator, Bayhawk or Mile High Annual Meetings (an
"Affiliate") to deliver to UCB, prior to the Effective Time, a written agreement
(an "Affiliate Agreement").
Under the Affiliate Agreement, such Affiliate will agree that the Affiliate
will not sell, transfer, exchange, pledge, or otherwise dispose of, or make any
offer or agreement relating to any of the foregoing with respect to, any shares
UCB Common Stock issued to the Affiliate in the Consolidation unless (i) such
transaction is permitted pursuant to Rule 145(c) and 145(d) under the Securities
Act, (ii) counsel representing the Affiliate, which counsel is reasonably
satisfactory to UCB, shall have advised UCB in a written opinion letter
satisfactory to UCB and UCB's legal counsel, and upon which UCB and its legal
counsel may rely, that no registration under the 1933 Act would be required in
connection with the proposed sale, transfer or other disposition, (iii) a
registration statement under the 1933 Act covering the UCB Stock proposed to be
sold, transferred or otherwise disposed of, describing the manner and terms of
the proposed sale, transfer or other disposition, and containing a current
prospectus, shall have been filed with the SEC and made effective under the
Securities Act, or (iv) an authorized representative of the SEC shall have
rendered written advice to the Affiliate (sought by the Affiliate or counsel to
the Affiliate, with a copy thereof and all other related communications
delivered to UCB) to the effect that the SEC would take no action, or that the
staff of the SEC would not recommend that the SEC take action, with respect to
the proposed disposition if consummated. UCB is under no obligation to register
under the Securities Act the sale, transfer or other disposition of UCB Common
Stock or to take any other action necessary to make compliance with an exemption
from such registration available.
Under the Affiliate Agreement, UCB will issue appropriate stock transfer
instructions to the transfer agent for the shares of UCB Common Stock that are
to be received by such Affiliate and will place restrictive legends on the
certificates evidencing UCB Common Stock. Unless the transfer by the Affiliate
of its UCB Common Stock has been registered under the Securities Act or is a
sale made in compliance with the provisions of Rule 145 under the Securities
Act, UCB has the right to insert restrictive legends on the certificates issued
to any transferee of the Affiliate.
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THE NASDAQ SMALLCAP MARKET
Application has been made to have the shares of UCB Common Stock listed on
The Nasdaq SmallCap Market under the symbol "ALES," subject to official notice
of issuance.
INVESTMENT AGREEMENT AND MERGER AGREEMENT
The following paragraphs summarize, among other things, the material terms
of the Investment Agreement and the Merger Agreement, which are attached hereto
as Annex A and B, respectively, and incorporated herein by reference.
Stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High are urged to
read the Investment Agreement in its entirety for a more complete description of
the terms of that agreement.
INVESTMENT BY UBA
Upon satisfaction of all the terms and conditions set forth in the
Investment Agreement, including but not limited to the consummation of the
Consolidation on terms satisfactory to UBA, (i) UBA has agreed to purchase from
UCB 1,047,619 shares of UCB Common Stock for $5,500,000 and (ii) James W. Bernau
has agreed to transfer to UBA 83,109 shares of UCB Common Stock and to transfer
to UCB for cancellation 174,912 shares of UCB Common Stock. The purchase price
of $5,500,000 will be offset by the aggregate principal amount outstanding at
the Closing Date, if any, under the Bridge Loans from UBA to Nor'Wester. After
giving effect to the Consolidation, the investment by UBA and the transfer of
shares by Mr. Bernau, UBA will own 40% of the outstanding UCB Common Stock on a
diluted basis and Mr. Bernau will own 10% of the outstanding UCB Common Stock on
a diluted basis.
EFFECTIVE TIME OF MERGER
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement the parties thereto will file
certificates of merger with the Secretary of State of the State of Delaware and
with respect to the Merger of Nor'Wester with and into Merger Sub1, the articles
of merger, which shall be filed with the Secretary of State of Oregon, and with
respect to the Merger of WVI with and into UCB, the articles of merger and
certificate of merger, which shall be filed with the Secretary of State of the
State of Oregon and the Secretary of State of the State of Delaware,
respectively. The Consolidation will become effective upon the filing of all
such documents for each Merger.
CONVERSION OF SHARES
At the Effective Time, each outstanding share of Nor'Wester, WVI, Aviator,
Bayhawk and Mile High Common Stock (other than shares of Aviator, Bayhawk and
Mile High Common Stock owned by WVI, which shall be cancelled) will be converted
into the right to receive a fraction of a share of UCB Common Stock equal to (i)
in the case of Nor'Wester Common Stock, 0.3333333 shares of UCB Common Stock,
(ii) in the case of WVI and Bayhawk Common Stock, 0.0785714 shares of UCB Common
Stock, and (iii) in the case of Aviator and Mile High Common Stock, 0.0523809
shares of UCB Common Stock.
Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4 will merge with and
into Nor'wester, Aviator, Bayhawk and Mile High, respectively, and WVI will
merge with and into UCB, with Nor'wester, Aviator, Bayhawk, Mile High and UCB
being the surviving corporations of the Consolidation (the "Surviving
Corporations"). Each share of Merger Sub1, Merger Sub2, Merger Sub3 and Merger
Sub4 common stock issued and outstanding immediately prior to the Effective Time
will be converted into one share of common stock of the Nor'wester, Aviator,
Bayhawk and Mile High, respectively.
As promptly as practicable after the Effective Time, the Surviving
Corporations will send to each stockholder of record of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High as of the Effective Time a Letter of Transmittal
and other transmittal materials for use in exchanging certificates of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock for certificates of
UCB Common Stock. The transmittal materials will contain information and
instructions with respect to the surrender of Nor'Wester, WVI, Aviator, Bayhawk
and Mile High Common Stock certificates in exchange for new certificates
representing UCB Common Stock and cash in payment for any fractional shares
resulting from the
72
exchange. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL
IS RECEIVED. Pending delivery to UCB of Nor'Wester, WVI, Aviator, Bayhawk and
Mile High Common Stock certificates, any dividends on the UCB Common Stock to be
issued as a result of the Consolidation that are payable prior to the delivery
of such certificates will be held by UCB. Such dividends will be paid, without
interest, to the persons entitled thereto upon delivery of such Nor'Wester, WVI,
Aviator, Bayhawk or Mile High Common Stock certificates to UCB.
Fractional shares of UCB Common Stock will not be issued in the
Consolidation. Instead, each stockholder of Nor'Wester, WVI, Aviator, Bayhawk or
Mile High who would otherwise be entitled to a fractional share will receive
cash equal to the product of (i) such fraction multiplied by (ii) $5.25.
TREATMENT OF STOCK OPTIONS AND WARRANTS
At the Effective Time, each outstanding option to purchase shares of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock under the stock
option plans duly adopted by each respective company (the "Stock Plans"),
whether vested or unvested, will be cancelled and UCB will grant an option in
substitution for each such cancelled option. Each new UCB option will be subject
to substantially the same terms and conditions as contained in the option
agreements entered into pursuant to the applicable Stock Plans immediately prior
to the Effective Time, except that (i) such option will be exercisable for that
number of whole shares of UCB Common Stock equal to the product of the number of
shares of Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock that were
purchasable under such option multiplied by (a) 0.3333333 in the case of
Nor'Wester options, (b) 0.0785714 in the case of WVI and Bayhawk options and (c)
0.0523809 in the case of Aviator and Mile High options, in each case rounded
down to the nearest whole number of shares of UCB Common Stock and (ii) the per
share exercise price for the shares of UCB Common Stock issuable upon exercise
of such assumed option will be equal to the quotient determined by dividing the
exercise price per share of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
Common Stock at which such option was exercisable immediately prior to the
Effective Time by the ratio set forth above for each company, and rounding the
resulting exercise price up to the nearest whole cent.
Black, one of its principal owners, Lawrence S. Black, and one of its former
employees hold warrants to purchase an aggregate of 115,000 shares of Nor'Wester
Common Stock. At the Effective Time these warrants will be assumed by UCB
pursuant to an assumption agreement and will become warrants to purchase 38,334
shares of UCB Common Stock. The warrants will continue to have, and be subject
to, the same terms and conditions set forth in the agreement pursuant to which
they were originally issued by Nor'Wester.
BUSINESS OF NOR'WESTER, WVI, AVIATOR, BAYHAWK AND MILE HIGH PENDING THE
CONSOLIDATION AND INVESTMENT
Pending the consummation of the Consolidation and Investment, and except as
expressly required or permitted by the Investment Agreement or as otherwise
consented to or approved in advance by UBA in writing, each of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High has agreed that they and their subsidiaries will,
among other things, (i) do or cause to be done all things necessary to preserve
and keep in full force and effect their corporate existence, and their rights
and franchises, (ii) timely make all payments required to be paid, (iii) not
incur any obligations or sell, dispose of or transfer any assets other than in
the ordinary course of business, (iv) not incur any obligations on behalf of, or
sell, dispose of or transfer cash, monies or other assets or extend guarantees
or provide any other financial or other support, directly or indirectly, to the
Mile High, except for management services in connection with the preservation of
the assets of the Mile High, (v) continue to conduct their business in the
brewing and distributing of malt beverages substantially as now conducted and
shall not engage in any material respect in any other business, (vi) to at all
times maintain, preserve and protect any trademark or trade name acquired or
owned by and currently being utilized in product marketing, (vii) preserve all
the remainder of its property, in use or useful in the conduct of its business
and keep the same in good repair, working order and condition (taking into
consideration ordinary wear and tear) and from time to time, make or cause to be
made, all necessary and proper repairs, renewals and replacements, betterments
and improvements thereto
73
consistent with industry practices, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times,
except to the extent such property has become obsolete, (viii) use its
reasonable efforts to retain as employees the individuals currently employed,
(ix) not waive any material right under any material contract, (x) not increase
or modify, or agree to increase or modify, the compensation, bonuses or other
benefits or prerequisites for employees, except in the ordinary course of
business consistent with past practice, (xi) use reasonable efforts in light of
the circumstances to preserve their operations, organization and reputation
intact, to preserve the goodwill and business of their customers, suppliers and
others having business relations with them and to continue to conduct their
financial operations, including credit and collection policies, with no less
effort, as in the prior conduct of their businesses, (xii) continue to maintain
and carry existing insurance and (xiii) maintain their books and records in
accordance with generally accepted accounting principles. In addition,
Nor'Wester, WVI, Aviator, Bayhawk and Mile High have agreed not to, without the
prior written consent of UBA, (i) amend their Articles or Certificate of
Incorporation, as the case may be, or their bylaws or enter into, agree to enter
into or effect any merger or consolidation, (ii) make any change in the number
of shares of its capital stock authorized, issued or outstanding; and except as
agreed upon with UBA, grant or issue any option, warrant or other right to
purchase, or convert any obligation into, shares of its capital stock, other
than the issuance of shares of common stock pursuant to outstanding options to
purchase such shares, (iii) declare or pay any dividends, (iv) purchase or
redeem any shares of their capital stock or any other security, (v) amend or
modify any of the material terms of any Material Contract (as defined in the
Investment Agreement), or (vi) enter into any agreement which would become a
Material Contract, except in the ordinary course of business and consistent with
past practices.
Pursuant to the Investment Agreement, each of Nor'Wester, WVI, Aviator,
Bayhawk, Mile High and to his knowledge, Mr. Bernau, shall give prompt notice to
UBA of the occurrence, or non-occurrence, of any event which would be likely to
cause any representation or warranty of the Investment Agreement to be untrue or
inaccurate, or any covenant, condition or agreement therein not to be complied
with or satisfied. Each of Nor'Wester, WVI, Aviator, Bayhawk and Mile High shall
keep UBA reasonably informed of all material operational matters and business
developments known to them by providing reports twice a month to UBA of such
material operational matters in a manner reasonably satisfactory to UBA. In
addition, Nor'Wester, WVI, Aviator, Bayhawk, Mile High and Mr. Bernau have
agreed not to take any action which is inconsistent with their obligations under
the Investment Agreement or that would hinder or delay the consummation of the
Consolidation or the other transactions contemplated by the Investment
Agreement.
Furthermore, pursuant to the Investment Agreement, each of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High is required to deliver to UBA certain financial
information, to provide reasonable access to their properties, equipment, books,
accounts, contracts and documents, to use, and Mr. Bernau is required to use
reasonable efforts to cause them to use, best efforts promptly to take or cause
to be taken all action and promptly to do or cause to be done all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Consolidation and the Investment. Also, Mr.
Bernau and Nor'Wester, WVI, Aviator, Bayhawk and Mile High have agreed not to
engage in any transaction with each other which is on terms less favorable to
such company than can be obtained from unaffiliated third parties and, except in
the case of Mile High so long as it does not have any independent directors,
which have not been approved by a majority of the independent directors of any
company which is a party thereto. James Bernau has agreed not to directly or
indirectly: (i) except as contemplated by the Investment Agreement, offer for
sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of,
or enter into any contract, option or other arrangement or understanding with
respect to or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of any or all of the shares to be
transferred by him to UBA or any interest therein or (ii) take any action that
would make any representation or warranty of Mr. Bernau contained in the
Investment Agreement untrue or incorrect or have the effect of preventing or
disabling Mr. Bernau from performing his obligations under the Investment
Agreement.
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SOLICITATION OF OTHER PROPOSALS
James W. Bernau and each of Nor'Wester, WVI, Aviator, Bayhawk and Mile High
and their respective employees or agents have agreed not to directly or
indirectly contact, solicit from, or negotiate with anyone other than UBA
regarding the sale or potential sale of the assets, the business or any equity
interest in any of Nor'Wester, WVI, Aviator, Bayhawk or Mile High. Each of
Nor'Wester, WVI, Aviator, Bayhawk, Mile High, and to his knowledge, Mr. Bernau
shall promptly notify the Purchaser in writing if any such offer or proposal is
made to them between the date of the Investment Agreement and the closing of the
investment by UBA.
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER
At the Effective Time, Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4
will be merged with and into Nor'Wester, Aviator, Bayhawk or Mile High,
respectively, and WVI will be merged with and into UCB, with Nor'Wester,
Aviator, Bayhawk, Mile High and UCB being the Surviving Corporations. Each share
of Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4 common stock issued and
outstanding immediately prior to the Effective Time will be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock of Nor'Wester, Aviator, Bayhawk and Mile High, respectively. Each stock
certificate of Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4 evidencing
ownership of any such shares shall continue to evidence ownership of such shares
of capital stock of the Surviving Corporation, except for UCB.
The directors of Merger Sub1, Merger Sub2, Merger Sub3 and Merger Sub4
immediately prior to the Effective Time will be the initial directors of the
corresponding Surviving Corporation, and the officers of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High immediately prior to the Effective Time will be
the initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified.
CONDITIONS TO THE CONSOLIDATION AND INVESTMENT BY UBA
Consummation of the Consolidation and the investment is subject to the
satisfaction of various conditions, including (i) the approval and adoption of
the Merger Agreement and the Consolidation by the requisite vote of the
stockholders of each of Nor'Wester, WVI, Aviator, Bayhawk and Mile High; (ii)
the receipt of opinions of counsel by UCB and UBA, (iii) the receipt of a
secretary's certificate by UBA from each of Nor'Wester, WVI, Aviator, Bayhawk
and Mile High as to the incumbency of the officers executing the Investment
Agreement and the Ancillary Agreements (as defined in the Investment Agreement)
to which they are a party, (iv) the receipt by UCB of a secretary's certificate
from UBA as to the incumbency of the officers executing the Investment Agreement
and the Ancillary Agreements to which they are a party, (v) the receipt by each
of UCB and UBA of the executed Ancillary Agreements, (vi) the receipt of certain
governmental certificates by UBA as to incorporation and good standing or
existence, as the case may be, of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High, (vii) the receipt of an officer's certificate by UBA from each of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High to the effect that all of the
representations and warranties made by the respective party are true and correct
on and as of the Effective Time and that the respective party has performed or
complied with all agreements and covenants required by the Investment Agreement
to be performed or complied with by such party on or prior to the Effective
Time, (viii) the receipt of an officer's certificate by UCB from UBA to the
effect that all of the representations and warranties made by UBA are true and
correct respects on and as of the Effective Time and that UBA has performed or
complied with all agreements and covenants required by the Investment Agreement
to be performed or complied with by UBA on or prior to the Effective Time; (ix)
the receipt of evidence by UBA and UCB, respectively, from the other party that
all licenses, permits, consents, waivers, approvals, authorizations,
qualifications or orders required for the consummation of the Consolidation and
the investment have been obtained (including those set forth on Schedules 3.6
and 3.30 of the Investment Agreement), (x) the absence of any restrictive court
orders or any other legal restraints or prohibitions,
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and of any governmental proceedings, preventing the consummation of the
Consolidation and investment, and the absence of any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Consolidation and investment which makes the consummation of
the Consolidation and investment illegal, (xi) there shall have been no changes
which have had a material adverse effect on Nor'Wester, WVI, Aviator, Bayhawk
and Mile High, taken as a whole, (xii) the Board of Directors of UCB shall
consist of seven persons, four of whom will be selected by UBA (one of whom
shall be Vijay Mallya), one of whom will be selected by Mr. Bernau and two of
whom will be outside directors mutually satisfactory to UBA and Mr. Bernau,
(xiii) the Consolidation shall have been completed on terms reasonably
satisfactory to UBA, (xiv) Mr. Bernau shall have transferred certain of his
shares in UCB to UBA, (xv) the line of credit provided by Bank of America to
Nor'Wester shall have been extended and any loan covenants shall have not been
violated, or if violated, have been waived, (xvi) the termination of certain
financial consulting agreements, (xvii) a majority of the stockholders of WVI
shall have voted in favor of releasing certain shares of WVI Common Stock held
in escrow pursuant to an escrow agreement with the Department of Consumer and
Business Affairs of the State of Oregon and such escrowed shares were in fact
released from escrow, (xix) the stockholders of UCB shall have approved the
sales of shares to UBA, and (xx) each of Nor'Wester, WVI, Aviator, Bayhawk and
Mile High shall have received fairness opinions from their respective investment
bankers (which condition has been satisfied).
TERMINATION; AMENDMENT
The Investment Agreement may be terminated and the Consolidation may be
abandoned prior to the Effective Time either before or after its approval by the
stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High, under the
circumstances specified therein, including (i) by mutual written consent of UBA
and Nor'Wester; (ii) by either Nor'Wester or UBA, if the Consolidation and
investment shall not have been consummated by August 31, 1997 and if the
terminating party has not caused the failure of the Consolidation and Investment
to be consummated on or before such date by its own willful failure to fulfill
any of its material obligations under the Investment Agreement; (iii) by UBA at
any time prior to the Closing Date in the event that any of Mr. Bernau,
Nor'Wester, WVI, Aviator, Bayhawk or Mile High has breached any covenant in
material respects or has breached any representation or warranty contained in
the Investment Agreement or any document relating to the Consolidation and
Investment, and such breach has not been promptly cured after notice has been
given; or (iv) by Nor'Wester at any time prior to the Closing Date in the event
that UBA has breached any covenant in material respects or has breached any
representation or warranty contained in the Investment Agreement, and such
breach has not been promptly cured after notice has been given to UBA.
The Investment Agreement may be amended by an agreement in writing among the
parties thereto at any time prior to the Closing Date.
FEES AND EXPENSES
Each of the parties to the Investment Agreement will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with the
Investment Agreement; PROVIDED, HOWEVER, that Nor'Wester has paid the costs and
expenses (including reasonable legal fees and expenses) incurred by UBA in
connection with the Bridge Loans. All fees and expenses incurred by UCB or UBA
relating to the Consolidation (the "Costs") will be borne by Nor'Wester.
Nor'Wester will reimburse these Costs upon request. Alternatively, UCB or UBA
may use Bridge Loan funds to pay the Costs. If the Investment Agreement is
terminated prior to the closing of the investment, all Costs not previously
reimbursed by Nor'Wester or funded through the Bridge Loans will be added to the
principal amount of the Bridge Loans. In addition, all costs and expenses
incurred by UBA relating to the possible acquisition of other companies or other
investment opportunities shall be reimbursed if the closing of the investment
occurs and UCB is the acquiring company or the company making the investment.
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ANCILLARY AGREEMENTS
UBA BRIDGE LOAN CREDIT AGREEMENT AND RELATED DOCUMENTS
Pursuant to the terms of the Investment Agreement, UBA is obligated to
provide Nor'Wester with up to $2.75 million in principal under the Bridge Loan
as interim financing to the Constituent Corporations. Advances under the Bridge
Loan have been and will continue to be used to cover operating expenses and pay
existing creditors of the Constituent Corporations until closing of the
Investment. Of the $2.75 million, $2.1 million has already been advanced. All
Bridge Loan amounts are advanced by UBA to Nor'Wester pursuant to the terms of a
Credit Agreement and related documents.
The principal terms of the Bridge Loan are as follows: (i) all advances
under the Bridge Loan are made at the times, in the amounts and for the purposes
determined by UBA and Nor'Wester based on a periodic review of the cash flow
needs and creditor demands of the Constituent Corporations; (ii) as a condition
to each advance under the Bridge Loan, neither Mr. Bernau nor any of the
Constituent Corporations may be in breach of any representation, warranty or
covenant under the Credit Agreement, any related document or the Investment
Agreement and there shall not be a "material adverse effect" in the business of
the Constituent Corporations as a whole; (iii) the principal amount of the
Bridge Loan is evidenced by a Promissory Note of Nor'Wester bearing interest at
11.25% per annum; (iv) the aggregate principal amount outstanding under the
Bridge Loan at the time of the closing of the Investment will be contributed to
UCB as part of the consideration for the Investment; (v) all Bridge Loan accrued
but unpaid interest is payable by Nor'Wester in cash to UBA upon closing of the
Investment; (vi) through a Security Agreement and Pledge Agreement all principal
and interest under the Promissory Note is secured by the assets of North Country
Joint Venture, LLC (i.e. the Saratoga Springs Brewery) and by Nor'Wester's
ownership interest in the joint venture; (vii) repayment of all principal and
interest is guaranteed personally by Jim Bernau pursuant to the terms of a
Guaranty Agreement; and (viii) all principal and interest under the Bridge Loan
is due 60 days after termination of the Investment Agreement or the occurrence
of certain events of default under the Credit Agreement or related documents
(including the breach by a Constituent Corporation or Mr. Bernau of any
representation, warranty or covenant under the Investment Agreement), and all
principal and interest under the Bridge Loan is due immediately if a "material
adverse effect" occurs in the business of the Constituent Corporations as a
whole or there is a breach by any Constituent Corporation or Mr. Bernau of any
representation, warranty or covenant under the Credit Agreement or any related
document.
BERNAU EMPLOYMENT AGREEMENT
The Investment Agreement requires UCB to enter into an employment agreement
with Mr. Bernau. The employment agreement will provide that Mr. Bernau shall
serve as President of UCB reporting directly to Vijay Mallya, the Chairman of
the Board and Chief Executive Officer of UCB, at an annual salary of $125,000.
For a description of the Employment Agreement between UCB and Mr. Bernau see
"Interests of Certain Persons in the Consolidation--Bernau Employment
Agreement."
REGISTRATION RIGHTS AGREEMENT
At the closing of the investment from UBA, UCB, Mr. Bernau and UBA will
enter into a Registration Rights Agreement, whereby UCB will grant certain
registration rights to Mr. Bernau and UBA. Upon a written request from UBA, UCB
will file a shelf registration statement with respect to all of the shares of
UCB Common Stock owned or acquired by UBA ("UBA Registrable Securities") and
subject to certain conditions, will use its best efforts to keep such
registration statement effective for two years. In addition, UCB will grant UBA
certain demand registration rights pursuant to which UBA will have the right to
cause UCB to file a registration statement, including for an underwritten
offering, for any or all of the UBA Registrable Securities. Under the
Registration Rights Agreement, UBA only will have the right to request three
demand registration statements and may only request one in any 365-day period.
UCB will
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be required to file these demand registration statements within 60 days of
receipt of a request from UBA, but UCB may defer the filing for 90 days under
certain conditions. However, UCB may not defer the filing of a registration
statement more than once in a twelve (12) month period. If UCB does defer the
filing, then UBA may withdraw its request and it will not count towards the
three demand registration statement limit. In addition, UCB will grant Mr.
Bernau and UBA certain piggyback registration rights should UCB file a
registration statement for public sale of its Common Stock. Mr. Bernau will have
such rights as to 50% of the shares of UCB Common Stock held by Mr. Bernau as of
the closing of the investment from UBA, subject to adjustment for stock splits
or stock dividends or in connection with any combination of shares,
recapitalization, merger, consolidation, reorganization or otherwise ("Bernau
Registrable Securities" and together with UBA Registrable Securities, the
"Registrable Securities"). Both UBA's and Mr. Bernau's piggyback registration
rights will be subject to standard underwriters' cutbacks and both of them will
agree to execute a lock-up, with respect to the remaining shares of UBA
Registrable Securities and Bernau Registrable Securities not being sold pursuant
to the registration statement, which prohibits Mr. Bernau and UBA from selling
such remaining securities for a period of 90 days from the date the offering
commences. In addition, Mr. Bernau will grant to UBA a right of first refusal
with respect to the Bernau Registrable Securities whether sold pursuant to a
registration statement or otherwise. Such right will allow UBA to purchase the
Bernau Registrable Securities on the same terms and conditions as a bona fide,
credit worthy purchaser. Under the Registration Rights Agreement, UCB will agree
to not provide registration rights to any other party that, taken as a whole,
are more favorable than those provided to UBA without also offering such
favorable rights to UBA. Excluding underwriting discounts and commissions, UCB
will agree to bear and pay all expenses incurred in connection with any
registration, filing, listing and qualification of the Registrable Securities.
SECURITY AGREEMENT
Mr. Bernau has agreed in the Investment Agreement to indemnify and hold
harmless UBA, its officers, directors and employees from and against certain
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses and disbursements relating to or
arising out of the Consolidation and the transactions contemplated by the
Investment Agreement. The Investment Agreement further provides that Mr.
Bernau's indemnity obligations thereunder are to be secured by a pledge of the
shares of UCB Common Stock held by Mr. Bernau after the Consolidation, but
excluding any shares of UCB Common Stock received by Mr. Bernau through the
exercise of options to purchase UCB Common Stock granted to Mr. Bernau pursuant
to his employment agreement with UCB. See "--Employment Agreement." Accordingly,
Mr. Bernau will enter into a pledge agreement with UBA wherein Mr. Bernau will
pledge and assign to UBA, and grant to UBA a security interest in, all right,
title and interest of Mr. Bernau in and to the shares of UCB Common Stock
described above as well as all dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed or distributable
in exchange for such shares and all proceeds of any of the foregoing. Mr. Bernau
will covenant in the pledge agreement not to surrender or lose possession of
(other than to UBA), sell encumber, lease, rent, option or otherwise dispose of
or transfer any pledged collateral or right or interest therein. Upon the
occurrence of any event giving rise to an indemnity obligation of Mr. Bernau
under the Investment Agreement, UBA will be entitled to exercise the voting and
other consensual rights that Mr. Bernau would otherwise be entitled to exercise
with respect to the pledged collateral, will have the right to sell or otherwise
dispose of any or all of the pledged collateral at one or more public or private
sales, will have the right to receive all dividends, interest, proceeds and
other amounts payable in respect of the pledged collateral, and will have the
right to enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for, the pledged collateral.
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MALLYA EMPLOYMENT AGREEMENT
At the closing of the investment from UBA, UCB will enter into an Executive
Employment Agreement with Vijay Mallya providing for Mr. Mallya to serve as
Chairman and Chief Executive Officer of UCB. During the term of the agreement,
Mr. Mallya will have full power and authority to manage and conduct the business
of UCB subject to the general direction of UCB's Board of Directors. Mr.
Mallya's employment agreement will have a one year term, unless sooner
terminated as provided in the agreement, and thereafter will continue on a
month-to-month basis terminable at any time, with or without cause, by either
party to the agreement upon 30 days' notice. Mr. Mallya will receive an annual
base salary of $126,000 and will be eligible for a salary increase after the
first year of the term of the agreement. Mr. Mallya will also be eligible to
participate in all UCB employee benefit programs, will be entitled to periodic
bonuses as determined by the Board from time to time in its sole discretion and
will be entitled to receive options to purchase shares of UCB's Common Stock
pursuant to an option agreement with UCB. All rights, assets, opportunities and
other benefits accruing as a result of Mr. Mallya's performance under his
employment agreement will be deemed the property of UCB. In addition, Mr. Mallya
will agree not to use, make available, sell, disclose, or otherwise communicate
to any third party, other than in his assigned duties and for the benefit of
UCB, any of UCB's confidential information, either before or after the
termination of his employment agreement.
Mr. Mallya will agree in the Executive Employment Agreement to use his best
efforts to cause UBA to present any opportunity that UBA develops or becomes
aware of relating to the production, marketing, sale and distribution of
microbrewed beverage products within North America (except opportunities related
to the Kingfisher Brands) to UCB for pursuit exclusively by UCB and to cause UBA
to cooperate with UCB in the pursuit of such opportunities. UCB will acknowledge
in the agreement that Mr. Mallya is a shareholder, director, officer and
employee of, and has significant responsibilities to, other companies and
business activities, including companies that produce, distribute and sell beer
and other alcoholic beverages in the United States, the United Kingdom, India
and other countries. The agreement will also provide that, except as set forth
above, to the maximum extent permitted by law, Mr. Mallya's position as a
shareholder, director, officer and employee of UCB will not be deemed to present
a conflict of interest or impose any restriction on his activities for other
companies and business activities nor impose any obligation on Mr. Mallya to
present business opportunities to UCB. Mr. Mallya will agree in the agreement to
protect, defend, indemnify and save UCB and its shareholders, affiliates,
directors, officers, employees, agents and attorneys free and harmless from any
and all claims, demands, actions, suits, liabilities, settlements, costs,
losses, penalties and expenses, including attorneys' fees, of any nature arising
out of his breach of any term of the agreement or arising out of his employment,
share ownership, partnership or other ownership of any corporation (other than
UCB), partnership or other business entity.
The employment agreement with Mr. Mallya will provide that he will receive
options to purchase shares of Common Stock of UCB in an amount equal to 4% of
the total number of shares of UCB Common Stock outstanding on a fully diluted
basis. The options will have an exercise price of $5.25 per share and 25% of the
options will be immediately exercisable, with the remaining options vesting
ratably over the next three years. All of the options will be immediately
exercisable if Mr. Mallya's employment is terminated by UCB without cause. The
options will be exercisable for a period of five years after Mr. Mallya ceases
being an employee of UCB.
STOCKHOLDER'S AGREEMENT
The Stockholder's Agreement provides, among other things, that, at any
meeting of the stockholders of Nor'Wester, WVI, Aviator, Bayhawk and Mile High,
however called, or in connection with any written consent of the stockholders of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High, James Bernau, Black and certain
officers and directors of Black (the "Stockholders") shall vote (or cause to be
voted) the shares of Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common
Stock, as the case may be, held of record or beneficially by the Stockholders
(as set forth in the Stockholder's Agreement), including, but not
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limited to, causing WVI to vote the shares held of record by it in Aviator,
Bayhawk and Mile High, (a) in favor of the Consolidation, the execution and
delivery by each of them of the Investment Agreement and the approval of the
terms thereof and each of the other actions contemplated by the Investment
Agreement and the Stockholder's Agreement and any actions required in
furtherance thereof; (b) against any action or agreement that would result in a
breach in any material respect of any covenant, representation or warranty or
any other obligation or agreement of each of Nor'Wester, WVI, Aviator, Bayhawk
or Mile High under the Investment Agreement or the Stockholder's Agreement; (c)
except as otherwise agreed to in writing in advance by UBA or permitted pursuant
to the Investment Agreement, against the following actions (other than the
Consolidation and the transactions contemplated by the Investment Agreement):
(i) any extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving any of Nor'Wester, WVI, Aviator, Bayhawk or
Mile High; (ii) a sale, lease or transfer of a material amount of assets of any
of Nor'Wester, WVI, Aviator, Bayhawk or Mile High or a reorganization,
recapitalization, dissolution or liquidation of any of such companies; (iii)(1)
any change in the majority of the board of directors of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High; (2) any material change in the present
capitalization of any of Nor'Wester, WVI, Aviator, Bayhawk and Mile High or any
amendment of any of their Articles or Certificates of Incorporation, as the case
may be; (3) any other material change in any of their corporate structure or
business; or (4) any other action which, in the case of each of the matters
referred to in clauses (iii)(1), (2), (3) or (4), is intended or could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or materially adversely affect the contemplated economic benefits to UBA of the
Consolidation or the transactions contemplated by the Investment Agreement or
the Stockholder's Agreement. In addition, none of the Stockholders shall enter
into any agreement or understanding, whether oral or written, with any person or
entity prior to the Termination Date (as defined in Section 7.1 of the
Stockholder's Agreement) to vote after the Termination Date in any manner
inconsistent with clauses (a), (b) or (c) of the preceding sentence.
In addition, the Stockholders have granted to, and appointed, UBA and Vijay
Mallya and O'Neil Nalavadi, in their respective capacities as officers of UBA,
and any individual who shall hereafter succeed to any such office of UBA, and
any other designee of UBA, each of them individually, the Stockholders'
irrevocable proxy and attorney-in-fact (with full power of substitution) to vote
the shares of Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock held
by the Stockholders as indicated in the Stockholder's Agreement.
COVENANTS OF THE STOCKHOLDERS. Except with regard to Mile High and Bayhawk,
the Stockholders have agreed not to, directly or indirectly, solicit (including
by way of furnishing information) or respond to any inquiries or the making of
any proposal by any person (other than UBA or any affiliate of UBA) with respect
to any of Nor'Wester, WVI, Aviator, Bayhawk or Mile High that constitutes or
could reasonably be expected to lead to a proposal to acquire an interest in any
of such companies. If the Stockholders receive any such inquiry or proposal,
then they have agreed to promptly inform UBA of the terms and conditions, if
any, of such inquiry or proposal and the identity of the person making it. The
Stockholders have also agreed to immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. In addition, the Stockholders
have agreed not to directly or indirectly: (i) except as contemplated by the
Investment Agreement and with respect to existing stock pledges, offer for sale,
sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all of their shares of
Nor'Wester, WVI, Aviator, Bayhawk or Mile High Common Stock or any interest
therein; (b) except as contemplated by the Stockholder's Agreement, grant any
proxies or powers of attorney, deposit any Shares (as defined in the
Stockholder's Agreement) into a voting trust or enter into a voting agreement
with respect to any Shares; or (c) take any action that would make any
representation or warranty of the Stockholder contained in the Stockholder's
Agreement untrue or incorrect or have the effect of preventing or disabling the
Stockholders from performing such Stockholder's obligations under the
Stockholder's Agreement.
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The Stockholders also waived any rights of appraisal or rights to dissent
from the Consolidation that they may have and any rights to cause any of
Nor'Wester, WVI, Aviator, Bayhawk and Mile High to register, or include in any
registration statement of such companies or UBA filed with the Securities and
Exchange Commission, under the Securities Act of 1933, as amended, any of the
Shares. The Stockholders also waived any co-sale or similar rights respecting
shares of Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock.
TERMINATION; EXPENSES. The Stockholder's Agreement and the obligations of
the Stockholders thereunder (other than those set forth in Sections 7.1, 7.2,
7.3 (relating to termination and expenses) and 9.4 (relating to governing law)
thereof, which shall survive any such termination) shall terminate on the first
to occur of (a) termination of the Investment Agreement in accordance with its
terms or (b) the closing of the investment from UBA. In addition, the
Stockholders Agreement and the obligations of the Stockholders thereunder may be
terminated (other than those set forth in Sections 7.1, 7.2, 7.3 and 9.4
thereof, which shall survive any such termination) by UBA if UBA is not in
material breach of its obligations under the Stockholder's Agreement and if
there has been a breach in any material respect by the Stockholders of any of
his representations, warranties, covenants or agreements contained in the
Stockholder's Agreement and such breach has not been promptly cured after notice
to the Stockholders; PROVIDED, HOWEVER, that such breach shall be of the kind
that denies UBA the material benefits contemplated by the Stockholder's
Agreement.
Except as set forth below, all fees and expenses incurred in connection with
the Stockholder's Agreement and the transactions contemplated thereby shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated.
If the Stockholder's Agreement is terminated pursuant to the second sentence
of Section 7.1 of the Stockholder's Agreement and provided that UBA is not then
in material breach of its obligations under the Stockholder's Agreement, then
the Stockholders shall reimburse UBA, within one (1) business day of UBA's
request therefor, for all reasonable and documented fees and expenses actually
incurred by UBA in connection with the Investment Agreement.
BREWING AGREEMENT
In connection with the closing of the Investment Agreement, UCB will enter
into a brewing agreement with UBA, whereby UBA will grant UCB the exclusive
right to manufacture, label and package all Kingfisher brand beer (pursuant to
the specifications provided by UBA) which is brewed outside India for sale in
North America. In order to brew the Kingfisher products, UCB will have to make
certain modifications to existing equipment and purchase new equipment. This
will all be done at UCB's expense. The price to be paid for the products brewed
under the brewing agreement will be agreed upon by the parties after such
improvements have been made. UBA will provide to UCB, on a monthly basis, a
rolling forecast of UBA's requirements of Kingfisher products for the following
three months, which shall be in reasonable commercial lot size amounts.
Forecasts made in respect of any month may not thereafter be revised by more
than 20% in either direction. The Brewing Agreement will be in effect beginning
on the closing date of the investment and continuing until terminated by either
party with six months notice. UCB will agree under the Brewing Agreement that
while the Brewing Agreement is in effect and for a period of three years after
its termination, UCB will not brew another South East Asian Lager (as defined in
the Brewing Agreement).
APPRAISAL RIGHTS
If the Consolidation is consummated, holders of shares of Nor'Wester Common
Stock, Aviator Common Stock and Mile High Common Stock will not be entitled to
appraisal or dissenters' rights. However, if the Consolidation is consummated
holders of shares of WVI Common Stock will be entitled to dissenters' rights
under the Oregon Business Corporation Act ("OBCA"), provided that they comply
with
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the conditions of Sections 60.551 through 60.594 of the OBCA, and holders of
shares of Bayhawk Common Stock would be entitled to appraisal rights under
Section 262 of the Delaware Law, provided that they comply with the conditions
of Section 262 of the Delaware Law.
WVI DISSENTERS' RIGHTS
SECTIONS 60.551 THROUGH 60.594 OF THE OBCA ARE REPRINTED IN THEIR ENTIRETY
AS APPENDIX TO THIS PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT
A COMPLETE STATEMENT OF THE LAW RELATING TO DISSENTERS' RIGHTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO ANNEX F. THIS DISCUSSION AND APPENDIX SHOULD BE
REVIEWED CAREFULLY BY ANY HOLDER OF WVI COMMON STOCK WHO WISHES TO EXERCISE
STATUTORY DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO.
FAILURE TO COMPLY WITH TB PROCEDURES SET FORTH IN SECTIONS 60.551 THROUGH 60.594
OF THE OBCA WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
If the Merger is consummated, holders of record of WVI Common Stock who (a)
deliver to WVI before the vote is taken written notice of their intent to demand
payment if the Merger Agreement is approved, (b) refrain from voting in favor of
the Merger Agreement, by either voting against the adoption of the Merger
Agreement or abstaining from voting, and (c) comply with the provisions of
Sections 60.551 through 60.594 of the OBCA, will then be entitled to have the
"fair value" of their shares at the time of the Merger paid to them. The
following is a brief summary of Sections 60.551 through 60.594 of the OBCA,
which sets forth the procedures for demanding statutory dissenters' rights. This
summary is qualified in its entirety by reference to Sections 60.551 through
60.594 of the OBCA, the text of which is attached hereto in Annex F.
If the Merger is approved and consummated, those shareholders of WVI who
elect to exercise their dissenters' rights and who properly and timely perfect
such rights will be entitled to receive the "fair value" in cash for their
shares of WVI Stock. Pursuant to Section 60.551(4) of the OBCA, such "fair
value" means the value of the shares immediately before the effectuation of the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger, unless such exclusion would be inequitable.
A shareholder who elects to exercise his or her dissenters' rights must
perfect such rights by delivering to WVI prior to the vote at the Annual Meeting
written notice of his or her intent to demand payment, and not vote his or her
shares in favor of the Merger Agreement, by either voting against the adoption
of the Merger Agreement or abstaining from voting.
If a shareholder fails to deliver written notice to WVI of the shareholder's
intent to demand payment prior to the vote at the Annual Meeting or if the
shareholder votes his or her shares in favor of the Merger Agreement, such
shareholder will lose the right to receive the fair value of his or her shares.
If the Merger is approved, within ten days after such approval, WVI will
deliver to those shareholders who deliver to WVI prior to the vote written
notice of their intent to demand payment and who refrain from voting in favor of
the Merger Agreement a written dissenters' notice (the "Dissenters' Notice").
The Dissenters' Notice shall set forth where the shareholder must send the
payment demand, where and when certificates for such shares must be deposited
and the date by which WVI must receive the payment demand (which date must not
be fewer than 30 days nor more that 60 days after the date on which the
Dissenters' Notice is delivered). In addition, the Dissenters' Notice must
include (a) a form for demanding payment which includes the date of the first
announcement to the shareholders of the terms of the Merger and requires the
shareholder to certify whether he or she acquired beneficial ownership of the
shares before that date, and (b) a copy of the sections of the OBCA pertaining
to dissenters' rights.
A shareholder who is sent a Dissenters' Notice must demand payment in
writing, certifying whether he or she acquired beneficial ownership of the
shares before the date specified in such notice and deposit his
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or her certificates in accordance with the Dissenters' Notice. A shareholder who
does not demand payment by the date set in the Dissenters' Notice or who does
not deposit his or her certificate" where required and by the date set in the
Dissenter's Notice is not entitled to a dissenters' right of payment for his or
her shares.
Upon the later of consummation of the Merger or receipt of the payment
demand, WVI shall pay each shareholder who has complied with the requirements
set forth above the amount that WVI estimates to be the fair value of such
shares, plus accrued interest. The payment must be accompanied by the latest
available financial statements of WVI, a statement of the estimate of the fair
value of the shares, an explanation of how the interest was calculated, a
statement of the dissenters' rights if the dissenter is dissatisfied with the
payment and a copy of the sections of the OBCA pertaining to dissenters' rights.
If (a) the dissenter believes that the amount paid by WVI is less than the
fair value of his or her shares or that the interest due is incorrectly
calculated, (b) WVI fails to make payment within 60 days after the date set in
the Dissenters' Notice for demanding payment, or (c) the Merger is not
consummated and WVI does not return to the dissenter the deposited certificates
within 60 days after the date set in the Dissenters' Notice for demanding
payment, the dissenter may notify WVI of his or her estimate of the fair value
of his or her shares and the amount of interest due and demand payment of his or
her estimate, less any payment previously received. The dissenter must notify
WVI of his or her demand in writing within 30 days after WVI made or offered
payment for the dissenters' shares. If, within 60 days after receipt by WVI of a
demand described in this paragraph, the demand remains unsettled, WVI shall
bring a special proceeding and shall petition the court to determine the fair
value of the shares and accrued interest thereon. If WVI does not bring the
special proceeding within such 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded. The dissenter shall be entitled to
judgment for the amount by which the court finds the fair value of his or her
shares plus interest exceeds the amount paid by WVI.
The Merger Agreement provides that it may be terminated by UCB in the event
that holders of more than 10% of the outstanding shares of WVI Common Stock
exercise dissenters' rights. Dissenting shareholders are urged to consult legal
counsel with respect to dissenters' rights under the OBCA.
BAYHAWK APPRAISAL RIGHTS
SECTION 262 IS REPRINTED IN ITS ENTIRETY AS ANNEX G TO THIS PROXY
STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF
THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO ANNEX G. THIS DISCUSSION AND ANNEX G SHOULD BE REVIEWED CAREFULLY
BY ANY HOLDER OF BAYHAWK COMMON STOCK WHO WISHES TO EXERCISE STATUTORY APPRAISAL
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO. FAILURE TO COMPLY WITH THE
PROCEDURES SET FORTH IN SECTION 262 WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
A record holder of shares of Bayhawk Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, and who otherwise complies
with the statutory requirements of Section 262 will be entitled to an appraisal
by the Delaware Court of the fair value of his or her shares of Bayhawk Common
Stock. All references in this summary of appraisal rights to a "stockholder" or
"holders of shares of Bayhawk Common Stock" are to the record holder or holders
of shares of Bayhawk Common Stock as of the Record Date.
Under Section 262, if a merger or combination is to be submitted for
approval at a meeting of stockholders, such as the Annual Meeting of Bayhawk,
not less than 20 days prior to such meeting, a constituent corporation must
notify each of the holders of its stock for which appraisal rights are available
that appraisal rights are available and include in each such notice a copy of
Section 262. This Proxy Statement/Prospectus shall constitute such notice to the
record holders of Bayhawk Common Stock.
83
Holders of shares of Bayhawk Common Stock who desire to exercise their
appraisal rights must deliver a separate written demand for appraisal to Bayhawk
prior to the vote by the holders of Bayhawk Common Stock who wish to preserve
their appraisal rights on the Merger Agreement. Section 262 also requires that
such holder neither vote his shares of stock in favor of nor consent in writing
to the Merger Agreement. Holders of Bayhawk Common Stock who wish to preserve
their appraisal rights are not entitled to vote such shares, nor execute written
consents, with respect to the Merger Agreement. A demand for appraisal must be
executed by or on behalf of the stockholder and must reasonably inform Bayhawk
of the identity of the stockholder and that such stockholder intends thereby to
demand appraisal of their Bayhawk Common Stock. A person having a beneficial
interest in shares of Bayhawk Common Stock that are held of record in the name
of another person, such as a broker, fiduciary or other nominee, must act
promptly to cause the record holder to follow the steps summarized herein
properly and in a timely manner to perfect whatever appraisal rights are
available. If the shares of Bayhawk Common Stock are owned of record by a person
other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of Bayhawk Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by or for all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a stockholder, however, the agent must identify the record owner
and expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of Bayhawk Common Stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all shares of Bayhawk Common Stock outstanding in the name of such record
owner.
A stockholder who elects to exercise appraisal rights should mail or deliver
his or her written demand to: Bayhawk Ales, Inc., 66 S.E. Morrison Street,
Portland, Oregon 97214, Attention: James W. Bernau.
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of Bayhawk Common Stock owned, and that
the stockholder is thereby demanding appraisal of his or her shares. Within ten
days after the Effective Time, a merged entity, such as UCB, must provide notice
of the Effective Time to all stockholders who have complied with Section 262.
Within 120 days after the Effective Time, either UCB or any stockholder who
has complied with the required conditions of Section 262 may file a petition in
the Delaware Court, with a copy served on UCB in the case of a petition filed by
a stockholder, demanding a determination of the fair value of the shares of all
stockholders who have properly demanded appraisal of their stock. There is no
present intent on the part of Bayhawk to file an appraisal petition and
stockholders seeking to exercise appraisal rights should not assume that UCB
will file such a petition or that UCB will initiate any negotiations with
respect to the fair value of such shares. Accordingly, holders of Bayhawk Common
Stock who desire to have their shares appraised should initiate any petitions
necessary for the perfection of their appraisal rights within the time periods
and in the manner prescribed in Section 262. Within 120 days after the Effective
Time, any such stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from UCB a statement setting forth the aggregate number of shares of Bayhawk
Common Stock with respect to which demands for appraisal were received by
Bayhawk and the aggregate number of holders of such shares. Such statement must
be mailed within 10 days after the written request therefor has been received by
UCB.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
84
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Delaware Court may dismiss
the proceedings as to such stockholder. Where proceedings are not dismissed, the
Delaware Court will appraise the shares of Bayhawk Common Stock owned by such
stockholders, determining the fair value of such shares exclusive of any element
of value arising from the accomplishment or expectation of the Consolidation
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In determining fair value, the Delaware Court
is to take into account all relevant factors. In WEINBERGER V. UOP INC., the
Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered and
that "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger which throw
light on future prospects of the merged entity. In WEINBERGER, the Delaware
Supreme Court stated that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered."
Holders of shares of Bayhawk Common Stock considering seeking appraisal
should recognize that the fair value of their shares determined under Section
262 could be more than, the same as or less than the consideration they are
entitled to receive as a result of the Consolidation if they do not seek
appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a stock holder
seeking appraisal, the Delaware Court may order that all or portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorney's fees and the
fees and expenses of experts, be charged PRO RATA against the value of all
shares of stock entitled to appraisal.
Any holder of shares of Bayhawk Common Stock who has duly demanded appraisal
in compliance with Section 262 will not, after the Effective Time, be entitled
to vote for any purpose any shares subject to such demand or to receive payment
of dividends or other distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior to the Effective
Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Consolidation; after this period, the stockholder may withdraw
such demand for appraisal only with the consent of UCB. If no petition for
appraisal is filed with the Delaware Court within 120 days after the Effective
Time, stockholders' rights to appraisal shall cease, and all holders of shares
of Bayhawk Common Stock will be entitled to receive the shares of UCB Common
Stock into which such shares were converted pursuant to the Consolidation. UCB
has no obligation to file such a petition, and Bayhawk has no present intention
to do so. Consequently, any holder of shares of Bayhawk Common Stock who desires
such a petition to be filed is advised to file it on a timely basis. Any
stockholder may withdraw his or her demand for appraisal by delivering to UCB,
One Harbor Drive, Suite 102, Sausalito, California 94965, Attention: Chief
Financial Officer, a written withdrawal of his or her demand for appraisal and
acceptance of the Consolidation, except (i) that any such attempt to withdraw
made more than 60 days after the Effective Time will require written approval of
UCB and (ii) that no appraisal proceeding in the Delaware Court shall be
dismissed as to any stockholder without the approval of such court, and such
approval may be conditioned upon such terms as such court deems just.
85
UCB MANAGEMENT
DIRECTORS
The names and ages of UCB's Directors are currently as follows:
INITIAL
DIRECTOR TERM
NAME AGE POSITION(S) WITH UCB SINCE EXPIRES
- -------------------------- --- --------------------------------------------------------- ----------- -----------
Vijay Mallya.............. 41 Chairman of the Board and Chief Executive Officer 1997 2000
Jerome Merchant........... 35 Director 1997 1998
O'Neil Nalavadi........... 37 Director 1997 1999
Vijay Mallya has been the Chairman of the Board and Chief Executive Officer
of UCB since its inception in April 1997. Mr. Mallya has been the Chairman of
The UB Group since 1983. The UB Group is one of Asia's leading beer and spirits
companies with annual sales in excess of US$1 Billion. While Chairman of The UB
Group, Mr. Mallya has been responsible for (i) growing the group into a market
leader in beer and spirits in India, (ii) developing world class brands in
spirits, some of which are in the top 100 brands in the world in terms of volume
and (iii) globalizing the business with operations in over 20 countries. Mr.
Mallya has participated in the World Economic Forum in Switzerland and sits on
boards of several companies and organizations including The Institute of
Economic Studies (India).
O'Neil Nalavadi has been a Director of UCB since its inception in April
1997. Mr. Nalavadi has been the Senior Vice President of The UB Group attached
to the Chairman's office since September 1995. He has been with The UB Group for
over 12 years in various positions. Between 1989 and 1995, Mr. Nalavadi was
based in the United Kingdom responsible for strategic planning of UB
International and assisting the Group Chairman in day to day operations of
businesses in Europe, the Far East, the Middle East, the Americas and Africa. In
1995, Mr. Nalavadi moved to India and has been involved in reengineering UB's
spirits and beer business. Lately he has been involved in implementing UB's
strategic plans for North America. Mr. Nalavadi is a Chartered Accountant.
Jerome G. Merchant has been a Director of UCB since its inception in April
1997. Mr. Merchant is currently the Strategic Planning Consultant, U.S.A. for
The UB Group and has served in such capacity since July 1996. Since April 1992,
Mr. Merchant has also served as President of J.G.M. Strategic Alliances, Ltd., a
business consulting firm. Between 1989 and April 1992, Mr. Merchant was the
Regional Vice President for Equus Capital Corporation, an investment company
with assets in excess of $500 million. In his position at Equus Capital
Corporation, Mr. Merchant provided equity investment capital, financial advice
and marketing for numerous investments in equity oriented management led
acquisitions. Mr. Merchant received his Bachelor of Science degree in Managerial
Economics-Finance from the University of California, at Davis.
If the Consolidation is consummated, James W. Bernau will be appointed to
the Board of Directors of UCB, as will one other appointee of UBA and two
independent directors who are mutually satisfactory to both Mr. Bernau and UBA.
It may be necessary for UCB to appoint these two independent directors within 90
days of the consummation of the Consolidation in order to maintain its Nasdaq
Small Cap Market listing. Failure to appoint such directors may result in
delisting of the Common Stock of UCB.
UCB's Board of Directors has recently established an audit committee and a
compensation committee. The audit committee will recommend the annual employment
of the Company's auditors and will review the scope of audit and non-audit
assignments, related fees, the accounting principles used by UCB in financial
reporting, internal financial auditing procedures and the adequacy of UCB's
internal control procedures. The compensation committee will determine officers'
salaries and bonuses, and will administer UCB's stock option plan. The two new
independent directors will be appointed to the audit and compensation committees
at the time they are elected or appointed to the Board of Directors.
86
EXECUTIVE OFFICER AND SIGNIFICANT EMPLOYEES
The names, ages and positions of UCB's executive officers and significant
employees are currently as follows:
NAME AGE CURRENT POSITION(S) WITH UCB SINCE
- ---------------------------------------- --- --------------------------------------------------------- ---------
Vijay Mallya............................ 41 Chairman of the Board and Chief Executive Officer 1997
James W. Bernau......................... 43 President 1997
Yashpal Singh........................... 51 Executive Vice President of Operations 1997
Percy A. Rivera......................... 44 Vice President, Finance and Accounting and Secretary 1997
For information on the business background of Mr. Mallya see "Directors"
above.
For information on the business background of Mr. Bernau see "Nor'Wester
Management" below.
Mr. Singh became Executive Vice President of Operations for UCB in June
1997. Since March 1997, Mr. Singh has also served as Executive Vice President of
Operations for Nor'Wester. From 1994 to date, Mr. Singh has been Senior Vice
President, Operations for United Breweries Ltd., in Bangalore, India. From 1990
to 1994, Mr. Singh served in various capacities at Kalyani Brewery of United
Breweries Ltd., most recently as Chief Executive. In addition, in 1992, Mr.
Singh became Chief Executive of Jupiter Breweries and Industries Ltd. Mr. Singh
holds degrees in Chemistry, Botany and Zoology from Punjab University in India.
Mr. Singh is a member of the Master Brewers Association of America.
Mr. Rivera became Vice President, Finance and Accounting in June 1997. Since
April 1997, Mr. Rivera has been employed by Nor'Wester as an accountant. From
1995 to 1997, Mr. Rivera served as Vice President of Finance and Administration
and Chief Financial Officer of William & Scott Inc., a national beverage sales
and marketing organization. From 1988 to 1995, Mr. Rivera served as Controller
and Information Systems Manager of Wisdom Import Sales Co., a national beverage
importer. Mr. Rivera holds a B.S. degree in Economics from National University
of Engineering, Lima, Peru, and an M.B.A. degree in Finance from California
State University, Dominguez Hills.
87
UCB PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common
Stock of UCB as adjusted as of the Closing Date of the Investment Agreement for
the consummation of the Consolidation and the Investment as to (i) each person
who is known by UCB to own beneficially 5% or more of the outstanding shares of
Common Stock, (ii) each Director of UCB, (iii) each of the executive officers
and (iv) all Directors and executive officers as a group. Except as otherwise
noted, UCB believes the persons listed below have sole investment and voting
power with respect to the Common Stock owned by them.
COMMON STOCK
--------------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED(1) OWNED(1)
- -------------------------------------------------------------------------- -------------- ----------------
United Breweries of America, Inc. ........................................ 1,130,728 40.0%(2)
One Harbor Drive, Suite 102
Sausalito, California 94965
Vijay Mallya ............................................................. 1,231,671(3) 42.1%
One Harbor Drive, Suite 102
Sausalito, California 94965
James W. Bernau .......................................................... 383,625(4) 13.1%(2)
8800 Enchanted Way SE
Turner, Oregon 97392
Black & Company, Inc. .................................................... 343,202(5) 12.0%(2)
One SW Columbia Street, Suite 1200
Portland, Oregon 97258
Jerome Merchant........................................................... -- --
O'Neil Nalavadi........................................................... -- --
All Directors and executive officers as a group (4 people)................ 1,615,296(6) 53.4%
- ------------------------
(1) Applicable percentage of ownership is based on 2,824,008 shares of Common
Stock outstanding after the Consolidation and Investment together with
applicable options for such shareholders. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to such shares. Shares of
Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days after the date of this Proxy Statement/Prospectus
are deemed outstanding for computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other person.
(2) As a result of the issuance of additional shares to Needham and Black as
partial payment for services in connection with the Consolidation, UBA's and
James W. Bernau's holdings will decrease to 39.7% and 13.0%, respectively,
and Black's beneficial holdings will increase to 12.4.%
(3) Mr. Mallya may be deemed to be a beneficial owner of UBA because the UBA
shares are owned by a foreign corporation, the shares of which are
controlled by fiduciaries who may exercise discretion in Mr. Mallya's favor
amongst others. Also includes options to purchase 100,943 shares of UCB
Common Stock to be granted pursuant to the Mallya Employment Agreement which
will be exercisable within 60 days.
(4) Includes options to purchase 100,943 shares of UCB Common Stock to be
granted pursuant to the Bernau Employment Agreement which will be
exercisable within 60 days.
(5) Includes a warrant to purchase 17,250 shares of UCB Common Stock held by
Black and a warrant to purchase 17,250 shares of UCB Common Stock held by
its Chairman, Lawrence S. Black. The shares are deemed to be beneficially
owned by Black, a broker-dealer registered under Section 15 of the
Securities Exchange Act of 1934, and represent (i) 103,327 shares owned
directly by Black, (ii) 158,675 shares beneficially owned by clients of
Black but held in managed accounts which give Black investment and/or voting
power over such shares, (iii) 46,700 shares held by two officers of Black,
(iv) 17,190 shares issuable pursuant to currently exercisable warrants
issued to and held by Black in connection with Nor'Wester's initial public
offering completed on January 17, 1996 ("Nor'Wester's IPO"), and (v) 17,190
shares issuable pursuant to currently exercisable warrants issued to and
held by an officer of Black in connection with Nor'Wester's IPO.
(6) Includes options to purchase 201,886 shares of UCB Common Stock which are
exercisable within 60 days. See also Note 3 above.
88
UCB PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma combined financial information gives pro
forma effect to the Consolidation, giving effect to the pro forma adjustments
described in the accompanying notes. The Consolidation will be accounted for by
UCB as the purchase by Nor'Wester of WVI, Aviator, Bayhawk and Mile High under
the "purchase" method of accounting. APB 16 requires the purchase price to be
allocated to the acquired assets and liabilities of WVI, Aviator, Bayhawk and
Mile High on the basis of their estimated fair values as of the date of
acquisition. The Unaudited Pro Forma Combined Balance Sheet as of March 31, 1997
gives effect to the Consolidation as if it occurred on March 31, 1997. The
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and for the three months ended March 31, 1997 give effect to
the Consolidation as if it occurred at the beginning of the periods presented
and includes adjustments directly attributable to the Consolidation and expected
to have a continuing impact on the combined company. The Unaudited Pro Forma
Combined Balance Sheet as of March 31, 1997 gives effect to the proposed
acquisition of Mendocino Brewing Company as if it occurred on March 31, 1997.
The Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1996 and for the three months ended March 31, 1997 give effect to
the proposed acquisition of Mendocino Brewing Company as if it occurred at the
beginning of the periods presented and includes adjustments directly
attributable to the proposed acquisition of Mendocino Brewing Company and
expected to have a continuing impact on the combined company. The acquisition of
Mendocino will be accounted for under the purchase method of accounting in
accordance with APB16. The Unaudited Pro Forma Balance Sheet reflects merger
expenses of $1.4 million expected to be incurred by UCB in connection with the
Consolidation. See "Risk Factors--Merger Expenses."
The Pro Forma Combined Financial Information and related notes are provided
for informational purposes only. The Pro Forma Combined Financial Information
presented is not necessarily indicative of the consolidated financial position
or results of operations of UCB as they may be in the future or as they might
have been had the Consolidation been effected on the assumed dates. The Pro
Forma Financial Information should be read in conjunction with the historical
consolidated financial statements of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High, and the related notes thereto, which are included elsewhere in this Proxy
Statement/Prospectus. See "Consolidated Financial Statements of Nor'Wester,"
"Consolidated Financial Statements of WVI," "Financial Statements of Aviator,"
"Financial Statements of Bayhawk" and "Financial Statements of Mile High"
herein.
89
UNITED CRAFT BREWERS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
WILLAMETTE
VALLEY, WVI CONSOLIDATION WVI NOR'WESTER
INC. AVIATOR BAYHAWK MILE HIGH ELIMINATIONS CONSOLIDATED CONSOLIDATED
---------- --------- ---------- ---------- ----------------- ------------ ------------
ASSETS:
Cash and cash
equivalents.......... $ 0 $ 0 $ 20,843 $ 3,726 $ 24,569 $ 80,543
Accounts receivable.... 0 190,544 56,739 22,396 269,679 592,813
Other receivables...... 8,799 0 0 0 8,799 103,761
Affiliate
receivables.......... 0 0 0 0 0 1,928,984
Inventories............ 0 292,392 31,705 0 324,097 830,902
Marketing supplies..... 0 0 0 0 0 77,982
Prepaids and other
current.............. 11,250 25,746 2,707 8,564 48,267 336,912
---------- --------- ---------- ---------- ------------ ------------
20,049 508,682 111,994 34,686 675,411 3,951,897
Property and
equipment............ 121,936 2,444,451 916,230 2,267,427 5,750,044 12,771,237
Less: accumulated
depreciation......... (67,743) (221,806) (126,245) (300,760) (716,554) (983,318)
Deferred stock offering
costs................
Other non-current
assets............... 0 0 0 8,169 8,169 65,000
Investment in
affiliates........... 300,000 0 0 0 $ (300,000)(1) 0 0
Goodwill............... 0 0 0 0 0 0
---------- --------- ---------- ---------- ------------ ------------
$ 374,242 $2,731,327 $ 901,979 $2,009,522 $5,717,070 $15,804,816
---------- --------- ---------- ---------- ------------ ------------
---------- --------- ---------- ---------- ------------ ------------
LIABILITIES AND
SHAREHOLDER'S EQUITY
Line of credit......... $ 0 $ 0 $ 0 $ 0 $ 0 $1,041,000
Current portion of
long-term debt....... 0 4,154 $ 0 71,218 75,372 3,689,289
Accounts payable....... 32,060 729,867 39,844 863,359 1,665,130 2,356,868
Container deposits..... 0 24,609 29,623 0 54,232 127,396
Reserve for impairment
loss................. 0 0 0 50,000 50,000 0
Accrued payroll and
other................ 72,386 35,182 22,329 24.533 154,430 223,266
Accrued construction
costs................ 0 0 0 0 0 0
Affiliate payables..... (1,149.371) 942,251 304,193 1,843,915 1,940,988 0
---------- --------- ---------- ---------- ------------ ------------
(1,044,925) 1,736,063 395,989 2,853,025 3,940,152 7,437,819
Long-term debt and
capital lease........ 0 56,262 0 217,446 273,708 10,825
Deferred rent.......... 0 78,602 0 0 78,602 0
---------- --------- ---------- ---------- ------------ ------------
Total liabilities...... (1,044,925) 1,870,927 395,989 3,070,471 4,292,462 7,448,644
---------- --------- ---------- ---------- ------------ ------------
Minority interest...... 0 0 0 0 120,066(2) 120,066 0
---------- --------- ---------- ---------- ------------ ------------
Shareholder's Equity:
Common stock........... 48,610 5,332 2,201 4,694 (12,227)(1) 48,610 11,064,480
Preferred stock........
Additional paid in
capital.............. 2,261,734 2,582,553 1,427,982 2,252,274 (287,773)(1) 5,453,712 0
(120,066)(2)
(2,662,992)(3)
Retained earnings
(deficit)............ (891,177) (1,727,485) (924,193) (3,317,917) 2,662,992(3) (4,197,780) (2,708,308)
---------- --------- ---------- ---------- ------------ ------------
1,419,167 860,400 505,990 (1,060,949) 1,304,542 8,356,172
---------- --------- ---------- ---------- ------------ ------------
$ 374,242 $2,731,327 $ 901,979 $2,009,522 $5,717,070 $15,804,816
---------- --------- ---------- ---------- ------------ ------------
---------- --------- ---------- ---------- ------------ ------------
PRO FORMA
CONSTITUENT UCB
CORPORATIONS PRO FORMA ADJUSTMENTS COMBINED MENDOCINO
PRO FORMA ------------------------------- BEFORE PRO FORMA
ELIMINATIONS COMBINED CONSOLIDATION UBA INVESTMENT MENDOCINO MENDOCINO ADJUSTMENTS
-------------- ------------ -------------- --------------- ---------- ------------- --------------
ASSETS:
Cash and cash
equivalents.......... $ 105,112 $ 3,250,000(6) $3,355,112 $ 290,523 $ 3,500,000(13)
Accounts receivable.... 862,492 862,492 386,825
Other receivables...... 112,560 112,560 71,900
Affiliate
receivables.......... $(1,907,897)(4) 21,087 21,087
Inventories............ 1,154,999 1,154,999 261,434
Marketing supplies..... 77,982 77,982
Prepaids and other
current.............. 385,179 (50,000)(6) 335,179 43,461
------------ ---------- -------------
2,719,411 5,919,411 1,054,143
Property and
equipment............ 18,521,281 18,521,281 11,229,623
Less: accumulated
depreciation......... (1,699,872) (1,699,872) (555,495)
Deferred stock offering
costs................ 0 0 317,222
Other non-current
assets............... 73,169 73,169 306,205
Investment in
affiliates........... 0 0 0
Goodwill............... 0 0 0 8,962,027(14)
------------ ---------- -------------
$19,613,989 $22,813,989 $ 12,351,698
------------ ---------- -------------
------------ ---------- -------------
LIABILITIES AND
SHAREHOLDER'S EQUITY
Line of credit......... $1,041,000 $1,041,000 $ 600,000
Current portion of
long-term debt....... 3,764,661 (900,000)(6) 2,864,661 3,499,496
Accounts payable....... 4,021,998 4,021,998 728,072
Container deposits..... 181,628 181,628
Reserve for impairment
loss................. 50,000 50,000
Accrued payroll and
other................ 377,696 377,696 156,109
Accrued construction
costs................ 0 0 1,048,901
Affiliate payables..... (1,907,897)(4) 33,091 33,091
------------ ---------- -------------
9,470,074 8,570,074 6,032,578
Long-term debt and
capital lease........ 284,533 284,533 1,988,047
Deferred rent.......... 78,602 78,602 18,100
------------ ---------- -------------
Total liabilities...... 9,833,209 8,933,209 8,038,725
------------ ---------- -------------
Minority interest...... 120,066 120,066 0
------------ ---------- -------------
Shareholder's Equity:
Common stock........... 11,113,090 (11,111,314)(5) 1,048(6) 2,824 4,005,532 (4,003,003)(15)
Preferred stock........ 227,600 (227,600)(16)
Additional paid in
capital.............. 5,453,712 11,111,314(5) 4,098,952(6) 16,466,198 0 8,962,027(14)
(4,197,780)(7) 3,500,000(13)
227,600(16)
79,841(17)
4,003,003(15)
Retained earnings
(deficit)............ (6,906,088) 4,197,780(7) (2,708,308) 79,841 (79,841)(17)
------------ ---------- -------------
9,660,714 13,760,714 4,312,973
------------ ---------- -------------
$19,613,989 $22,813,989 $ 12,351,698
------------ ---------- -------------
------------ ---------- -------------
PRO FORMA
UCB
COMBINED
----------
ASSETS:
Cash and cash
equivalents.......... $7,145,635
Accounts receivable.... 1,249,317
Other receivables...... 184,460
Affiliate
receivables.......... 21,087
Inventories............ 1,416,433
Marketing supplies..... 77,982
Prepaids and other
current.............. 378,640
----------
10,473,554
Property and
equipment............ 29,750,904
Less: accumulated
depreciation......... (2,255,367)
Deferred stock offering
costs................ 317,222
Other non-current
assets............... 379,374
Investment in
affiliates........... 0
Goodwill............... 8,962,027
----------
$47,627,714
----------
----------
LIABILITIES AND
SHAREHOLDER'S EQUITY
Line of credit......... $1,641,000
Current portion of
long-term debt....... 6,364,157
Accounts payable....... 4,750,070
Container deposits..... 181,628
Reserve for impairment
loss................. 50,000
Accrued payroll and
other................ 533,805
Accrued construction
costs................ 1,048,901
Affiliate payables..... 33,091
----------
14,602,652
Long-term debt and
capital lease........ 2,272,580
Deferred rent.......... 96,702
----------
Total liabilities...... 16,971,934
----------
Minority interest...... 120,066
----------
Shareholder's Equity:
Common stock........... 5,353
Preferred stock........ 0
Additional paid in
capital.............. 33,238,595
Retained earnings
(deficit)............ (2,708,308)
----------
30,535,714
----------
$47,627,714
----------
----------
90
UNITED CRAFT BREWERS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
WILLAMETTE
VALLEY, WVI CONSOLIDATION WVI NOR'WESTER
INC. AVIATOR BAYHAWK MILE HIGH ELIMINATIONS CONSOLIDATED CONSOLIDATED
----------- --------- ---------- ---------- ----------------- ------------ ------------
Revenue:
Gross revenues............. $ 0 $ 298,632 $ 92,652 $ 16,770 $ 408,054 $1,317,212
Less excise taxes.......... 0 (15,486) (5,451) (1,701) (22,638) (63,365)
----------- --------- ---------- ---------- ------------ ------------
Net revenues............... 0 283,146 87,201 15,069 385,416 1,253,847
Management services........ 0 0 0 0 0 0
----------- --------- ---------- ---------- ------------ ------------
0 283,146 87,201 15,069 385,416 1,253,847
----------- --------- ---------- ---------- ------------ ------------
Cost of goods sold:
Cost of products........... 0 294,825 88,110 80,947 463,882 980,409
Management services........ 0 0
----------- --------- ---------- ---------- ------------ ------------
0 294,825 88,110 80,947 463,882 980,409
----------- --------- ---------- ---------- ------------ ------------
Gross margin............... 0 (11,679) (909) (65,878) (78,466) 273,438
Selling, general,
administrative........... 65,259 110,637 60,598 91,423 327,917 578,838
----------- --------- ---------- ---------- ------------ ------------
Loss from operations....... (65,259) (122,316) (61,507) (157,301) (406,383) (305,400)
Other income (expense):
Interest income
(expense)................ 7 (2,095) 207 (1,881) (118,597)
Other income (expense)..... (8,636) (8,636) 0
----------- --------- ---------- ---------- ------------ ------------
Loss before taxes and
minority interest........ (73,888) (124,411) (61,300) (157,301) (416,900) (423,997)
Income taxes (benefit)..... 0 0 0 0 0 0
----------- --------- ---------- ---------- ------------ ------------
Loss before minority
interest................. (73,888) (124,411) (61,300) (157,301) (416,900) (423,997)
Minority interest in
income................... 0 0 0 0 $ 163,640(9) 163,640
----------- --------- ---------- ---------- ------------ ------------
Net loss................... $ (73,888) $(124,411) $ (61,300) $ (157,301) $ (253,260) $ (423,997)
----------- --------- ---------- ---------- ------------ ------------
----------- --------- ---------- ---------- ------------ ------------
Net loss per common share.. $ (0.02) $ (0.03) $ (0.03) $ (0.05) $ (0.11)
--------- ---------- ---------- ------------ ------------
--------- ---------- ---------- ------------ ------------
Weighted average number of
common shares
outstanding.............. 5,331,775 2,200,814 4,693,787 4,860,996 3,711,097
--------- ---------- ---------- ------------ ------------
--------- ---------- ---------- ------------ ------------
PRO FORMA
CONSTITUENT UCB
CORPORATIONS PRO FORMA ADJUSTMENTS COMBINED MENDOCINO
PRO FORMA ------------------------------ BEFORE PRO FORMA
ELIMINATIONS COMBINED CONSOLIDATION UBA INVESTMENT MENDOCINO MENDOCINO ADJUSTMENTS
--------------- ------------ ------------- --------------- ---------- ----------- ------------
Revenue:
Gross revenues............. $1,725,266 $1,725,266 $1,051,487
Less excise taxes.......... (86,003) (86,003) (46,914)
------------ ---------- -----------
Net revenues............... 1,639,263 1,639,263 1,004,573
Management services........ 0 0
------------ ---------- -----------
1,639,263 1,639,263 1,004,573
------------ ---------- -----------
Cost of goods sold:
Cost of products........... 1,444,291 1,444,291 576,240
Management services........ 0 0
------------ ---------- -----------
1,444,291 1,444,291 576,240
------------ ---------- -----------
Gross margin............... 194,972 194,972 428,333
Selling, general,
administrative........... 906,755 906,755 558,019 $ 149,367(18)
------------ ---------- -----------
Loss from operations....... (711,783) (711,783) (129,686)
Other income (expense):
Interest income
(expense)................ (120,478) (120,478) 1,996
Other income (expense)..... (8,636) (8,636) 5,260
------------ ---------- -----------
Loss before taxes and
minority interest........ (840,897) (840,897) (122,430)
Income taxes (benefit)..... 0 0 800
------------ ---------- -----------
Loss before minority
interest................. (840,897) (840,897) (123,230)
Minority interest in
income................... 163,640 163,640
------------ ---------- -----------
Net loss................... $ (677,257) $ (677,257) $(123,230)
------------ ---------- -----------
------------ ---------- -----------
Net loss per common share.. $ (0.38) $ (0.24) $ (0.05)
------------ ---------- -----------
------------ ---------- -----------
Weighted average number of
common shares
outstanding.............. 1,776,389 2,824,008 2,329,783
------------ ---------- -----------
------------ ---------- -----------
PRO FORMA
UCB
COMBINED
----------
Revenue:
Gross revenues............. $2,776,753
Less excise taxes.......... (132,917)
----------
Net revenues............... 2,643,836
Management services........ 0
----------
2,643,836
----------
Cost of goods sold:
Cost of products........... 2,020,531
Management services........ 0
----------
2,020,531
----------
Gross margin............... 623,305
Selling, general,
administrative........... 1,614,141
----------
Loss from operations....... (990,836)
Other income (expense):
Interest income
(expense)................ (118,482)
Other income (expense)..... (3,376)
----------
Loss before taxes and
minority interest........ (1,112,694)
Income taxes (benefit)..... 800
----------
Loss before minority
interest................. (1,113,494)
Minority interest in
income................... 163,640
----------
Net loss................... $ (949,854)
----------
----------
Net loss per common share.. $ (0.18)
----------
----------
Weighted average number of
common shares
outstanding.............. 5,352,579
----------
----------
91
UNITED CRAFT BREWERS, INC.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
WILLAMETTE
VALLEY, WVI CONSOLIDATION WVI NOR'WESTER
INC. BAYHAWK AVIATOR MILE HIGH ELIMINATIONS CONSOLIDATED CONSOLIDATED
----------- --------- ---------- ---------- ----------------- ------------ ------------
Revenue:
Gross revenues....... $ 0 $ 461,549 $1,905,511 $1,600,915 $3,967,975 $6,820,691
Less excise taxes.... 0 (41,611) (81,434) (85,426) (208,471) (296,609)
----------- --------- ---------- ---------- ------------ ------------
Net revenues......... 0 419,938 1,824,077 1,515,489 3,759,504 6,524,082
Management services.. 266,775 0 0 0 $ (156,975)(8) 109,800 0
----------- --------- ---------- ---------- ------------ ------------
266,775 419,938 1,824,077 1,515,489 3,869,304 6,524,082
----------- --------- ---------- ---------- ------------ ------------
Cost of goods sold:
Cost of products..... 0 364,450 1,879,062 1,905,335 4,148,847 5,159,889
Management services.. 266,775 0 0 0 (156,975 (8) 109,800 0
----------- --------- ---------- ---------- ------------ ------------
266,775 364,450 1,879,062 1,905,335 4,258,647 5,159,889
----------- --------- ---------- ---------- ------------ ------------
Gross margin......... 0 55,488 (54,985) (389,846) (389,343 ) 1,364,193
Selling, general,
administrative..... 247,285 339,766 851,352 790,615 2,229,018 4,545,559
Write-off of stock
offering costs..... 0 0 249,871 212,098 461,969 0
Estimated impairment
loss............... 0 0 0 1,018,879 1,018,879 0
----------- --------- ---------- ---------- ------------ ------------
Loss from
operations......... (247,285 ) (284,278) (1,156,208) (2,411,438) (4,099,209 ) (3,181,366)
Other income
(expense):
Interest income
(expense).......... 16,261 (11,606) (1,498) (37,958) (34,801 ) 43,400
Other income
(expense).......... (204,782 ) 4,342 0 17,124 (183,316 ) (4,457)
----------- --------- ---------- ---------- ------------ ------------
Loss before taxes and
minority
interest........... (435,806 ) (291,542) (1,157,706) (2,432,272) (4,317,326 ) (3,142,423)
Income taxes
(benefit).......... 0 0 0 0 0 (168,000)
----------- --------- ---------- ---------- ------------ ------------
Loss before minority
interest........... (435,806 ) (291,542) (1,157,706) (2,432,272) (4,317,326 ) (2,974,423)
Minority interest in
income............. 0 0 0 1,853,095 (9) 1,853,095 222,497
----------- --------- ---------- ---------- ------------ ------------
Net loss............. $ (435,806 ) $(291,542) $(1,157,706) $(2,432,272) $(2,464,231 ) $(2,751,926)
----------- --------- ---------- ---------- ------------ ------------
----------- --------- ---------- ---------- ------------ ------------
Net loss per common
share.............. $ (0.13) $ (0.20) $ (0.52) $ (0.51 ) $ (0.74)
--------- ---------- ---------- ------------ ------------
--------- ---------- ---------- ------------ ------------
Weighted average
number of common
shares
outstanding........ 2,200,814 5,685,642 4,691,810 4,852,513 3,696,041
--------- ---------- ---------- ------------ ------------
--------- ---------- ---------- ------------ ------------
PRO FORMA
CONSTITUENT UCB
CORPORATIONS PRO FORMA ADJUSTMENTS COMBINED MENDOCINO
PRO FORMA ------------------------------ BEFORE PRO FORMA
ELIMINATIONS COMBINED CONSOLIDATION UBA INVESTMENT MENDOCINO MENDOCINO ADJUSTMENTS
--------------- ------------ ------------- --------------- ---------- ---------- -------------
Revenue:
Gross revenues....... $(1,375,222)(10) $9,413,444 $9,413,444 $4,004,700
Less excise taxes.... (505,080) (505,080) (165,000)
------------ ---------- ----------
Net revenues......... 8,908,364 8,908,364 3,839,700
Management services.. (90,975 11) 18,825 18,825
------------ ---------- ----------
8,927,189 8,927,189 3,839,700
------------ ---------- ----------
Cost of goods sold:
Cost of products..... (1,375,222 0) 7,933,514 7,933,514 1,909,700
Management services.. (90,975 11) 18,825 18,825
------------ ---------- ----------
7,952,339 7,952,339 1,909,700
------------ ---------- ----------
Gross margin......... 974,850 974,850 1,930,000
Selling, general,
administrative..... 6,774,577 6,774,577 2,102,400 597,468 (18)
Write-off of stock
offering costs..... 461,969 461,969
Estimated impairment
loss............... 1,018,879 1,018,879
------------ ---------- ----------
Loss from
operations......... (7,280,575 ) (7,280,575) (172,400)
Other income
(expense):
Interest income
(expense).......... 8,599 8,599 11,600
Other income
(expense).......... (222,497 2) 34,724 34,724 (41,200)
------------ ---------- ----------
Loss before taxes and
minority
interest........... (7,237,252 ) (7,237,252) (202,000)
Income taxes
(benefit).......... (168,000 ) (168,000) (78,200)
------------ ---------- ----------
Loss before minority
interest........... (7,069,252 ) (7,069,252) (123,800)
Minority interest in
income............. (222,497 2) 1,853,095 1,853,095
------------ ---------- ----------
Net loss............. $(5,216,157 ) $(5,216,157) $ (123,800)
------------ ---------- ----------
------------ ---------- ----------
Net loss per common
share.............. $ (2.94 ) $ (1.85) $ (0.05)
------------ ---------- ----------
------------ ---------- ----------
Weighted average
number of common
shares
outstanding........ 1,776,389 2,824,008 2,322,222
------------ ---------- ----------
------------ ---------- ----------
PRO FORMA
UCB
COMBINED
----------
Revenue:
Gross revenues....... $13,418,144
Less excise taxes.... (670,080)
----------
Net revenues......... 12,748,064
Management services.. 18,825
----------
12,766,889
----------
Cost of goods sold:
Cost of products..... 9,843,214
Management services.. 18,825
----------
9,862,039
----------
Gross margin......... 2,904,850
Selling, general,
administrative..... 9,474,445
Write-off of stock
offering costs..... 461,969
Estimated impairment
loss............... 1,018,879
----------
Loss from
operations......... (8,050,443)
Other income
(expense):
Interest income
(expense).......... 20,199
Other income
(expense).......... (6,476)
----------
Loss before taxes and
minority
interest........... (8,036,720)
Income taxes
(benefit).......... (246,200)
----------
Loss before minority
interest........... (7,790,520)
Minority interest in
income............. 1,853,095
----------
Net loss............. $(5,937,425)
----------
----------
Net loss per common
share.............. $ (1.11)
----------
----------
Weighted average
number of common
shares
outstanding........ 5,352,579
----------
----------
- ----------------------------------------
FOOTNOTES ON NEXT PAGE
92
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. Represents the elimination of WVI's investment in its subsidiaries.
2. Represents the recording of the minority interest in the net assets of
Aviator, Bayhawk and Mile High.
3. Represents the recording of the minority interests' share in the accumulated
losses of Aviator, Bayhawk and Mile High.
4. Represents the elimination of affiliate receivables/payables between
Nor'Wester and the WVI entities.
5. Represents the reclassification of common stock to additional paid-in
capital related to the exchange of shares by the existing companies for 60%
of the total shares being issued by UCB. UCB common stock has a par value of
$0.001.
6. Represents the investment of $5.5 million by UBA in exchange for a 40%
interest in UCB. $900,000 had been paid to Nor'Wester during 1996 in the
form of a bridge loan, and this amount is reclassified as equity for pro
forma purposes. Estimated expenses of $1.4 million related to raising
capital, $50,000 of which were deferred at December 31, 1996, are recorded
as a reduction of capital. UCB common stock has a par value of $0.001,
accordingly, the net investment of $4.1 million is recorded primarily as
additional paid-in capital.
7. Represents the reclassification of accumulated deficits of WVI and its
subsidiaries to additional paid-in capital in order to present UCB as a new
entity.
8. Represents the elimination of management services provided to Aviator,
Bayhawk and Mile High.
9. Represents the minority interests' share in the losses incurred by Aviator,
Bayhawk and Mile High.
10. Represents the elimination of cooperative brewing revenues and costs
recorded by Nor'Wester, Aviator, Bayhawk and Mile High.
11. Represents the elimination of management services provided by WVI to
Nor'Wester and the elimination of management services provided by Nor'Wester
to WVI, Aviator, Bayhawk and Mile High.
12. Represents the elimination of the minority interests' share in the losses of
North Country Joint Venture for the first nine months of 1996 during which
WVI owned 39% of North Country Joint Venture. Nor'Wester purchased the 39%
interest from WVI in October, 1996, and North Country Joint Venture was a
wholly-owned subsidiary of Nor'Wester at December 31, 1996.
13. Represents an estimate of the investment by UBA in UCB prior to the merger
of Mendocino with a subsidiary of UCB. The Letter of Intent with Mendocino
contemplates that UBA will purchase preferred and/or common equity
securities for an ownership interest of approximately 30% for between
$3,000,000 and $4,000,000 in cash. The parties are still in negotiations
regarding the actual purchase price to be paid to Mendocino. Accordingly,
for purposes of the pro forma calculations only, a purchase price of
$3,500,000 has been assumed. The actual amount of such purchase price may be
higher or lower.
14. Represents the recording of goodwill related to the purchase price in excess
of the net assets of Mendocino after the investment by UBA. The Letter of
Intent with Mendocino contemplates that the value assigned to Mendocino's
shares of common stock for the purposes of the investment by UBA and the
exchange of UCB shares for Mendocino shares will be between $4.00 and $4.50
per share. The parties are still in negotiations regarding the actual
purchase price to be paid by UBA and the number of shares of UCB common
stock to be exchanged for each share of Mendocino common stock. Accordingly,
for purposes of the pro forma calculations only, a value of $4.25 per share
of Mendocino common stock has been assumed. The actual value assigned to
Mendocino's shares may be higher or lower. See also Note 13 above. Therefore
the amount of goodwill may change based upon a due
93
diligence review and possible further negotiations of total purchase price.
For purposes of the pro forma adjustments, an estimated purchase price of
$13,275,000 has been used as the value of the Mendocino shares to be
acquired by UCB in the stock exchange. Based on the net book value of
Mendocino as of March 31, 1997 of $4,312,973, this results in goodwill of
$8,962,027. Management believes that net book value approximates fair value
of the assets to be acquired based on management's understanding of the
current market for craft brewing equipment. For every $1,000 change in the
actual purchase price, it is estimated that goodwill will change by $1,000
and related amortization would change by approximately $67 and $17 for the
year ended December 31, 1996 and the three months ended March 31, 1997,
respectively. Based upon additional due diligence procedures, certain
intangibles may be identified that have a life different than the
fifteen-year life assigned to goodwill for purposes of the pro forma
adjustments; however, management believes that the effect of the excess
purchase price that may be allocated to intangibles with lives less than
fifteen years is not expected to have a material effect on the amortization
expense. See also Note 18.
15. Represents the reclassification of common stock of Mendocino as additional
paid-in capital related to the exchange of approximately 2.3 million shares
of Common Stock of Mendocino for approximately 2.5 million shares of UCB
Common Stock assuming a purchase price of $13,275,000 for Mendocino (the
assumed value of Mendocino based upon the investment by UBA as described in
Note 13) and assuming a fair market value of $5.25 per share of UCB Common
Stock, $0.001 par value (the value assigned to UCB Common Stock in
determining the exchange ratios in connection with the Consolidation). See
Notes 13 and 14 above.
16. Represents the reclassification of preferred stock of Mendocino as
additional paid-in capital in accordance with APB 16 purchase accounting.
17. Represents the reclassification of the retained earnings of Mendocino to
additional paid-in capital in accordance with APB 16 purchase accounting.
18. Amount represents goodwill amortization created by the purchase of Mendocino
as if the purchase occurred at the beginning of the period presented. The
goodwill is being amortized over an estimated life of fifteen years. See
also Note 14 above.
94
GENERAL DESCRIPTION OF THE CRAFT BREWING INDUSTRY
AND THE BUSINESSES OF THE CONSTITUENT CORPORATIONS
Each of the Constituent Corporations (except WVI) operates one or more craft
breweries (the "Breweries"). The following is a general description of the craft
brewing industry and the businesses of the Constituent Corporations. For a
description of certain matters specific to the business, properties, products,
and operations of each Constituent Corporation, see "Nor'Wester Business," "WVI
Business," "Aviator Business," "Bayhawk Business," and "Mile High Business."
THE INDUSTRY
The craft brewing segment of the United States brewing industry is comprised
of regional craft brewers such as Nor'Wester (i.e. brewers that produces between
15,000 and 1,000,000 barrels a year), contract brewers (i.e. companies that
formulate and market products brewed by third-party mass production brewers),
microbrewers such as Bayhawk (i.e. brewers that produce under 15,000 barrels of
craft beer a year) and brewpubs (i.e. a combination restaurant and brewery which
produces principally for on-site consumption). Craft beers are full flavored
beers, brewed in traditional European brewing styles with quality hops, malted
barley, yeast and water.
Beginning in California, Oregon and Washington and more recently in the New
England states, Colorado and other regions across the country, regional craft
brewers, contract brewers, microbrewers, and brewpubs emerged to form the craft
beer industry. Certain craft brewers, such as Nor'Wester, have been able to grow
from microbrewers into regional craft brewers by increasing the size of their
breweries, while maintaining traditional European brewing methods. Contract
brewers, who generally do not have their own brewing facilities, have taken
advantage of demand by retaining industrial brewers to perform contract brewing
at otherwise under-utilized industrial brewing facilities. Industrial brewers
have also sought to appeal to this demand for craft beers by introducing their
own fuller flavored specialty beers or by acquiring or forming partnerships with
existing craft brewers.
RAW MATERIALS
Raw materials used by the Breweries consist primarily of malted grains,
hops, brewers' yeast and water filtered through activated charcoal filters. The
Breweries typically purchase all of their malted barley and wheat from one or
two suppliers, although several comparable, alternative suppliers exist. Each of
the Breweries typically selects the variety and grower of its high quality,
whole flower Pacific Northwest hops, and purchases them through two major
brokers. The Constituent Corporations believe that alternative sources of malted
grains and hops are available at competitive prices. Each of the Breweries
currently cultivates its own yeast supply and multiple competitive sources of
supply for most packaging materials, such as bottles, labels, six-pack carriers,
crowns and shipping cases are available to the Breweries.
DISTRIBUTION
Each of the Constituent Corporations markets its products under a locally
based brand name developed specifically for that brewery. (See
"Business--Trademarks" for each Constituent Corporation). Each of the
Constituent Corporations sells its draft beers directly to consumers visiting
the respective brewery and through wholesale distribution to pubs, taverns, and
restaurants. Products from each of the Constituent Corporations (except Bayhawk)
are also purchased by consumers in bottles at supermarkets, warehouse clubs,
convenience stores and liquor stores, depending on state and local laws. The
products are delivered to these retail outlets through a network of independent
distributors.
The Constituent Corporations' distributors also represent competing
specialty beer brands, as well as national beer brands, and are to varying
degrees influenced by their continued business relationships with other brewers.
The independent distributors may be influenced by a large brewer if they rely on
that brewer for a significant portion of their sales. While each of the
Constituent Corporations believes that its
95
relationships with its distributors are generally good, these relationships are
relatively new and untested. There can be no assurance that the distributors
will continue to effectively market and distribute the products of the
Constituent Corporations.
Typically, the distribution agreements cover a specific geographic area, and
appoint the distributor as the exclusive distributor in that geographic area,
subject in certain cases to rights to engage in certain limited retailing
activities. The distribution agreements provide that payment shall be made in
full not more than 30 days after the date of delivery. The distribution
agreements also provide for general cooperation among the distributors and the
applicable Constituent Corporation in marketing, merchandising and promotional
efforts. Each distribution agreement may be terminated by either party 60 days
after written notice of dissatisfaction with performance specifying the grounds
for such dissatisfaction if the specified deficiencies have not been cured by
the end of the 60-day period.
Craft beers generally sell at a price premium relative to domestic
industrial beers. Retail prices for bottled craft beers typically range from
$4.99 to $7.99 per six pack of 12 ounce bottles versus approximately $2.99 to
$3.99 for industrial beers. This price premium provides generally higher profit
margins for the distributors and retailers that offer craft beers. The
Constituent Corporations believe that distributors and retailers of bottled
beers are eager to increase their sales of higher margin craft beers as
industrial brewers continue to wage price wars to gain market share in this flat
growth segment thereby decreasing distributor's margins.
To further promote retail product sales, the Constituent Corporations
periodically offer "post-offs," or price discounts to their distributors.
Distributors and retailers often participate in these price discounts.
COMPETITION
The craft beer segment is highly fragmented and competitive, especially in
the Pacific Northwest, which is one of the most developed craft beer markets in
the United States in terms of number of breweries and consumer awareness. The
Constituent Corporations compete primarily with other craft brewers, contract
brewers, producers of imported beers and mass market industrial brewers. The
principal means of competition in the craft beer segment are product quality,
taste, consistency and freshness, brand and product differentiation,
distribution methods and area coverage, promotional methods, packaging,
development of new products and, to a lesser extent, pricing.
The craft beer industry has become saturated with numerous brands each
comprised of several beer styles. As a result, growth rates are slowing,
especially in the Pacific Northwest where there are many brands vying for
available shelf space and taps. The industry is also facing a loss of shelf
space, and therefore sales, to the industrial brewers, who have created fuller
flavor specialty beers and are threatening to withdraw their business from
distributors who also distribute brewery brands.
Competition among craft brewers is expected to continue to increase,
possibly resulting in decreases in market share, growth rates and product
prices.
RESEARCH AND DEVELOPMENT
To meet varying consumer style and flavor preferences, the Constituent
Corporations engage in the development and testing of new products. Small
batches of new products are made for sampling at the Constituent Corporations
and in community tastings. Research is also done through tastings and surveys
with distributors and consumers on beer styles and brand imagery.
REGULATION AND DRAM SHOP LIABILITY
The craft beer business is highly regulated at federal, state and local
levels. Various permits, licenses and approvals necessary for brewery and pub
operations and the sale of alcoholic beverages are required from various
agencies, including the U.S. Treasury Department, Bureau of Alcohol, Tobacco and
Firearms
96
(the "BATF"); the United States Department of Agriculture; the United States
Food and Drug Administration; state alcohol regulatory agencies; and state and
local health, sanitation, safety, fire and environmental agencies. In addition,
the beer industry is subject to substantial federal and state excise taxes.
Existing permits or licenses could be revoked if a brewery failed to comply with
the terms of such permits or licenses, and additional permits or licenses could,
in the future, be required for existing or expanded operations. If licenses,
permits or approvals necessary for the brewery or pub operations were
unavailable or unduly delayed, or if any such permits or licenses were revoked,
a brewery's ability to conduct its business could be substantially and adversely
affected.
The serving of alcoholic beverages to a person known to be intoxicated may,
under certain circumstances, result in the server's being held liable to third
parties for injuries caused by the intoxicated customer. Various strategies can
be used to address this concern, such as establishing early closing hours and
employee training and designated driver programs. In addition, host liquor and
legal liquor liability insurance coverage can be utilized if it is available at
a reasonable cost. Future increases in premiums could make it prohibitive to
maintain adequate insurance coverage. Any large uninsured damage awards could
have a material adverse affect on a brewery's business and financial condition.
THE STRATEGIC ALLIANCE
In January 1996, the Constituent Corporations established a strategic
alliance among Nor'Wester, Aviator, Mile High, Bayhawk and WVI (the "Alliance").
The purpose of the Alliance is to expand the production capacity and
distribution for Nor'Wester's beer and to promote and support the growth of each
Alliance member. The Alliance is created through a Strategic Alliance Agreement
among the Constituent Corporations, a General Services Agreement between
Nor'Wester and WVI and separate Cooperative Brewing Agreements between
Nor'Wester and each of Aviator, Mile High and Bayhawk (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 Agreements are 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, all
such agreements will terminate. Details of the agreements are as follows
(although, as discussed above, many of the terms are no longer applicable):
STRATEGIC ALLIANCE AGREEMENT. Under the terms of the Strategic Alliance
Agreement, each Constituent Corporation has agreed to (i) support the expansion
of Nor'Wester's products into the Constituent Corporation'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 a
Constituent Corporation from promoting its products in markets served by other
Alliance members. The Agreement provides that no Constituent Corporation will
use the proprietary information or technology of another Alliance member to
produce any beer with a flavor profile or appearance of such other Constituent
Client's beer. With the consent of all Constituent Corporation 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
97
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 markup
of 10%. The Agreement provides that no Constituent Corporation will use the
proprietary information or technology of another Constituent Corporation to
produce any beer with a flavor profile or appearance that is substantially
similar to such Constituent Corporation'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 Constituent Corporations 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.
98
NOR'WESTER SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with Nor'Wester's Consolidated Financial Statements and notes thereto and
"Nor'Wester Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Proxy Statement/Prospectus.
The selected financial information presented below have been derived from
Nor'Wester's financial statements. The financial statements as of December 31,
1995 and December 31, 1996 and for each of the three years in the period ended
December 31, 1996, have been audited by Price Waterhouse LLP, independent
accountants, whose report on those periods is included elsewhere herein. The
statement of operations data for the period from inception (December 18, 1992)
to December 31, 1992 and for the years ended December 31, 1993 and December 31,
1994 and the balance sheet data as of December 31, 1992, December 31, 1993 and
December 31, 1994 are derived from audited financial statements not included
herein. The financial statements as of and for the three months ended March 31,
1997 and March 31, 1996 are included herein and have not been audited. In the
opinion of management, the interim financial statements reflect all adjustments,
consisting of only normal recurring items which are necessary for a fair
presentation for the interim periods presented.
THREE MONTHS ENDED DECEMBER 18, 1992
MARCH 31, YEAR ENDED DECEMBER 31, (INCEPTION) TO
---------------------- ------------------------------------------- DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- --------- --------- --------- -----------------
(UNAUDITED)
OPERATING RESULTS:
Net revenues............... $1,253,847 $1,479,786 $6,524,082 $5,587,758 $2,452,915 $ 145,443 $ 0
Cost of goods sold......... 980,409 968,267 5,159,889 3,459,902 1,434,139 133,763 0
Selling, general and
administrative........... 578,838 475,471 4,545,559 1,409,023 741,712 287,212 0
Other income (expenses),
net...................... (118,597) 38,321 38,943 (17,152) 19,840 8,416 0
Net income (loss).......... (423,997) 63,057 (2,751,926) 442,727 292,004 (267,116) 0
Net income (loss) per
share.................... $ (0.11) $ 0.02 $ (0.74) $ 0.18 $ 0.12 $ (0.08) $ 0
Weighted average shares
outstanding.............. 3,711,097 3,651,554 3,696,041 2,420,787 2,339,849 3,161,099 1,634,082
BALANCE SHEET DATA
(AT PERIOD END):
Working capital
(deficit)................ $(3,485,922) $10,361,416 $(3,216,897) $ 803,604 $1,120,670 $ 626,692 $ 45,135
Total assets............... 15,804,816 16,738,225 15,788,533 7,373,444 3,673,944 2,357,009 143,175
Long-term debt and capital
lease obligations........ 10,825 1,895,586 11,405 1,474,339 0 0 0
Retained earnings
(deficit)................ (2,708,308) 530,672 (2,284,311) 467,615 24,888 (267,116) 0
Shareholders' equity....... 8,356,172 11,577,000 8,780,169 3,824,103 3,374,151 1,992,922 100,000
99
NOR'WESTER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Proxy Statement/Prospectus 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 Nor'Wester's business, management's beliefs and assumptions
made by management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations and
payment of past due creditors, successful performance of internal operations,
impact of competition, changes in distributor relationship or performance,
successful completion of the planned consolidation of the Affiliated Companies
and other risks detailed below as well as those discussed elsewhere in this
Proxy Statement/Prospectus and from time to time in Nor'Wester's Securities and
Exchange Commission filing and reports. 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 Nor'Wester's statements of
operations stated as a percentage of net revenues:
THREE MONTHS ENDED
YEAR ENDED DECEMBER
31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
Gross revenues.................................................................. 104.5% 105.1% 105.1% 105.1%
Less excise taxes............................................................... 4.5 5.1 5.1 5.1
--------- --------- --------- ---------
Net revenues.................................................................... 100.0 100.0 100.0 100.0
Cost of goods sold.............................................................. 79.1 61.9 78.2 65.4
Selling, general and administrative expenses.................................... 69.7 25.2 46.2 32.1
--------- --------- --------- ---------
Operating income (loss)......................................................... (48.8) 12.9 (24.4) 2.4
--------- --------- --------- ---------
Income (loss) before income taxes and minority interest......................... (48.2) 12.6 (33.8) 5.0
--------- --------- --------- ---------
Net income (loss)............................................................... (42.2)% 7.9% (33.8)% 4.3%
--------- --------- --------- ---------
--------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Nor'Wester's subsidiary, North Country Joint Venture, LLC, began producing
and selling beer in October 1996 at its Saratoga Springs Brewery. Therefore, the
Company's consolidated results of operations for the quarter ended March 31,
1997 include those of North Country Joint Venture, LLC while the results for the
quarter ended March 31, 1996 do not.
GROSS REVENUES. Gross revenues from beer, pub and retail products totaled
$1,317,212 for the quarter ended March 31, 1997 and $1,554,845 for the quarter
ended March 31, 1996. The decrease in revenues is primarily a result of
increased competition in Nor'Wester's Pacific Northwest market from the
continued proliferation of new and existing craft brewers and the introduction
of fuller-flavored products
100
by certain major national brewers. North Country Joint Venture, LLC's gross
revenues represented $497,307 of consolidated gross revenues for the quarter
ended March 31, 1997.
Nor'Wester's Portland Brewery currently has an annual production capacity of
41,000 barrels. Nor'Wester sold 4,480 barrels and 7,966 barrels during the
quarter ended March 31, 1997 and 1996 respectively.
Nor'Wester's Saratoga Springs Brewery currently has an annual production
capacity of 30,000 barrels and sold 2,724 and 0 barrels during the quarter ended
March 31, 1997 and 1996, respectively.
EXCISE TAXES. Excise taxes decreased to $63,365 (5.1% of gross revenues)
for the quarter ended March 31, 1997 from $75,059 (4.8% of gross revenues) for
the quarter ended March 31, 1996. The decrease in excise taxes is the result of
the decreased gross sales on which the taxes are assessed.
COST OF GOODS SOLD. Cost of goods sold totaled $980,409 (78% of net
revenues) for the quarter ended March 31, 1997 compared to $968,267 (65% of net
revenues) for the quarter ended March 31, 1996. The increase in cost of goods
sold as a percentage of net revenues is due primarily to the commencement of
brewing operations at the Saratoga Springs Brewery which is operating below
designed capacity and the increased cost structure due to additional brewing
equipment (tanks and cooperage) acquired to meet anticipated sales that never
materialized.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $578,838 (46% of net revenues) for the quarter
ended March 31, 1997 from $475,471 (32% of net revenues) for the quarter ended
March 31, 1996. The increase in SG&A expenses is primarily attributable to
marketing and related costs associated with initial production at the Saratoga
Springs Brewery and increased shipping costs associated with delivering beer to
markets located considerable distances from the Portland and Saratoga Springs
brewing facilities.
NET INCOME (LOSS). As a result of the individual line items discussed
above, net loss was $423,997 for the quarter ended March 31, 1997 compared to
net income of $63,057 for the quarter ended March 31, 1996.
1996 COMPARED TO 1995
GROSS REVENUES. Gross revenues from beer and retail products totaled $6.8
million for the year ended December 31, 1996 and $5.9 million for the year ended
December 31, 1995. The increase in revenues is primarily a result of a national
rollout of Nor'Wester branded beers. This increase was offset by the challenges
Nor'Wester faced both in its home markets, with increased competition and
changing consumer tastes, and in other markets where Nor'Wester struggled to
establish and maintain relationships with distributors. In addition, one of
Nor'Wester's competitors began selling its Hefe Weizen beer in bottles into
Nor'Wester's principal distribution channels in the Portland area during 1996,
thus decreasing Nor'Wester's market share in its most significant market.
Nor'Wester's Saratoga Springs Brewery began producing and selling beer in
October 1996.
Nor'Wester's Portland Brewery currently has an annual production capacity of
41,000 barrels. Nor'Wester sold 35,287 barrels (including beer produced at the
Constituent Corporations under Cooperative Brewing Agreements) and 32,375
barrels during 1996 and 1995, respectively.
Nor'Wester's Saratoga Springs Brewery currently has an annual production
capacity of 30,000 barrels and sold 1,041 barrels during 1996.
EXCISE TAXES. Excise taxes increased to $296,609 (4.3 percent of gross
revenues) for the year ended December 31, 1996 from $283,979 (4.8 percent of
gross revenues) for the year ended December 31, 1995.
101
The decrease as a percent of gross sales is a result of the increase in sales to
states in which no state excise tax is paid by the producer.
COST OF GOODS SOLD. Cost of goods sold totaled $5.2 million (79 percent of
net revenues) for the year ended December 31, 1996 compared to $3.5 million (62
percent of net revenues) for the year ended December 31, 1995. The increase in
cost of goods sold as a percentage of net revenues is due primarily to the
following factors: (i) purchasing beer from Affiliated Companies under
Cooperative Brewing Agreements resulting in higher costs than could be incurred
if the beer was produced by Nor'Wester; (ii) the sale in the second quarter of
1996 of approximately 12,500 cases of beer at cost to a national beer club, for
sale to its 25,000 members, as a national sales promotion strategy; (iii) costs
associated with the commencement (and subsequent cessation) of production of
Nor'Wester beer at affiliated breweries under the Cooperative Brewing
Agreements; (iv) additional storage costs resulting from the buildup of finished
goods inventory produced to meet projected sales that never materialized; (v)
the write-down of approximately $110,000 for excess finished goods inventory
that was moved through an alternate distribution channel; and (vi) increased
cost structure developed to meet projected sales volumes that never
materialized.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $4.6 million (70 percent of net revenues) for the year
ended December 31, 1996 from $1.4 million (25 percent of net revenues) for the
year ended December 31, 1995. The increase in SG&A expenses is primarily
attributable to (i) the addition of salaried sales personnel to establish and
oversee Nor'Wester's anticipated growth in new markets; (ii) increased shipping
costs associated with bringing beer to markets located considerable distances
away from the Portland Brewery; (iii) increased advertising costs as Nor'Wester
expanded its sales efforts in order to quickly penetrate target markets (iv)
start-up and operating costs of $202,000 associated with the construction and
operation of the Saratoga Springs Brewery; and (v) the write-off of
approximately $500,000 of point-of-sale materials and excess finished goods
inventory. In the third quarter of 1996, Nor'Wester restructured sales-related
compensation, implemented expense controls and reduced staff in an effort to
reduce SG&A expenses while still increasing sales.
NET INCOME (LOSS). As a result of the individual line items discussed
above, net loss was $2.8 million for the year ended December 31, 1996 compared
to net income of $442,727 for the year ended December 31, 1995.
SEASONALITY. Beer consumption nationwide has historically increased by
approximately 20% during the summer months. In 1994 and 1995, seasonality had
little measurable effect on sales as Nor'Wester experienced rapid growth in the
sale of its products during those years. In 1996, as a result of a downturn in
Nor'Wester's sales following the introduction of bottled wheat (weizen) beers by
one of Nor'Wester's competitors in May 1996, Nor'Wester has had difficulty
measuring the impact of seasonality in 1996. Further, it is not clear to what
extent seasonality will affect Nor'Wester as it expands its capacity at the
Saratoga Springs Brewery. Nor'Wester brews seasonal beers which augment sales
during the periods in which they are available.
LIQUIDITY AND CAPITAL RESOURCES
In January 1996, Nor'Wester completed an underwritten public offering (the
"Offering"), resulting in the issuance of 1,287,500 shares of its Common Stock
at $7.00 per share, generating net proceeds of approximately $7,694,000. Prior
to the Offering, Nor'Wester funded its operations and capital requirements
through cash generated from two self-underwritten public stock offerings, sales
from operations, and bank borrowings.
Nor'Wester had cash and cash equivalents at March 31, 1997, December 31,
1996 and December 31, 1995 of $80,543, $252,049 and $276,807, respectively.
Changes in cash and cash equivalents for the quarter ended March 31, 1997
primarily consisted of $611,717 used in operating activities, advances to
affiliates of $130,634, and purchases of brewing and related equipment in the
amount of $29,155, offset by $600,000 in
102
borrowings net of principal repayments. Changes in cash and cash equivalents for
the year ended December 31, 1996 consisted primarily of $870,401 used in
operating activities, $7,873,255 used to purchase fixed assets related primarily
to cooperative brewing activities and constructing the brewery in Saratoga
Springs, and advances to affiliated companies of $1,098,350, offset by net
proceeds of $7,693,916 received in the Offering and increases in borrowings of
$2,125,593.
Nor'Wester's working capital (deficit) at March 31, 1997, December 31, 1996
and December 31, 1995 was ($3,485,922), ($3,216,897) and $803,604, respectively.
At March 31, 1997, December 31, 1996 and December 31, 1995 the current ratio was
.53:1, .54:1 and 1.4:1, respectively.
Accounts payable at March 31, 1997, December 31, 1996 and December 31, 1995
were $2,356,868, $2,427,073 and $870,731, respectively. Of the $2,356,868 in
accounts payable at March 31, 1997, $2,093,991 was past due.
At March 31, 1997, Nor'Wester had receivables from affiliated companies of
$1,928,984 which accounts for 49% of Nor'Wester's accounts receivables. Advances
to the affiliated companies increased $1,098,350 to $1,798,350 at December 31,
1996 from $700,000 at December 31, 1995 due primarily to the need to
increasingly support the the brewing operations of Nor'Wester's affiliates
throughout the year, each of which was engaged to cooperatively brew
Nor'Wester's beer and each of which reported operating losses for the year ended
December 31, 1996. Management expects that the receivables from affiliates will
be eliminated upon completion of the Consolidation.
In 1996 and the first quarter of 1997, Nor'Wester utilized working capital
primarily to finance the construction and start-up of the Saratoga Springs
Brewery and to increase the brewing capacity of the brewing facilities of its
affiliates. In addition, Nor'Wester required capital to finance its operations
and continues to require capital for ongoing operations. The recently completed
construction and start-up of the Saratoga Springs Brewery and Nor'Wester's
attempts to regain market share in the Pacific Northwest for its Nor'Wester
branded products has had and is expected to continue to have a material impact
on Nor'Wester's assets, liabilities, capital expenditure commitments, and
liquidity.
Capital expenditures for 1996 totaled approximately $7.9 million. These
expenditures related primarily to the costs associated with constructing the
Saratoga Springs Brewery which was substantially completed in September 1996 at
a total cost of approximately $7.0 million, including all brewing equipment and
fermentation tanks. Commercial brewing at the Saratoga Springs Brewery began in
October 1996. Nor'Wester's total investment of approximately $8.7 million in the
Saratoga Spring's Brewery was $4.7 million more than originally planned due to:
(i) the failure of North Country Brewing, Inc., Nor'Wester's intended joint
venture partner in the Saratoga Springs Brewery, to make its planned $2.55
million capital contribution to the Saratoga Springs joint venture, (ii)
Nor'Wester's inability to obtain $2.0 million in planned bank financing to
finance construction and operation of the brewery, and (iii) an increase of
approximately $200,000 in the cost of brewery construction and structural
improvements to the leased building over initial estimates. Capital expenditures
for the quarter ending March 31, 1997 totalled $29,155.
At March 31, 1997, the Company had $2,842,351 outstanding under its bank
credit facilities consisting of a $1 million revolving line of credit and a
$1,842,351 term loan. The term loan bears interest at 8.63% and calls for equal
monthly installments over a 7-year period. The revolving line of credit expired
on December 31, 1996 and remains unpaid. Under the credit facilities, Nor'Wester
must (i) maintain certain financial ratios, (ii) not incur further debt or
create or assume any other lien on its property without the bank's prior
approval, and (iii) make no payment dividends without the bank's prior approval.
Nor'Wester is in violation of items (i) and (ii). The bank has notified
Nor'Wester that the $2.0 million term loan will become due and payable
immediately unless an acceptable amendment to the bank's loan agreements is
executed. Nor'Wester is involved in discussions with the bank in order to (i)
extend the $1.0 million credit facility to mature on the earlier of September
30, 1997 or 10 days following closing of the investment by UBA, (ii) renew the
term loan and (iii) waive the loan covenants associated with these loans so long
as Nor'Wester remains in compliance with all terms of the Investment Agreement
and achieves reasonable progress toward closing the investment with UBA.
However, final approval of the amendment to the bank's loan agreements has not
yet been received and subsequent to March 31, 1997 the bank notified the Company
that all amounts owed under the credit facilities are currently due. See "Risk
Factors--Risks of Debt and Default on Bank Loans."
103
Nor'Wester's management believes that current working capital together with
projected income from operations is not sufficient to meet Nor'Wester's cash
needs through the end of 1997. Nor'Wester's independent accountants expressed
substantial doubt as to Nor'Wester's ability to continue as a going concern in
their report on Nor'Wester's 1996 consolidated financial statements.
To address poor operating performance and the need for working capital,
Nor'Wester has developed and is in the process of implementing plans designed to
sustain its operations until profitability is restored. In particular,
Nor'Wester has taken steps to: (i) eliminate the national roll-out of its
products in favor of more focused regional sales and marketing efforts designed
to increase sales of beer sold under its Nor'Wester and North Country brands;
(ii) significantly reduce or eliminate cooperative brewing arrangements with
affiliates which proved to be inefficient and costly and establish third party
contract brewing at its Saratoga Springs Brewery; (iii) negotiate with past-due
creditors for extended terms and payment plans; (iv) restructure terms of its
bank loans to ensure that the loans will not be called and to allow for the
possibility of obtaining additional debt financing; (v) hire and retain highly
qualified employees familiar with the brewing industry; (vi) use bridge loans
from UBA to fund operations until the Investment closes; and (vii) sell
duplicative and/or underutilized assets created by the Consolidation for cash.
While management believes these plans will sustain Nor'Wester's operations
through December 31, 1997, no assurance can be given that these plans will
provide the necessary revenue and profits to sustain operations through that
period. Nor'Wester is highly dependent upon the receipt of additional amounts
from UBA under the bridge loan and closing of the Investment. For a description
of the general terms and conditions of the bridge loan from UBA see "Ancillary
Agreements--UBA Bridge Loan Credit Agreement and Related Documents." No
assurance can be given that UBA will loan Nor'Wester further amounts under the
bridge loan or that the Investment will close. See "Risk Factors--Dependence
Upon Bridge Loans and Investment from United Breweries of America, Inc." If, for
any reason, the Investment does not occur, alternative sources of debt financing
and/or equity capital would have to be developed. There can be no assurance that
such debt financing or capital will be available or, if available, under terms
and conditions acceptable to Nor'Wester. Nor'Wester's inability to obtain
additional capital would result in a material adverse effect on Nor'Wester's
business and results of operations.
Furthermore, assuming the Investment closes, UCB will be dependent upon the
receipt of additional debt or equity financing to sustain operations of the
Constituent Corporations until revenues are sufficiently increased and costs
controlled to enable them to achieve positive cash flow and profitability. No
assurance can be given that additional debt or equity financing will be
available on terms acceptable to UCB or at all. Failure to obtain additional
financing would have a material adverse effect on the operations and financial
condition of the Constituent Corporations, including Nor'Wester. See "Risk
Factors--Capital Requirements."
NOR'WESTER BUSINESS
GENERAL
Nor'Wester has been a brewer of fresh, high quality, full-flavored premium
beers, generally known as craft beers, since November 1993. Nor'Wester's leading
brews include its Hefe Weizen, Raspberry Weizen and the White Forest Scottish
Ale. The key elements of Nor'Wester's brewing process include milling a unique
blend of malted Pacific Northwest and European grown wheat and barley grains,
brewing in small batches using Pacific Northwest and European hops, yeast
developed and cultured at the brewery, and conditioning for long periods at near
freezing temperatures. Although Nor'Wester uses advanced technology in small
batch brewing, its brewers deliberately perform certain operations by hand to
ensure quality and achieve the desired flavors in their beers. Nor'Wester's
initial brewery located in Portland, Oregon (the "Portland Brewery") currently
has an annual production capacity of approximately 41,000 barrels. Nor'Wester is
the sole owner of North Country Joint Venture, LLC ("North Country LLC"), which
owns and operates a brewery in Saratoga Springs, New York (the "Saratoga Springs
Brewery"). The Saratoga Springs Brewery began producing and selling beer in
October 1996, and currently has an annual
104
production capacity of 30,000 barrels. See also "General Description of the
Craft Brewing Industry and the Businesses of the Constituent Corporations."
Mr. James Bernau, Director, President and Secretary of Nor'Wester, owns
approximately 25% of Nor'Wester's Common Stock. Mr. Bernau also owns
approximately 62% of Willamette Valley, Inc. Microbreweries Across America
("WVI"), a brewery development company and affiliate of Nor'Wester. WVI
currently holds the following ownership interests in each of the following
brewing subsidiaries: Aviator Ales, Inc., the owner and operator of the Seattle
Brewery ("Aviator")--51%; Mile High Brewing Company, Inc., the owner and
operator of the Denver Brewery ("Mile High")--51%; and Bayhawk Ales, Inc., the
owner and operator of the Southern California Brewery ("Bayhawk")--57%.
STRATEGY
Consumers have shown strong support for craft beers brewed in or near their
local markets and Nor'Wester believes the appropriate strategy is to develop and
protect strong local craft beer brands. Nor'Wester further believes that this
strategy can be strengthened through the Constituent Corporation's ability to
build a network of breweries each producing their own brand with local appeal
while benefiting from operating efficiencies, the decrease in production,
marketing and distribution costs and the increase in the ability of the
Constituent Corporations to finance growth and provide shareholders with a
liquid market for their shares. Once these local brands are established, the
Constituent Corporations may expand the distribution of one or more of their
beer styles into additional selected markets.
To implement this new strategy, the Boards of Directors of the Constituent
Corporations have elected to consolidate their entities under a single entity,
UCB. Furthermore, on January 30, 1997 the Constituent Corporations entered into
a definitive investment agreement with UBA for the purpose of funding operations
until the consolidation is completed and provide for future growth thereafter.
PRODUCTION AND PRODUCTS
Nor'Wester's products are currently produced at the Portland Brewery and the
Saratoga Springs Brewery. Each brewery is designed to brew selected, high
quality grains and hops into ales and/or lager beers. The particular beer styles
produced by each brewery are dependent on local taste, climate, ethnic
influences and lifestyles. Quality in the ingredients and the brewing process is
the primary guiding principle in the development and production of each
brewery's products. Each brewery is equipped with a superior and efficient
brewhouse that utilizes modern electronic temperature controls in the
fermentation and conditioning tanks, and each brewery employs a brewmaster
experienced in producing high quality craft beer. Products currently produced by
each of Nor'Wester's breweries are as follows:
PORTLAND BREWERY: Hefe Weizen, Best Bitter Ale, Dunkel Weizen, Raspberry
Weizen, Blacksmith Porter, Honey Weizen, Oregon Amber Ale, Peach Cream Ale,
White Forest Scottish Ale, Dead Eye Rye, Smith Rock Bock and Maple Ale.
SARATOGA SPRINGS BREWERY: North Country branded products: Whiteface Pale
Ale, Fat Bear Stout and Maple Amber. Nor'Wester branded products: Raspberry
Weizen, Hefe Weizen, Best Bitter Ale and Blacksmith Porter.
DISTRIBUTION
The Portland Brewery products are sold to distributors who serve multiple
states, including Oregon, Washington, Idaho, Alaska, California, Colorado,
Montana and New Mexico, as well as southwestern Canada. Two distributors,
Maletis Beverage and Young's Market, accounted for approximately 17 percent and
10 percent, respectively, of the Portland Brewery's sales in 1996. No other
customer accounted for more than 10 percent of the Portland Brewery's sales in
1996. The loss, without replacement, of either of
105
these distributors could have a material adverse effect on Nor'Wester's
business, financial condition and results of operation.
The Saratoga Springs Brewery products are sold to distributors who serve
multiple states, including New York, Illinois, Virginia, Connecticut, Vermont,
Rhode Island, Pennsylvania, Maine, Massachusetts, Georgia, New Hampshire, New
Jersey, Maryland, Florida and South Carolina. Two distributors, DeCrescente
Distributing and East Coast Distributing accounted for approximately 30 percent
and 13 percent, respectively, of the Saratoga Springs Brewery's sales in 1996.
No other customer accounted for more than 10 percent of the Saratoga Springs
Brewery's sales in 1996. The loss of either of these distributors could have a
material adverse effect on Nor'Wester's business, financial condition and
results of operation. See also "General Description of the Craft Brewing
Industry and Businesses of the Constituent Corporations--Distribution."
COMPETITION
During 1996, Nor'Wester experienced significant competition from a
competitor who began selling its weizen (wheat) based beer in bottles into the
same principal channels of distribution as Nor'Wester's Nor'Wester brand. This
competitor already held a majority of the draft market share for weizen based
beers in and around Portland. The entry of this competitor into the bottled
market resulted in a significant decline in market share for Nor'Wester, which
had a significant negative impact on 1996 results. To date, Nor'Wester has been
unable to regain this market share. This competitor also utilizes the same
primary distributor within the Portland market as Nor'Wester. See also "General
Description of the Craft Brewing Industry and the Businesses of the Constituent
Corporations--Competition."
REGULATION
Management believes that Nor'Wester currently has all licenses, permits and
approvals necessary for its current operations and is in material compliance
with all applicable government regulations. See also "General Description of the
Craft Brewing Industry and the Businesses of the Constituent Corporations--
Regulation and Dram Shop Liability."
TRADEMARKS
"Nor'Wester Registered Trademark" and the Nor'Wester compass logo (a
miscellaneous design mark) are federally registered trademarks of Nor'Wester and
Nor'Wester has filed for federal trademark protection for certain of its flavor
styles which include, but are not limited to, "Blacksmith-TM-", "Peach
Creme-TM-", "Deadeye-TM-" and "Smith Rock Bock-TM-". Nor'Wester has also filed
for trademark protection of the "North Country-TM-" which is the brand name
under which the Saratoga Springs Brewery markets its products. Nor'Wester's
policy is to preserve registration of its marks whenever possible and to oppose
vigorously any infringement of its marks.
EMPLOYEES
At December 31, 1996, Nor'Wester had a total of 50 full time and 4 part time
employees, including 15 full time employees of North Country LLC, Nor'Wester's
100 percent owned subsidiary which owns and operates the Saratoga Springs
Brewery. None of Nor'Wester's employees are covered by collective bargaining
agreements, there have been no work stoppages and Nor'Wester believes that
relations with its employees are adequate.
PROPERTIES
THE PORTLAND BREWERY. In November 1993, Nor'Wester opened the Portland
Brewery in a leased building directly across the Willamette River from
Portland's downtown core area. The Portland Brewery is located in a 12,200
square foot facility which includes the Nor'Wester Public House, a 2,200 square
foot
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pub/restaurant with a serving capacity of 140 persons. Nor'Wester's corporate
offices are also located in this facility. Nor'Wester's lease expires on January
31, 2002, and contains renewal options for up to an additional 10 years. The
Portland Brewery has a current maximum annual production capacity of 41,000
barrels. Due to current space limitations, no further brewing capacity may be
added in this facility. However, Nor'Wester has a first right of refusal to
lease an additional 19,300 square feet of the building which is currently leased
to another party through December 31, 1998. Nor'Wester also has a first right of
refusal to purchase the building. The Portland Brewery also has a bottling line
and a labeler.
THE SARATOGA SPRINGS BREWERY. The Saratoga Springs Brewery, is located in
an approximately 16,750 square foot leased facility on approximately 3.65 acres
in Saratoga Springs, New York. This lease expires in February 2001 and has
three, five year renewal options. The brewery also has a high speed bottling
line and a labeler. The Saratoga Springs Brewery has a current maximum annual
production capacity of 30,000 barrels which can be increased to 200,000 barrels
by adding additional brewing equipment and fermentation tanks within the
existing facility structure.
LEGAL PROCEEDINGS
Nor'Wester is a defendant in a suit filed by Santa Rosa Stainless Steel on
or about July 24, 1997 in the Superior Court of California, County of Sonoma.
The suit claims that Nor'Wester, its affiliate North Country Brewing Company and
other unnamed parties owe plaintiff $280,705 on a contract for the purchase and
installation of certain stainless steel tanks, piping and equipment. The suit is
seeking damages in the amount of $280,705 plus unspecified amounts for interest,
attorney fees and costs, and such other relief as the court may deem proper.
Nor'Wester is in the process of determining the amount, if any, which it owes to
plaintiff and whether it has any defenses to the plaintiff's claims. From time
to time, Nor'Wester becomes involved in ordinary, routine or regulatory legal
proceedings incidental to the business of Nor'Wester.
MARKET PRICE OF AND DIVIDENDS ON NOR'WESTER COMMON STOCK
Nor'Wester's Common Stock is traded on the Nasdaq National Market under the
symbol "ALES." The following table sets forth the high and low sales prices as
reported by the Nasdaq National Market for the periods indicated. Nor'Wester's
Common Stock commenced trading on January 18, 1996.
YEAR ENDING DECEMBER 31, 1997 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
Quarter 2 (through June 20, 1997)........................................... $ 2.75 $ 1.75
Quarter 1................................................................... 3.13 2.00
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
Quarter 4................................................................... $ 6.75 $ 2.50
Quarter 3................................................................... 6.75 3.63
Quarter 2................................................................... 7.00 4.88
Quarter 1 (from January 18, 1996)........................................... 9.50 6.00
The approximate number of shareholders of record on December 31, 1996 was
4,403. There were no cash dividends declared or paid in fiscal years 1996 or
1995. Nor'Wester does not anticipate declaring such dividends in the foreseeable
future.
There were no sales of unregistered securities by Nor'Wester during the year
ended December 31, 1996.
107
NOR'WESTER MANAGEMENT
DIRECTORS
The names and ages of Nor'Wester's Directors are as follows:
DIRECTOR
NAME AGE POSITION(S) WITH NOR'WESTER SINCE
- --------------------------- --- ------------------------------------------------ -----------
James W. Bernau............ 43 Chairperson of the Board, President and 1992
Secretary
Winser P. Acton............ 71 Director 1993
William V. Cross........... 49 Director 1992
Andrew C. Kerr............. 34 Director 1993
Donald E. Voorhies......... 73 Director 1993
Mr. Bernau has been Chairperson of the Board of Directors, President and
Secretary since Nor'Wester's inception in December 1992. Mr. Bernau is also the
President and Chairperson of the Board of Directors of five other public
companies and has held these positions since the dates indicated: Willamette
Valley Vineyards ("WVV") since May 1988, WVI since December 1993 and three
majority owned subsidiaries of WVI, Aviator and Bayhawk since February 1994 and
Mile High since June 1994. Mr. Bernau also serves as one of the three Managers
of the North Country Joint Venture LLC, a wholly owned subsidiary of Nor'Wester
since its inception in January 1996. Mr. Bernau began this alliance of
consumer/investor owned companies by first co-founding WVV in 1988 with Donald
Voorhies. From 1981 to September 1989, Mr. Bernau was Director of the Oregon
Chapter of the National Federation of Independent Businesses (NFIB), an
association of 15,000 independent businesses in Oregon. While at NFIB, his
responsibilities primarily involved communicating with association members and
lobbying the Oregon state legislature regarding issues impacting the members.
Mr. Acton has been a Director of Nor'Wester since January 1993. Mr. Acton
has been President of Acton Associates, a consulting firm that offers marketing
and sales services, since 1988. From 1985 to 1988, Mr. Acton served as director
of worldwide pulp sales for ITT Rayonier, Inc. Mr. Acton holds a B.S. degree
from Willamette University and an M.S. degree and a Ph.D. in Chemistry from
Pennsylvania State University.
Mr. Cross has been a Director of Nor'Wester since December 1992, and also
served as the Nor'Wester's Vice President and Marketing Director, through
October 1995. From October 1992 to present, Mr. Cross has been President of W.
V. Cross Enterprises, Inc., a professional services consulting firm. From 1993
to 1995, Mr. Cross also served as Director of Marketing for WVI. Mr. Cross was
Executive Vice President of the Oregon Restaurant Association from 1990 through
1992, representing over 3,000 restaurants, taverns and hotels and was previously
the Executive Director of the Oregon Restaurant and Beverage Association.
Mr. Kerr has been a Director of Nor'Wester since January 1993. Since 1984,
Mr. Kerr has been Secretary and Treasurer and co-owner of Capital Farms, Inc., a
family-owned hop growing operation in the Willamette Valley. He is a member of
the Hop Growers of America, the Oregon Hop Growers Association and the Keizer
City Chamber of Commerce.
Mr. Voorhies has served as a Director of Nor'Wester since January 1993. Mr.
Voorhies has also served as Vice President and Director of WVV since its
inception in 1988. Mr. Voorhies also serves as a member of the Board of
Directors of WVI and Bayhawk. From 1981 to 1995, Mr. Voorhies owned and operated
a 30-acre vineyard, Salem Hills Vineyard, which he developed from raw land
purchased in 1981. Prior to his retirement in 1983, Mr. Voorhies was employed by
General Electric Company as Sales Manager of the Lighting Products Division for
the Pacific Northwest Region. Mr. Voorhies holds a B.S. in Electrical
108
Engineering from the University of California at Berkeley. Mr. Voorhies
currently serves as a liaison between the Oregon Wine Growers Association and
the Oregon Wine Advisory Board.
EXECUTIVE OFFICER AND SIGNIFICANT EMPLOYEES
The names, ages and positions of Nor'Wester's executive officers and
significant employees are as follows:
NAME AGE CURRENT POSITION(S) WITH NOR'WESTER SINCE
- ------------------------ --- ----------------------------------------------------- ---------
James W. Bernau......... 43 Chairperson of the Board, President and Secretary 1992
Robert L. Craven........ 39 Director, Manager and Vice President of Operations of 1996
North Country Joint Venture LLC
E. J. Harkins........... 38 Manager and Vice President of Sales of North Country 1996
Joint Venture LLC
Yashpal Singh........... 51 Executive Vice President of Operations 1997
For information on the business background of Mr. Bernau see "Directors"
above.
Mr. Craven joined Nor'Wester in 1996 as Director, Manager and Vice President
of Operations of Joint Venture North Country LLC. From 1988 to 1994, Mr. Craven
worked for C. R. Bard, an international manufacturer of medical devices. From
1983 to 1988, Mr. Craven was Project Engineer with General Electric and from
1981 to 1983, Mr. Craven was with International Paper. Mr. Craven holds a B.S.
degree in Mechanical Engineering from Pennsylvania State University.
Mr. Harkins joined Nor'Wester in April 1996 as Manager and Vice President of
Sales of North Country Joint Venture LLC. From 1981 to 1996, Mr. Harkins was the
General Sales Manager for Great State Beverages, Inc. Mr. Harkins holds a
marketing degree from New Hampshire college.
Mr. Singh became Executive Vice President of Operations for Nor'Wester in
March 1997. Since June 1997, Mr. Singh has also served as Executive Vice
President of Operations for UCB. From 1994 to date, Mr. Singh has been Senior
Vice President, Operations for United Breweries Ltd., in Bangalore, India. From
1990 to 1994, Mr. Singh served in various capacities at Kalyani Brewery of
United Breweries Ltd., most recently as Chief Executive. In addition, in 1992,
Mr. Singh became Chief Executive of Jupiter Breweries and Industries Ltd. Mr.
Singh holds degrees in Chemistry, Botany and Zoology from Punjab University in
India. Mr. Singh is a member of the Master Brewers Association of America.
COMMITTEES OF THE BOARD
During fiscal 1996, the Board of Directors held five meetings and acted by
unanimous written consent on numerous occasions. In 1995, Nor'Wester established
an Audit Committee, a Compensation Committee and an Affiliated Transactions
Committee. The Audit Committee, comprised of Messrs. Cross and Acton, oversees
actions taken by Nor'Wester's independent auditors and reviews Nor'Wester's
internal audit controls. The Compensation Committee, comprised of Messrs.
Voorhies and Cross, reviews the compensation levels of Nor'Wester's employees
and makes recommendations to the Board of Directors regarding changes in
compensation. The Affiliated Transactions Committee, comprised of Messrs. Cross
and Acton, reviews the appropriateness of all transactions between Nor'Wester
and any affiliate and oversees the activities of the Alliance's Executive
Committee. Nor'Wester does not have a nominating committee. They are no family
relationships between any of the executive officers and directors.
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ATTENDANCE AT MEETINGS
During 1996, there were no members of the Board of Directors who attended
fewer than seventy-five percent of the meetings of the Board of Directors and
all committees of the Board on which they served.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Nor'Wester's executive officers and Directors, and persons who own more
than ten percent of a registered class of Nor'Wester's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers, Inc.
Executive officers, Directors and greater than ten percent stockholders are
required by SEC regulation to furnish Nor'Wester with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons,
Nor'Wester believes that, for the fiscal year ended December 31, 1996, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements, except for in the following instances: (i)
Mr. Cross, a Director of Nor'Wester, failed to timely file one Form 4, Statement
of Changes in Beneficial Ownership, and one Form 5, Annual Statement of Changes
in Beneficial Ownership for the receipt of an option grant; (ii) Messrs. Acton,
Voorhies and Kerr, Directors of Nor'Wester, each failed to timely file one Form
5, Annual Statement of Changes in Beneficial Ownership for the receipt of an
option grant; and (iii) Mr. Bernau, a Director and Named Executive Officer of
Nor'Wester, failed to timely file one Form 5, Annual Statement of Changes in
Beneficial Ownership for the gifting of a portion of his shares of Nor'Wester's
Common Stock.
110
NOR'WESTER EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to Nor'Wester's Chief Executive
Officer and other executive officers of Nor'Wester whose total annual salary and
bonus exceeded $100,000 (collectively, the "named executive officers") for
fiscal years 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND PRINCIPAL ------------------------
POSITION (A) YEAR EMPLOYER SALARY($) BONUS($)
- ----------------------------- --------- ----------------------------------------------------- ----------- -----------
James W. Bernau (B).......... 1996 Nor'Wester Brewing Company, Inc. 68,045 --
Chairperson of the 1996 All affiliated companies except Nor'Wester Brewing 25,167 --
Board, President Company, Inc.
and Secretary 1995 Nor'Wester Brewing Company, Inc. 65,600 --
1995 All affiliated companies except Nor'Wester Brewing 30,400 10,882
Company, Inc.
1994 Nor'Wester Brewing Company, Inc. 12,952 8,400
1994 All affiliated companies except Nor'Wester Brewing 70,548 26,785
Company, Inc.
- ------------------------
(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of Nor'Wester, WVI, Aviator, Bayhawk,
Mile High and North Country. Each of these companies pays a pro rata portion
of Mr. Bernau's monthly salary based on the amount of time which Mr. Bernau
has devoted to the respective company's business in that month.
STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.
OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held
by Mr. Bernau at December 31, 1996.
JAMES BERNAU EMPLOYMENT AGREEMENT
Nor'Wester has entered into an Employment Agreement with James Bernau, its
President and Secretary. Under the Employment Agreement, Mr. Bernau must spend
not less than 70 percent of his business time and attention on the affairs of
Nor'Wester. In consideration of Mr. Bernau's services to all of the Affiliated
Companies, he will receive a salary of $96,000 per year. The initial term of the
Employment Agreement extended through December 26, 1996 and was automatically
extended for an additional one year period, and will continue to be
automatically extended for one year periods unless notice of termination is
provided by either party within 60 days prior to the anniversary date. In
addition, the agreement may be terminated at any time by Nor'Wester's Board of
Directors upon 120 days prior written notice thereof.
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COMPENSATION OF DIRECTORS OF NOR'WESTER
Directors receive no cash compensation for serving on the Board of
Directors. Beginning in 1996, however, pursuant to the 1996 Non-Employee
Director's Stock Option Plan (the "Plan"), non-employee Directors of Nor'Wester
each receive an option grant covering 1,000 shares of Nor'Wester's Common Stock
upon becoming a non-employee Director of Nor'Wester and additional grants
covering 750 shares of Nor'Wester's Common Stock on the date of each subsequent
Annual Meeting of Shareholders. Pursuant to the Plan, each non-employee Director
received a nonqualified stock option grant covering 750 shares of Nor'Wester's
Common Stock on June 25, 1996. Such options are fully vested upon grant and
expire ten years from the date of grant. The options were granted at an exercise
price of $5.25 per share, the fair market value of Nor'Wester's Common Stock on
the date of grant. The total number of shares covered by options that were
granted to Nor'Wester's Directors during 1996 was 3,000. Each Director who is a
non-employee Director on the date of each subsequent Annual Meeting of
Shareholders will receive a like option grant covering 750 shares of
Nor'Wester's Common Stock.
In addition to the grant described above, in exchange for lobbying the
Oregon Legislature with respect to various legislative matters affecting
Nor'Wester, William Cross, a Director of Nor'Wester, was awarded an option on
June 1, 1996 exercisable for 2,000 shares of Nor'Wester's Common Stock at an
exercise price of $5.75 per share, the fair market value of Nor'Wester's Common
Stock on the date of grant. Such option vests as to 10 percent of the covered
shares on each of the first through tenth anniversaries of the grant date and
expires ten years and one day from the date of grant.
Subsequent to the granting of the options covering all 5,000 shares of
Nor'Wester's Common Stock described above, Nor'Wester repriced these options and
the exercise price of the options is now $3.25 per share.
CERTAIN TRANSACTIONS
GENERAL. Each of WVI, Aviator, Bayhawk and Mile High is affiliated with
Nor'Wester in that James W. Bernau, Nor'Wester'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
Nor'Wester 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 Nor'Wester's President's time.
UNDERWRITER'S DISCOUNTS AND FEES. In connection with serving as the
managing underwriter of Nor'Wester's IPO, Black, a current significant
stockholder, received compensation for its services as managing underwriter in
the amount of (i) $367,500 in discounts and commissions, (ii) $152,088 as a
management fee, (iii) $117,075 as a nonaccountable expense allowance, and (iv)
warrants to purchase at an exercise price of $8.40 per share (subsequently
repriced to $1.75 per share) an aggregate of 115,000 shares of Nor'Wester's
Common Stock exercisable on or before January 18, 2000.
ADVANCES TO AFFILIATES. In 1995 and 1996, Nor'Wester loaned or advanced
$350,000 to each of Aviator and Mile High for working capital needs and for the
purchase of brewing ingredients and raw materials to brew Nor'Wester beer under
Nor'Wester's Cooperative Brewing Agreements with Aviator and Mile High entered
into as part of the Alliance. In addition, in 1996, Nor'Wester also loaned
$150,000 to Mile High to help pay for the construction of Mile High's pub.
Furthermore, in 1995 and 1996, in support of the creation and development of the
Alliance, Nor'Wester paid certain bills on behalf of WVI, Aviator, Mile High,
Bayhawk and WVV and provided certain of these companies with services under the
General Services Agreement also entered into as part of the Alliance. Each of
these advances is unsecured and does not
112
bear interest. For a description of the purposes and terms of the Alliance see
"General Description of the Craft Brewing Industry and the Business of the
Constituent Corporations--The Strategic Alliance."
STRATEGIC ALLIANCE. In January 1996, Nor'Wester established the Alliance
with Aviator, Mile High, Bayhawk and WVI, the purpose and terms of which are
more fully described in "General Description of the Craft Brewing Industry and
the Businesses of the Constituent Corporations--The Strategic Alliance."
Nor'Wester paid WVI amounts totaling $0 and $48,600 and WVV $0 and $17,550
for services received under the General Services Agreement for the quarter ended
March 31, 1997 and the year ended December 31, 1996, respectively. Amounts
charged under the General Services Agreement by Nor'Wester to each of its
affiliates during the quarter ended March 31, 1997 and during 1996 are as
follows:
MARCH 31,
COMPANY NAME 1997 1996
- ---------------------------------------------------------------------- ----------- ----------
WVI................................................................... $ 8,859 $ 49,025
Aviator............................................................... 13,842 52,550
Bayhawk............................................................... 9,609 16,350
Mile High............................................................. 14,757 51,500
WVV................................................................... 1,500 22,800
----------- ----------
Total............................................................. $ 48,567 $ 192,225
----------- ----------
----------- ----------
PAYMENT TO AND FROM AFFILIATES. The following table represents net amounts
received by Nor'Wester from (or paid by Nor'Wester to) its affiliates during the
quarter ended March 31, 1997 and during 1996 and 1995 in connection with the
repayment of loans/advances or in payment of services associated with creating
and supporting the Alliance:
AMOUNTS RECEIVED (PAID)
----------------------------------------
COMPANY NAME MARCH 31, 1997 1996 1995
- --------------------------------------------------- -------------- ----------- -----------
WVI................................................ $ (19,024) $ (338,331) $ (113,168)
Aviator............................................ (46,701) (163,677) 9,107
Bayhawk............................................ (3,030) (42,508) 10,924
Mile High.......................................... (17,500) (198,297) 46,713
North Country...................................... -- -- (1,412)
WVV................................................ 2,062 (10,751) --
-------------- ----------- -----------
Total.......................................... $ (84,193) $ (753,564) $ (50,573)
-------------- ----------- -----------
-------------- ----------- -----------
AMOUNTS DUE FROM AFFILIATES. As a result of the above-described
transactions, Nor'Wester was owed the following amounts by its affiliates at
March 31, 1997: WVI--$475,403, Aviator--$629,857, Mile High-- $735,134,
Bayhawk--$67,497 and WVV--$21,093. These amounts are unsecured, do not bear
interest, are payable on Nor'Wester's demand and are reflected as "receivables
from affiliated companies" on Nor'Wester's balance sheet.
LOAN FROM JIM BERNAU. In the fourth quarter of 1996, Jim Bernau, President
and a Director of Nor'Wester, loaned Nor'Wester $250,000 for short-term working
capital needs. The loan bears interest at 10.5 percent and is payable on demand.
NORTH COUNTRY JOINT VENTURE AGREEMENT AND TERMINATION THEREOF
On January 1, 1996, Nor'Wester and North Country Brewing, a wholly owned
subsidiary of WVI entered into an Operating Agreement which details the
respective rights and obligations of the owners in a joint venture to develop,
own and operate a brewery in Saratoga Springs, New York (the "North Country
Joint Venture"). Nor'Wester's initial contribution to the North Country Joint
Venture consisted of
113
(i) $3,500,000 in cash; (ii) deposits toward the purchase of equipment with a
value of approximately $500,000; (iii) use of Nor'Wester's beer recipes pursuant
to a licensing agreement between Nor'Wester and the North Country Joint Venture.
North Country Brewing's initial contribution consisted of (i) an unsecured,
non-interest bearing $2,550,000 promissory note payable by North Country to the
North Country Joint Venture on or before the completion of North Country
Brewing's planned self-underwritten public stock offering or October 1, 1996,
whichever occurs first; (ii) use of North Country Brewing's beer recipes
pursuant to a licensing agreement between the North Country Joint Venture and
North Country Brewing; and (iii) North Country Brewing's brewery development
efforts consisting of a business and operating plan for the Saratoga Springs
Brewery, a lease agreement for the facility in which the brewery will be
established, and a local brand name and imagery. Nor'Wester's and North Country
Brewing's capital accounts with the North Country Joint Venture were credited
with $4,000,000 and $2,550,000, respectively, upon formation.
The North Country Brewing public offering was canceled in September 1996 and
North Country Brewing did not pay the $2,550,000 due under the note.
Accordingly, on October 1, 1996, North Country Brewing withdrew from the North
Country Joint Venture Agreement and transferred its interest to Nor'Wester.
Concurrently, Nor'Wester executed a promissory note payable to WVI evidencing
the purchase price for North Country Brewing's membership interest in the amount
of $192,358, which amount represents WVI's out of pocket development expenses to
establish the Saratoga Springs Brewery and to develop North Country Brewing's
beer recipes and brand imagery.
ARMS LENGTH TRANSACTIONS
Nor'Wester believes that the Alliance and the transactions set forth above
were made on terms no less favorable to Nor'Wester than could have been obtained
from unaffiliated third parties. All future transactions between Nor'Wester and
its officers, directors, principal shareholders and affiliates will be approved
by a majority of the independent outside members of Nor'Wester's Board of
Directors who do not have an interest in the transactions, and will be on terms
no less favorable to Nor'Wester than could be obtained from unaffiliated third
parties.
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NOR'WESTER PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of Nor'Wester as of February 28, 1997 as to (i) each
person who is known by Nor'Wester to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) each Director of Nor'Wester, (iii) each
of the executive officers named in the Summary Compensation Table above and (iv)
all Directors and executive officers as a group. Except as otherwise noted,
Nor'Wester believes the persons listed below have sole investment and voting
power with respect to the Common Stock owned by them.
COMMON STOCK
----------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED(1) OWNED
- ------------------------------------------------------------------- ----------- ---------------
James W. Bernau ................................................... 910,618 24.5%
8800 Enchanted Way SE
Turner, Oregon 97392
Black & Company, Inc. (2) ......................................... 1,029,607 27.0%
One SW Columbia Street, Suite 1200
Portland, Oregon 97258
Winser P. Acton (3) ............................................... 12,077 *
2685 Bolton Terrace South
Salem, Oregon 97302
Donald E. Voorhies (4) ............................................ 6,777 *
1715 Wickshire Court
Salem, Oregon 97302
William V. Cross (5) .............................................. 4,869 *
114 Collidge Street
Silverton, Oregon 97381
Andrew C. Kerr (4) ................................................ 1,961 *
8985 Winsor Island Road
Salem, Oregon 97303
All Directors and executive officers as a group (7 people) (6)..... 936,302 25.2%
- ------------------------
*Less than 1%
(1) Applicable percentage of ownership is based on 3,711,097 shares of Common
Stock outstanding as of February 28, 1997 together with applicable options
for such shareholders. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting and
investment power with respect to such shares. Shares of Common Stock subject
to options or warrants currently exercisable or exercisable within 60 days
after February 28, 1997 are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other person.
(2) The shares are deemed to be beneficially owned by Black, a broker-dealer
registered under Section 15 of the Securities Exchange Act of 1934, and
represent (i) 309,982 shares owned directly by Black, (ii) 476,025 shares
beneficially owned by clients of Black but held in managed accounts which
give Black investment and/or voting power over such shares, (iii) 140,100
shares held by two officers of Black, (iv) 51,750 shares issuable pursuant
to currently exercisable warrants issued to and held by Black in connection
with Nor'Wester's IPO and (v) 51,750 shares issuable pursuant to currently
exercisable warrants issued to and held by an officer of Black in connection
with Nor'Wester's IPO.
115
(3) Includes 750 shares subject to options granted pursuant to Nor'Wester's 1996
Non-Employee Stock Option Plan and exercisable within 60 days of February
28, 1997 and 2,349 shares held by Mr. Acton's wife.
(4) Includes 750 shares subject to options granted pursuant to Nor'Wester's 1996
Non-Employee Stock Option Plan and exercisable within 60 days of February
28, 1997.
(5) Includes 4,862 shares subject to options granted pursuant to Nor'Wester's
1996 Non-Employee Stock Option Plan and exercisable within 60 days of
February 28, 1997.
(6) Includes 7,112 shares subject to options granted pursuant to Nor'Wester's
1996 Non-Employee Stock Option Plan and exercisable within 60 days of
February 28, 1997.
ELECTION OF NOR'WESTER DIRECTORS
The persons named below are nominees for director to serve until the next
annual meeting of shareholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved and the
Merger is consummated, such persons will serve as directors only until the
Merger is consummated. Directors are elected to serve for a term of one year and
until a successor shall have been chosen and qualified.
In the absence of instructions to the contrary, shares of Nor'Wester Common
Stock represented by the proxy will be voted and the proxies will vote FOR the
election of all such nominees to the Board of Directors. If any of such persons
is unable or unwilling to be a candidate for the office of director at the dates
of the Nor'Wester Annual Meeting, or any adjournment thereof, the proxies will
vote FOR such substitute nominee as shall be designated by the proxies. The
management of Nor'Wester has no reason to believe that any of such nominees will
be unable or unwilling to serve if elected a director. Set forth below is
certain information concerning the nominees which is based on data furnished by
them.
PRINCIPAL OCCUPATION OR POSITION SERVED AS
NOMINEES FOR DIRECTOR AGE HELD WITH NOR'WESTER DIRECTOR SINCE
- ---------------------------- --- ---------------------------------------------------- ---------------
James W. Bernau............. 43 Chairperson of the Board, President and Secretary 1992
Winser P. Acton............. 71 Director 1993
William V. Cross............ 49 Director 1992
Andrew C. Kerr.............. 34 Director 1993
Donald E. Voorhies.......... 73 Director 1993
For certain biographical information regarding the directors of Nor'Wester
and certain information regarding committees of the Board of Directors and
director compensation, see "Nor'Wester Management" and "Nor'Wester Executive
Compensation."
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Nor'Wester Board has selected Price Waterhouse LLP to serve as
independent public accountants for Nor'Wester for the fiscal year ending
December 31, 1997. The Nor'Wester Board considers Price Waterhouse LLP to be
eminently qualified.
Although it is not required to do so, the Nor'Wester Board is submitting its
selection of the Nor'Wester public accountants for ratification at the
Nor'Wester Annual Meeting, in order to ascertain the views of shareholders
regarding such selection. If the selection is not ratified, the Nor'Wester Board
will reconsider its selection.
The Nor'Wester Board recommends that stockholders vote FOR ratification of
the selection of Price Waterhouse LLP to examine the financial statements of
Nor'Wester for Nor'Wester's financial year ending December 31, 1997. It is the
intention of the persons named in the accompanying form of Proxy to vote the
shares represented thereby in favor of such ratification unless otherwise
instructed therein.
A representative of Price Waterhouse LLP will be present at the Nor'Wester
Annual Meeting with the opportunity to make a statement if such representative
desires to do so and will be available to respond to appropriate questions.
116
WVI SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with WVI's Consolidated Financial Statements and notes thereto and "WVI
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Proxy Statement/Prospectus. The selected
financial information presented below have been derived from WVI's financial
statements. The financial statements as of December 31, 1995 and December 31,
1996 and for the period from inception (December 2, 1993) through December 31,
1996 have been audited by Price Waterhouse LLP, independent accountants, whose
report on those periods is included elsewhere herein. The balance sheet data as
of December 31, 1993 and December 31, 1994 and the operating results for the
year ended December 31, 1994 are derived from audited financial statements not
included herein. The financial statements as of and for the three months ended
March 31, 1997 and March 31, 1996 are included herein and have not been audited.
In the opinion of management, the interim financial statements reflect all
adjustments, consisting of only normal recurring items which are necessary for a
fair presentation for the interim periods presented.
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, DECEMBER 2, 1993
---------------------------- ------------------------------------------ (INCEPTION) TO
1997 1996 1996 1995 1994 DECEMBER 31, 1993
------------- ------------- ------------- ------------- ------------ -----------------
(UNAUDITED)
OPERATING RESULTS:
Net revenues................. $ 385,416 $ 410,024 $ 3,869,304 $ 1,211,490 $ 173,313 $ 0
Cost of goods sold........... 463,882 597,144 4,258,647 1,186,025 142,708 0
Selling, general and
administrative............. 327,917 525,057 2,229,018 2,176,410 310,546 0
Estimated impairment loss.... 0 0 1,018,879 0 0 0
Write-off of stock offering
costs...................... 0 0 461,969 0 0 0
Other income (expense),
net........................ (10,517) (4,789) (218,117) 175,984 83,406 0
Net loss..................... (253,260) (490,287) (2,464,231) (1,330,842) (149,447) 0
Net loss per share........... $ (0.05) $ (0.10) $ (0.51) $ (0.27) $ (0.03) $ 0
Weighted average shares
outstanding................ 4,850,796 4,850,796 4,852,513 4,850,796 4,395,746 3,353,826
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit).... $ (3,264,741) $ (1,978,282) $ (2,914,247) $ 1,353,210 $ 5,587,875 $ 0
Total assets................. 5,717,070 9,627,425 5,784,356 7,695,426 7,058,692 59,064
Long-term obligations........ 352,310 1,114,719 368,991 899,743 50,000 0
Deficit accumulated during
development stage.......... (4,197,780) (1,970,723) (3,994,520) (1,480,289) (149,447) 0
Shareholders' equity......... 1,304,542 3,759,164 1,557,802 4,254,605 4,752,874 0
117
WVI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Proxy Statement/Prospectus 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 WVI's business, management's beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations and
payment of past due creditors, successful performance of internal operations,
impact of competition, changes in distributor relationship or performance,
successful completion of the planned consolidation of the Affiliated Companies
and other risks detailed below as well as those discussed elsewhere in this
Proxy Statement/Prospectus and from time to time in WVI's Securities and
Exchange Commission filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic economic conditions.
RESULTS OF OPERATIONS
The following table reflects selected data from WVI's statements of
operations stated as a percentage of net revenues:
YEAR ENDED THREE MONTHS ENDED MARCH
DECEMBER 31, 31,
-------------------------- --------------------------
1996 1995 1997 1996
------------ ------------ ------------ ------------
Gross revenues............................. 102.6% 48.1% 105.9% 106.0%
Less excise taxes.......................... 5.4 2.1 5.9 6.0
------ ------ ------ ------
Net revenues of beer and related
products................................. 97.2 46.0 100.0 100.0
Management services to affiliated
companies................................ 2.8 54.0 0.0 0.0
------ ------ ------ ------
Net revenues............................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of beer and related products sold..... 107.2 50.8 120.4 145.6
Cost of management services provided....... 2.8 47.1 0.0 0.0
------ ------ ------ ------
Total cost of sales........................ 110.0 97.9 120.4 145.6
Selling, general and administrative
expenses................................. 57.6 179.6 85.1 128.1
------ ------ ------ ------
Operating income (loss).................... (105.9) (177.5) (105.4) (173.7)
------ ------ ------ ------
Loss before income taxes and minority
interest................................. (111.6) (163.0) (108.2) (174.9)
------ ------ ------ ------
Net loss................................... (63.7)% (109.9)% (65.7)% (119.6)%
------ ------ ------ ------
------ ------ ------ ------
118
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
GROSS REVENUES. Gross revenues from beer and retail products totaled
$408,054 for the quarter ended March 31, 1997 and $434,648 for the quarter ended
March 31, 1996, a decrease of 6%. The following explains the decrease in
revenues:
Aviator: Gross revenues from beer and retail products totaled $298,632 for
the quarter ended March 31, 1997 and $274, 105 for the quarter ended March 31,
1996, an increase of 9%. The increase in revenues is primarily a result of
Aviator's efforts to build its distribution channel, enhance its awareness of
its line of ales, develop a growing contingency of loyal customers and an
increase in sales of products to affiliated companies.
Bayhawk: Gross revenues from beer and retail products totaled $92,652 for
the quarter ended March 31, 1997 and $55,928 for the quarter ended March 31,
1996, an increase of 66%. The increase in revenues is primarily a result of
increased share in Southern and Northern California beer markets. This increase
in sales, however, is not sufficient for Bayhawk to become self-sustaining in
the near term.
Mile High: Gross revenues from beer and retail products totaled $16,770 for
the quarter ended March 31, 1997 and $100,207 for the quarter ended March 31,
1996, a decrease of 83%. The decrease is due to Mile High's inability to
effectively penetrate and establish its brand in the local Colorado market.
During the quarter ended March 31, 1997, Mile High's management established a
plan to sell the operating assets of Mile High and is looking for other contract
brewing opportunities. Based on this plan and pursuant to SFAS 121, management
has recorded a partial write-down of operating brewery assets to their estimated
fair value at December 31, 1996. Management's estimate of this write-down, based
on a pending offer, is $969,000. In addition, management estimates the cost to
dispose of the assets to be $50,000, and this amount was recorded in the
financial statements as of December 31, 1996, as part of the impairment loss.
While management searches for other potential buyers, Mile High intends to
operate on a limited basis as a contract brewer for a local brewery.
EXCISE TAXES. Excise taxes were $22,638 (6% of gross sales) for the three
months ended March 31, 1997 compared to $24,624 (6% of gross sales) for the same
period in 1996.
COST OF REVENUES. Cost of revenues totaled $463,882 (120% of net revenues)
for the quarter ended March 31, 1997 compared to $597,144 (146% of net revenues)
for the quarter ended March 31, 1996. Although cost of revenues declined as a
percentage of net revenues for the quarter ended March 31, 1997 from the same
period in the 1996, the continuing high cost of revenues in 1997 is the result
of the disproportionate cost of production for products sold while the
facilities were operating at less than designed capacity and an unusually high
percentage of discounted sales made to beer clubs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $327,917 (85% of net revenues) for the
quarter ended March 31, 1997 from $525,057 (128% net revenues) for the quarter
ended March 31, 1996. The decrease is primarily attributable to cost cutting
measures designed to lower selling, general and administrative expenses in light
of continued operating losses.
NET LOSS. As a result of the individual line items discussed above, net
loss was $253,260 for the quarter ended March 31, 1997 compared to net loss of
$490,287 for the quarter ended March 31, 1996.
1996 COMPARED TO 1995
GROSS REVENUES. Brewery revenues of WVI's subsidiaries include sales of
beer as well as retail merchandise such as T-shirts and caps. Net revenues from
brewery operations and retail products increased 574 percent in 1996, totaling
$3,759,504 for the year ended December 31, 1996 compared to $557,714 for the
year ended December 31, 1995. The increase is primarily attributable to a full
year of revenues in 1996 for Aviator and Mile High which commenced their brewing
operations in the third quarter of 1995 and the
119
addition of the sale of $1,375,000 of beer under the Cooperative Brewing
Agreements during 1996. Mile High ceased normal operations in the fourth quarter
of 1996 due to its inability to successfully penetrate its market and entered
into a limited contract brewing agreement. The Microbreweries operated at the
following capacity during 1996 and 1995:
CURRENT BARRELS PRODUCED
CAPACITY
(NO. OF BARRELS --------------------
BREWERY PER YEAR) 1996 1995
- ------------------------------------------------------------- --------------- --------- ---------
Aviator...................................................... 57,000 9,742 574
Bayhawk...................................................... 10,000 3,658 1,360
Mile High (1)................................................ 39,000 9,932 658
- ------------------------
(1) Mile High ceased production of its own products in November 1996 and is
currently producing limited quantities of beer pursuant to a contract
brewing arrangement with a third party.
Competition for market share with each of the Microbreweries' markets has
increased due to the level of market saturation by competing companies,
especially in the Northwest where there are many brands vying for available
shelf space. The industry is also facing a loss of shelf space, and therefore
sales, to the industrial brewers, who are threatening to withdraw their business
from distributors who also distribute microbrewery brands.
Specifically, during 1996, Aviator experienced significant competition from
one competitor who began selling its Hefe Weizen beer in bottles into the same
channels of distribution as Aviator. This resulted in a decline in market share
for Aviator and for Nor'Wester, an affiliated company. To date, Aviator has been
unable to regain this market share.
COST OF BREWERY SALES. The cost of brewery sales represents 107 percent of
revenues for 1996 and 51 percent for 1995, reflecting the disproportionate cost
of production for goods sold during a period when the breweries are operating at
less than their maximum designed capacity, as well as start-up costs such as
recipe testing. In addition, the margin on beer brewed cooperatively for
Nor'Wester under the Cooperative Brewing Agreements is substantially less than
the Microbreweries' own products. All of the breweries commenced operations
during 1995, and Mile High ceased production of its own products during the
fourth quarter of 1996 and entered into a limited contract brewing agreement.
REVENUES AND COSTS RELATED TO MANAGEMENT SERVICES. Revenues from management
services provided to affiliated companies totaled $109,800 and $653,776 for the
years ended December 31, 1996 and 1995, respectively. Cost of management
services provided for the same periods was 100 percent and 87 percent of such
revenues, respectively. Revenues from management services represent the
Company's cost in 1996 and cost plus a certain markup in 1995. WVI's cost
includes all direct labor and other direct costs as well as a portion of WVI's
general and administrative costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") totaled $2.23 million and $2.18 million for the
years ended December 31, 1996 and 1995, respectively. SG&A reflect management
and administrative costs incurred on behalf of WVI and its subsidiaries. The
increase in SG&A is primarily a result of increased periods of operations for
the Microbreweries and increased shipping costs as WVI's Microbreweries
introduced their products into surrounding states. During the third quarter of
1996, the selling and administrative staff was restructured, thus decreasing
such expenses during the later part of 1996, partially offsetting the increase.
IMPAIRMENT LOSS. Mile High ceased operations in 1996, and subsequent to
December 31, 1996, Mile High began looking for opportunities for contract
brewing or to dispose of all of its assets. Mile High wrote off the value of its
inventory to $0, and wrote down the value of its equipment to $2 million as of
120
December 31, 1996. In addition, Mile High management estimated costs to sell the
assets to be $50,000. Accordingly, Mile High has recorded an impairment loss of
$1,018,879.
WRITE-OFF OF STOCK OFFERING COSTS. Consists of costs related to the write
off of legal and accounting fees related to Aviator's and Mile High's
discontinued public stock offerings.
INTEREST INCOME AND INTEREST EXPENSE. Interest income totaled $33,605 and
$185,284 for the years ended December 31, 1996 and 1995, respectively, as a
result of interest earned on WVI's consolidated cash balances. Interest expense
of $68,406 and $9,300 was incurred during 1996 and 1995, respectively, on
Aviator's long-term debt for the purchase of land in Woodinville, Washington and
for capital equipment lease obligations of Aviator, Bayhawk and Mile High.
OTHER. Other expenses of $183,316 relate primarily to costs associated with
transferring partial ownership of North Country Joint Venture, LLC from North
Country Brewing Company, Inc. to Nor'Wester.
NET LOSS. Net loss was $2.5 million in 1996 compared to $1.3 million in
1995, as a result of the individual line items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
WVI had cash and cash equivalents at March 31, 1997, December 31, 1996 and
December 31, 1995 of $24,569, $90,492 and $1,117,134, respectively. Changes in
cash and cash equivalents for the quarter ended March 31, 1997 primarily
consisted of cash used in operating activities of $176,973, limited purchases of
fixed assets and other long-term assets of $11,736 and payments on capital lease
obligations of $23,136, offset by borrowings from affiliates of $145,922.
Changes in cash and cash equivalents for the year ended December 31, 1996 are
due to cash used in operating activities of $1,623,418, purchases made for
brewing and related equipment of $398,744 and principal payments made on capital
lease obligations of $76,848, offset by advances from affiliates of $1,072,368.
WVI's working capital (deficit) at March 31, 1997, December 31, 1996 and
December 31, 1995 was ($3,264,741), ($2,914,247) and $1,353,210, respectively.
At March 31, 1997, December 31, 1996 and December 31, 1995 the current ratio was
.16:1, .18:1 and 3.02:1, respectively. In 1996 WVI utilized working capital
primarily to finance the start-up operations of breweries operated by its
subsidiaries, Aviator and Mile High.
Accounts payable at March 31, 1997, December 31, 1996 and December 31, 1995
were $1,665,130, $1,470,891 and $406,797, respectively. Of the $1,665,130 in
accounts payable at March 31, 1997, $1,410,970 was past due.
At March 31, 1997, WVI had payables to affiliates of $1,940,988 which
accounts for 49% of WVI's current liabilities. The payables to affiliates
consist primarily of advances by Nor'Wester to support Aviator and Mile High,
each of which was engaged to cooperatively brew Nor'Wester's beer during most of
1996 and each of which reported operating losses for the year ended December 31,
1996. Management expects that the payables to affiliates will be eliminated upon
completion of the Consolidation.
WVI accrued $50,000 at December 31, 1996 for the potential sale and
disposition of the assets of Mile High.
WVI's management believes that current working capital together with
projected income from operations is not sufficient to meet the cash needs of
WVI's operating subsidiaries through the end of 1997. WVI's independent
accountants expressed substantial doubt as to WVI's ability to continue as a
going concern in their report on WVI's 1996 consolidated financial statements.
121
To address recent losses and the need for working capital by WVI's
subsidiaries, WVI and its subsidiaries have developed and are in the process of
implementing plans designed to sustain operations until profitability is
reached. In particular, WVI's subsidiaries have taken steps to: (i) implement a
more focused marketing and sales plan at Aviator and Bayhawk designed to
increase sales on a regional basis; (ii) significantly reduce or eliminate
cooperative brewing arrangements with affiliates which proved to be inefficient
and costly; (iii) negotiate with past-due creditors for extended terms and
payment plans and to allow for the possibility of obtaining debt financing; (iv)
hire and retain highly qualified employees familiar with the brewing industry;
(v) use bridge loans from UBA to fund operations until the Investment closes;
and (vi) sell duplicative and/or unutilized assets created by the Consolidation
for cash.
While management believes these plans will sustain the operations of WVI's
subsidiaries through December 31, 1997, no assurance can be given that these
plans will provide the necessary revenue and profits to sustain operations
through that period. WVI's subsidiaries are highly dependent upon the receipt of
additional amounts from UBA under the bridge loan and closing of the Investment.
For a description of the general terms and conditions of the bridge loan from
UBA see "Ancillary Agreements--UBA Bridge Loan Credit Agreement and Related
Documents." No assurance can be given that UBA will loan WVI's subsidiaries
further amounts under the bridge loan or that the Investment will close. See
"Risk Factors-- Dependence Upon Bridge Loans and Investment from United
Breweries of America, Inc." If, for any reason, the Investment does not occur,
alternative sources of debt financing and/or equity capital would have to be
developed. There can be no assurance that such debt financing or capital will be
available or, if available, under terms and conditions acceptable to WVI or its
subsidiaries. The inability of WVI and its subsidiaries to obtain additional
capital would result in a material adverse effect on their businesses and
results of operations.
Furthermore, assuming the Investment closes, UCB will be dependent upon the
receipt of additional debt or equity financing to sustain operations of the
Constituent Corporations until revenues are sufficiently increased and costs
controlled to enable them to achieve positive cash flow and profitability. No
assurance can be given that additional debt or equity financing will be
available on terms acceptable to UCB or at all. Failure to obtain additional
financing would have a material adverse effect on the operations and financial
condition of the Constituent Corporations, including WVI's subsidiaries. See
"Risk Factors--Capital Requirements."
WVI BUSINESS
GENERAL
WVI was organized in 1993 to establish a series of microbreweries throughout
the United States using a consumer owned capitalization plan and certain
marketing strategies and other trade secrets developed by James W. Bernau, its
founder, President and Chairperson of its Board of Directors. As of December 31,
1996, WVI had established and capitalized three separate operating subsidiaries:
Aviator, Bayhawk and Mile High. Aviator and Bayhawk have constructed and are now
operating their own microbrewery. Mile High had constructed and operated a
microbrewery, but it is currently operating on a limited contract brewing basis
and its assets are held for sale. Each microbrewery is designed to produce and
sell high quality ales and/or lager beers marketed under a locally based brand
name developed specifically for that microbrewery's target market. The initial
success of each microbrewery is dependent primarily upon the respective
subsidiary's ability to successfully penetrate the subsidiary's local craft beer
market by producing and selling high quality beer. One additional wholly owned
subsidiary, North Country Brewing Company, Inc. ("North Country Brewing") is not
currently capitalized and is not operating in any capacity.
North Country Brewing was formed in May 1995 for the purpose of establishing
and operating microbreweries in the State of New York. North Country Brewing and
Nor'Wester, pursuant to a Joint Venture Agreement, created North Country Joint
Venture, LLC, to construct, own and operate a microbrewery in Saratoga Springs,
New York. Upon the failure of North Country Brewing to make its planned $2.55
million capital contribution to the joint venture in September 1996, however,
Nor'Wester
122
became the sole owner of North Country Joint Venture, LLC, which is the sole
owner of the Saratoga Springs brewery. For a description of the business of each
of the other subsidiaries see "Aviator," "Bayhawk" and "Mile High." See also
"General Description of the Craft Brewing Industry and the Businesses of the
Constituent Corporations."
At December 31, 1996, WVI held the following ownership interests in each of
its subsidiaries: Aviator--51%; Mile High--51%; Bayhawk--57%; and North Country
Brewing--100%.
STRATEGY
Consumers have shown strong support for craft beers brewed in or near their
local markets and WVI believes the appropriate strategy is to develop and
protect strong local craft beer brands. WVI further believes that this strategy
can be strengthened through the Constituent Corporations' ability to build a
network of breweries each producing their own brand with local appeal while
benefiting from operating efficiencies, the decrease in production, marketing
and distribution costs and the increase in the ability of the Constituent
Corporations to finance growth and provide shareholders with a liquid market for
their shares. Once these local brands are established, the Constituent
Corporations may expand the distribution of one or more of their beer styles
into additional selected markets.
To implement this new strategy, the Boards of Directors of the Constituent
Corporations have elected to consolidate their entities under a single entity,
UCB. Furthermore, on January 30, 1997 the Constituent Corporations entered into
a definitive investment agreement with UBA for the purpose of funding operations
until the consolidation is completed and provide for future growth thereafter.
Should the proposed Consolidation occur, the Cooperative Brewing Agreements,
the Strategic Alliance Agreement and the General Services Agreement will
terminate.
PRODUCTION AND PRODUCTS
The level of production at each microbrewery depends on (i) the size of the
microbrewery's target market, (ii) the strategy identified to penetrate the
microbrewed beer market in the microbrewery's specified market, and (iii) the
amount of money raised in the microbrewery's public offering. The current annual
production capacity of the Seattle Brewery, the Southern California Brewery and
the Denver Brewery is approximately 57,000 barrels, 10,000 barrels and 39,000
barrels, respectively. The maximum annual production capacity that could be
achieved at the Seattle Brewery, the Southern California Brewery and the Denver
Brewery by adding additional equipment within the existing structure is
approximately 125,000 barrels, 10,000 barrels and 60,000 barrels, respectively.
Each microbrewery is designed to brew selected, high quality grains and hops
into ales and/or lager beers. The particular beer styles produced by
microbrewery are dependent on local taste, climate, ethnic influences and
lifestyles. Quality in the ingredients and the brewing process is the primary
guiding principle in the development and production of each microbrewery's
products. Each microbrewery is equipped with a superior and efficient brewhouse
that utilizes modern electronic temperature controls in the fermentation and
conditioning tanks, and each microbrewery employs a brewmaster experienced in
producing high quality microbrewed beer. Products by microbrewery are as
follows:
AVIATOR: Aviator brand: Amber Ale, India Pale Ale, Honey Brown Ale, Hefe
Weizen, Porter and a variety of seasonal ales. Nor'Wester brand: Deadeye Rye and
Maple Brown Ale.
BAYHAWK: Honey Blond, Amber Ale, California Cerveza, Hefe Weizen and
Chocolate Porter.
MILE HIGH: No longer in production.
123
RESEARCH AND DEVELOPMENT
To meet varying consumer style and flavor preferences, WVI's subsidiaries
continually engage in the development and testing of new products. WVI's
subsidiaries pilot brew small batches of new products for sampling at the
breweries, as well as in community tastings. WVI's subsidiaries also perform
numerous tastings and surveys with their distributors and consumers on beer
styles and brand imagery.
REGULATION
Management believes that WVI's subsidiaries currently have all licenses,
permits and approvals necessary for their current operations and are in material
compliance with all applicable government regulations. See "General Description
of the Craft Brewing Industry and the Businesses of the Constituent
Corporations--Regulation and Dram Shop Liability."
TRADEMARKS
WVI has no significant trademarks, as they are held at the subsidiary level.
EMPLOYEES
At December 31, 1996, WVI had a total of 23 full time and 2 part time
employees, including 10 full time employees at Aviator, 6 full time employees
and 1 part time employee at Mile High and 5 full time employees and 1 part time
employee at Bayhawk, WVI's majority owned subsidiaries. None of WVI's employees
are covered by collective bargaining agreements, there have been no work
stoppages and WVI believes that relations with its employees are adequate.
PROPERTIES
WVI shares leased space in Portland, Oregon with Nor'Wester. Nor'Wester
leases 12,200 square feet of space. Nor'Wester's lease expires on January 31,
1997, with a renewal option for up to an additional 18 years. Aviator has
executed a 20-year lease for the Seattle Brewery that runs until August 1, 2015,
with the right to renew the lease for two additional terms of ten years each.
The leased facility comprises approximately 19,000 square feet in Woodinville,
Washington, and WVI also has an option on additional adjacent space of
approximately 10,000 square feet that is exercisable between years 2 and 5 of
the current lease. WVI has constructed the Seattle Brewery with sufficient
leasehold improvements to enable it to grow to a maximum annual brewing capacity
of 125,000 barrels (current brewing capacity is approximately 57,000 barrels).
To reach maximum capacity, additional brewing equipment, fermentation and
conditioning tanks must be purchased and installed, and an option to lease
additional space adjacent to the existing facility must be exercised. WVI also
has purchased a highspeed Krones bottling line and labeler.
The Denver Brewery, owned by Mile High, is located in an approximately
14,200 square foot leased facility in lower downtown Denver, Colorado. Mile High
has executed a 15 year lease with the right to renew for two additional terms of
five years each. The Denver Brewery has a maximum annual production capacity of
60,000 barrels. The Denver Brewery also has a high speed Krones bottling line
capable of bottling 100 twelve ounce bottles of beer per minute. WVI's assets
are currently being held for sale and Mile High intends to assign the lease to
the purchaser of the assets.
The Southern California Brewery of Bayhawk is located in an approximately
2,000 square foot leased facility adjacent to the McCormick & Schmick's Seafood
Restaurant in Irvine, California. The lease for the Southern California Brewery
expires January 2015, with the right to renew the lease for two additional terms
of five years each. The Southern California Brewery includes a 17 barrel
brewhouse and 50 barrel fermenters designed for a maximum annual production
capacity of 10,000 barrels. The Southern California Brewery produces only draft
beer since it does not have adequate space to house a bottling line.
124
LEGAL PROCEEDINGS
One of WVI's subsidiaries, Mile High, dba Timberline Brewpub, and Mr. John
Carter, a Vice President of Mile High, are defendants in a suit filed by United
Glassware and China Company on November 5, 1996 in the District Court, City and
County of Denver, Colorado. The suit claims that the defendants owe $54,700 on
an alleged promissory note for materials supplied to Mile High. The suit is
seeking damages in the sum of $54,700 in principal and unspecified amounts for
interest and attorney fees. Mile High has asserted vigorous defenses and filed
certain counterclaims.
From time to time, WVI's subsidiaries become involved in ordinary, routine
or regulatory legal proceedings incidental to their businesses.
MARKET PRICE OF AND DIVIDENDS ON WVI COMMON STOCK
There is no public trading market for WVI's Common Stock. The approximate
number of shareholders of record on December 31, 1996 was 1,783. There were no
cash dividends declared or paid in fiscal years 1996 or 1995. WVI does not
anticipate declaring such dividends in the foreseeable future.
WVI and each of its subsidiaries issued the following number of unregistered
shares of their Common Stock at various times throughout 1996 to employees and
distributors of each respective Company:
COMPANY NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
WVI........................................................................ 10,200
Aviator.................................................................... 1,500
Bayhawk.................................................................... 2,370
Mile High.................................................................. 3,620
WVI MANAGEMENT
DIRECTORS
The names and ages of WVI's Directors are as follows:
NAME AGE POSITION(S) WITH WVI DIRECTOR SINCE
- ----------------------------------- --- ----------------------------------- ---------------
James W. Bernau.................... 43 Chairperson of the Board, President 1993
and Secretary
Ron Brigham........................ 44 Director 1995
Carol Fischer...................... 43 Director 1995
Carl F. Flipper.................... 49 Director 1995
Earl Littrell...................... 54 Director 1995
Donald E. Voorhies................. 73 Director 1995
Mr. Bernau has been President and Chairperson of the Board of Directors of
WVI since its inception in December 1993. He is also President and Chairperson
of the Board of Directors for five other public companies and has held these
positions since the dates indicated: Willamette Valley Vineyards, Inc. ("WVV")
since May 1988, Nor'Wester since December 1992 and of three other subsidiaries
of WVI, Aviator, and Bayhawk, since February 1994. Mr. Bernau also serves as one
of the three Managers of the North Country Joint Venture LLC, a wholly owned
subsidiary of Nor'Wester. Mr. Bernau began this alliance of consumer/investor
owned companies by first co-founding WVV in 1988 with Donald Voorhies. From 1981
to September 1989, Mr. Bernau was Director of the Oregon Chapter of the National
Federation of Independent Businesses (NFIB), an association of 15,000
independent businesses in Oregon. While at NFIB, his responsibilities primarily
involved communicating with association members and lobbying the Oregon state
legislature regarding issues impacting the members.
125
Mr. Brigham has been a Director of WVI since April 1995. Mr. Brigham has
served as a District Manager for Coffee People, Inc., an Oregon-based specialty
coffee retailer. From 1985 to 1994 he served as Area Supervisor for NIPI, Inc.
dba McDonald's Restaurants of Eugene-Springfield, Oregon.
Ms. Fischer has been a Director of WVI since April 1995. Since 1987, Ms.
Fischer has been employed as the Public Affairs Director of Marion County,
Oregon. Ms. Fischer serves as the President of the Board of Directors for the
Girl Scouts of Santiam Council, treasurer and board member of the National
Association of County Information Officers, executive committee member of the
National Association of County Governmental Affairs Officials and on the Board
of the Oregon Student Lobby Foundation. Ms. Fischer has a B. S. degree in
Political Science and English from Oregon State University and she completed the
graduate program for Senior Executives in Local Government at Harvard
University's Kennedy School of Public administration in 1994.
Mr. Flipper has served as a Director of WVI since April 1995. From 1992 to
1995, Mr. Flipper served as President and Executive Director of the Oregon
Enterprise Forum ("OEF"), a private sector, nonprofit organization dedicated to
promoting the development of emerging growth companies located in Oregon. Mr.
Flipper also serves as a regional manager of Northwest Capital Network, a
service company matching entrepreneurs with private investors. Prior to 1992,
Mr. Flipper worked for the Entrepreneurial Services Division of Deloitte &
Touche, certified public accountants, in its Chicago office. Mr. Flipper has
worked extensively to promote minority employment and minority business
development. Mr. Flipper serves on the Board of Directors for the National
Economic Development and Law Center. He has also held faculty appointments at
the University of Idaho and Lewis & Clark State College.
Mr. Littrell has served as a Director of WVI since April 1995. Mr. Littrell
has been a professor of Accounting and Information Sciences at Willamette
University's Atkinson Graduate School of Management since 1976. In addition to
his teaching duties, Mr. Littrell is a co-founder of OC3, Inc., a publishing
company that specializes in preparing candidates for the CMA and CIA exams. Mr.
Littrell is the past-President of the Pacific Northwest Council of the Institute
of Management Accountants and was a member of the IMA's national Board of
Directors from 1985-1987 and 1990-1991. Mr. Littrell has authored numerous
articles on the subject of accounting. Mr. Littrell, a Stanford University
undergraduate, obtained his Ph.D. in Accounting from the University of Oregon.
He is a Certified Management Accountant.
Mr. Voorhies has served as a Director of WVI since April 1995. Mr. Voorhies
has also served as Vice President and Director of WVV since its inception in
1988. Mr. Voorhies also serves as a member of the Board of Directors of
Nor'Wester and Bayhawk. From 1981 to 1995, Mr. Voorhies owned and operated a
30-acre vineyard, Salem Hills Vineyard, which he developed from raw land
purchased in 1981. Prior to his retirement in 1983, Mr. Voorhies was employed by
General Electric Company as Sales Manager of the Lighting Products Division for
the Pacific Northwest Region. Mr. Voorhies holds a B.S. in Electrical
Engineering from University of California at Berkeley. Mr. Voorhies currently
serves as a liaison between the Oregon Wine Growers Association and the Oregon
Wine Advisory Board.
126
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and positions of the executive officers and key management
of WVI and its subsidiaries are as follows:
NAME AGE POSITION(S) WITH WVI SINCE
- --------------------------------------- --- --------------------------------------- ---------
James W. Bernau........................ 43 Chairperson of the Board, President and 1993
Secretary
Mark Anderson.......................... 43 National Sales Manager and Southeast 1996
Regional Leader
John Carter............................ 28 Vice President Mile High Brewing 1996
Company and Rocky Mountain/ Midwest
Regional Leader
E. J. Harkins.......................... 39 Vice President North Country Brewery 1996
and Northeast Regional Leader
Yashpal Singh.......................... 51 Executive Vice President of Operations 1997
David B. Voorhies...................... 47 Vice President of Bayhawk and Southwest 1994
Regional Leader
Dustin Wyant........................... 27 Vice President of Aviator and Northwest 1995
Regional Leader
For a description of the business background of Mr. Bernau, see "Directors"
above.
Mr. Anderson joined WVI in January 1996 as the Southeast Regional Leader and
was promoted during 1996 to National Sales Manager and Southeast Regional
Leader. Prior to joining WVI, Mr. Anderson was the owner and President of Asa
Beverage Brokers, a company specializing in establishing distribution channels
for craft beer and wine. From 1990 to 1994, Mr. Anderson was the Southeast Sales
Manager for Barton Beers, Inc., selling primarily imported beers throughout nine
states. From 1979 to 1994, Mr. Anderson was a Sales Manager for National
Distributing Company, a liquor, wine and beer distributor.
Mr. Carter joined WVI in September 1996 as General Manager. From 1994 until
1996, Mr. Carter served as Regional Sales Manager of Southern and Northern
California for the Nor'Wester/WVI Alliance. From 1991 until 1994, Mr. Carter
served as a manager in the hospitality industry while also attending school. Mr.
Carter has a B.A. from Oregon State University and has completed everything
except his thesis for his Master of Arts, also from Oregon State University.
Mr. Harkins joined WVI in January 1996 as the Northeast Regional Sales
Leader. Mr. Harkins is also Vice President, North Country Brewing. Mr. Harkins
has over 15 years of beverage industry experience, with his most recent position
prior to joining WVI being General Sales Manager for Great State Beverages of
Manchester, NH, one of the premier beverage distributors in the United States.
Mr. Harkins has participated in numerous industry related seminars and has also
been recognized by numerous suppliers for excellence.
Mr. Singh became Executive Vice President of Operations for WVI in March
1997. From 1994 to date, Mr. Singh has been Senior Vice President, Operations
for United Breweries Ltd., in Bangalore, India, an affiliate of The UB Group.
From 1990 to 1994, Mr. Singh served in various capacities at Kalyani Brewery of
United Breweries Ltd., most recently as Chief Executive. In addition, in 1992,
Mr. Singh became Chief Executive of Jupiter Breweries and Industries Ltd. Mr.
Singh holds degrees in Chemistry, Botany and Zoology from Punjab University in
India. Mr. Singh is a member of the Master Brewers Association of America.
127
Mr. Voorhies joined WVI in 1995 as its Southwest Regional Leader. Mr.
Voorhies joined Bayhawk in December 1994 and serves as its General Manager and
Chief Operating Officer on a full-time basis. He is responsible for overseeing
Bayhawk's operations, including production, marketing and sales. Prior to
joining Bayhawk, Mr. Voorhies spent 22 years as a civil engineer managing the
design and construction of numerous complex building projects for organizations
such as Honeywell, Johnson Controls and the Washington Public Power Supply
System, among others. From April 1990 to December 1994, Mr. Voorhies served as
Project Manager for Creegan and D'Angelo Consulting Engineers, a design project
management consulting firm based in Fairfield, California. In addition to
bringing significant management experience to WVI, Mr. Voorhies has been a home
brewer for over 5 years. Mr. Voorhies received his B.S. in Civil Engineering
from Washington State University. He is a registered professional engineer in
both California and Washington.
Mr. Wyant joined WVI in 1995 as its Northwest Regional Leader. Mr. Wyant
also serves as Vice President of Aviator. Mr. Wyant is also a Director and Vice
Chairperson of the Aviator Board of Directors. From January 1994 to January
1995, Mr. Wyant served as Retail Manager for Nor'Wester and Willamette Valley
Vineyards ("WVV"). During 1993, Mr. Wyant was an independent sales
representative for WVV. From 1990 to 1992, Mr. Wyant was obtaining his commerce
degree at the University of Virginia and Bath University in England.
COMMITTEES OF THE BOARD
During 1996, the Board of Directors held five meetings and acted by
unanimous written consent on numerous occasions. In April 1995, WVI established
an Audit Committee and a Compensation Committee. The Audit Committee, comprised
of Mr. Littrell and Ms. Fischer, oversees actions taken by WVI's independent
auditors and reviews WVI's internal audit controls. The Compensation Committee,
comprised of Messrs. Brigham and Flipper, reviews the compensation levels of
WVI's employees and makes recommendations to the Board of Directors regarding
changes in compensation. WVI does not have a nominating committee. They are no
family relationships between any of the executive officers and directors.
ATTENDANCE AT MEETINGS
Except for Mr. Flipper, during 1996, there were no members of the Board of
Directors who attended fewer than seventy-five percent of the meetings of the
Board of Directors and all committees of the Board on which they served.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires WVI's executive officers and Directors, and persons who own more than
ten percent of a registered class of WVI's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the National Association of Securities Dealers, Inc. Executive
officers, Directors and greater than ten percent stockholders are required by
SEC regulation to furnish WVI with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, WVI believes that, for
the fiscal year ended December 31, 1996, all executive officers, Directors and
greater than 10% shareholders complied with all applicable filing requirements,
except in one instance, Mr. John Carter, a Vice President of Mile High, failed
to timely file a Statement of Initial Beneficial Ownership on Form 3.
128
WVI EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to WVI's Executive Officer and other
executive officers of WVI whose total annual salary and bonus exceeded $100,000
(collectively, the "named executive officers") for fiscal years 1996, 1995 and
1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION (A) YEAR EMPLOYER SALARY($) BONUS($)
- ---------------------------------- --------- ------------------------------------------------ ----------- -----------
James W. Bernau (B)............... 1996 Willamette Valley, Inc. 7,457
Chairperson of the Board, . 1996 All affiliated companies except Willamette 85,755
President and Secretary Valley, Inc.
1995 Willamette Valley, Inc. 13,600 10,882
1995 All affiliated companies except Willamette 82,400
Valley, Inc.
1994 Willamette Valley, Inc. 13,100 8,682
1994 All affiliated companies except Willamette 70,400
Valley, Inc.
- ------------------------
(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of WVI, Nor'Wester, Aviator, Bayhawk,
Mile High and North Country. Each of these companies pays a pro rata portion
of Mr. Bernau's monthly salary based on the amount of time which Mr. Bernau
has devoted to the respective company's business in that month.
STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.
OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held
by Mr. Bernau at December 31, 1996.
COMPENSATION OF DIRECTORS OF THE WVI
Directors of WVI are not compensated for acting in such capacity.
129
CERTAIN TRANSACTIONS
GENERAL
Each of Nor'Wester, Aviator, Bayhawk and Mile High is affiliated with WVI in
that James W. Bernau, WVI's founder, President and Chairperson of the Board of
Directors, is also President and Chairperson of the Board of Directors of each
such affiliated company. Mr. Bernau is also a significant equity owner of each
affiliated company either directly, as in the case of Nor'Wester, in which Mr.
Bernau owns approximately 25% of the outstanding capital stock, or indirectly
through his controlling interest in WVI (62%), which in turn owns a controlling
interest in each of Aviator (51%), Bayhawk (57%) and Mile High (51%). As a
result of certain arrangements between WVI and its affiliates, as well as Mr.
Bernau's positions and/or ownership interests in each of these companies,
inherent conflicts of interest exist with respect to the pricing of services,
the sharing of resources and the allocation of WVI's President's time.
LOANS AND ADVANCES TO AND FROM AFFILIATES
BAYHAWK BRIDGE LOAN. During 1994 and 1995, WVI loaned $1,353,823 to
Bayhawk, a subsidiary of WVI, to construct, equip and operate Bayhawk's brewery
pending completion of Bayhawk's direct public stock offering completed in
December 1995 (the "Bayhawk Bridge Loan"). In 1995 and 1996, Bayhawk repaid
$1,103,635 of loan principal. In January 1996, the loan was converted to a
promissory note issued to WVI. The note bears interest at 8% beginning on
January 1, 1996, provides for payments $4,600 principal and interest per month,
and is unsecured. As of December 31, 1996, $250,188 was owed on the note.
MILE HIGH BRIDGE LOAN. During 1995, WVI loaned $800,000 to Mile High, a
subsidiary of WVI, to pay for leasehold improvements, purchase capital assets
and fund the working capital needs of Mile High's brewery (the "Mile High Bridge
Loan"). The Mile High Bridge Loan was to be repaid from the proceeds of Mile
High's planned second direct public stock offering which commenced in May 1996
but was terminated in October 1996 as a result of the planned Consolidation and
investment by UBA. In October 1996, the loan was converted to an 18 month
installment note issued to WVI. The note bears interest at 10%, provides for
monthly principal and interest payments of $5,300, and is unsecured. As of
December 31, 1996, no payments had been made on the note.
LOANS AND ADVANCES FROM NOR'WESTER. In 1995 and 1996, Nor'Wester loaned and
advanced $350,000 to each of Aviator and Mile High for working capital needs and
for the purchase of brewing ingredients and raw materials to brew Nor'Wester
beer under Nor'Wester's Cooperative Brewing Agreements with Aviator and Mile
High entered into as part of the Alliance. In 1996, Nor'Wester also loaned
$150,000 to Mile High to help pay for the construction of Mile High's pub. In
addition, in 1995 and 1996, in support of the creation and development of the
Alliance, Nor'Wester paid certain bills on behalf of WVI, Aviator, Mile High and
Bayhawk and provided certain of these companies with services under the General
Services Agreement also entered into as part of the Alliance. These advances are
unsecured and do not bear interest.
LOANS AND ADVANCES TO AFFILIATES. During 1996, WVI advanced $240,000 to
Aviator and $186,364 to Mile High. These loans were made to purchase capital
assets and support the working capital needs of Aviator's and Mile High's
respective breweries. In addition, in 1995 and 1996, WVI paid certain bills on
behalf of Nor'Wester, Aviator, Mile High and Bayhawk and provided certain of
these companies with services under the General Services Agreement also entered
into as part of the Alliance. These advances are unsecured and do not bear
interest. For a description of the purposes and terms of the Alliance see
"General Description of the Craft Brewing Industry and the Business of the
Constituent Corporation-- The Strategic Alliance."
STRATEGIC ALLIANCE In January 1996, WVI established the Alliance with
Aviator, Mile High, Bayhawk and Nor'Wester, the purpose and terms of which are
more fully described in "General Description of the Craft Brewing Industry and
the Businesses of the Constituent Corporations--Strategic Alliance."
130
WVI was charged $169,425 by Nor'Wester for services under the General
Services Agreement of the Alliance during 1996. Amounts charged under the
General Services Agreement by WVI to its affiliates and subsidiaries during the
quarter ended March 31, 1997 and during 1996 are as follows:
MARCH 31,
COMPANY NAME 1997 1996
- ---------------------------------------------------------------------- ----------- ----------
Nor'Wester............................................................ $ -- $ 85,575
Aviator............................................................... -- 55,125
Bayhawk............................................................... -- 20,175
Mile High............................................................. -- 56,025
North Country Brewing................................................. -- 25,650
Willamette Valley Vineyards........................................... -- 24,225
----- ----------
$ -- $ 266,775
----- ----------
----- ----------
PAYMENTS TO AND FROM AFFILIATES. The following table represents net amounts
received by WVI from (or paid by WVI to) its affiliates during the quarter ended
March 31, 1997 and during 1996 and 1995 in connection with the repayment of
loans/advances, other than the Bayhawk Bridge Loan, or in payment of services
associated with creating and supporting the Alliance:
AMOUNTS RECEIVED (PAID)
--------------------------------------
COMPANY NAME MARCH 31, 1997 1996 1995
- -------------------------------------------------- -------------- ---------- ----------
Nor'Wester........................................ $ 19,024 $ 338,331 $ 113,168
Aviator........................................... (501) 3,124 18,056
Bayhawk........................................... 3,091 84,927 497,600
Mile High......................................... (30,105) (21,754) 32,096
North Country..................................... -- 88,265 (86,065)
------- ---------- ----------
Total....................................... $ (8,491) $ 492,893 $ 574,855
------- ---------- ----------
------- ---------- ----------
AMOUNTS OWED TO AND DUE FROM AFFILIATES. As a result of the above-described
transactions, WVI and its subsidiaries owed the following amounts to Nor'Wester
at March 31, 1997: WVI--$475,403, Aviator-- $629,857, Mile High--$735,134,
Bayhawk--$67,497. These amounts are unsecured, do not bear interest, are payable
on Nor'Wester's demand and are reflected as "payable to affiliated companies" on
WVI's balance sheet. Further, as a result of the above-described transactions,
other than the Bayhawk Bridge Loan and the Mile High Bridge Loan, at March 31,
1997, WVI was owed the following amounts from its affiliates: Aviator--$276,513,
Bayhawk--$4,669, and Mile High--$283,701. These amounts are unsecured, do not
bear interest and are payable on WVI's demand. At March 31, 1997, WVI was owed
$250,188 by Bayhawk on the Bayhawk Bridge Loan and $800,000 by Mile High on the
Mile High Bridge Loan. None of the foregoing amounts are reflected on WVI's
balance sheet as they have been eliminated in the process of consolidating the
financial statements of WVI and its subsidiaries.
NORTH COUNTRY JOINT VENTURE AGREEMENT AND TERMINATION THEREOF
On January 1, 1996, Nor'Wester and North Country Brewing, a wholly owned
subsidiary of WVI entered into an Operating Agreement which details the
respective rights and obligations of the owners in a joint venture to develop,
own and operate a brewery in Saratoga Springs, New York (the "North Country
Joint Venture"). Nor'Wester's initial contribution to the North Country Joint
Venture consisted of (i) $3,500,000 in cash; (ii) deposits toward the purchase
of equipment with a value of approximately $500,000; (iii) use of Nor'Wester's
beer recipes pursuant to a licensing agreement between Nor'Wester and the North
Country Joint Venture. North Country Brewing's initial contribution consisted of
(i) an unsecured, noninterest bearing $2,550,000 promissory note payable by
North Country to the North Country Joint Venture on or before the completion of
North Country Brewing's planned self underwritten
131
public stock offering or October 1, 1996, whichever occurs first; (ii) use of
North Country Brewing's beer recipes pursuant to a licensing agreement between
the North Country Joint Venture and North Country Brewing; and (iii) North
Country Brewing's brewery development efforts consisting of a business and
operating plan for the Saratoga Springs Brewery, a lease agreement for the
facility in which the brewery will be established, and a local brand name and
imagery. Nor'Wester's and North Country Brewing's capital accounts with the
North Country Joint Venture were credited with $4,000,000 and $2,550,000,
respectively, upon formation.
North Country Brewing's public offering was canceled in September 1996 and
North Country Brewing did not pay the $2,550,000 due under the note.
Accordingly, on October 1, 1996, North Country Brewing withdrew from the North
Country Joint Venture Agreement and transferred its interest to Nor'Wester.
Concurrently, Nor'Wester executed a promissory note payable to WVI evidencing
the purchase price for North Country Brewing's membership interest in the amount
of $192,358, which amount represents WVI's out of pocket development expenses to
establish the Saratoga Springs Brewery and to develop North Country Brewing's
beer recipes and brand imagery.
ARMS-LENGTH TRANSACTIONS
WVI believes that the Alliance and the transactions set forth above were
made on terms no less favorable to WVI than could have been obtained from
unaffiliated third parties. All future transactions between WVI and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the independent outside members of WVI's Board of Directors who do
not have an interest in the transactions, and will be on terms no less favorable
to WVI than could be obtained from unaffiliated third parties.
132
WVI PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of WVI as of February 28, 1997 as to (i) each person
who is known by WVI to own beneficially 5% or more of the outstanding shares of
Common Stock, (ii) each Director of WVI (iii) each of the executive officers
named in the Summary Compensation Table above and (iv) all Directors and
executive officers as a group. Except as otherwise noted, WVI believes the
persons listed below have sole investment and voting power with respect to the
Common Stock owned by them.
COMMON STOCK
--------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED(1) OWNED
- ------------------------------------------------------------------- ----------- -------------
James W. Bernau (2)................................................ 3,018,444 62.1%
8800 Enchanted Way SE
Turner, Oregon 97392
James F. Hensel (2)................................................ 335,982 6.9%
2911 SW Orchard Hill Place
Lake Oswego, Oregon 97035
Donald E. Voorhies (3)............................................. 21,000 *
1715 Wickshire Ct.
Salem, Oregon 97302
Carol Fischer (4).................................................. 50 *
160 Wilson Street SE
Salem, Oregon 97302
Ron Brigham........................................................ -- *
16887 NW Richard's Court
Sherwood, Oregon 97104
Carl F. Flipper.................................................... -- *
2538 NE Killingsworth, Apt 4
Portland, Oregon 97211
Earl Littrell...................................................... -- *
2737 Vick Avenue NW
Salem, Oregon 97304
All Directors and executive officers as a group (12 persons) (5)... 3,052,494 62.7%
- ------------------------
* Less than 1%
(1) Applicable percentage of ownership is based on 4,860,996 shares of Common
Stock outstanding as of February 28, 1997. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission.
(2) As a condition to registering shares for the 1994 offering under Oregon
Securities Laws, WVI's founders agreed to place in escrow all 3,353,826
shares they beneficially owned prior to the offering. These shares will be
released upon WVI's reaching certain performance milestones. Unless released
pursuant to those milestones, the shares shall remain in escrow until
released in 25 percent increments on October 31 of the years 2000 through
2003. The shares have the same rights and privileges of all outstanding
shares except rights relating to transferability and liquidation.
(3) Mr. Voorhies also owns 15,000 shares of Common Stock of WVI's subsidiary,
Bayhawk.
(4) Ms. Fischer also owns 450 shares of Common Stock of WVI's subsidiary,
Aviator.
(5) Includes 10,000 shares subject to options exercisable within 60 days of
February 28, 1997.
133
ELECTION OF WVI DIRECTORS
The persons named below are nominees for director to serve until the next
annual meeting of shareholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved and the
Merger is consummated, such persons will serve as directors only until the
Merger is consummated. Directors are elected to serve for a term of one year and
until a successor shall have been chosen and qualified.
In the absence of instructions to the contrary, shares of WVI Common Stock
represented by the proxy will be voted and the proxies will vote FOR the
election of all such nominees to the Board of Directors. If any of such persons
is unable or unwilling to be a candidate for the office of director at the dates
of the WVI Annual Meeting, or any adjournment thereof, the proxies will vote FOR
such substitute nominee as shall be designated by the proxies. The management of
WVI has no reason to believe that any of such nominees will be unable or
unwilling to serve if elected a director. Set forth below is certain information
concerning the nominees which is based on data furnished by them.
PRINCIPAL OCCUPATION OR SERVED AS
NOMINEES FOR DIRECTOR AGE POSITION HELD WITH WVI DIRECTOR SINCE
- ------------------------------- --- --------------------------------------- ---------------
James W. Bernau................ 43 Chairperson of the Board, President and 1993
Secretary
Ron Brigham.................... 44 Director 1995
Carol Fischer.................. 43 Director 1995
Carl F. Flipper................ 49 Director 1995
Earl Littrell.................. 54 Director 1995
Donald E. Voorhies............. 73 Director 1995
For certain biographical information regarding the directors of WVI and
certain information regarding committees of the Board of Directors and director
compensation, see "WVI Management" and "WVI Executive Compensation."
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The WVI Board has selected Price Waterhouse LLP to serve as independent
public accountants for WVI for the fiscal year ending December 31, 1997. The WVI
Board considers Price Waterhouse LLP to be eminently qualified.
Although it is not required to do so, the WVI Board is submitting its
selection of the WVI public accountants for ratification at the WVI Annual
Meeting, in order to ascertain the views of shareholders regarding such
selection. If the selection is not ratified, the WVI Board will reconsider its
selection.
The WVI Board recommends that stockholders vote FOR ratification of the
selection of Price Waterhouse LLP to examine the financial statements of WVI for
WVI's financial year ending December 31, 1997. It is the intention of the
persons named in the accompanying form of Proxy to vote the shares represented
thereby in favor of such ratification unless otherwise instructed therein.
A representative of Price Waterhouse LLP will be present at the WVI Annual
Meeting with the opportunity to make a statement if such representative desires
to do so and will be available to respond to appropriate questions.
134
AVIATOR SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with Aviator's Consolidated Financial Statements and notes thereto and "Aviator
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Proxy Statement/Prospectus. The selected
financial information presented below have been derived from Aviator's financial
statements. The financial statements as of December 31, 1995 and December 31,
1996 and for each of the two years in the period ended December 31, 1996 and for
the period from inception (February 14, 1994) to December 31, 1996 have been
audited by Price Waterhouse LLP, independent accountants, whose report on those
periods is included elsewhere herein. The financial statements as of and for the
three months ended March 31, 1997 and March 31, 1996 are included herein and
have not been audited. In the opinion of management, the interim financial
statements reflect all adjustments, consisting of only normal recurring items
which are necessary for a fair presentation for the interim periods presented.
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31, FEBRUARY 14, 1994
--------------------------- --------------------------- (INCEPTION TO
1997 1996 1996 1995 DECEMBER 31, 1994)
------------- ------------ ------------- ------------ ------------------
(UNAUDITED)
OPERATING RESULTS:
Net revenues....................... $ 283,146 $ 258,750 $ 1,824,077 $ 181,966 $ 43,698
Cost of goods sold................. 294,825 329,640 1,879,062 165,006 23,487
Selling, general and
administrative................... 110,637 157,019 851,352 490,646 110,230
Write-off of stock offering costs.. 0 0 249,871 0 0
Other income (expense) net......... (2,095) 807 (1,498) 79,046 39,291
Net loss........................... (124,411) (227,102) (1,157,706) (394,640) (50,728)
Net loss per share................. $ (0.02) $ (0.03) $ (0.20) $ (0.07) $ (0.01)
Weighted average shares
outstanding...................... 5,331,775 6,864,533 5,685,642 5,326,209 5,557,025
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......... $ (1,227,381) $ 13,494 $ (1,145,814) $ 317,481 $ 2,469,866
Total assets....................... 2,731,327 2,682,366 2,665,317 2,747,668 2,637,678
Long-term obligations.............. 134,864 356,452 127,767 347,951 50,000
Deficit accumulated during
development stage................ (1,727,485) (672,469) (1,603,074) (445,368) (50,728)
Shareholders' equity............... 860,400 1,912,641 984,811 2,139,742 2,523,512
135
AVIATOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Proxy Statement/Prospectus 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 Aviator's business, management's beliefs and assumptions made
by management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations and
payment of past due creditors, successful performance of internal operations,
impact of competition, changes in distributor relationship or performance,
successful completion of the planned consolidation of the Affiliated Companies,
and other risks detailed below as well as those discussed elsewhere in this
Proxy Prospectus/Statement and from time to time in Aviator's Securities and
Exchange Commission filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic economic conditions.
RESULTS OF OPERATIONS
The following table reflects selected data from Aviator's statements of
operations stated as a percentage of net revenues:
THREE MONTHS ENDED
YEAR ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1995 1997 1996
--------- --------- --------- ---------
Gross revenues......................................... 104.5% 102.7% 105.5% 105.9%
Less excise taxes...................................... 4.5 2.7 5.5 5.9
--------- --------- --------- ---------
Net revenues........................................... 100.0 100.0 100.0 100.0
Cost of goods sold..................................... 103.0 90.7 104.1 127.4
Selling, general and administrative expenses........... 46.7 269.6 39.1 60.7
--------- --------- --------- ---------
Operating loss......................................... (63.4) (260.3) (43.2) (88.1)
--------- --------- --------- ---------
Income (loss) before income taxes...................... (63.5) (216.9) (43.9) (87.8)
--------- --------- --------- ---------
Net loss............................................... (63.5)% (216.9)% (43.9)% (87.8)%
--------- --------- --------- ---------
--------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
GROSS REVENUES. Gross revenues from beer and retail products totaled
$298,632 for the quarter ended March 31, 1997 and $274,105 for the quarter ended
March 31, 1996, an increase of 9%. The increase in revenues is primarily a
result of Aviator's efforts to build its distribution channel, enhance its
awareness of its line of ales, develop a growing contingency of loyal customers
and an increase in sales of products to beer clubs.
Aviator's brewery currently has an annual production capacity of 57,000
barrels. Aviator sold 2,024 barrels and 1,270 barrels during the quarter ended
March 31, 1997 and 1996 respectively.
EXCISE TAXES. Excise taxes were $15,486 (5% of gross sales) for the three
months ended March 31, 1997 compared to $15,355 (6% of gross sales) for the same
period in 1996.
136
COST OF REVENUES. Cost of revenues totaled $294,825 (104 percent of net
revenues) for the quarter ended March 31, 1997 compared to $329,640 (127 percent
of net revenues) for the quarter ended March 31, 1996. Although cost of revenues
declined as a percentage of net revenues for the quarter ended March 31, 1997
from the same period in 1996, the high cost of revenues in 1997 is the result of
the disproportionate cost of production for products sold while the facility was
operating at less than designed capacity and the high percentage of discounted
sales made to beer clubs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $110,637 (39 percent of net revenues) for
the quarter ended March 31, 1997 from $157,019 (61 percent of net revenues) for
the quarter ended March 31, 1996. The decrease is primarily attributable to
higher advertising costs in 1996 as Aviator expanded its sales efforts in order
to quickly penetrate target markets. The level of these expenses was not
sustained into 1997.
NET INCOME (LOSS). As a result of the individual line items discussed
above, net loss was $124,411 for the quarter ended March 31, 1997 compared to
net loss of $227,102 for the quarter ended March 31, 1996.
1996 COMPARED TO 1995
GROSS REVENUES. Aviator began brewing beer in August 1995, with gross
revenues from beer and retail products totaling $1,905,511 for the year ended
December 31, 1996 and $186,818 for the year ended December 31, 1995. The
increase is primarily attributable to the fact that Aviator did not start
brewing and selling beer until late in the third quarter of 1995, and to the
sale of $543,799 (29 percent of gross revenues) of cooperatively brewed beer
under the Cooperative Brewing Agreement. During 1996, Aviator continued to build
its distribution channels, develop a contingency of loyal customers and promote
enhanced awareness of its line of ales. Aviator is not currently brewing beer
for Nor'Wester under the Cooperative Brewing Agreement.
Aviator's facility has a current annual production capacity of 57,000
barrels and sold 9,742 barrels and 574 barrels during 1996 and 1995,
respectively.
EXCISE TAXES. Excise taxes increased to $81,434 (4.3 percent of gross
revenues) for the year ended December 31, 1996 from $4,852 (2.6 percent of gross
revenues) for the year ended December 31, 1995. The increase as a percent of
gross revenues is a result of the mix of products sold shifting more to beer and
away from other retail products in 1996, offset in part by the Cooperative
Brewing Agreement with Nor'Wester and a brewing arrangement with Bayhawk, where
Aviator was reimbursed for excise taxes paid that were applicable to the
cooperatively brewed beer.
COST OF GOODS SOLD. Cost of goods sold totaled $1,879,062 (103 percent of
net revenues) for the year ended December 31, 1996 compared to $165,006 (91
percent of net revenues) for the year ended December 31, 1995. The cost of goods
sold percentages 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, lower margins were achieved on products produced
and sold under the Cooperative Brewing Agreement than on Aviator's own products
and Aviator wrote off approximately $80,000 of spoiled beer and obsolete
packaging materials during 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $851,352 (47 percent of net revenues) for the
year ended December 31, 1996 from $490,646 (270 percent of net revenues) for the
year ended December 31, 1995. SG&A expenses reflect operating management and
administrative services provided by Aviator's parent, WVI, as well as direct
charges such as selling and administrative salaries and advertising expenses.
The increase in SG&A expenses is primarily attributable to a full year of
operations in 1996 as well as increased shipping costs as Aviator introduced its
products into surrounding states, offset in part by higher costs incurred during
the first months of Aviator's operations in late 1995. SG&A, as a percentage of
net revenues, has decreased primarily as a result of
137
having a full year of operations in 1996. Aviator has restructured sales related
compensation, implemented expense controls and reduced staff in an effort to
reduce SG&A expenses while still increasing sales.
WRITE-OFF OF STOCK OFFERING COSTS. Consists of costs related to the
write-off of legal and accounting fees related to Aviator's attempted second
public stock offering.
NET LOSS. Net loss increased to $1,157,706 for the year ended December 31,
1996 from $394,640 for the year ended December 31, 1995 as a result of the
individual line items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, Aviator embarked upon its second direct public stock offering
to sell up to 820,000 shares of Common Stock at $1.85 per share, with estimated
net proceeds of approximately $1,289,450. The offering failed to raise the
minimum escrow amount of $650,000 and was terminated. Furthermore, terms of the
Investment Agreement with UBA prohibit Aviator from selling any of its
securities without the approval of UBA.
Aviator had cash and cash equivalents at March 31, 1997, December 31, 1996
and December 31, 1995 of $0, $19,218 and $226,401, respectively. Changes in cash
and cash equivalents for the quarter ended March 31, 1997 primarily consisted of
cash used in operating activities of $14,249, purchases of brewing equipment of
$3,567 and principal payments on lease obligations of $1,402. Changes in cash
and cash equivalents for the year ended December 31, 1996 are due primarily to
cash used in operating activites of $596,480 and purchases of brewing equipment
of $229,965 offset by borrowings and advances from affiliates of $602,901.
Aviator's working capital (deficit) at March 31, 1997, December 31, 1996 and
December 31, 1995 was ($1,227,381), ($1,145,814) and $317,481, respectively. At
March 31, 1997, December 31, 1996 and December 31, 1995 the current ratio was
.29:1, .26:1 and 2.2:1, respectively.
Accounts payable at March 31, 1997, December 31, 1996 and December 31, 1995
were $729,867, $607,570 and $202,312, respectively. Of the $729,867 in accounts
payable at March 31, 1997, $583,652 was past due.
At March 31, 1997, Aviator had payables to WVI, its parent, and to other
affiliated companies of $942,251 which accounts for 54% of Aviator's current
liabilities. The payables to affiliates consist primarily of advances by
Nor'Wester to support Aviator, which was engaged to cooperatively brew
Nor'Wester's beer during most of 1996. Management expects that the payables to
affiliates will be eliminated upon completion of the Consolidation.
In the first quarter of 1996, WVI, Aviator's parent, loaned Aviator $240,000
to fund its working capital needs. Because of the Consolidation, management does
not expect to repay this loan. Instead, the loan will be considered in
determining the purchase price and stock conversion ratios being used in the
Consolidation.
Aviator requires significant capital to continue its operations. However,
Aviator has very little capital resources, has insufficient operating results to
obtain a bank line of credit and WVI, Aviator's parent, does not currently have
adequate resources to support Aviator's operations. Aviator's management
believes that current working capital together with projected income from
operations is not sufficient to meet the cash needs of Aviator's operating
subsidiaries through the end of 1997. Aviator's independent accountants
expressed substantial doubt as to Aviator's ability to continue as a going
concern in their report on Aviator's 1996 consolidated financial statements.
To address recent losses and the need for working capital, Aviator and its
parent, WVI, have developed and are in the process of implementing plans
designed to sustain operations until profitability is reached. In particular,
Aviator has taken steps to: (i) implement a more focused marketing and sales
plan designed to increase sales on a regional basis; (ii) significantly reduce
or eliminate cooperative brewing
138
arrangements with affiliates which proved to be inefficient and costly; (iii)
negotiate with past-due creditors for extended terms and payment plans and to
allow for the possibility of obtaining debt financing; (iv) hire and retain
highly qualified employees familiar with the brewing industry; (v) use bridge
loans from UBA to fund operations until the Investment closes; and (vi) sell
duplicative and/or unutilized assets created by the Consolidation for cash.
While management believes these plans will sustain Aviator's operations
through December 31, 1997, no assurance can be given that these plans will
provide the necessary revenue and profits to sustain Aviator's through that
period. Aviator is highly dependent upon the receipt of additional amounts from
UBA under the bridge loan and closing of the Investment. For a description of
the general terms and conditions of the bridge loan from UBA see "Ancillary
Agreements--UBA Bridge Loan Credit Agreement and Related Documents." No
assurance can be given that UBA will loan Aviator further amounts under the
bridge loan or that the Investment will close. See "Risk Factors--Dependence
Upon Bridge Loans and Investment from United Breweries of America, Inc." If, for
any reason, the Investment does not occur, alternative sources of debt financing
and/or equity capital would have to be developed. There can be no assurance that
such debt financing or capital will be available or, if available, under terms
and conditions acceptable to Aviator. Aviator's inability to obtain additional
capital would result in a material adverse effect on Aviator's business and
results of operations.
Furthermore, assuming the Investment closes, UCB will be dependent upon the
receipt of additional debt or equity financing to sustain operations of the
Constituent Corporations until revenues are sufficiently increased and costs
controlled to enable them to achieve positive cash flow and profitability. No
assurance can be given that additional debt or equity financing will be
available on terms acceptable to UCB or at all. Failure to obtain additional
financing would have a material adverse effect on the operations and financial
condition of the Constituent Corporations, including Aviator. See "Risk
Factors-- Capital Requirements."
AVIATOR BUSINESS
GENERAL
Aviator was formed in February 1994 for the purpose of developing and
operating one or more breweries in Washington for the production of high
quality, handcrafted ales for sale in bottles and draft. Aviator has built a
brewery (the "Seattle Brewery") in a leased industrial building in Woodinville,
Washington. Woodinville is a city of approximately 6,000 people located 20 miles
northeast of Seattle. In recent years, Woodinville has developed a cottage
industry of local microbrewers and vintners, including Silver Lake Sparkling
Cellars, Paul Thomas Winery, Columbia Winery, Chateau Ste. Michelle Winery,
Facelli Winery and Redhook Brewery. See also "General Description of the Craft
Brewing Industry and the Businesses of the Constituent Corporations."
STRATEGY
Consumers have shown strong support for craft beers brewed in or near their
local markets and Aviator believes the appropriate strategy is to develop and
protect strong local craft beer brands. The further believes that this strategy
can be strengthened through the Constituent Corporations' ability to build a
network of breweries each producing their own brand with local appeal while
benefiting from operating efficiencies, the decrease in production, marketing
and distribution costs and the increase in the ability of the Constituent
Corporations to finance growth and provide shareholders with a liquid market for
their shares. Once these local brands are established, the Constituent
Corporations may expand the distribution of one or more of their beer styles
into additional selected markets.
To implement this new strategy, the Boards of Directors of the Constituent
Corporations have elected to consolidate their entities under a single entity,
UCB. Furthermore, on January 30, 1997 the Constituent Corporations entered into
a definitive investment agreement with UBA for the purpose of funding operations
until the consolidation is completed and provide for future growth thereafter.
139
Should the proposed Consolidation occur, the Cooperative Brewing Agreements,
the Strategic Alliance Agreement and the General Services Agreement will
terminate.
PRODUCTION AND PRODUCTS
The maximum annual production capacity and the current annual brewing
capacity of Aviator is 125,000 barrels and 57,000 barrels, respectively.
Aviator's Seattle Brewery is designed to brew selected, high quality grains and
hops into ales and/or lager beers. The particular beer styles produced by
Seattle Brewery are dependent on local taste, climate, ethnic influences and
lifestyles. Quality in the ingredients and the brewing process is the primary
guiding principle in the development and production of the Seattle Brewery's
products. The Seattle Brewery is equipped with a superior and efficient
brewhouse that utilizes modern electronic temperature controls in the
fermentation and conditioning tanks, and employs a brewmaster experienced in
producing high quality microbrewed beer.
Aviator currently sells the following products under the Aviator brand:
Amber Ale, India Pale Ale, Honey Brown Ale, Hefe Weizen, Porter and a variety of
seasonal ales.
DISTRIBUTION
The Seattle Brewery products are sold to distributors who serve multiple
states, including Washington, Oregon, Idaho, Alaska, California, Colorado and
Montana. Two distributors, K&L Distributing and Cabo Distributing, accounted for
approximately 29 percent and 12 percent, respectively, of the Seattle Brewery's
sales in 1996. No other customer accounted for more than 10 percent of the
Seattle Brewery's sales in 1996. The loss, without replacement, of either of
these distributors could have a material adverse effect on Aviator's business,
financial condition and results of operation. See also "General Description of
the Craft Brewing Industry and the Businesses of the Constituent
Corporations--Distribution."
REGULATION
Management believes that Aviator currently has all licenses, permits and
approvals necessary for its current operations and is in material compliance
with all applicable government regulations. See also "General Description of the
Craft Brewing Industry and the Businesses of the Constituent Corporations--
Regulation and Dram Shop Liability."
TRADEMARKS
"Aviator" is a registered trademark of Aviator. Aviator has also filed for
federal trademark protection for certain of its flavor styles. Aviator's policy
is to preserve registration of its marks whenever possible and to oppose
vigorously an infringement of its marks.
EMPLOYEES
At December 31, 1996, Aviator had a total of 10 full time employees. None of
Aviator's employees are covered by collective bargaining agreements, there have
been no work stoppages and Aviator believes that relations with its employees
are adequate.
PROPERTIES
In October 1995, Aviator opened the Seattle Brewery in a leased industrial
building in Woodinville, Washington. Aviator has executed a 20 year lease for
the Brewery that runs until August 1, 2015, with the right to renew the lease
for two additional terms of ten years each. The leased facility comprises
approximately 19,000 square feet and Aviator also has an option on additional
adjacent space of approximately 10,000 square feet that is exercisable between
years 2 and 5 of the current lease. Aviator has constructed the Brewery with
sufficient leasehold improvements to enable it to grow to a maximum annual
brewing capacity of 125,000 barrels (current brewing capacity is 57,000
barrels). To reach maximum capacity, additional brewing equipment, fermentation
and conditioning tanks must be purchased and
140
installed, and an option to lease additional space adjacent to the Brewery must
be exercised. Aviator also has purchased a highspeed Krones bottling line and
labeler.
In addition to its principal facility, Aviator has purchased a 1.3 acre
parcel in the Woodinville Tourist District on which it planned to build a
specialty draft only brewhouse and pub/restaurant. However, Aviator does not
expect to develop this site in the foreseeable future.
Under its Cooperative Brewing Agreement with Nor'Wester, Nor'Wester has
provided at its expense, additional equipment at the Brewery, including
fermenting and conditioning tanks, a yeast propagator and a Hop Jack, which was
dedicated to the production of Nor'Wester products. The addition of this
Nor'Wester owned equipment gives Aviator the capacity to produce up to 23,000
barrels of Nor'Wester beer annually. However, no beer is currently being brewed
under the Cooperative Brewing Agreement.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Aviator was a
party. From time to time, Aviator becomes involved in ordinary, routine or
regulatory legal proceedings incidental to the business of Aviator.
MARKET PRICE OF AND DIVIDENDS ON AVIATOR COMMON STOCK
There is no public trading market for Aviator's Common Stock. The
approximate number of shareholders of record on December 31, 1996 was 3,494.
There were no cash dividends declared or paid in fiscal years 1996 or 1995.
Aviator does not anticipate declaring such dividends in the foreseeable future.
Aviator issued a total of 1,500 unregistered shares of its Common Stock at
various times throughout 1996 to its distributors.
AVIATOR MANAGEMENT
DIRECTORS
The names and ages of Aviator's Directors are as follows:
DIRECTOR
NAME AGE POSITION(S) WITH AVIATOR SINCE
- ------------------------------ --- ------------------------------------------------------------- -------------
James W. Bernau............... 43 Chairperson of the Board, President and Secretary 1994
Dustin Wyant.................. 27 Director, Vice President and General Manager 1996
Jim Gregory................... 47 Director 1995
Howard Lovering............... 59 Director 1995
David McCray.................. 40 Director 1995
Bonnie Pladson................ 55 Director 1995
Mr. Bernau has been Chairperson of the Board of Directors, President and
Secretary since Aviator's inception in February 1994. Mr. Bernau is also the
President and Chairperson of the Board of Directors of five other public
companies and has held these positions since the dates indicated: WVV since May
1988, Nor'Wester since December 1992, WVI, Aviator's parent, since December 1993
and two other majority owned subsidiaries of WVI, Bayhawk since February 1994
and Mile High since June 1994. Mr. Bernau also serves as one of the three
Managers of the North Country Joint Venture LLC, a wholly owned subsidiary of
Nor'Wester. Mr. Bernau began this alliance of consumer/investor owned companies
by first co-founding WVV in 1988 with Donald Voorhies. From 1981 to September
1989, Mr. Bernau was Director of the Oregon Chapter of the National Federation
of Independent Businesses (NFIB), an association of 15,000 independent
businesses in Oregon. While at NFIB, his responsibilities primarily involved
communicating with association members and lobbying the Oregon state legislature
regarding issues impacting the members.
Mr. Wyant has served as Director since 1996 and as Vice President and
General Manager since 1995. From January 1994 to January 1995, Mr. Wyant served
as Retail Manager for Nor'Wester and WVV.
141
During 1993, Mr. Wyant was an independent sales representative for WVV. From
1990 to 1992, Mr. Wyant was obtaining his commerce degree at the University of
Virginia and Bath University in England.
Mr. Gregory has served as a Director of Aviator since June 1995. Since
December 1995, Mr. Gregory has served as a manager of Contra Costa Newspapers,
Inc., a group of San Francisco Bay Area newspapers owned by KnightRidder
Corporation. From January 1994 to December 1995, Mr. Gregory was senior partner
of JG Associates, a business he established to provide marketing and management
consulting services. From 1982 to January 1994, Mr. Gregory was Director of
Marketing and Circulation for THE HERALD, a daily circulation newspaper in
Everett, Washington.
Mr. Lovering has served as a Director of Aviator since June 1995. Since
January 1992, Mr. Lovering has been the owner and president of LOGIC
Incorporated, a museum and visitor attraction consulting company. From 1977 to
1991, Mr. Lovering was the Executive Director of the Museum of Flight Foundation
in Seattle, Washington.
Mr. McCray has served as a Director of Aviator since June 1995. From 1984
through January 1996, Mr. McCray was vice president and Chief Financial Officer
of Larry's Markets, Inc., a Seattle based supermarket chain. Currently, Mr.
McCray is a Director of Finance and Management Information Systems for West
Coast Paper Corporation. Mr. McCray is a certified public accountant and a
certified management accountant.
Ms. Pladson has served as a Director of Aviator since June 1995. Since
August 1995, Ms. Pladson, a lawyer, has been a Senior Trust Officer with Safeco
Trust in Seattle, Washington. Prior to joining Safeco, Ms. Pladson spent six
years as a Vice President with Laird, Norton Trust. Ms. Pladson is an active
Board Member of the Bellevue Community college Foundation, Chairperson of the
Bellevue Arts Commission and a member of the Washington State Bar Association.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and positions of Aviator's executive officers are as
follows:
NAME AGE POSITION(S) WITH AVIATOR SINCE
- ------------------------------ --- -------------------------------------------------------------------- ---------
James W. Bernau............... 43 Chairman of the Board, President and Secretary 1994
Dustin Wyant.................. 27 Director, Vice President and General Manager 1995
Traye Veillon................. 26 Lead Brewer 1997
For information on the business background of Messrs. Bernau and Wyant see
"Directors" above.
Mr. Veillon became Lead Brewer for Aviator in 1997. From 1995 to 1996, Mr.
Veillon was assistant brewer at Mile High. In 1995, Mr. Veillon received a BA in
Chemistry from Metro State College of Denver and earned his BS in Biology from
Colorado Christian University in 1993.
COMMITTEES OF THE BOARD
During 1996, the Board of Directors held three meetings and acted by
unanimous written consent on numerous occasions. In June 1995, Aviator
established an Audit Committee, a Compensation Committee and an Affiliated
Transactions Committee. The Audit Committee, comprised of Mr. McCray and Ms.
Pladson, oversees actions taken by Aviator's independent auditors and reviews
Aviator's internal audit controls. The Compensation Committee, comprised of Mr.
Gregory, reviews the compensation levels of Aviator's employees and makes
recommendations to the Board of Directors regarding changes in compensation. The
Affiliated Transactions Committee, comprised of Mr. McCray and Ms. Pladson,
reviews the appropriateness of all transactions between Aviator and any
affiliate and oversees the activities of the Alliance's Executive Committee.
During 1996, Mr. William Gates served on the Audit, Compensation and Affiliated
Transactions Committees. Mr. Gates resigned from the Aviator Board effective
142
October 23, 1996. Aviator does not have a nominating committee. They are no
family relationships between any of the executive officers and directors.
ATTENDANCE AT MEETINGS
During 1996, there were no members of the Board of Directors who attended
fewer than seventy-five percent of the meetings of the Board of Directors and
all committees of the Board on which they served.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, Directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, for the fiscal year ended December 31, 1996, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements.
143
AVIATOR EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to Aviator's Chief Executive Officer
and other executive officers of Aviator whose total annual salary and bonus
exceeded $100,000 (collectively, the "named executive officers") for fiscal
years 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION(A) YEAR EMPLOYER SALARY($) BONUS($)
- ---------------------------------- --------- ------------------------------------------------ ----------- -----------
James W. Bernau(B)................ 1996 Aviator Ales, Inc. 4,661
Chairperson of the Board, 1996 All affiliated and companies except Aviator 88,551
President Secretary Ales, Inc.
1995 Aviator Ales, Inc. 2,640
1995 All affiliated companies except Aviator Ales, 93,360 10,882
Inc.
- ------------------------
(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of Aviator, WVI, Nor'Wester, Bayhawk,
Mile High and North Country. Each of these companies pays a pro rata portion
of Mr. Bernau's monthly salary based on the amount of time which Mr. Bernau
has devoted to the respective company's business in that month.
STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.
OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held
by Mr. Bernau at December 31, 1996.
COMPENSATION OF DIRECTORS OF AVIATOR
Directors of Aviator are not compensated for acting in such capacity.
144
CERTAIN TRANSACTIONS
GENERAL
Each of Nor'Wester, WVI, Bayhawk and Mile High is affiliated with Aviator in
that James W. Bernau, Aviator'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 Aviator 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 Aviator's President's
time.
LOANS, ADVANCES AND SERVICES FROM AFFILIATES
LOANS AND ADVANCES FROM NOR'WESTER AND WVI. In 1995 and 1996, Nor'Wester
loaned or advanced $350,000 to Aviator for working capital needs and for the
purchase of brewing ingredients and raw materials to brew Nor'Wester beer under
Aviator'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 "General Description of the Craft Brewing
Industry and the Business of the Constituent Corporations--The Strategic
Alliance." In 1996, WVI advanced $240,000 to Aviator, a majority owned
subsidiary of WVI, to purchase capital assets and support the working capital
needs of Aviator'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 Aviator and provided Aviator 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 Aviator and provided Aviator with services under
the General Services Agreement entered into as part of the Alliance. For a
description of the General Services Agreement see "General Description of the
Craft Brewing Industry and the Business of the Constituent Corporations--The
Strategic Alliance."
PAYMENTS TO AFFILIATES. During 1995, Aviator paid WVI, WVV and Nor'Wester
$18,056, $12,500 and $9,107, respectively, in payment of the above-described
loans, advances and services. During the quarter ended March 31, 1997 and during
1996, Aviator paid WVI $0 and $3,124, respectively, in payment of the
above-described loans, advances and services.
STRATEGIC ALLIANCE. In January 1996, Aviator established the Alliance with
WVI, Mile High, Bayhawk and Nor'Wester the purpose and terms of which are more
fully described in "General Description of the Craft Brewing Industry and the
Businesses of the Constituent Corporations--The Strategic Alliance." During 1996
Aviator was charged by Nor'Wester and WVI $52,550 and $55,125, respectively, for
services under the General Services Agreement of the Alliance and was charged
$13,842 by Nor' Wester for such services for the quarter ended March 31, 1997.
AMOUNTS OWED TO AFFILIATES. As a result of the above-described
transactions, at March 31, 1997, Aviator owed $276,513 to WVI, $34,910 to WVV,
and $629,857 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, and are
reflected as "payables to parent and affiliated companies" on Aviator's balance
sheet.
ARMS-LENGTH TRANSACTIONS
Aviator believes that the Alliance and the transactions set forth above were
made on terms no less favorable to Aviator than could have been obtained from
unaffiliated third parties. All future transactions
145
between Aviator and its officers, directors, principal shareholders and
affiliates will be approved by a majority of the independent outside members of
Aviator's Board of Directors who do not have an interest in the transactions,
and will be on terms no less favorable to Aviator than could be obtained from
unaffiliated third parties.
AVIATOR PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of Aviator as of February 28, 1997 as to (i) each
person who is known by Aviator to own beneficially 5%or more of the outstanding
shares of Common Stock, (ii) each Director of Aviator, (iii) each of the
executive officers named in the Summary Compensation Table above and (iv) all
Directors and executive officers as a group. Except as otherwise noted, Aviator
believes the persons listed below have sole investment and voting power with
respect to the Common Stock owned by them.
COMMON STOCK
--------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED(1) OWNED
- --------------------------------------------------------------------------------------- ----------- -------------
Willamette Valley, Inc. ............................................................... 2,715,584 50.9%
Microbreweries Across America
66 SE Morrison Street
Portland, Oregon97214
James W. Bernau (2) ................................................................... 2,715,584 50.9%
66 SE Morrison Street
Portland, Oregon97214
Dustin Wyant (3) ...................................................................... 20,000 *
14316 NE 203rd Street
Woodinville, Washington 98072
James G. Gregory ...................................................................... 3,000 *
18944 Mount Lassen Drive
Castro Valley, California 94552
David M. McCray ....................................................................... 1,000 *
6815 Ripley Lane North
Renton, Washington 98056
Bonnie A. Pladson ..................................................................... 450 *
15429 SE 47th Place
Bellevue, Washington 98006
Howard Lovering ....................................................................... -- *
4615 NE 54th Street
Seattle, Washington98105
All Directors and executive officers as a group (5 persons) (3)........................ 2,740,034 51.2%
- ------------------------
* Less than 1%
(1) Applicable percentage of ownership is based on 5,331,775 shares of Aviator's
Common Stock outstanding as of February 28, 1997 together with applicable
options for such shareholders. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to such shares. Shares of
Aviator Common
146
Stock subject to options or warrants currently exercisable or exercisable
within 60 days after February 28, 1997 are deemed outstanding for computing
the percentage ownership of the person holding such options or warrants, but
are not deemed outstanding for computing the percentage of any other person.
(2) Mr. Bernau is deemed to be the beneficial owner of all of the 2,715,584
shares of Aviator's Common Stock owned by WVI as a result of his ownership
of approximately 62 percent of the outstanding Common Stock of WVI. Mr.
Bernau does not own any shares of Aviator's Common Stock directly.
(3) Includes 20,000 shares subject to options granted pursuant to Aviator's 1994
Stock Incentive Plan and exercisable within 60 days of February 28, 1997.
147
ELECTION OF AVIATOR DIRECTORS
The persons named below are nominees for director to serve until the next
annual meeting of shareholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved and the
Merger is consummated, such persons will serve as directors only until the
Merger is consummated. Directors are elected to serve for a term of one year and
until a successor shall have been chosen and qualified.
In the absence of instructions to the contrary, shares of Aviator Common
Stock represented by the proxy will be voted and the proxies will vote FOR the
election of all such nominees to the Board of Directors. If any of such persons
is unable or unwilling to be a candidate for the office of director at the dates
of the Aviator Annual Meeting, or any adjournment thereof, the proxies will vote
FOR such substitute nominee as shall be designated by the proxies. The
management of Aviator has no reason to believe that any of such nominees will be
unable or unwilling to serve if elected a director. Set forth below is certain
information concerning the nominees which is based on data furnished by them.
PRINCIPAL OCCUPATION OR SERVED AS
NOMINEES FOR DIRECTOR AGE POSITION HELD WITH AVIATOR DIRECTOR SINCE
- ----------------------------------- --- ------------------------------------------------------- ---------------
James W. Bernau.................... 43 Chairman of the Board, President and Secretary 1994
Dustin Wyant....................... 27 Director, Vice President and General Manager 1996
Jim Gregory........................ 47 Director 1995
Howard Lovering.................... 59 Director 1995
David McCray....................... 40 Director 1995
Bonnie Pladson..................... 55 Director 1995
For certain biographical information regarding the directors of Aviator and
certain information regarding committees of the Board of Directors and director
compensation, see "Aviator Management" and "Aviator Executive Compensation."
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Aviator Board has selected Price Waterhouse LLP to serve as independent
public accountants for Aviator for the fiscal year ending December 31, 1997. The
Aviator Board considers Price Waterhouse LLP to be eminently qualified.
Although it is not required to do so, the Aviator Board is submitting its
selection of the Aviator public accountants for ratification at the Aviator
Annual Meeting, in order to ascertain the views of shareholders regarding such
selection. If the selection is not ratified, the Aviator Board will reconsider
its selection.
The Aviator Board recommends that stockholders vote FOR ratification of the
selection of Price Waterhouse LLP to examine the financial statements of Aviator
for Aviator's financial year ending December 31, 1997. It is the intention of
the persons named in the accompanying form of Proxy to vote the shares
represented thereby in favor of such ratification unless otherwise instructed
therein.
A representative of Price Waterhouse LLP will be present at the Aviator
Annual Meeting with the opportunity to make a statement if such representative
desires to do so and will be available to respond to appropriate questions.
148
BAYHAWK SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with Bayhawk's Consolidated Financial Statements and notes thereto and "Bayhawk
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Proxy Statement/Prospectus. The selected
financial information presented below have been derived from the Bayhawk's
financial statements. The financial statements as of December 31, 1995 and
December 31, 1996 and for each of the two years in the period ended December 31,
1996 and for the period from inception (February 14, 1994) to December 31, 1996,
have been audited by Price Waterhouse LLP, independent accountants, whose report
on those periods is included elsewhere herein. The balance sheet data as of
December 31, 1994 is derived from audited financial statements not included
herein. The financial statements as of and for the three months ended March 31,
1997 and March 31, 1996 are included herein and have not been audited. In the
opinion of management, the interim financial statements reflect all adjustments,
consisting of only normal recurring items which are necessary for a fair
presentation for the interim periods presented.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31, FEBRUARY 14, 1994
---------------------------- -------------------------- (INCEPTION) TO
1997 1996 1996 1995 DECEMBER 31, 1994
------------ -------------- ------------ ------------ ------------------
(UNAUDITED)
OPERATING RESULTS:
Net revenues....................... $ 87,201 $ 51,066 $ 419,938 $ 163,167 $ 0
Cost of goods sold................. 88,110 93,834 364,450 229,856 0
Selling, general and
administrative................... 60,598 66,646 339,766 418,661 94,976
Other income (expense), net........ 207 (1,582) (7,264) 8,298 677
Net loss........................... (61,300) (110,996) (291,542) (477,052) (94,299)
Net loss per share................. $ (0.03) $ (0.05) $ (0.13) $ (0.28) $ (0.08)
Weighted average shares
outstanding...................... 2,200,814 2,205,844 2,200,814 1,709,513 (1,249,811)
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......... $ (283,995) $ 189,121 $ (235,508) $ 292,711 $ (949,456)
Total assets....................... 901,979 1,170,052 931,793 1,261,648 994,342
Long-term obligations.............. 0 321,000 0 321,000 0
Deficit accumulated during
development stage................ (924,193) (682,347) (862,893) (571,351) (94,299)
Shareholders' equity............... 505,990 739,663 567,290 854,922 5,701
149
BAYHAWK MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Proxy Statement/Prospectus 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 Bayhawk's business, management's beliefs and assumptions made
by management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations,
successful performance of internal operations, impact of competition, changes in
distributor relationship or performance, successful completion of the planned
consolidation of the Affiliated Companies, and other risks detailed below as
well as those discussed elsewhere in this Proxy Statement/Prospectus and from
time to time in Bayhawk's Securities and Exchange Commission filings and
reports. In addition, such statements could be affected by general industry and
market conditions and growth rates, and general domestic economic conditions.
RESULTS OF OPERATIONS
The following table reflects selected data from Bayhawk's statements of
operations stated as a percentage of net revenues:
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ---------------------
1996 1995 1997 1996
--------- --------- --------- ----------
Gross revenues....................................... 109.9% 110.1% 106.3% 109.5%
Less excise taxes.................................... 9.9 10.1 6.3 9.5
--------- --------- --------- ----------
Net revenues......................................... 100.0 100.0 100.0 100.0
Cost of goods sold................................... 86.8 140.9 101.0 183.8
Selling, general and administrative expenses......... 80.9 256.6 69.5 130.5
--------- --------- --------- ----------
Operating loss....................................... (67.7) (297.5) (70.5) (214.3)
--------- --------- --------- ----------
Loss before income taxes............................. (69.4) (292.4) (70.3) (217.4)
--------- --------- --------- ----------
Net loss............................................. (69.4)% (292.4)% (70.3)% (217.4)%
--------- --------- --------- ----------
--------- --------- --------- ----------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
GROSS REVENUES. Gross revenues from beer and retail products totaled
$92,652 for the quarter ended March 31, 1997 and $55,928 for the quarter ended
March 31, 1996, an increase of 66%. The increase in revenues is primarily a
result of increased share in Southern and Northern California beer markets. This
increase in sales, however, is not sufficient for Bayhawk to become
self-sustaining in the near term.
Bayhawk's brewery currently has an annual production capacity of 10,000
barrels. Bayhawk sold 745 barrels and 602 barrels during the quarter ended March
31, 1997 and 1996 respectively.
EXCISE TAXES. Excise taxes were $5,451 (5.9% of gross revenues) for the
three months ended March 31, 1997 compared to $4,862 (8.7% of gross revenues)
for the same period in 1996.
COST OF REVENUES. Cost of revenues totaled $88,110 (101% of net revenues)
for the quarter ended March 31, 1997 compared to $93,834 (184% of net revenues)
for the quarter ended March 31, 1996. The high cost of goods sold as a
percentage of net revenues for each of the respective quarters is due primarily
150
to the disproportionate cost of production for goods sold during periods when
the facility was operating at less than its maximum designed capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased to $60,598 (69% of net revenues) for
the quarter ended March 31, 1997 from $66,646 (130% of net revenues) for the
quarter ended March 31, 1996. The decrease in SG&A expense is primarily
attributable to cost cutting measures designed to lower selling, general and
administrative expenses in light of continued operating losses.
1996 COMPARED TO 1995
GROSS REVENUES. Bayhawk began brewing beer in January 1995, with gross
revenues from beer and retail products totaling $461,549 for the year ended
December 31, 1996 and $179,592 for the year ended December 31, 1995. The
increase is primarily attributable to the sale of $34,000 of Nor'Wester brand
beer under the Cooperative Brewing Agreement and increased market share
throughout Southern and Northern California. In July, however, Nor'Wester
suspended brewing under the Cooperative Brewing Agreement with Bayhawk as the
brewing capacity for Nor'Wester brand beer on draft was not needed and is not
expected to be needed in the near future. Cooperative brewing of Nor'Wester
brand beers accounted for 17 percent of Bayhawk's total revenues for 1996.
Bayhawk's facility has a current annual production capacity of 10,000
barrels and sold 3,658 barrels and 1,360 barrels during 1996 and 1995,
respectively.
EXCISE TAXES. Excise taxes increased to $41,611 (9 percent of gross
revenues) for the year ended December 31, 1996 from $16,425 (9 percent of gross
revenues) for the year ended December 31, 1995, due to higher sales volume.
COST OF GOODS SOLD. Cost of goods sold totaled $364,450 (87 percent of net
revenues) for the year ended December 31, 1996 compared to $229,856 (141 percent
of net revenues) for the year ended December 31, 1995. While decreasing in 1996,
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, lower margins were
achieved on products produced and sold under the Cooperative Brewing Agreement
than on Bayhawk's own products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses decreased to $339,766 (81 percent of net revenues) for the
year ended December 31, 1996 from $418,661 (257 percent of net revenues) for the
year ended December 31, 1995. SG&A expenses reflect operating management and
administrative services provided by Bayhawk's parent, WVI, as well as direct
charges such as the general manager's salary and advertising expenses. The
decrease in SG&A expenses is primarily attributable to higher costs incurred
during the first months of Bayhawk's operations in early 1995. Bayhawk has
restructured sales related compensation, implemented expense controls and
reduced staff in an effort to reduce SG&A expenses.
NET LOSS. Net loss decreased to $291,542 for the year ended December 31,
1996 from $477,052 for the year ended December 31, 1995 as a result of the
individual line items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Bayhawk had cash and cash equivalents at March 31, 1997, December 31, 1996
and December 31, 1995 of $20,843, $40,954 and $302,247, respectively. Changes in
cash and cash equivalents for the quarter ended March 31, 1997 primarily
consisted of cash used in operating activities of $32,718 offset by borrowings
from affiliates of $12,607. Changes in cash and cash equivalents for the year
ended December 31, 1996 are due primarily to cash used in operating activities
of $219,683, purchases of brewing equipment of $25,996 and repayments of $69,409
of loans from affiliates, offset by proceeds on sales of capital assets of
$53,795.
Bayhawk's working capital (deficit) at March 31, 1997, December 31, 1996 and
December 31, 1995 was ($283,955), ($235,508) and $292,711, respectively. At
March 31, 1997, December 31, 1996 and December 31, 1995 the current ratio was
.28:1, .35:1 and 4.4:1, respectively.
151
Accounts payable at March 31, 1997, December 31, 1996 and December 31, 1995
were $39,844, $36,798 and $9,249, respectively.
At March 31, 1997, Bayhawk had payables to WVI and to other affiliated
companies of $304,193 which accounts for 77% of Bayhawk's current liabilities.
The payables to affiliates consist primarily of advances by WVI to construct
Bayhawk's brewery. Management expects that the payables to affiliates will be
eliminated upon completion of the Consolidation.
On November 30, 1995, Bayhawk issued a note to WVI for the balance of funds
loaned by WVI to construct, equip and operate Bayhawk's brewery. The note, which
had a principal balance of $250,188 at December 31, 1996, and bears interest at
8 percent per annum is secured by all of Bayhawk's assets. The terms of the note
provide that payments of principal and interest are payable in monthly
installments of $4,600 with a balloon payment of the remaining balance due on
December 31, 1999. Because of the Consolidation, management does not expect to
repay the loan or advances. Instead, the loan and advances are being considered
in determining the purchase price and stock conversion ratios being used in the
Consolidation.
Bayhawk requires significant capital to continue its operations. However,
Bayhawk has very little capital resources, has insufficient operating results to
obtain a bank line of credit and WVI, Bayhawk's parent, does not currently have
adequate resources to support Bayhawk's operations. Bayhawk's management
believes that current working capital together with projected income from
operations is not sufficient to meet the cash needs of Bayhawk's operating
subsidiaries through the end of 1997. Bayhawk's independent accountants
expressed substantial doubt as to Bayhawk's ability to continue as a going
concern in their report on Bayhawk's 1996 consolidated financial statements.
To address recent losses and the need for working capital, Bayhawk and its
parent, WVI, have developed and are in the process of implementing plans
designed to sustain operations until profitability is reached. In particular,
Bayhawk has taken steps to: (i) implement a more focused marketing and sales
plan designed to increase sales on a regional basis; (ii) significantly reduce
or eliminate cooperative brewing arrangements with affiliates which proved to be
inefficient and costly; (iii) negotiate with past-due creditors for extended
terms and payment plans and to allow for the possibility of obtaining debt
financing; (iv) hire and retain highly qualified employees familiar with the
brewing industry; (v) use bridge loans from UBA to fund operations until the
Investment closes; and (vi) sell duplicate and/or unutilized assets created by
the Consolidation for cash.
While management believes these plans will sustain Bayhawk's operations
through December 31, 1997, no assurance can be given that these plans will
provide the necessary revenue and profits to sustain Bayhawk's through that
period. Bayhawk is highly dependent upon the receipt of additional amounts from
UBA under the bridge loan and closing of the Investment. For a description of
the general terms and conditions of the bridge loan from UBA see "Ancillary
Agreements--UBA Bridge Loan Credit Agreement and Related Documents." No
assurance can be given that UBA will loan Bayhawk further amounts under the
bridge loan or that the Investment will close. See "Risk Factors--Dependence
Upon Bridge Loans and Investment from United Breweries of America, Inc." If, for
any reason, the Investment does not occur, alternative sources of debt financing
and/or equity capital would have to be developed. There can be no assurance that
such debt financing or capital will be available or, if available, under terms
and conditions acceptable to Bayhawk. Bayhawk's inability to obtain additional
capital would result in a material adverse effect on Bayhawk's business and
results of operations.
Furthermore, assuming the Investment closes, UCB will be dependent upon the
receipt of additional debt or equity financing to sustain operations of the
Constituent Corporations until revenues are sufficiently increased and costs
controlled to enable them to achieve positive cash flow and profitability. No
assurance can be given that additional debt or equity financing will be
available on terms acceptable to UCB or at all. Failure to obtain additional
financing would have a material adverse effect on the operations and financial
condition of the Constituent Corporations, including Bayhawk. See "Risk Factors
- -- Capital Requirements."
152
BAYHAWK BUSINESS
GENERAL
Bayhawk was formed in February 1994 for the purpose of developing and
operating one or more breweries in California for the production of high
quality, handcrafted ales for sale in bottle and draft. Bayhawk has built a 17
barrel showcase brewery (the "Southern California Brewery") in a leased building
next to McCormick & Schmick's Seafood Restaurant in Irvine, California.
The Southern California Brewery, located in the central business district of
Irvine, near John Wayne International Airport, began brewing beer in January
1995. Irvine is south of Los Angeles and is adjacent to Newport Beach. It is a
suburban city of the greater Los Angeles metropolitan area and the location of
numerous businesses. The Los Angeles metropolitan area is the largest single
market for beer in the United States. See also "General Description of the Craft
Brewing Industry and the Businesses of the Constituent Corporations."
STRATEGY
Consumers have shown strong support for craft beers brewed in or near their
local markets and Bayhawk believes the appropriate strategy is to develop and
protect strong local craft beer brands. Bayhawk further believes that this
strategy can be strengthened through the Constituent Corporations' ability to
build a network of breweries each producing their own brand with local appeal
while benefiting from operating efficiencies, the decrease in production,
marketing and distribution costs and the increase in the ability of the
Constituent Corporations to finance growth and provide shareholders with a
liquid market for their shares. Once these local brands are established, the
Constituent Corporations may expand the distribution of one or more of their
beer styles into additional selected markets.
To implement this new strategy, the Boards of Directors of the Constituent
Corporations have elected to consolidate their entities under a single entity,
UCB. Furthermore, on January 30, 1997 the Constituent Corporations entered into
a definitive investment agreement with UBA for the purpose of funding operations
until the consolidation is completed and provide for future growth thereafter.
Should the proposed consolidation occur, the Cooperative Brewing Agreements,
the Strategic Alliance Agreement and the General Services Agreement will
terminate.
PRODUCTS
Bayhawk's Southern California Brewery is designed to brew selected, high
quality grains and hops into ales and/or lager beers. The particular beer styles
produced by the Southern California Brewery are dependent on local taste,
climate, ethnic influences and lifestyles. Quality in the ingredients and the
brewing process is the primary guiding principle in the development and
production of the Southern California Brewery products. The Southern California
Brewery is equipped with an efficient brewhouse that utilizes modern electronic
temperature controls in the fermentation and conditioning tanks, and employs a
brewmaster experienced in producing high quality microbrewed beer. Bayhawk
produces draft beer only since the Southern California Brewery does not have
sufficient space to house a bottling line.
Bayhawk currently sells the following products: Honey Blond, Amber Ale,
California Cerveza, Hefe Weizen and Chocolate Porter.
DISTRIBUTION
One of Bayhawk's distributors, Young's Market, accounted for approximately
94 percent of Bayhawk's sales (excluding cooperatively brewed beer) in 1996. The
loss, without replacement, of this distributor could have a material adverse
effect on Bayhawk's business, financial condition and results of operation.
153
See also "General Description of the Craft Brewing Industry and the Businesses
of the Constituent Corporations--Distribution."
RESEARCH AND DEVELOPMENT
To meet varying consumer style and flavor preferences, Bayhawk continually
engages in the development and testing of new products. Bayhawk pilot brews
small batches of new products for sampling at the Southern California Brewery,
as well as in community tastings. Bayhawk also performs numerous tastings and
surveys with its distributors and consumers on beer styles and brand imagery.
REGULATION
Management believes that Bayhawk currently has all licenses, permits and
approvals necessary for its current operations and is in material compliance
with all applicable government regulations. See also, "General Description of
the Craft Brewing Industry and the Businesses of the Constituent Corporations--
Regulation and Dram Shop Liability."
TRADEMARKS
Bayhawk has filed for Federal trademark protection for its brand name
"Bayhawk-TM-" and has also filed for trademark protection on certain of its
flavor styles which include, but are not limited to "Honey Blonde-TM-".
Bayhawk's policy is to preserve registration of its marks whenever possible and
to oppose vigorously an infringement of its marks.
EMPLOYEES
At December 31, 1996, Bayhawk had a total of 5 full time and 1 part time
employees. None of Bayhawk's employees are covered by collective bargaining
agreements, there have been no work stoppages and Bayhawk believes that
relations with its employees are adequate.
PROPERTIES
The Southern California Brewery of Bayhawk is located in an approximately
2,000 square foot leased facility adjacent to the McCormick & Schmick's Seafood
Restaurant in Irvine, California. The lease for the Southern California Brewery
expires January 2010, with the right to renew the lease for two additional terms
of five years each. The Southern California Brewery includes a 17 barrel
brewhouse and has a current annual production capacity of 10,000 barrels. Due to
space limitations, the annual production capacity of the Southern California
Brewery cannot be increased beyond 10,000 barrels.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Bayhawk was a
party. From time to time, Bayhawk becomes involved in ordinary, routine or
regulatory legal proceedings incidental to the business of Bayhawk.
MARKET PRICE OF AND DIVIDENDS ON BAYHAWK COMMON STOCK
There is no public trading market for Bayhawk's Common Stock. The
approximate number of shareholders of record on December 31, 1996 was 1,268.
There were no cash dividends declared or paid in fiscal years 1996 or 1995.
Bayhawk does not anticipate declaring such dividends in the foreseeable future.
There were no sales of unregistered securities by Bayhawk during the year
ended December 31, 1996.
154
BAYHAWK MANAGEMENT
DIRECTORS
The names and ages of Bayhawk's Directors are as follows:
NAME AGE POSITION(S) WITH BAYHAWK DIRECTOR SINCE
- -------------------------------------------------- --- ---------------------------------------- ---------------
James W. Bernau................................... 43 Chairperson of the Board of Directors, 1994
President and Secretary
David Voorhies.................................... 46 Director, Vice President and General 1996
Manager
Jim Moreland...................................... 50 Director 1996
Roy Roberson...................................... 35 Director 1996
Donald Voorhies................................... 73 Director 1996
Pete Wachob....................................... 49 Director 1996
Karl J. Zappa..................................... 38 Director 1996
Mr. Bernau has been Chairperson of the Board of Directors, President and
Secretary since Bayhawk's inception in February 1994. Mr. Bernau is also the
President and Chairperson of the Board of Directors of five other public
companies and has held these positions since the dates indicated: Willamette
Valley Vineyards, Inc. ("WVV") since May 1988, Nor'Wester since December 1992,
WVI, Bayhawk's parent, since December 1993 and two other majority owned
subsidiaries of WVI, Aviator since February 1994 and Mile High since June 1994.
Mr. Bernau also serves as one of the three Managers of the North Country Joint
Venture LLC, a wholly owned subsidiary of Nor'Wester. Mr. Bernau began this
alliance of consumer/ investor owned companies by first co-founding WVV in 1988
with Donald Voorhies. From 1981 to September 1989, Mr. Bernau was Director of
the Oregon Chapter of the National Federation of Independent Businesses (NFIB),
an association of 15,000 independent businesses in Oregon. While at NFIB, his
responsibilities primarily involved communicating with association members and
lobbying the Oregon state legislature regarding issues impacting the members.
Mr. David Voorhies joined Bayhawk in January 1995 and serves as its Vice
President and General Manager. Mr. Voorhies is also the Regional Leader for the
Alliance Members, responsible for sales of Alliance Members' products in the
Southwest Region. Prior to joining the, Mr. Voorhies spent 22 years as a civil
engineer managing the design and construction of numerous complex building
projects for organizations such as Honeywell, Johnson Controls and the
Washington Public Power Supply System, among others. From April 1990 to December
1994, Mr. Voorhies served as Project Manager for Creegan and D'Angelo Consulting
Engineers, a design project management consulting firm based in Fairfield,
California. In addition to bringing significant management experience to the,
Mr. Voorhies has been a home brewer for over 5 years. Mr. Voorhies received his
B.S. in Civil Engineering from Washington State University. He is a registered
professional engineer in both California and Washington.
Mr. Moreland is the Director of Quality for Wacker Siltronic Corporation, a
German-owned manufacturer of silicon wafers. Since joining Wacker Siltronic in
1978, he has had numerous responsibilities including positions in Quality
Assurance, Process Engineering, Development, Applications Engineering and
Material Characterization. Mr. Moreland holds a Ph.D. in Chemistry from the
University of California, Irvine. Mr. Moreland currently serves on the Board of
Directors of The Oregon Quality Initiative Inc., a nonprofit organization
dedicated to promoting quality practices in Oregon businesses.
Mr. Roberson is the owner of EKOTek, an engineering consulting firm he
founded in 1994. Prior to that time, Mr. Roberson was a civil engineer involved
in commercial and residential development for 15 years.
Mr. Donald Voorhies has served as a Vice President and a Director of
Willamette Valley Vineyards, Inc. since its inception in 1988. Mr. Voorhies has
also served as a member of the Board of Directors of
155
Nor'Wester Brewing since 1993. From 1981 to 1995, Mr. Voorhies owned and
operated a 30-acre vineyard, Salem Hills Vineyard, which he developed from raw
land purchased in 1981. Prior to his retirement in 1983, Mr. Voorhies was
employed by General Electric as Sales Manager of the Lighting Products Division
for the Pacific Northwest Region. Mr. Voorhies holds a B.S. in Electrical
Engineering from University of California at Berkeley. Mr. Voorhies currently
serves as a liaison between the Oregon Wine Growers Association and the Oregon
Wine Advisory Board.
Mr. Wachob has served as the Chief Financial Officer of a group of companies
in computer related industries, Compel Corp., Data Processing Air Corp., Damac
Products and Landau Electronics, since 1992. From 1989 to 1991, Mr. Wachob was
the Vice President of Finance for Voit Enterprises Peregrine Industries, Inc., a
development stage company that ceased operation in 1992 after acquiring the
technology to produce semi-automatic handguns and rifles. Mr. Wachob has a
Bachelor's Degree in Accounting from the University of Southern California and
has been a CPA in the state of California since 1975.
Mr. Zappa is currently a senior loan officer with Cochran Investment
Corporation. Prior to taking that position in 1994, Mr. Zappa was President and
CEO of United Funding Financial Group, Inc. for eleven years and he continues to
serve on the Board of Directors of that company.
OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and positions of Bayhawk's executive officers and
significant employees are as follows:
NAME AGE POSITION(S) WITH BAYHAWK DIRECTOR SINCE
- -------------------------------------------------- --- ---------------------------------------- ---------------
James W. Bernau................................... 43 Chairperson of the Board of Directors, 1994
President and Secretary
David Voorhies.................................... 46 Director, Vice President and General 1995
Manager
For information on the business background of Messrs. Bernau and Voorhies,
see "Directors" above.
COMMITTEES OF THE BOARD
During 1996, the Board of Directors held four meetings and acted by
unanimous written consent on numerous occasions. Bayhawk does not have an audit
committee, compensation committee or a nominating committee. They are no family
relationships between any of the executive officers and directors.
ATTENDANCE AT MEETINGS
During 1996, there were no members of the Board of Directors who attended
fewer than seventy-five percent of the meetings of the Board of Directors and
all committees of the Board on which they served.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, Directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, for the fiscal year ended December 31, 1996, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements.
156
BAYHAWK EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to Bayhawk's Chief Executive Officer
and other executive officers of Bayhawk whose total annual salary and bonus
exceeded $100,000 (collectively, the "named executive officers") for fiscal
years 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION (A) YEAR EMPLOYER SALARY($) BONUS($)
- ----------------------------------------------------- --------- ----------------------------- ----------- -----------
James W. Bernau(B) .................................. 1996 Bayhawk Ales, Inc. 2,796
Chairperson of 1996 All affiliated companies 90,416
the Board, President except Bayhawk Ales, Inc.
and Secretary
1995 Bayhawk Ales, Inc. 1,760
1995 All affiliated companies 94,240 10,882
except Bayhawk Ales, Inc.
1994 Bayhawk Ales, Inc. 2,320 10,000
1994 All affiliated companies 81,180 25,185
except Bayhawk Ales, Inc.
- ------------------------
(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of Bayhawk, WVI, Nor'Wester, Aviator,
Mile High and North Country. Each of these companies pays a pro rata portion
of Mr. Bernau's monthly salary based on the amount of time which Mr. Bernau
has devoted to the respective company's business in that month.
STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.
OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held
by Mr. Bernau at December 31, 1996.
COMPENSATION OF DIRECTORS OF BAYHAWK
Directors of Bayhawk are not compensated for acting in such capacity.
157
CERTAIN TRANSACTIONS
GENERAL
Each of Nor'Wester, WVI, Aviator and Mile High is affiliated with Bayhawk in
that James W. Bernau, Bayhawk'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 Bayhawk 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 Bayhawk's President's
time.
LOANS, ADVANCES AND SERVICES FROM AFFILIATES
BAYHAWK BRIDGE LOAN. During 1994 and 1995, WVI loaned $1,353,823 to
Bayhawk, a subsidiary of WVI, to construct, equip and operate Bayhawk's brewery
pending completion of Bayhawk's direct public stock offering completed in
December 1995 (the "Bayhawk Bridge Loan"). In 1995 and 1996, Bayhawk repaid
$1,103,635 of loan principal. In October 1996, the loan was converted to a
promissory note issued to WVI. The note bears interest at 8% beginning on
January 1, 1996, provides for payments of $4,600 of principal and interest per
month, and is unsecured. As of March 31, 1997, $250,188 remained owed on the
note.
ADVANCES AND SERVICES FROM WVI, WVV AND NOR'WESTER. In 1995 and 1996, WVI
and WVV paid certain bills on behalf of Bayhawk and provided Bayhawk 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 Bayhawk and provided Bayhawk with services under
the General Services Agreement entered into as part of the Alliance. For a
description of the General Services Agreement see "General Description of the
Craft Brewing Industry and the Business of the Constituent Corporations--The
Strategic Alliance."
PAYMENTS TO AFFILIATES. During 1995, Bayhawk paid WVI, WVV and Nor'Wester
$497,600, $8,500 and $10,924, respectively, in payment of the above-described
advances and services. During the quarter ended March 31, 1997 and during 1996,
Bayhawk made no payments toward the above-described advances and services.
STRATEGIC ALLIANCE. In January 1996, Bayhawk established the Alliance with
WVI, Mile High, Aviator and Nor'Wester the purpose and terms of which are more
fully described in "General Description of the Craft Brewing Industry and the
Businesses of the Constituent Corporations--The Strategic Alliance. During 1996,
Bayhawk was charged by Nor'Wester and WVI $16,350 and $20,175, respectively, for
services under the General Services Agreement of the Alliance and was charged
$9,609 by Nor'Wester for such services for the quarter ended March 31, 1997.
AMOUNTS OWED TO AFFILIATES. As a result of the above-described
transactions, other than the Bayhawk Bridge Loan, at March 31, 1997, Bayhawk
owed $4,669 to WVI, $10,400 to WVV, and $67,497 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 March 31, 1997 Bayhawk owed $250,188 to WVI
on the Bayhawk Bridge Loan. The foregoing amounts are reflected as "payables to
affiliated companies" on Bayhawk's balance sheet.
158
ARMS-LENGTH TRANSACTIONS
Bayhawk believes that the Alliance and the transactions set forth above were
made on terms no less favorable to Bayhawk than could have been obtained from
unaffiliated third parties. All future transactions between Bayhawk and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the independent outside members of Bayhawk's Board of Directors who
do not have an interest in the transactions, and will be on terms no less
favorable to Bayhawk than could be obtained from unaffiliated third parties.
BAYHAWK PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of Bayhawk as of February 28, 1997 as to (i) each
person who is known by Bayhawk to own beneficially 5% or more of the outstanding
shares of Common Stock, (ii) each Director of Bayhawk, (iii) each of the
executive officers named in the Summary Compensation Table above and (iv) all
Directors and executive officers as a group. Except as otherwise noted, Bayhawk
believes the persons listed below have sole investment and voting power with
respect to the Common Stock owned by them.
COMMON STOCK
----------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED(1) OWNED
- --------------------------------------------------------------------------------------- ----------- ---------------
Willamette Valley, Inc.,............................................................... 1,249,811 56.8%
Microbreweries Across America
66 SE Morrison Street
Portland, Oregon
James W. Bernau (2).................................................................... 1,249,811 56.8%
8800 Enchanted Way SE
Turner, Oregon 97392
Donald Voorhies........................................................................ 15,000 *
1715 Wickshire Ct.
Salem, Oregon 97302
David Voorhies (3)..................................................................... 10,000 *
24662 LaCienega Blvd.
Laguna Hills, California 92653
Jim Moreland........................................................................... 3,000 *
300 NW 88th Avenue
Portland, Oregon 97229
Roy Roberson........................................................................... 606 *
41 Via Bacchus
Laguna Beach, California 92656
Pete Wachob............................................................................ 300 *
19412 Surfdale Lane
Huntington Beach, California, 92648
Karl J. Zappa.......................................................................... 300 *
P.O. Box 1238
Brea, California 92622
All Directors and executive officers as a group (8 people) (3)......................... 1,279,017 57.8%
- ------------------------
* Less than 1%
(1) Applicable percentage of ownership is based on 2,200,814 shares of Common
Stock outstanding as of February 28, 1997. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to such
shares.
159
(2) Mr. Bernau is deemed to be the beneficial owner of all of the 1,249,811
shares of Bayhawk's Common Stock owned by WVI as a result of his ownership
of approximately 62 percent of the outstanding Common Stock of WVI. Mr.
Bernau does not own any shares of Bayhawk's Common Stock directly.
(3) Includes 10,000 shares subject to options granted pursuant to Bayhawk's 1994
Stock Incentive Plan and exercisable within 60 days of February 28, 1997.
ELECTION OF BAYHAWK DIRECTORS
The persons named below are nominees for director to serve until the next
annual meeting of shareholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved and the
Merger is consummated, such persons will serve as directors only until the
Merger is consummated. Directors are elected to serve for a term of one year and
until a successor shall have been chosen and qualified.
In the absence of instructions to the contrary, shares of Bayhawk Common
Stock represented by the proxy will be voted and the proxies will vote FOR the
election of all such nominees to the Board of Directors. If any of such persons
is unable or unwilling to be a candidate for the office of director at the dates
of the Bayhawk Annual Meeting, or any adjournment thereof, the proxies will vote
FOR such substitute nominee as shall be designated by the proxies. The
management of Bayhawk has no reason to believe that any of such nominees will be
unable or unwilling to serve if elected a director. Set forth below is certain
information concerning the nominees which is based on data furnished by them.
PRINCIPAL OCCUPATION OR SERVED AS
NOMINEES FOR DIRECTOR AGE POSITION HELD WITH BAYHAWK DIRECTOR SINCE
- ------------------------------------------ --- ----------------------------- ---------------
James W. Bernau........................... 43 Chairperson of the Board of 1994
Directors, President and
Secretary
David Voorhies............................ 46 Director, Vice President and 1996
General Manager
Jim Moreland.............................. 50 Director 1996
Roy Roberson.............................. 35 Director 1996
Donald Voorhies........................... 73 Director 1996
Peter Wachob.............................. 49 Director 1996
Karl J. Zappa............................. 38 Director 1996
For certain biographical information regarding the directors of Bayhawk and
certain information regarding committees of the Board of Directors and director
compensation, see "Bayhawk Management" and "Bayhawk Executive Compensation."
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Bayhawk Board has selected Price Waterhouse LLP to serve as independent
public accountants for Bayhawk for the fiscal year ending December 31, 1997. The
Bayhawk Board considers Price Waterhouse LLP to be eminently qualified.
Although it is not required to do so, the Bayhawk Board is submitting its
selection of the Bayhawk public accountants for ratification at the Bayhawk
Annual Meeting, in order to ascertain the views of shareholders regarding such
selection. If the selection is not ratified, the Bayhawk Board will reconsider
its selection.
The Bayhawk Board recommends that stockholders vote FOR ratification of the
selection of Price Waterhouse LLP to examine the financial statements of Bayhawk
for Bayhawk's financial year ending December 31, 1997. It is the intention of
the persons named in the accompanying form of Proxy to vote the shares
represented thereby in favor of such ratification unless otherwise instructed
therein.
160
A representative of Price Waterhouse LLP will be present at the Bayhawk
Annual Meeting with the opportunity to make a statement if such representative
desires to do so and will be available to respond to appropriate questions.
MILE HIGH SELECTED FINANCIAL INFORMATION
The following selected financial information should be read in conjunction
with Mile High's Financial Statements and notes thereto and "Mile High
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Proxy Statement/Prospectus. The selected
financial information presented below have been derived from Mile High's
financial statements. The financial statements as of December 31, 1995 and
December 31, 1996 and for each of the two years in the period ended December31,
1996 and for the period from inception (June 8, 1994) to December 31, 1996 have
been audited by Price Waterhouse LLP, independent accountants, whose report on
those periods is included elsewhere herein. The balance sheet data as of
December 31, 1994 is derived from audited financial statements not included
herein. The financial statements as of and for the three months ended March 31,
1997 and March 31, 1996 are included herein and have not been audited. In the
opinion of management, the interim financial statements reflect all adjustments,
consisting of only normal recurring items which are necessary for a fair
presentation for the interim periods presented.
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, JUNE 8, 1994
---------------------------- --------------------------- (INCEPTION) TO
1997 1996 1996 1995 DECEMBER 31, 1994
------------- ------------- ------------- ------------ -----------------
(UNAUDITED)
OPERATING RESULTS:
Net revenues....................... $ 15,069 $ 100,207 $ 1,515,489 $ 212,581 $ 0
Cost of goods sold................. 80,947 173,669 1,905,335 220,656 0
Selling, general and
administrative................... 91,423 160,070 790,615 728,021 64,279
Estimated impairment loss.......... 0 0 1,018,879 0 0
Write-off of stock offering
costs............................ 0 0 212,098 0 0
Other income (expenses), net....... 0 (775) (20,834) 67,615 4,416
Net loss........................... (157,301) (234,307) (2,432,272) (668,481) (59,863)
Net loss per share................. $ (0.03) $ (0.05) $ (0.52) $ (0.14) $ (0.02)
Weighted average shares
outstanding...................... 4,693,787 4,690,167 4,691,810 4,685,649 2,714,698
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......... $ (2,818,339) $ (439,407) $ (2,662,424) $ (89,510) $ 2,134,293
Total assets....................... 2,009,522 3,003,705 2,123,690 2,889,091 2,270,625
Long-term obligations.............. 217,446 1,018,094 241,224 699,245 0
Deficit accumulated during
development stage................ (3,317,917) (962,651) (3,160,616) (728,344) (59,863)
Shareholders' equity............... (1,060,949) 1,287,498 (903,648) 1,521,927 2,147,298
161
MILE HIGH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Proxy Statement/Prospectus 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 Mile High's business, management's beliefs and assumptions
made by management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations and
payment of past due creditors, ability to sell Mile High'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 Proxy Statement/Prospectus and from time to time in Mile High's
Securities and Exchange Commission filings and reports. In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic economic conditions.
RESULTS OF OPERATIONS
The following table reflects selected data from Mile High's statements of
operations stated as a percentage of net revenues:
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- ---------------------
1996 1995 1997 1996
--------- --------- ---------- ---------
Gross revenues........................................................ 105.6% 101.8% 111.3% 104.4%
Less excise taxes..................................................... 5.6 1.8 11.3 4.4
--------- --------- ---------- ---------
Net revenues.......................................................... 100.0 100.0 100.0 100.0
Cost of goods sold.................................................... 125.7 103.8 537.2 173.3
Selling, general and administrative................................... 52.2 342.5 606.7 159.7
--------- --------- ---------- ---------
Operating loss........................................................ (159.1) (346.3) (1,043.9) (233.0)
--------- --------- ---------- ---------
Loss before income taxes.............................................. (160.5) (314.5) (1,043.9) (233.8)
--------- --------- ---------- ---------
Net loss.............................................................. (160.5)% (314.5)% (1,043.9)% (233.8)%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
GROSS REVENUES AND COST OF SALES. Gross revenues from beer and retail
products totaled $16,770 for the quarter ended March 31, 1997 and $100,207 for
the quarter ended March 31, 1996, a decrease of 83%. The decrease is due to Mile
High's inability to effectively penetrate and establish its brand in the local
Colorado market. During the quarter ended March 31, 1997, Mile High's management
established a plan to sell the operating assets of Mile High and is looking for
other contract brewing opportunities. Based on this plan and pursuant to SFAS
121, management has recorded a partial write-down of operating brewery assets to
their estimated fair value. Management's estimate of this write-down, based on a
pending offer, is $969,000. In addition, management estimates the cost to
dispose of the assets to be $50,000, and this amount was recorded in the
financial statements as of December 31, 1996, as part of the impairment loss.
Until management's plans are finalized, Mile High intends to use advances from
Nor'Wester's bridge loans
162
from UBA to help finance activities. Mile High is currently operating on a
limited basis as a contract brewer for a local brewery. No definitive agreement
has been reached regarding the sale or lease of the facility, but management has
received an offer of approximately $2 million in exchange for all of MHB's
property and equipment and assumption of the facility lease.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $91,423 for the quarter ended March 31,
1997 from $160,070 for the quarter ended March 31, 1996. The decrease is
primarily attributable to management's decision to limit operations to
third-party brewing contracts.
NET INCOME (LOSS). As a result of the individual line items discussed
above, net loss was $157,000 for the quarter ended March 31, 1997 compared to
net loss of $234,000 for the quarter ended March 31, 1996.
1996 COMPARED TO 1995
GROSS REVENUES. Mile High 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 Mile High did not start
selling beer until late August 1995 and to the sale of $796,549 (50 percent of
gross revenues) of Nor'Wester brand beer under the Cooperative Brewing Agreement
during 1996. Mile High ceased operations in November 1996 and is researching
various options for the disposal of its assets or for contract brewing
arrangements. During this time, Mile High is performing a limited amount of
contract brewing for a third party.
Mile High'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
revenues) for the year ended December 31, 1996 from $3,917 (1.8 percent of gross
revenues) 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 revenues) for the year ended December 31, 1996 compared to $220,656 (104
percent of net revenues) 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, Mile High achieved lower margins on
products produced and sold under the Cooperative Brewing Agreement during 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $790,615 (52 percent of net revenues) for the
year ended December 31, 1996 from $728,021 (342 percent of net revenues) for the
year ended December 31, 1995. SG&A expenses reflect operating management and
administrative services provided by Mile High's parent, WVI, 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 Mile High introduced its
products into surrounding states, offset in part by higher costs incurred during
the first months of Mile High'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 attempted second
public stock offering.
163
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, Mile High embarked upon its second direct public stock
offering to sell up to 1,053,000 shares of Common Stock at $1.85 per share, with
estimated net proceeds of approximately $1,948,050. The offering failed to raise
the minimum escrow amount of $750,000 and has been terminated. Furthermore, the
terms of the Investment Agreement with UBA prohibits Mile High from selling any
of its securities without the approval of UBA.
Mile High had cash and cash equivalents at March 31, 1997, December 31, 1996
and December 31, 1995 of $3,726, $30,320 and $379,691, respectively. Changes in
cash and cash equivalents for the quarter ended March 31, 1997 primarily
consisted of cash used in operating activities of $5,963, purchases of long-term
assets of $8,169 and principal payments on capital lease obligations of $21,830,
offset by increases in advances from affiliates of $9,368. Changes in cash and
cash equivalents for the year ended December 31, 1996 are due primarily to cash
used in operating activities of $662,434, purchases of brewing and pub related
equipment of $385,712 and principal payments on capital lease obligations of
$65,158, offset by borrowings from affiliates of $763,933.
Mile High's working capital deficit at March 31, 1997, December 31, 1996 and
December 31, 1995 was $2,818,339, $2,662,424 and $89,510, respectively. At March
31, 1997, December 31, 1996 and December 31, 1995 the current ratio was .01:1,
.04:1 and .87:1, respectively.
Accounts payable at March 31, 1997, December 31, 1996 and December 31, 1995
were $863,359, $816,664 and $143,750, respectively. Of the $863,359 in accounts
payable at March 31, 1997, $827,318 was past due.
At March 31, 1997, Mile High had payables to WVI, its parent, and to other
affiliated companies of $1,843,915 which accounts for 65% of Mile High's current
liabilities. The payables to affiliates consist primarily of advances by WVI to
construct Mile High's brewery and to support Mile High's operations. Management
expects that the payables to affiliates will be eliminated upon completion of
the Consolidation.
During 1995, WVI, Mile High's parent, loaned $800,000 to Mile High for the
purpose of paying for leasehold improvements, the purchase of capital assets for
Mile High's brewery and for funding the brewery's working capital needs. When
issued, the note was unsecured and carried no interest, however, upon
termination of Mile High's offering in October 1996, the note converted into an
installment note at 10 percent per annum and was secured by all assets of Mile
High. The note is payable in monthly installments of $5,300, with the remaining
principal balance 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, Mile High ceased its normal operations, except for a small
amount of contract brewing for third party brewers during which time
management's plan is to research various options for liquidating its assets or
obtaining additional contract brewing opportunities. Mile High currently has no
source of capital to finance its limited activities other than limited contract
brewing revenue, advances under the UBA bridge loan and proceeds which may be
derived from the liquidation of underutilized assets.
Mile High is dependent upon the receipt of additional amounts from UBA under
the bridge loan and closing of the Investment. For a description of the general
terms and conditions of the bridge loan from UBA see "Ancillary Agreements--UBA
Bridge Loan Credit Agreement and Related Documents." No assurance can be given
that UBA will loan Mile High further amounts under the bridge loan or that the
Investments will close. See "Risk Factors--Dependence Upon Bridge Loans and
Investments from United
164
Brewers of America, Inc." If, for any reason, the Investment does not occur,
alternative sources of debt financing and/or equity capital would have to be
developed. There can be no assurance that such debt financing or capital will be
available or, if available, under terms and conditions acceptable to Mile High.
Mile High's inability to obtain additional capital could result in a material
adverse effect on the purchase price received for Mile High's assets.
MILE HIGH BUSINESS
GENERAL
Mile High was organized in June 1994 for the purpose of developing and
operating one or more breweries in Colorado for the production of high quality,
handcrafted ales for sale in bottle and draft. In November 1996, Mile High
ceased brewing its Timberline TM Ales and is currently exploring alternatives
for selling its existing assets. To date, Mile High has engaged in preliminary
negotiations with several groups interested in acquiring the Denver Brewery.
Until its assets are sold Mile High intends to utilize the Denver Brewery to
brew beer for third parties under limited contract brewing agreements. See also
"General Description of the Craft Brewing Industry and the Businesses of the
Constituent Corporations."
STRATEGY
Consumers have shown strong support for craft beers brewed in or near their
local markets and Mile High believes the appropriate strategy is to develop and
protect strong local craft beer brands. Mile High further believes that this
strategy can be strengthened through the Affiliated Companies' ability to build
a network of breweries each producing their own brand with local appeal while
benefiting from operating efficiencies, the decrease in production, marketing
and distribution costs and the increase in the ability of the Affiliated
Companies to finance growth and provide shareholders with a liquid market for
their shares. Once these local brands are established, the Affiliated Companies
may expand the distribution of one or more of their beer styles into additional
selected markets.
To implement this new strategy, the Boards of Directors of the Affiliated
Companies have elected to consolidate their entities under a single entity,
United Craft Breweries, Inc. ("UCB"). Furthermore, on January 30, 1997 the
Affiliated Companies entered into a definitive investment agreement with United
Breweries of America, Inc. ("UBA") for the purpose of funding operations until
consolidation is completed and provide for future growth thereafter.
Should the proposed consolidation occur, the Cooperative Brewing Agreements,
the Strategic Alliance Agreement and the General Services Agreement will
terminate.
PRODUCTION AND PRODUCTS
Mile High's Denver Brewery is not currently producing or selling any of its
own products. The Denver Brewery is, however, performing a small amount of
contract brewing for third party brewers and has a current production capacity
of 39,000 barrels.
REGULATION
Management believes that Mile High currently has all licenses, permits and
approvals necessary for its current operations and is in material compliance
with all applicable government regulations. See "General Conditions in the Craft
Brewing Industry and the Businesses of the Constitution Corporations--Regulation
and Dram Shop Liability."
TRADEMARKS
Mile High has filed for Federal trademark protection on its flavor styles
which include, but are not limited to, "Ales With An Altitude-TM-" and "White
Forest Ale-TM-". Mile High's policy is to preserve
165
registration of its marks whenever possible and to oppose vigorously an
infringement of its marks. Whether Mile High continues this policy will depend
on management's determination of the economic value of the marks.
EMPLOYEES
At December 31, 1996, Mile High had a total of 6 full time and 1 part time
employee. None of Mile High's employees are covered by collective bargaining
agreements, there have been no work stoppages and Mile High believes that
relations with its employees are adequate.
PROPERTIES
The Denver Brewery is located in an approximately 14,200 square foot leased
facility in lower downtown Denver, Colorado. Mile High has executed a 15 year
lease with the right to renew for 2 additional terms of 5 years each. The Denver
Brewery has a maximum annual production capacity of 60,000 barrels. The Denver
Brewery also has a high speed Krones bottling line capable of bottling 100
twelve ounce bottles of beer per minute. Mile High is currently using its
operating assets in a limited manner as a contract brewer for a local brewery.
LEGAL PROCEEDINGS
Mile High and Mr. John Carter, a Vice President of Mile High, are defendants
in a suit filed by United Glassware and China on November 5, 1996 in the
District Court, City and County of Denver, Colorado. The suit claims that the
defendants owe $54,700 on an alleged promissory note for materials supplied to
Mile High Brewery. The suit is seeking damages in the sum of $54,700 in
principal and unspecified amounts for interest and attorney fees. Mile High has
asserted vigorous defenses and filed certain counterclaims.
From time to time, Mile High becomes involved in ordinary, routine or
regulatory legal proceedings incidental to its business.
MARKET PRICE OF AND DIVIDENDS ON MILE HIGH COMMON STOCK
There is no public trading market for High Mile's Common Stock.
The approximate number of shareholders of record on December 31, 1996 was
2,594. There were no cash dividends declared or paid in fiscal years 1996 or
1995. High Mile does not anticipate declaring such dividends in the foreseeable
future.
Mile High issued a total of 3,620 unregistered shares of its Common Stock at
various times throughout July, August and October 1996 to various employees.
166
MILE HIGH MANAGEMENT
DIRECTOR
The name and age of Mile High's Director is as follows:
DIRECTOR
NAME AGE CURRENT POSITION(S) WITH MILE HIGH SINCE
- ------------------------------------- --- --------------------------------------- -----------
James W. Bernau...................... 43 Sole Director, President and Secretary 1994
Mr. Bernau has been the Sole Director, President and Secretary since Mile
High's inception in June 1994. Mr. Bernau is also the President and Chairperson
of the Board of Directors of five other public companies and has held these
positions since the dates indicated: Willamette Valley Vineyards, Inc. ("WVV")
since May 1988, Nor'Wester since December 1992, WVI, Mile High's parent, since
December 1993 and two other majority owned subsidiaries of WVI, Bayhawk since
February 1994 and Aviator since February 1994. Mr. Bernau also serves as one of
the three Managers of the North Country Joint Venture LLC, a wholly owned
subsidiary of Nor'Wester. Mr. Bernau began this alliance of consumer/ investor
owned companies by first co-founding WVV in 1988 with Donald Voorhies. From 1981
to September 1989, Mr. Bernau was Director of the Oregon Chapter of the National
Federation of Independent Businesses (NFIB), an association of 15,000
independent businesses in Oregon. While at NFIB, his responsibilities primarily
involved communicating with association members and lobbying the Oregon state
legislature regarding issues impacting the members.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names, ages and positions of Mile High's executive officers are as
follows:
NAME AGE CURRENT POSITION(S) WITH MILE HIGH SINCE
- --------------------------------------- --- --------------------------------------- ---------
James W. Bernau........................ 43 Chairperson of the Board, President and 1994
Secretary
John Carter............................ 28 Vice President, Rocky Mountain/ Midwest 1996
Regional Leader
For information on the business background of Mr. Bernau see "Director"
above.
Mr. Carter joined Mile High in September 1996 as General Manager. From 1994
until 1996, Mr. Carter served as Regional Sales Manager of Southern and Northern
California for the Nor'Wester/ WVI Alliance. From 1991 until 1994, Mr. Carter
served as a manager in the hospitality industry while also attending school. Mr.
Carter has a B.A. from Oregon State University and has completed everything
except his thesis for his Master of Arts, also from Oregon State University.
COMMITTEES OF THE BOARD
During 1996, the Board of Directors held no meetings and acted by unanimous
written consent on numerous occasions. Mile High does not have an audit,
compensation or nominating committee. There are no family relationships between
any of the executive officers and the sole director.
ATTENDANCE AT MEETINGS
During 1996, since there were no meetings held there were no members of the
Board of Directors who attended fewer than seventy-five percent of the meetings
of the Board of Directors and all committees of the Board on which they served.
167
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
Inc. Executive officers, Directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that, for the fiscal year ended December 31, 1996, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements, except in one instance, Mr. Carter, an
executive officer of the Company, failed to timely file a Statement of Initial
Beneficial Ownership of Form 3.
MILE HIGH EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation awarded to, earned by or paid to Mile High's Chief Executive
Officer and other executive officers of Mile High whose total annual salary and
bonus exceeded $100,000 (collectively, the "named executive officers") for
fiscal years 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION (A) YEAR EMPLOYER SALARY($) BONUS($)
- ------------------------------------------------------ --------- -------------------------- ----------- -----------
James W. Bernau (B)................................... 1996 Mile High Brewing 5,593 --
Chairperson of 1996 All affiliated companies 87,619
the Board, President and Secretary except Mile High Brewing
Co.
1995 Mile High Brewing 7,440 --
1995 All affiliated companies 88,500 10,882
except Mile High Brewing
Co.
- ------------------------
(A) Other than Mr. Bernau, no other individuals earned more than $100,000 in
1996, 1995 or 1994.
(B) Mr. Bernau serves as the President of Mile High, WVI, Nor'Wester, Bayhawk,
Mile High and North Country. Each of these companies pays a PRO RATA portion
of Mr. Bernau's monthly salary based on the amount of time which Mr. Bernau
has devoted to the respective company's business in that month.
STOCK OPTION GRANTS
No stock options were granted to Mr. Bernau during 1996.
OPTION EXERCISES AND HOLDINGS
No options were exercised by Mr. Bernau during 1996 and no options are held
by Mr. Bernau at December 31, 1996.
COMPENSATION OF DIRECTORS OF MILE HIGH
Directors of Mile High are not compensated for acting in such capacity.
168
CERTAIN 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 $800,000 to Mile High, a
subsidiary of WVI, to pay for leasehold improvements, purchase capital assets
and fund the working capital needs of Mile High's brewery (the "Mile High Bridge
Loan"). The Mile High Bridge Loan was to be repaid from the proceeds of Mile
High's planned second direct public stock offering which commenced in May 1996
but was terminated in October 1996 as a result of the planned Consolidation and
investment by UBA 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 March 31, 1997, 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 "General Description of the Craft
Brewing Industry and the Business of the Constituent Corporations--The Strategic
Alliance." 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 "General Description of the
Craft Brewing Industry and the Business of the Constituent Corporations--The
Strategic Alliance."
PAYMENTS TO AFFILIATES. During 1995, Mile High paid WVI, WVV and Nor'Wester
$32,096, $15,300 and $46,713, respectively, in payment of the above-described
loans, advances and services. During the quarter ended March 31, 1997 and during
1996, Mile High made no payments toward the above-described loans, advances and
services.
STRATEGIC ALLIANCE. In January 1996, Mile High established the Alliance
with WVI, Aviator, Bayhawk and Nor'Wester the purpose and terms of which are
more fully described in "General Discussion of the
169
Craft Brewing Industry and the Businesses of the Constituent Corporations--The
Strategic Alliance." During 1996, Mile High was charged by Nor'Wester and WVI
$51,500 and $56,025, respectively, for services under the General Services
Agreement of the Alliance and was charged $14,757 by Nor'Wester for such
services for the quarter ended March 31, 1997.
AMOUNTS OWED TO AFFILIATES As a result of the above-described transactions,
other than the Mile High Bridge Loan, at March 31, 1997, Mile High owed $283,701
to WVI, $17,743 to WVV, and $735,134 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 March 31, 1997, 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.
ARMS-LENGTH TRANSACTIONS
Mile High believes that the transactions set forth above were made on terms
no less favorable to Mile High than could have been obtained from unaffiliated
third parties. All future transactions between Mile High and its officers,
directors, principal shareholders and affiliates will be approved by a majority
of the independent outside members of Mile High's Board of Directors who do not
have an interest in the transactions, and will be on terms no less favorable to
Mile High than could be obtained from unaffiliated third parties.
MILE HIGH PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of Mile High as of February 28, 1997 as to (i) each
person who is known by Mile High to own beneficially 5% or more of Mile High
outstanding shares of Common Stock, (ii) each Director of Mile High, (iii) each
of the executive officers named in the Summary Compensation Table above and (iv)
all Directors and executive officers as a group. Except as otherwise noted, Mile
High believes the persons listed below have sole investment and voting power
with respect to the Common Stock owned by them.
COMMON STOCK
----------------------------
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OWNED (1) OWNED
- ------------------------------------------------------------------- ----------- ---------------
Willamette Valley, Inc............................................. 2,391,985 51%
Microbreweries Across America
66 SE Morrison Street
Portland, Oregon 97214
James W. Bernau (2)................................................ 2,391,985 51%
66 SE Morrison Street
Portland, Oregon 97214
All Directors and executive officers as a group (2 people)......... 2,391,985 51%
- ------------------------
* Less than 1%
(1) Applicable percentage of ownership is based on 4,693,787 shares of Common
Stock outstanding as of February 28, 1997. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to such
shares.
(2) Mr. Bernau is deemed to be the beneficial owner of all of the 2,391,985
shares of Mile High's Common Stock owned by WVI as a result of his ownership
of approximately 62 percent of the outstanding Common Stock of WVI. Mr.
Bernau does not own any shares of Mile High's Common Stock directly.
170
ELECTION OF MILE HIGH DIRECTORS
The persons named below are nominees for director to serve until the next
annual meeting of shareholders or until their successors are elected and
qualified; provided, however, that if the Merger Agreement is approved and the
Merger is consummated, such persons will serve as directors only until the
Merger is consummated. Directors are elected to serve for a term of one year and
until a successor shall have been chosen and qualified.
In the absence of instructions to the contrary, shares of Mile High Common
Stock represented by the proxy will be voted and the proxies will vote FOR the
election of all such nominees to the Board of Directors. If any of such persons
is unable or unwilling to be a candidate for the office of director at the dates
of the Mile High Annual Meeting, or any adjournment thereof, the proxies will
vote FOR such substitute nominee as shall be designated by the proxies. The
management of Mile High has no reason to believe that any of such nominees will
be unable or unwilling to serve if elected a director. Set forth below is
certain information concerning the nominees which is based on data furnished by
them.
NOMINEES FOR PRINCIPAL OCCUPATION OR SERVED AS
DIRECTOR AGE POSITION HELD WITH MILE HIGH DIRECTOR SINCE
- -------------------- --- ---------------------------------------------- ---------------
James W. Bernau..... 43 Sole Director, President and Secretary 1994
For certain biographical information regarding the directors of Mile High
and certain information regarding committees of the Board of Directors and
director compensation, see "Mile High Management" and "Mile High Executive
Compensation."
RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Mile High Board has selected Price Waterhouse LLP to serve as
independent public accountants for Mile High for the fiscal year ending December
31, 1997. The Mile High Board considers Price Waterhouse LLP to be eminently
qualified.
Although it is not required to do so, the Mile High Board is submitting its
selection of the Mile High public accountants for ratification at the Mile High
Annual Meeting, in order to ascertain the views of shareholders regarding such
selection. If the selection is not ratified, the Mile High Board will reconsider
its selection.
The Mile High Board recommends that stockholders vote FOR ratification of
the selection of Price Waterhouse LLP to examine the financial statements of
Mile High for Mile High's financial year ending December 31, 1997. It is the
intention of the persons named in the accompanying form of Proxy to vote the
shares represented thereby in favor of such ratification unless otherwise
instructed therein.
A representative of Price Waterhouse LLP will be present at the Mile High
Annual Meeting with the opportunity to make a statement if such representative
desires to do so and will be available to respond to appropriate questions.
171
DESCRIPTION OF UCB CAPITAL STOCK
As of the date of this Proxy Statement/Prospectus, the authorized capital
stock of UCB consists of 25,000,000 shares of UCB Common Stock and 2,000,000
shares of Preferred Stock, par value $.001 per share ("UCB Preferred Stock") of
UCB. For a discussion of significant differences between UCB's Certificate of
Incorporation and Bylaws and the Articles or Certificates of Incorporation, as
the case may be, and Bylaws for Nor'Wester, WVI, Aviator, Bayhawk and Mile High,
see "Comparison of the Rights of Holders of UCB Common Stock and Nor'Wester,
WVI, Aviator, Bayhawk and Mile High Common Stock."
COMMON STOCK
As of the date of this Proxy Statement/Prospectus, there were 100 shares of
UCB Common Stock outstanding all of which are held by UBA. Holders of shares of
UCB Common Stock are entitled to one vote per share on all matters to be voted
on by stockholders. Subject to the preferences that may be applicable to any
outstanding UCB Preferred Stock, holders of UCB Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of a liquidation, dissolution,
or winding up of UCB, the holders of UCB Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding UCB Preferred Stock. Holders of UCB Common Stock
have no preemptive rights and have no rights to convert their UCB Common Stock
into any other securities. The outstanding shares of UCB Common Stock are, and
the UCB Common Stock to be outstanding upon completion of the offering will be,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to cause UCB to issue up to
2,000,000 shares of UCB Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders. The
issuance of UCB Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of UCB without further action by the
stockholders. The issuance of UCB Preferred Stock could decrease the amount of
earnings and assets available for distribution to the holders of UCB Common
Stock or could adversely affect the rights and powers, including the voting
power, of the holders of the UCB Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the UCB Common
Stock as of the date of this Proxy Statement/Prospectus, no shares of UCB
Preferred Stock were outstanding and UCB has no present plans to issue any
shares of UCB Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
UCB is subject to the provisions of Section 203 of the Delaware General
Corporation Law. This statute generally prohibits, under certain circumstances,
a Delaware corporation whose stock is publicly traded, from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation or bylaws not to be governed by this Delaware law (UCB has not
made such an election); (ii) prior to the time the stockholder became an
interested stockholder, the board of directors approved either the business
combination or the transaction which resulted in the person becoming an
interested stockholder, (iii) the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who were also officers or held in certain employee stock plans) upon
consummation of the transaction which resulted in a stockholder becoming an
interested stockholder or (iv) the business combination was approved by the
board of directors and by two thirds of the outstanding voting stock of the
corporation (excluding shares
172
held by the interested stockholder). An "interested stockholder" is a person
who, together with affiliates and associates, owns (or any time within the prior
three years did own) 15% or more of the corporation's outstanding voting stock.
The term "business combination" is defined generally to include mergers,
consolidations, stock sales, asset based transactions, and other transactions
resulting in a financial benefit to the interested stockholder.
CERTAIN OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of UCB's Certificate of Incorporation, UCB's By-Laws and
Delaware statutory law described in "Comparison of the Rights of Holders of UCB
Common Stock and Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock"
may delay or make more difficult acquisitions or changes of control of UCB not
approved by the UCB Board. Such provisions could have the effect of discouraging
third parties from making proposals involving an acquisition or change of
control of UCB's stockholders. Such provisions may also have the effect of
making it more difficult for third parties to cause the replacement of the
current management of UCB without the concurrence of the UCB Board.
A copy of the Certificate of Incorporation is attached to this Proxy
Statement/Prospectus as Annex E and is incorporated herein by reference. The
description of certain provisions of the Certificate of Incorporation and the
By-Laws set forth in "Comparison of the Rights of Holders of UCB Common Stock
and Nor'Wester, WVI, Aviator, Bayhawk and Mile High Common Stock" does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the UCB Certificate of Incorporation and the UCB By-Laws.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Company serves as the transfer agent and registrar
for UCB's Common Stock.
173
COMPARISON OF THE RIGHTS OF HOLDERS OF
UCB COMMON STOCK AND NOR'WESTER, WVI, AVIATOR,
BAYHAWK AND MILE HIGH COMMON STOCK
As a consequence of the Consolidation, the stockholders of Nor'Wester, WVI,
Aviator, Bayhawk and Mile High will become stockholders of UCB. The following is
a summary of material differences between the rights of holders of UCB Common
Stock and the rights of holders of Nor'Wester, WVI, Aviator, Bayhawk and Mile
High Common Stock.
UCB, Aviator, Bayhawk and Mile High are incorporated in Delaware and
Nor'Wester and WVI are incorporated in Oregon. Stockholders of Aviator, Bayhawk
and Mile High, whose rights as stockholders are currently governed by Delaware
law, and by each of Aviator's, Bayhawk's and Mile High's respective Certificate
of Incorporation (the "Aviator Certificate", "Bayhawk Certificate" and "Mile
High Certificate") and each of Aviator's, Bayhawk's and Mile High's respective
By-laws (the "Aviator By-laws", "Bayhawk By-laws" and "Mile High By-laws") will,
upon consummation of the Consolidation, automatically become stockholders of
UCB, and their rights will be governed by Delaware law, UCB's Certificate of
Incorporation ("UCB Certificate") and UCB's By-laws ("UCB By-laws").
Stockholders of Nor'Wester and WVI, whose rights as stockholders are currently
governed by Oregon law, and by each of Nor'Wester's and WVI's respective
Articles of Incorporation (the "Nor'Wester Articles" and "WVI Articles") and by
each of Nor'Wester's and WVI's respective By-laws (the "Nor'Wester By-laws" and
"WVI By-laws") will, upon consummation of the Consolidation, automatically
become stockholders of UCB, and their rights will be governed by Delaware law,
UCB's Certificate and UCB's By-laws. The following is a discussion of only those
material similarities and differences between the rights of Nor'Wester and WVI
stockholders under the Nor'Wester and WVI Articles and Bylaws and Oregon law and
the rights of Aviator, Bayhawk and Mile High stockholders under the Aviator
Certificate and By-laws, the Bayhawk Certificate and By-laws, the Mile High
Certificate and By-laws and Delaware law on the one hand and UCB stockholders
under the UCB Certificate and By-laws and Delaware law on the other hand. This
summary does not purport to be a complete discussion of, and is qualified in its
entirety by reference to, the governing law and the Nor'Wester Articles, the WVI
Articles, the Aviator Certificate, the Bayhawk Certificate, the Mile High
Certificate, the UCB Certificate, the Nor'Wester By-laws, the WVI By-laws, the
Aviator By-laws, the Bayhawk By-laws, the Mile High By-laws and the UCB By-laws.
CORPORATE CHARTER AND BY-LAW AMENDMENTS
Both Oregon and Delaware law generally provide that in order for an
amendment to a corporate charter to be adopted, the board of directors of the
corporation must adopt a resolution setting forth the proposed amendment and
directing that it be submitted to a vote at a meeting of shareholders. Under
Oregon law, in order for an amendment to a corporation's articles of
incorporation to be adopted, the amendment must be approved by a majority of the
votes entitled to be cast on the amendment by any voting group as to which the
amendment would create dissenters' rights and by every other voting group
entitled to vote on the amendment.
Delaware law requires that the amendment must receive the affirmative vote
of a majority of the outstanding stock entitled to vote thereon and of a
majority of the outstanding stock of each class of shares entitled to vote
thereon as a class. Notwithstanding the foregoing, any proposal to amend, alter,
change or repeal the provisions of the UCB Certificate relating (i) the
classification of the UCB Board, (ii) removal of UCB Directors, (iii) the
prohibition of stockholder action by written consent or stockholder calls for
special meetings, (iv) amendment of UCB By-laws, or (v) amendment of the UCB
Certificate requires approval by the affirmative vote of 66 2/3% of the voting
power of all of the shares of UCB's capital stock entitled to vote generally in
the election of directors, voting together as a single class.
Under Oregon law, a corporation's board of directors may amend or repeal the
corporation's bylaws unless the corporation's articles of incorporation or
Oregon law reserves the power to amend the bylaws
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exclusively to the shareholders in whole or in part or the shareholders, in
amending or repealing a particular bylaw, provide expressly that the board of
directors may not amend or repeal that bylaw. The Nor'Wester and WVI By-laws
provide that they may be changed or amended by a vote of a majority of the whole
number of directors of Nor'Wester and WVI, respectively.
Delaware law provides that the power to amend or repeal the bylaws or to
adopt new bylaws is vested in the stockholders of the corporation, provided that
the corporation may, in its certificate of incorporation, also confer the power
to adopt, amend or repeal bylaws upon the corporations's directors. The Aviator,
Bayhawk, Mile High and UCB Certificates and the Aviator, Bayhawk, Mile High and
UCB By-laws provide that the board of directors may adopt, amend or repeal
bylaws. In addition, the UCB Certificate provides the holders of at least
66 2/3% of the voting power of all shares of UCB's capital stock then entitled
to vote generally in the election of directors, voting together as a single
class, have the power to amend or repeal the UCB By-laws.
SPECIAL MEETING OF SHAREHOLDERS
Oregon law provides that a special meeting of shareholders may be called by
the board of directors or the holders of 10% or more of the votes entitled to be
cast on any issue proposed to be considered at the proposed special meeting, or
by such persons as are specified in the articles of incorporation or bylaws. The
Nor'Wester and WVI By-laws permit special meetings of shareholders to be called
by the President, the Board of Directors and by the holders of not less than
one-tenth of all the outstanding shares of such corporations entitled to vote at
the meeting.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or such other persons as may be authorized by the certificate
of incorporation or the bylaws. The Aviator, Bayhawk and Mile High By-laws
provide that special meetings may be called by the President or the Board of
Directors. The UCB Certificate provides that special meetings of the
stockholders can only be called pursuant to a resolution approved by a majority
of the UCB Board then in office. Stockholders of UCB are not permitted to call a
special meeting of stockholders.
CORPORATE ACTION WITHOUT A MEETING
Oregon law permits corporate action without a shareholders meeting upon the
written consent of all the shareholders entitled to vote on the action.
Delaware law permits corporate action without a stockholders meeting,
without prior notice and without a vote of stockholders upon receipt of written
consent of that number of shares that would be necessary to authorize the
proposed corporate action at a meeting at which all shares entitled to vote
thereon were present and voting, unless the charter expressly provides
otherwise. Prompt notice of the taking of action without a meeting by less than
unanimous written consent must be given to all stockholders who have not
consented in writing. The UCB Certificate provides that, except as may be
provided in a resolution or resolutions of the UCB Board providing for any class
or series of Preferred Stock, stockholder action cannot be taken by written
consent in lieu of a meeting.
DIVIDENDS
Under Oregon law, the board of directors of a corporation may authorize and
the corporation may make distributions (including dividends) to shareholders
only if after giving effect to the distribution (i) the corporation would be
able to pay its debts as they become due in the usual course of business and
(ii) the corporation's total assets would at least equal the sum of its total
liabilities plus, unless the corporation's articles of incorporation permit
otherwise, the amount that would be needed if the corporation were to be
dissolved at the time of the distribution to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
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Under Delaware law, the directors of a corporation are generally permitted
to declare and pay dividends out of surplus or out of net profits for the
current and/or preceding fiscal year, provided that such dividends will not
reduce capital below the amount of capital represented by all classes of issued
and outstanding stock having a preference upon the distribution of assets. Also
under Delaware law, a corporation may generally redeem or purchase shares of its
stock if such redemption or purchase will not impair the capital of the
corporation.
CAPITAL STOCK
The authorized capital stock of UCB consists of 25,000,000 shares of UCB
Common Stock and 2,000,000 shares of preferred stock. The authorized preferred
stock may be issued without a vote of the holders of UCB Common Stock. The UCB
Board is authorized to divide the preferred stock into series and, within the
limitations provided by Delaware law and the UCB Certificate, to fix the number,
designation, relative rights, preferences, and limitations of the shares of each
series so established. The authority of the UCB Board includes the right to fix
for each series the dividend rate, redemption price, liquidation rights, sinking
fund provisions, conversion rights, and voting rights. If the preferred stock
were to be issued, the rights of the holders of UCB Common Stock would be
subordinated in certain respects to the rights of the holders of the preferred
stock. UCB has no preferred stock outstanding.
The authorized capital stock of Nor'Wester consists of 10,000,000 shares of
Nor'Wester Common Stock and 15,000,000 shares of preferred stock. The authorized
preferred stock may be issued without a vote of the holders of Nor'Wester Common
Stock. The Nor'Wester Board is authorized to divide the preferred stock into
series and, within the limitations provided by Oregon law and the Nor'Wester
Articles, to fix the number, designation, relative rights, preferences, and
limitations of the shares of each series so established. The authority of the
Nor'Wester Board includes the right to fix for each series the dividend rate,
redemption price, liquidation rights, sinking fund provisions, conversion
rights, and voting rights. If the preferred stock were to be issued, the rights
of the holders of Nor'Wester Common Stock would be subordinated in certain
respects to the rights of the holders of the preferred stock. Nor'Wester has no
preferred stock outstanding.
The authorized capital stock of Aviator consists of 10,000,000 shares of
Aviator Common Stock and no preferred stock. The authorized capital stock of
Bayhawk consists of 10,000,000 shares of Bayhawk Common Stock and no preferred
stock. The authorized capital stock of Mile High consists of 10,000,000 shares
of Mile High Common Stock and no preferred stock. The authorized capital stock
of WVI consists of 10,000,000 shares of WVI Common Stock and no preferred stock.
DISSENTERS' AND APPRAISAL RIGHTS
Under Oregon law, a shareholder is entitled to dissent from, and obtain
payment of the fair value of the shareholder's shares in the event of, any of
the following corporate acts:
(i) consummation of a plan of merger to which the corporation is a party
if shareholder approval is required and the shareholder is entitled to vote
on the merger, or if the corporation is a subsidiary that is merged with its
parent under applicable Oregon law providing for the merger of a 90% owned
subsidiary into its parent without shareholder approval;
(ii) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(iii) consummation of a sale or exchange of all substantially all of the
property of the corporation other than in the usual and regular course of
business if the shareholder is entitled to vote on the sale or exchange;
(iv) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (A)
alters or abolishes a preemptive right of the holder of the
176
shares to acquire shares or other securities or (B) reduces the number of
shares owned by the shareholder to a fraction of a share if the fractional
share so created is to be acquired for cash under Oregon law; or
(v) any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
Unless the articles of incorporation provide otherwise, dissenters' rights
do not apply to the holders of shares of any class or series if the shares of
the class or series were registered on a national securities exchange or quoted
on the NASDAQ National Market System on the record date for the meeting of
shareholders at which the corporate action giving rise to dissenters' rights is
to be approved or on the date a copy or summary of the plan of merger is mailed
to shareholders pursuant to the procedures for short-form mergers of
subsidiaries. Holders of Nor'Wester Common Stock will not have dissenters'
rights in connection with the Consolidation since Nor'Wester's Common Stock is
quoted on the NASDAQ National Market System, but holders of WVI Common Stock
will have dissenters' rights. See "Appraisal Rights."
Under Delaware law, appraisal rights are available in connection with a
statutory merger or consolidation in certain specified situations. Appraisal
rights are not available when a corporation is to be the surviving corporation
and no vote of its stockholders is required to approve the merger. In addition,
unless otherwise provided in the charter, no appraisal rights are available to
holders of shares of any class of stock which is either: (a) listed on a
national securities exchange or designated as a national market system security
on an inter-dealer quotation system by the National Association of Securities
Dealers, Inc., or (b) held of record by more than 2,000 stockholders, unless
such stockholders are required by the terms of the merger to accept anything
other than (i) shares of stock of the surviving corporation; (ii) shares of
stock of another corporation which are or will be so listed on a national
securities exchange or designated as a national market system security in an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares of such stock; or (iv) any combination thereof. The Aviator,
Bayhawk, Mile High and UCB Certificates have no provisions for appraisal rights.
Holders of Aviator and Mile High Common Stock will not have appraisal rights in
connection with the Consolidation, but holders of Bayhawk Common Stock will have
appraisal rights. See "Appraisal Rights."
PROVISIONS RELATING TO DIRECTORS
Under both Oregon law and Delaware law, a corporation must have a board of
directors consisting of at least one director. The Aviator By-laws provide that
the Aviator Board of Directors shall consist of not less than one nor more than
seven persons. The Board of Directors or stockholders of Aviator may change from
time to time the number of directors. The number of directors of Aviator is
currently fixed at seven. The Bayhawk By-laws provide that the Bayhawk Board of
Directors shall consist of not less than one nor more than seven persons. The
Board of Directors or stockholders of Bayhawk may change from time to time the
number of directors. The number of directors of Bayhawk is currently fixed at
seven. The Mile High By-laws provide that the Mile High Board of Directors shall
consist of not less than one nor more than seven persons. The Board of Directors
or stockholders of Mile High may change time to time the number of directors.
The number of directors of Mile High is currently fixed at one. The Nor'Wester
By-laws provide that the Nor'Wester Board shall consist of not less than one nor
more than nine persons. The Board of Directors or stockholders of Nor'Wester may
change from time to time the number of directors. The number of directors of
Nor'Wester is currently fixed at seven. The WVI By-laws provide that the WVI
Board shall consist of not less than one nor more than nine persons. The Board
of Directors or stockholders of WVI may change from time to time the number of
directors. The number of directors of WVI is currently fixed at seven. The UCB
By-laws provide that the number of directors of the corporation shall be fixed
from time to time exclusively by a vote of a majority of the Board of Directors
of UCB then in office, but shall not be less than three. The number of directors
of UCB is currently fixed at three.
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The Aviator, Bayhawk, Mile High, Nor'Wester and WVI By-laws provide that
vacancies in their respective boards of directors may be filled by shareholders,
the board of directors, or the affirmative vote
of a majority of the remaining directors if less than a quorum, and that the
stockholders may fill any vacancies not filled by the directors. The UCB
Certificate provides that the UCB Board shall have the exclusive right to fill
vacancies, including vacancies created by expansion of the UCB Board.
Oregon law permits classification of the board of directors if the articles
of incorporation or bylaws so provide. Delaware law permits classification of
the board of directors if the certificate of incorporation or an initial bylaw
or a bylaw adopted by a vote of the stockholders so provide. None of the
Certificates, Articles or By-laws of Nor'Wester, WVI, Aviator, Bayhawk or Mile
High provide for classification of directors. The UCB Certificate provides for
the UCB Board to be divided into three classes of directors serving staggered
three year terms. As a result, approximately one-third of the UCB Board will be
elected each year. UCB believes that a classified board will help to assure the
continuity and stability of the UCB Board and its business strategies and
policies as determined by the UCB Board, because a majority of the directors at
any given time will have prior experience as directors of UCB. The provision
should also help to ensure that the UCB Board, if confronted with an unsolicited
proposal from a third party that has acquired a block of UCB's Common Stock,
will have sufficient time to review the proposal, to consider appropriate
alternatives and to seek the best available result for all stockholders. This
provision could prevent a party who acquires control of a majority of the
outstanding UCB Common Stock from obtaining control of the UCB Board until the
second annual stockholders' meeting following the date the acquiror obtains the
controlling stock interest, could have the effect of discouraging a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
UCB and could thus increase the likelihood that incumbent directors will retain
their positions.
Under Oregon law, a director may be removed with or without cause unless the
articles of incorporation provide that directors may be removed only for cause.
The Nor'Wester and WVI Articles do not provide that the directors may be removed
only for cause. If a director is selected by a voting group of shareholders,
only the shareholders of that voting group may participate in the vote to remove
the director. If cumulative voting is authorized, a director may not be removed
if the number of votes sufficient to elect the director under cumulative voting
is voted against the director's removal. If cumulative voting is not authorized,
a director may be removed only if the number of votes cast to remove the
director exceeds the number of votes cast not to remove the director. A director
may be removed by the shareholders only at a meeting called for the purpose of
removing the director and the meeting notice must state that the purpose, or one
of the purposes, of the meeting is removal of the director.
Under Delaware law, any director or the entire board of directors of a
corporation may be removed, with or without cause, by the holders of a majority
of the shares then entitled to elect directors. In the case of a corporation
whose board is classified, stockholders may effect such removal only for cause
unless the charter provides otherwise. The UCB Certificate provides that, except
as may be provided in a resolution or resolutions of the UCB Board providing for
any class or series of Preferred Stock with respect to any directors elected by
the holders of such class or series, directors may be removed by stockholders
only for cause and only by the affirmative vote of at least 66 2/3% of the
voting power of all of the shares of UCB's capital stock then entitled to vote
generally in the election of directors, voting together as a single class. These
provisions, in conjunction with the provision of the UCB Certificate authorizing
the UCB Board to fill vacant directorships, could prevent stockholders from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The UCB By-laws establish an advance notice procedure for stockholder
proposals to be brought before a meeting of stockholders of UCB and for
nomination by stockholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, including without limitation Rule 14a-8 under
the Exchange Act, only such business may be conducted at a meeting of
stockholders as has been brought before the meeting by, or at
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the direction of, the UCB Board, or by a stockholder who has given to the
Secretary of UCB timely written notice, in proper form, of the stockholder's
intention to bring that business before the meeting. The presiding officer at
such meeting has the authority to make such determinations. Only persons who are
nominated by, or at the direction of, the UCB Board, or who are nominated by a
stockholder who has given timely written notice, in proper form, to the
Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of UCB.
To be timely, a stockholder's notice of nominations or other business to
brought before an annual meeting must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than one hundred
twenty (120) calendar days in advance of the date specified in the Corporation's
proxy statement released to stockholders in connection with the previous year's
annual meeting of stockholders.
The notice of any nomination for election as a director must set forth: (1)
the name, age, business address and residence address of such person, (2) the
principal occupation or employment of such person, (3) the class and number of
shares of UCB capital stock which are beneficially owned by such person, (4) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the stockholder and (5) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected). The person
submitting the notice of nomination, and any person acting in concert with such
person, must provide their names and business addresses, the name and address
under which they appear on UCB's books (if they so appear), and the class and
number of shares of UCB's capital stock that are beneficially owned by them.
DELAWARE AND OREGON BUSINESS COMBINATION STATUTES--CERTAIN ANTITAKEOVER
PROVISIONS
Pursuant to Delaware law, a corporation shall not engage in any business
combination with an interested stockholder (generally defined as the holder of
15% or more of the corporation's voting stock) for a period of three years
following the date that such stockholder because an interested stockholder,
unless (a) the board of directors approved either the business combination or
transaction prior to the date that the interested stockholder became an
interested stockholder (the Boards of Directors of each of Aviator, Bayhawk and
Mile High have approved the Consolidation which will result in UCB becoming a
holder of all of the outstanding shares of each company); (b) upon consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
by (i) any persons who are directors and also officers and (ii) employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (c) on or subsequent to the date the stockholder
became an interested stockholder, the board of directors approved the
transaction and the stockholders approved the transaction, not by written
consent, but at an annual or special meeting of stockholders, with an
affirmative vote of two-thirds of the outstanding voting stock, excluding any
stock owned by the interested stockholder. The restrictions prescribed by the
statute will not be applicable if (a) a corporation's charter or bylaws contain
a provision expressly providing that the corporation shall not be subject to
such statutory restrictions; (b) if the corporation does not have a class of
voting stock that is (i) listed on a national securities exchange; (ii)
authorized for quotation on an inter-dealer quotation system of a registered
national securities associated; or (iii) held of record by more than 2,000
stockholders, unless any of the foregoing results from action taken directly or
indirectly by an interested stockholder or from a transaction in which a person
becomes an interested stockholder; or (c) a stockholder becomes an interested
stockholder inadvertently and divests sufficient shares so that the stockholder
ceases to be an interested stockholder and would not
179
at any time during the three-year period immediately prior to a business
combination between the corporation and the interested stockholder have been an
interested stockholder but for the inadvertent acquisition; or (d) the business
combination is proposed prior to the consummation or abandonment of and
subsequent to the earlier of the public announcement or required notice to
interested stockholders of a proposed transaction: (i) involving (A) a merger or
consolidation (except a merger in respect of which no vote of the stockholders
of the corporation is required); (B) a sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets of the corporation or of any direct or
indirect majority-owned subsidiary of the corporation having an aggregate market
value equal to 50% or more of either the aggregate market value of all the
assets of the corporation determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the corporation; or (C) a proposed
tender offer or exchange offer for 50% or more of the outstanding voting stock
of the corporation; (ii) which is with or by a person who either was not an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the corporation's board of
directors; and (iii) which is approved or not opposed by a majority of the
members of the board of directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
directors. Neither the Aviator, Bayhawk, Mile High nor UCB Certificate nor the
Aviator, Bayhawk, Mile High nor UCB By-laws contain any provision expressly
providing that the corporation will not be subject to the restrictions
prescribed by the statute.
Pursuant to the Oregon Control Share Act, a person (the "Oregon Acquiror")
who acquires voting stock of a public Oregon corporation (the "Oregon Acquired
Corporation") in a transaction that results in such Oregon Acquiror holding more
than 20%, 33% or 50% of the total voting power of the Oregon Acquired
Corporation (an "Oregon Control Share Acquisition") may not vote the shares it
acquires in the Oregon Control Share Acquisition ("Oregon Control Shares")
unless voting rights are accorded to such Oregon Control Shares by (i) a
majority of each voting group entitled to vote and (ii) the holders of a
majority of the outstanding voting shares, excluding the Oregon Control Shares
held by the Oregon Acquiror and all shares held by officers and employee
directors. The term "Oregon Acquiror" includes persons acting as a group.
The Oregon Acquiror may, but is not required to, submit to the Oregon
Acquired Corporation an "Acquiring Person Statement" setting forth certain
information about itself and its plans with respect to the Oregon Acquired
Corporation. The statement may also request that the Oregon Acquired Corporation
call a special meeting of shareholders to determine whether voting rights will
be restored to the Oregon Control Shares. If the Oregon Acquiror does not
request a special shareholders meeting, the issue of voting rights of Oregon
Control Shares will be considered at the next annual or special meeting of the
Oregon Acquired Corporation's shareholders. If the Oregon Acquiror's Oregon
Control Shares are accorded voting rights and represent a majority or more of
all voting power, the Oregon Acquired Corporation's shareholders who do not vote
in favor of voting rights for the Oregon Control Shares will have the right to
receive the appraised "fair value" of their shares, which may not be less than
the highest price paid per share by the Oregon Acquiror for the Oregon Control
Shares.
The Oregon Business Corporation Act governs "business combinations" between
corporations and "interested shareholders." The term "business combination" is
defined generally to include mergers or consolidations between an Oregon
corporation and an "interested shareholder," transactions with an interested
shareholder involving the assets or stock of the corporation or its
majority-owned subsidiaries, and transactions that increase an interested
shareholder's percentage ownership of stock. The term "interested shareholder"
is defined generally as any shareholder who becomes a beneficial owner of 15% or
more of the corporation's voting stock. Business combinations between
corporations and interested shareholders are prohibited for a three-year period
following the date that such shareholder became an interested shareholder,
unless (i) the corporation has elected in its articles of incorporation not to
be governed by the Oregon business combination law (neither Nor'Wester nor WVI
made such an election), (ii) prior to the transaction, the corporation's board
of directors approves either the business combination or the transaction which
resulted in the shareholder becoming an interested shareholder (the Boards of
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Directors of both Nor'Wester and WVI have approved the Consolidation which will
result in UCB becoming an interested shareholder), (iii) upon consummation of
the transaction that made it an interested shareholder, the interested
shareholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers of held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan), or (iv) the business combination was approved by the corporation's
board of directors and ratified by at least 66 2/3% of the voting stock not
owned by the interested shareholder.
A corporation may provide in its articles of incorporation and/or bylaws
that the statutory provisions described above do not apply to its shares. In
connection with the Consolidation and Investment, the Boards of Directors of
each of Nor'Wester and WVI have amended their Bylaws to provide that the Oregon
Control Share Act shall not apply to any transaction in their respective company
shares. However, neither Nor'Wester nor WVI has elected to "Opt out" of the
provisions of the Oregon Business Combination Act. Therefore, such statutory
provisions will apply to acquisitions of shares of Nor'Wester's and WVI's voting
stock. The effect of these statutes may be to discourage unfriendly attempts to
acquire control of Nor'Wester and WVI.
LEGAL MATTERS
Orrick, Herrington & Sutcliffe LLP, San Francisco, California is acting as
counsel for UCB in connection with certain legal matters relating to the
Consolidation and the transactions contemplated thereby, including the validity
of the shares of UCB Common Stock to be issued in connection with the
Consolidation.
Ater Wynne Hewitt Dodson & Skerritt, LLP, Portland, Oregon, is acting as
counsel for Nor'Wester in connection with certain legal matters relating to the
Consolidation and the transactions contemplated thereby. Donaldson, Albert,
Tweet, Connolly, Hanna & Muniz, LLP, Salem, Oregon, is acting as counsel for WVI
in connection with certain legal matters relating to the Consolidation and the
transactions contemplated thereby.
EXPERTS
The financial statements of Nor'Wester and its subsidiary, and of WVI and
its subsidiaries, Aviator, Bayhawk and Mile High, as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996
included in this Proxy Statement/Prospectus have been so included in reliance on
the reports (which reports contain an explanatory paragraph relating to the
Companies' ability to continue as a going concern as described in Note 1 to the
financial statements) of Price Waterhouse LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of Mendocino Brewing Company, Inc. included in this
Proxy Statement/ Prospectus have been audited by Moss Adams LLP, independent
public accountants, as indicated in their report with respect thereto, in
reliance upon the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
Nor'Wester's, WVI's, Aviator's, Bayhawk's and Mile High's Board does not
intend to bring any matters before the Annual Meetings other than those
specifically set forth in the Notices of Annual Meeting and it does not know of
any matters to be brought before the Nor'Wester, WVI, Aviator, Bayhawk and Mile
High Annual Meeting, respectively, by others. If any other matters properly come
before the Nor'Wester, WVI, Aviator, Bayhawk and Mile High Annual Meeting, it is
the intention of the persons named in the accompanying proxies to vote such
proxies in accordance with the judgment of the Nor'Wester, WVI, Aviator, Bayhawk
and Mile High Board, respectively.
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STOCKHOLDER PROPOSALS
If the Consolidation is not consummated, the date by which stockholder
proposals must be received by Nor'Wester, WVI, Aviator, Bayhawk and Mile High
for inclusion in the Proxy Statement and Form of Proxy for each of their
respective 1998 Annual Meeting of Stockholders is January 31, 1998. Such
stockholder proposals should be submitted to (i) in the case of Nor'Wester,
Nor'Wester Brewing , Inc., 66 S.E. Morrison Street, Portland, Oregon 97214,
Attention: Secretary, (ii) in the case of WVI, Willamette Valley, Inc.
Microbreweries Across America, 66 S.E. Morrison Street, Portland, Oregon 97214,
Attention: Secretary, (iii) in the case of Aviator, Aviator Ales, Inc., 66 S.E.
Morrison Street, Portland, Oregon 97214, Attention: Secretary, (iv) in the case
of Bayhawk, Bayhawk Ales, Inc., 66 S.E. Morrison Street, Portland, Oregon 97214,
Attention: Secretary, or (v) in the case of Mile High, Mile High Brewing, 66
S.E. Morrison Street, Portland, Oregon 97214, Attention: Secretary.
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INDEX TO FINANCIAL STATEMENTS
PAGE
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NOR'WESTER BREWING COMPANY, INC.
Report of Independent Accountants...................................................................... F-4
Consolidated Balance Sheet as of December 31, 1996 and December 31, 1995............................... F-5
Consolidated Statement of Operations for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.................................................................................... F-6
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995
and December 31, 1994................................................................................ F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.................................................................................... F-8
Notes to Consolidated Financial Statements............................................................. F-9
Condensed Consolidated Balance Sheet as of March 31, 1997 (unaudited) and
December 31, 1996.................................................................................... F-26
Condensed Consolidated Statement of Operations for the three months ended
March 31, 1997 and March 31, 1996 (unaudited)........................................................ F-27
Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 (unaudited)........................................................ F-28
Notes to Condensed Consolidated Financial Statements (unaudited)....................................... F-29
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
AND SUBSIDIARIES
Report of Independent Accountants...................................................................... F-36
Consolidated Balance Sheet as of December 31, 1996 and December 31, 1995............................... F-38
Consolidated Statement of Operations for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.................................................................................... F-39
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995
and December 31, 1994................................................................................ F-40
Consolidated Statement of Cash Flows for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.................................................................................... F-41
Notes to Consolidated Financial Statements............................................................. F-42
Condensed Consolidated Balance Sheet as of March 31, 1997 (unaudited) and
December 31, 1996.................................................................................... F-58
Condensed Consolidated Statement of Operations for the three months ended
March 31, 1997 and March 31, 1996 (unaudited)........................................................ F-59
Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 (unaudited)........................................................ F-60
Notes to Condensed Consolidated Financial Statements (unaudited)....................................... F-61
AVIATOR ALES, INC.
Report of Independent Accountants...................................................................... F-66
Balance Sheet as of December 31, 1996 and December 31, 1995............................................ F-67
Statement of Operations for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-68
Statement of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995 and December
31, 1994............................................................................................. F-69
F-1
PAGE
---------
Statement of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-70
Notes to Financial Statements.......................................................................... F-71
Condensed Balance Sheet as of March 31, 1997 (unaudited) and December 31, 1996......................... F-82
Condensed Statement of Operations for the three months ended March 31, 1997
and March 31, 1996 (unaudited)....................................................................... F-83
Condensed Statement of Cash Flows for the three months ended March 31, 1997
and March 31, 1996 (unaudited)....................................................................... F-84
Notes to Condensed Financial Statements (unaudited).................................................... F-85
BAYHAWK ALES, INC.
Report of Independent Accountants...................................................................... F-91
Balance Sheet as of December 31, 1996 and December 31, 1995............................................ F-92
Statement of Operations for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-93
Statement of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995 and December
31, 1994............................................................................................. F-94
Statement of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-95
Notes to Financial Statements.......................................................................... F-96
Condensed Balance Sheet as of March 31, 1997 (unaudited) and December 31, 1996......................... F-106
Condensed Statement of Operations for the three months ended March 31, 1997
and March 31, 1996 (unaudited)....................................................................... F-107
Condensed Statement of Cash Flows for the three months ended March 31, 1997 and March 31, 1996
(unaudited).......................................................................................... F-108
Notes to Condensed Financial Statements (unaudited).................................................... F-109
MILE HIGH BREWING COMPANY
Report of Independent Accountants...................................................................... F-114
Balance Sheet as of December 31, 1996 and December 31, 1995............................................ F-116
Statement of Operations for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-117
Statement of Shareholders' Equity for the years ended December 31, 1996, December 31, 1995 and December
31, 1994............................................................................................. F-118
Statement of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31,
1994................................................................................................. F-119
Notes to Financial Statements.......................................................................... F-120
Condensed Balance Sheet as of March 31, 1997 (unaudited) and December 31, 1996......................... F-132
Condensed Statement of Operations for the three months ended March 31, 1997
and March 31, 1996 (unaudited)....................................................................... F-133
Condensed Statement of Cash Flows for the three months ended March 31, 1997
and March 31, 1996 (unaudited)....................................................................... F-134
Notes to Condensed Financial Statements (unaudited).................................................... F-135
F-2
PAGE
---------
MENDOCINO BREWING COMPANY
Independent Auditor's Report........................................................................... F-141
Balance Sheets as of December 31, 1996 and December 31, 1995........................................... F-142
Statements of Operations for the years ended December 31, 1996 and December 31, 1995................... F-144
Statements of Stockholders' Equity for the years ended December 31, 1996 and December 31, 1995......... F-145
Statements of Cash Flows for the years ended December 31, 1996 and December 31, 1995................... F-146
Notes to Financial Statements.......................................................................... F-147
Condensed Balance Sheet as of March 31, 1997 (unaudited)............................................... F-157
Condensed Statements of Income for the three months ended March 31, 1997 and March 31, 1996
(unaudited).......................................................................................... F-158
Condensed Statements of Cash Flows for the three months ended March 31, 1997 and March 31, 1996
(unaudited).......................................................................................... F-159
Notes to Condensed Financial Statements (unaudited).................................................... F-160
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Nor'Wester Brewing Company, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Nor'Wester Brewing Company, Inc. and its subsidiary at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended 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 has incurred significant losses in 1996, has
negative working capital of $3,216,897 at year end, is not in compliance with
its debt covenants, and has limited access to capital with which to fund future
operations. Such factors, among others, raise substantial doubt as to its
ability to continue as a going concern. 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.
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.
Nor'Wester Brewing Company, Inc. 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, the Company has restated its 1996 financial
statements to revise the Company's share of the net losses sustained by North
Country Joint Venture, LLC, which was purchased by the Company in October 1996
from WVI, an affiliated company, and to reflect the current classification of
its non-revolving credit facility which is due September 30, 1997 as the Company
is not in compliance with its debt covenants, and to reflect advances to
affiliates as cash used for financing activities.
PRICE WATERHOUSE LLP
Portland, Oregon
March 21, 1997, except as to Note 13, which is as of March 24, 1997, and Note 5,
Note 14 and Note 1 (third paragraph only) which are as of June 23, 1997
F-4
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
(RESTATED -
NOTE 14)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 252,049 $ 276,807
Accounts receivable................................................................ 606,642 582,584
Income taxes receivable............................................................ 103,761 103,761
Receivables from affiliates (Note 9)............................................... 1,798,350 200,000
Inventories (Note 2)............................................................... 720,507 663,058
Assets held for sale (Note 1)...................................................... -- 218,000
Marketing supplies................................................................. 77,530 134,452
Deferred stock offering costs...................................................... -- 386,573
Prepaid expenses and other current assets.......................................... 221,223 123,407
------------- ------------
Total current assets............................................................. 3,780,062 2,688,642
Property and equipment, net (Note 3)................................................. 11,968,471 4,117,558
Advances to affiliates (Note 9)...................................................... -- 500,000
Other noncurrent assets.............................................................. 40,000 67,244
------------- ------------
Total assets......................................................................... $ 15,788,533 $ 7,373,444
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 4)............................................................ $ 1,041,000 $ 500,000
Current portion of long-term debt and capital leases (Note 5)...................... 1,938,709 41,182
Notes payable (Note 4)............................................................. 1,150,000 --
Accounts payable................................................................... 2,427,073 870,731
Container deposits................................................................. 130,921 50,000
Accrued stock offering costs....................................................... -- 206,000
Accrued payroll and other liabilities.............................................. 309,256 217,125
------------- ------------
Total current liabilities........................................................ 6,996,959 1,885,038
Long-term debt and capital leases (Note 5)........................................... 11,405 1,474,339
Deferred tax liability (Note 8)...................................................... -- 189,964
------------- ------------
Total liabilities................................................................ 7,008,364 3,549,341
------------- ------------
Commitments and Contingencies (Notes 5, 10, 12 and 13)
Shareholders' equity (Notes 6, 7, 12 and 13):
Preferred stock, 15,000,000 shares authorized in 1996, no shares issued and
outstanding...................................................................... -- --
Common stock, no par value, 10,000,000 shares authorized, 3,711,097 and 2,421,554
shares issued and outstanding at December 31, 1996 and 1995...................... 11,064,480 3,356,488
Retained earnings (accumulated deficit)............................................ (2,284,311) 467,615
------------- ------------
Total shareholders' equity....................................................... 8,780,169 3,824,103
------------- ------------
Total liabilities and shareholders' equity........................................... $ 15,788,533 $ 7,373,444
------------- ------------
------------- ------------
The accompanying notes are an integral part of these financial statements.
F-5
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------------ ------------ ------------
(RESTATED--NOTE
14)
Gross revenues (Notes 9 and 11).................................. $ 6,820,691 $ 5,871,737 $ 2,564,994
Less excise taxes................................................ (296,609) (283,979) (112,079)
------------------ ------------ ------------
Net revenues..................................................... 6,524,082 5,587,758 2,452,915
Cost of goods sold (Note 9)...................................... 5,159,889 3,459,902 1,434,139
------------------ ------------ ------------
Gross margin..................................................... 1,364,193 2,127,856 1,018,776
Selling, general and administrative expenses (Note 9)............ 4,545,559 1,409,023 741,712
------------------ ------------ ------------
Income (loss) from operations.................................... (3,181,366) 718,833 277,064
Interest and other income (expense), net......................... 38,943 (17,152) 19,840
------------------ ------------ ------------
Income (loss) before income taxes and minority interest in losses
of consolidated subsidiary companies........................... (3,142,423) 701,681 296,904
Income tax (benefit) expense (Note 8)............................ (168,000) 258,954 4,900
------------------ ------------ ------------
Net income (loss) before minority interest in losses of
consolidated subsidiary companies.............................. (2,974,423) 442,727 292,004
Minority interest in losses of consolidated subsidiary
companies...................................................... 222,497 -- --
------------------ ------------ ------------
Net income (loss)................................................ $ (2,751,926) $ 442,727 $ 292,004
------------------ ------------ ------------
------------------ ------------ ------------
Net income (loss) per common share............................... $ (0.74) $ 0.18 $ 0.12
------------------ ------------ ------------
------------------ ------------ ------------
Weighted average number of common shares outstanding............. 3,696,041 2,420,787 2,339,849
------------------ ------------ ------------
------------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-6
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
RETAINED
COMMON STOCK EARNINGS
------------------------- (ACCUMULATED
SHARES DOLLARS DEFICIT) TOTAL
---------- ------------- ------------- -------------
Balances at December 31, 1993........................... 2,233,799 $ 2,260,038 $ (267,116) $ 1,992,922
Net cash proceeds from common stock offerings (Note
6).................................................... 183,198 1,083,609 -- 1,083,609
Issuance of common stock to employees and distributors
(Note 7).............................................. 3,276 5,616 -- 5,616
Net income.............................................. -- -- 292,004 292,004
---------- ------------- ------------- -------------
Balances at December 31, 1994........................... 2,420,273 3,349,263 24,888 3,374,151
Issuance of common stock to employees and distributors
(Note 7).............................................. 1,281 7,225 -- 7,225
Net income.............................................. -- -- 442,727 442,727
---------- ------------- ------------- -------------
Balances at December 31, 1995........................... 2,421,554 3,356,488 467,615 3,824,103
Net proceeds from common stock offering (Note 6)........ 1,287,500 7,693,916 -- 7,693,916
Issuance of common stock to employees and distributors
(Note 7).............................................. 2,043 14,076 -- 14,076
Net loss................................................ -- -- (2,751,926) (2,751,926)
---------- ------------- ------------- -------------
Balances at December 31, 1996 (Restated-- Note 14)...... 3,711,097 $ 11,064,480 $ (2,284,311) $ 8,780,169
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-7
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(RESTATED--
NOTE 14)
Cash flows from operating activities:
Net income (loss).................................................. $ (2,751,926) $ 442,727 $ 292,004
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation..................................................... 438,388 198,464 133,572
Amortization..................................................... 12,032 6,912 4,362
Deferred income tax expense (benefit)............................ (168,000) 174,900 (6,900)
Stock grants..................................................... 14,076 7,225 5,616
Changes in assets and liabilities:
Accounts receivable............................................ (24,058) (179,661) (362,012)
Other receivables.............................................. -- (116,173) (3,997)
Inventories.................................................... (57,449) (383,161) (169,642)
Assets held for sale........................................... -- (218,000) --
Marketing supplies............................................. 56,922 (80,545) (53,907)
Prepaid expenses and other current assets...................... (119,780) (55,172) 2,171
Accounts payable............................................... 1,556,342 675,182 (108,299)
Container deposits............................................. 80,921 4,984 45,016
Accrued payroll and other liabilities.......................... 92,131 157,897 (1,011)
------------- ------------- -------------
Net cash provided by (used for) operating activities................. (870,401) 635,579 (223,027)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of equipment............................................. (7,873,255) (2,094,388) (1,000,086)
Increase in other noncurrent assets................................ -- (33,055) (18,199)
------------- ------------- -------------
Net cash used for investing activities............................... (7,873,255) (2,127,443) (1,018,285)
------------- ------------- -------------
Cash flows from financing activities:
Stock offering proceeds, net....................................... 7,693,916 -- 1,083,609
Increase in deferred stock offering costs.......................... -- (386,573) --
Increase in accrued stock offering costs........................... -- 206,000 --
Advances to affiliates............................................. (1,098,350) (700,000) --
Principal payments on capital lease obligation..................... (2,261) (633) --
Proceeds from long-term debt and line of credit.................... 2,125,593 2,000,000 --
------------- ------------- -------------
Net cash provided by financing activities............................ 8,718,898 1,118,794 1,083,609
------------- ------------- -------------
Net decrease in cash and cash equivalents............................ (24,758) (373,070) (157,703)
Cash and cash equivalents--beginning of period....................... 276,807 649,877 807,580
------------- ------------- -------------
Cash and cash equivalents--end of period............................. $ 252,049 $ 276,807 $ 649,877
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-8
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Nor'Wester Brewing Company, Inc. (the Company) is engaged in the production
and sale of high-quality, hand-crafted ales which are sold primarily to
distributors in the State of Oregon and at the Company's public house in
Portland, Oregon. The Company was organized in December 1992 in the State of
Oregon under the name Willamette Valley Brewing Company. The Company was
considered a development stage enterprise until December 31, 1993. Through
December 31, 1993, the Company devoted significant efforts to raising capital,
acquiring property and equipment, and developing viable ales and a market for
those ales. The Company recognized its first sales in November 1993. The
Company's products are marketed under the "Nor'Wester" label.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has recorded
significant losses in the current year, has negative working capital of
$3,216,897, is not in compliance with its debt covenants, and has limited access
to capital with which to fund future operations. There can be no assurance that
the Company will produce and sell its products on a profitable basis to sustain
operations. Such factors, among others, raise substantial doubt as to its
ability to continue as a going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) restructure bank facilities and loan covenants to
ensure loans will not be called and which may allow for additional operating
lines; (v) hire and retain high-quality employees familiar with the brewing
industry, (vi) use available bridge loans from a proposed investor (see Note 12)
to fund operations until new strategies result in positive cash flows and
improved profitability, and; (vii) use of proceeds from the disposition of
duplicative and/or unutilized assets created by the proposed merger. Management
believes these plans will result in the Company sustaining operations as a going
concern for next 12 months.
As part of the plans, subsequent to December 31, 1996, the Company entered
into an investment agreement to be merged with other affiliated companies and
convert its stock into shares of a new publicly traded entity as discussed in
Note 12.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which require management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities as of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-9
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nor'Wester
Brewing Company and its subsidiary, North Country Joint Venture (NCJV) (see
Note 9). NCJV was formed in January 1996. For the first nine months of 1996,
the Company owned 61% of NCJV and the remaining 39% was owned by North
Country Brewing Company, Inc., an affiliated company. In October 1996, NCJV
became a wholly-owned subsidiary of the Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its product to customers.
Sales are recorded as trade accounts receivable and no collateral is required.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes the purchase price of materials, direct labor and an
allocation of indirect production expenses.
ASSETS HELD FOR SALE
Assets held for sale at December 31, 1995 consisted of unused brewing
equipment. Management was unable to sell these assets; therefore, they were
shipped to an affiliated brewery in the State of Washington for use in the
cooperative brewing agreement (see Note 9). These assets are included with
property, plant and equipment at December 31, 1996.
DEFERRED STOCK OFFERING COSTS
As of December 31, 1995, the Company had deferred stock offering costs
aggregating $386,573 in connection with a public stock offering which was
declared effective by the United States Securities and Exchange Commission (SEC)
in January 1996; see also Note 6. In January 1996, these deferred costs were
charged against the proceeds received from the common stock offering.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over their estimated useful lives as follows:
Leasehold improvements........................................... 5-21 years
Machinery and equipment.......................................... 5-15 years
Expenditures for repairs and maintenance are charged to operating expenses
as incurred. Expenditures for additions and improvements are capitalized.
Leasehold improvements are depreciated over the life of the lease or the life of
the asset, whichever is shorter.
F-10
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted the statement in fiscal 1996; however, the adoption has not had a
significant impact on the Company's financial statements. Management expects the
Company's long-lived assets to be used by the newly formed public company (see
Note 12).
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.
NET INCOME (LOSS) PER COMMON SHARE
All share and per share amounts have been restated to reflect the .602-for-1
reverse stock split discussed in Note 6.
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding, including common stock equivalent shares
from stock options if their effect is dilutive.
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 years
ended December 31, 1996, 1995, and 1994, the Company paid interest of $85,166,
$56,249, and $0, respectively. Income tax payments of $0, $191,000, and $18,500
were made in 1996, 1995, and 1994, respectively. During 1996, $218,000 in
equipment previously recorded as assets held for sale were transferred into the
property, plant and equipment balance (see Note 1). In addition, certain
equipment was transferred to the Company from affiliated companies. These
non-cash transactions have been excluded from the accompanying statement of cash
flows. During 1995, the Company obtained approximately $15,000 of assets under a
capital lease obligation.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The fair market value of the Company's recorded financial instruments
approximates 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.
F-11
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," 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 No. 25 (APB 25) or use the fair value method
prescribed in SFAS 123. The Company plans to continue 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 financial statement presentation for the year ended December 31,
1996. These reclassifications have no effect on previously reported results of
operations or shareholders' equity.
2. INVENTORIES
Inventories consist of:
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Beer-making and packaging materials................................... $ 460,423 $ 378,384
Work in process (costs relating to unprocessed or unbottled beer
products)........................................................... 75,553 68,101
Finished goods (beer and related products)............................ 184,531 216,573
---------- ----------
$ 720,507 $ 663,058
---------- ----------
---------- ----------
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
Land and improvements............................................ $ 243,071 $ 237,072
Leasehold improvements........................................... 2,338,391 485,200
Equipment........................................................ 9,612,828 3,034,972
Construction in progress......................................... 547,792 705,568
------------- ------------
12,742,082 4,462,812
Less accumulated depreciation.................................... (773,611) (345,254)
------------- ------------
$ 11,968,471 $ 4,117,558
------------- ------------
------------- ------------
F-12
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LINE OF CREDIT AND SHORT TERM NOTES PAYABLE
In October 1995, the Company obtained a $1,000,000 revolving line of credit
bearing interest at the bank's reference rate plus 0.5% (8.75% at December 31,
1996). This revolving line of credit expired on December 31, 1996. It is secured
by the Company's assets, and contains certain covenants and restrictions (see
Note 5). At December 31, 1996 and 1995, $1,000,000 and $500,000, respectively,
was outstanding under this line of credit. In addition, the Company's North
Country subsidiary obtained a $50,000 line of credit in 1996 bearing interest at
9.75% of which the outstanding balance was $41,000 at December 31, 1996.
In October 1996, the president of the Company loaned the Company $250,000
at 10.5% interest. Repayment of the loan is required upon completion of the
proposed merger with UBA (see Note 12).
As of December 31, 1996 the Company had also obtained $900,000 at 11.25% in
bridge loans related to an investment agreement the Company entered into (see
Note 12).
5. LONG-TERM DEBT
In October 1995, the Company obtained a non-revolving credit facility which
permits borrowings up to $2,000,000 bearing interest at the bank's reference
rate plus 0.5% (8.63% at December 31, 1996). Amounts borrowed under this
facility are payable in equal monthly instalments over seven years. At December
31, 1996, $1,936,831 was borrowed under this facility. This non-revolving credit
facility and the revolving credit facility discussed in Note 4 are secured by
the Company's assets and contain covenants which require the Company to maintain
certain financial ratios and prohibit the Company from making any dividend
payments without the bank's approval.
At December 31, 1996, the Company was not in compliance with certain of its
loan covenants relating both to the non-revolving credit facility and the
revolving line of credit discussed in Note 4. Subsequent to December 31, 1996,
the Company received notification that both the non-revolving credit facility
and the revolving line of credit would be due and payable September 30, 1997.
Accordingly, the entire amount borrowed under the non-revolving credit facility
is classified as current in the accompanying consolidated balance sheet.
F-13
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
During 1995, the Company also entered into a capital lease obligation
related to the acquisition of certain assets. This lease requires monthly
payments of $248 through 2002. Principal payments under the Company's credit
facility and capital lease are summarized as follows:
CAPITAL LEASES
YEAR ENDED ------------------------------- DEBT TOTAL
DECEMBER 31, PRINCIPAL INTEREST TOTAL PRINCIPAL PRINCIPAL
- ------------------------------------------------------ --------- --------- --------- ------------ ------------
1997.................................................. $ 1,878 $ 1,051 $ 2,929 $ 1,936,831 $ 1,938,709
1998.................................................. 2,056 888 2,944 -- 2,056
1999.................................................. 2,239 712 2,951 -- 2,239
2000.................................................. 2,443 521 2,964 -- 2,443
2001.................................................. 2,657 313 2,970 -- 2,657
Thereafter............................................ 2,010 90 2,100 -- 2,010
--------- --------- --------- ------------ ------------
$ 13,283 $ 3,575 $ 16,858 $ 1,936,831 1,950,114
--------- --------- --------- ------------
--------- --------- --------- ------------
Less current portion.................................. 1,938,709
------------
$ 11,405
------------
------------
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. At its discretion,
the Board of Directors may declare dividends on shares of common stock, although
the Board does not anticipate paying dividends in the foreseeable future.
In November 1995, the Board of Directors authorized, and the shareholders
subsequently approved, a .602-for-1 reverse stock split of the Company's common
stock. All share and per share amounts in the accompanying financial statements
have been adjusted to retroactively reflect this reverse stock split.
During 1994, the Company sold 183,198 shares at $6.89 per share,
respectively, pursuant to a Regulation A public offering filed with the U.S.
Securities and Exchange Commission. Cash proceeds, net of offering expenses of
$178,625 aggregated $1,083,609 during 1994.
On January 18, 1996, the Company completed a public offering of 1,115,000
shares of common stock at $7.00 per share. On February 7, 1996, the underwriters
exercised an over-allotment option for an additional 172,500 shares of common
stock at $7.00 per share. Proceeds to the Company totaled approximately
$7,693,000, after offering expenses of approximately $1,320,000.
F-14
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
In January 1996, the shareholders of the Company authorized 15,000,000
shares of preferred stock to be available for issuance, the terms of which the
Board of Directors have the authority to establish. There are no current
agreements or understandings for the issuance of any shares of preferred stock.
7. STOCK INCENTIVE AND STOCK GRANT PLANS
In 1993, the Board of Directors established a pool of 128,482 shares for a
stock incentive plan for issuance to employees, consultants, distributors and
their employees, and directors of the Company pursuant to the exercise of stock
options granted under the plan or stock grants or stock sales. Administration of
the plan, including determination of the number of shares to be issued, the term
of exercise of any option, the option exercise price, and type of options to be
granted, lies with the Board of Directors or a duly authorized committee of the
Board of Directors. At December 31, 1994, 39,129 options issued under this plan
were outstanding. Of these, 33,687 have an exercise price of $1.99 per share,
and 5,442 have an exercise price of $6.89 per share. The options began vesting
ratably over a five- to ten-year period beginning in January 1995. During the
year ended December 31, 1995, an additional 71,110 options were granted and
40,950 were subsequently cancelled. Of the options granted in 1995, 68,100 had
an exercise price of $7.00 per share, 30,000 of which vest ratably over ten
years and 38,100 of which vest ratably over five years; 3,010 had an exercise
price of $6.65 per share and a vesting period of five years.
During the year ended December 31, 1996, 77,750 options were granted, and
20,500 were subsequently canceled. Of the options granted in 1996 and still
outstanding at December 31, 1996, 17,500 have an exercise price of $7.00 per
share and a vesting period of five years, 1,250 have an exercise price of $7.00
per share and a vesting period of two years; 18,500 have an exercise price of
$6.75 per share and a vesting period of ten years; 15,000 have an exercise price
of $6.75 per share and a vesting period of five years; 2,000 have an exercise
price of $5.75 per share and a vesting period of ten years; and 3,000 have an
exercise price of $5.75 and a vesting period of one year.
No compensation expense has been recorded as a result of granting any of the
options as all such options were granted with an exercise price equal to the
market price on the date of grant. No options have been exercised to date.
In January 1996, the shareholders of the Company approved an increase to
the number of shares available under the Company's stock incentive plan to
360,000 shares. In January 1996, the shareholders also approved the adoption
of a non-employee director's stock option plan and the reservation of 40,000
shares thereunder. Additionally, the Company grants shares of common stock to
distributors and their employees to establish the Company's distribution
network. Eligible persons receive seven shares of stock each. During the
years ended December 31, 1996, 1995, and 1994, the Company granted 2,043,
1,281, and 3,276 shares, respectively, to distributors and their employees.
Selling, general and administrative expenses for the years ended December 31,
1996, 1995, and 1994 include $14,076, $7,225, and $5,616, respectively,
related to the grant of these shares.
F-15
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK INCENTIVE AND STOCK GRANT PLANS (CONTINUED)
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 have resulted in a pro forma net
loss of $2,812,822 ($0.76 per share) for the year ended December 31, 1996 and
pro forma net income of $404,959 ($0.17 per share) for the year ended December
31, 1995. The effects of applying SFAS 123 for providing pro forma disclosure
for 1996 and 1995 are not likely to be representative of the effects in reported
net income and earnings per share for future years since options vest over
several years and additional awards are made each year. 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 6.27% and 5.88%, respectively, an expected dividend yield of 0%
and 0%, respectively, an expected life of 7.07 years and 7.55 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 $4.06
and $4.01, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1996 and 1995, the total value of the options granted
was computed to be $317,289 and $285,151, 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. INCOME TAXES
The provision for income taxes consists of:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------- ---------- ---------
Current tax expense:
Federal................................................. $ -- $ 75,740 $ 8,100
State................................................... -- 8,314 3,700
----------- ---------- ---------
-- 84,054 11,800
----------- ---------- ---------
Deferred (benefit):
Federal................................................. (148,905) 155,660 (4,800)
State................................................... (19,095) 19,240 (2,100)
----------- ---------- ---------
(168,000) 174,900 (6,900)
----------- ---------- ---------
$ (168,000) $ 258,954 $ 4,900
----------- ---------- ---------
----------- ---------- ---------
F-16
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The benefit for income taxes differs from the amount of incomes taxes
determined by applying the U.S. statutory graduated federal rate due to the
following:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Federal statutory rate (graduated)................................. 34.0% 33.3% 33.4%
State taxes, net of federal benefit................................ 4.2% 3.8 4.4
Reserve of net deferred tax assets................................. (33.1)% -- --
Permanent differences.............................................. (0.4)% 0.5 --
Utilization of fully reserved tax assets........................... -- -- (36.1)
Other.............................................................. 0.3 (0.7) --
--------- --- ---------
5.0% 36.9% 1.7%
--------- --- ---------
--------- --- ---------
Deferred tax assets (liabilities) consist of:
DECEMBER 31,
--------------------------
1996 1995
------------- -----------
Tax credit carryforwards.......................................... $ 10,109 $ 10,108
Fixed assets...................................................... -- --
Net operating loss carryforward................................... 1,639,738 --
Other............................................................. 20,489 11,856
------------- -----------
Gross deferred tax assets......................................... 1,670,336 21,964
------------- -----------
Fixed assets...................................................... (558,839) 189,964
------------- -----------
Gross deferred tax liabilities.................................... (558,839) 189,964
------------- -----------
Deferred tax asset (liability) before valuation allowance......... 1,111,497 (168,000)
Deferred tax valuation allowance.................................. (1,111,497) --
------------- -----------
Net deferred (liability).......................................... $ -- $ (168,000)
------------- -----------
------------- -----------
F-17
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are classified as follows:
DECEMBER 31,
----------------------
1996 1995
--------- -----------
Non-current asset....................................................... $ -- $ --
Non-current liability................................................... -- (189,964)
Current asset........................................................... 21,964
--------- -----------
$ -- $ (168,000)
--------- -----------
--------- -----------
The current deferred tax asset at December 31, 1995 is included in prepaid
expenses and other current assets in the accompanying balance sheet.
As of December 31, 1996, the Company had a net operating loss carryforward
aggregating approximately $4,168,000 for federal income tax purposes, which may
be used to offset future taxable income, if any. The annual utilization of this
carryforward may be limited after the Company undergoes the ownership change
anticipated by management or fails to meet the continuity of business
requirements defined by the Internal Revenue Code (see Note 12). The Company's
net operating loss carryforward expires in 2012.
9. RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president partially owns and controls Willamette Valley
Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc. Microbreweries
across America (WVI), a company organized to establish microbreweries throughout
the United States. Additionally, the Company's president is the president of
each of the following subsidiaries of WVI: Aviator Ales, Inc. (AAI); Mile High
Brewing Company (MHBC); Bayhawk Ales, Inc. (BAI); and North Country Brewing
Company, Inc. (NCBCI), development stage companies located in Washington,
Colorado, 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.
F-18
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES (CONTINUED)
RELATED PARTY TRANSACTIONS
The Company has purchased management services from WVV and WVI, consisting
of secretarial, accounting, marketing, administrative, stock transfer, and
brewery payroll services provided on a cost-plus fee basis. WVV provided such
services through June 1994, at which time WVI began providing these services. In
1994, charges for services provided to the Company by WVV and WVI aggregated
approximately $260,000, of which approximately $218,000 is included in selling,
general and administrative expenses, and $42,000 has been charged against stock
offering proceeds in the 1994 financial statements. At December 31, 1995,
accounts payable include approximately $45,000 owed to WVI as a result of these
transactions. During the year ended December 31, 1995, charges for services
provided to the Company by WVI aggregated approximately $363,000 of which
approximately $51,000 is included in deferred stock offering costs, and
approximately $312,000 is included in selling, general and administrative
expenses in the statement of operations for the year ended December 31, 1995.
During 1996, charges for services provided to the Company by WVI and WVV
aggregated approximately $66,000 all of which is included in selling, general
and administrative expenses in the 1996 statement of operations.
The Company continues to purchase certain management and administrative
services from WVI and WVV. In 1996, the Company began providing certain
management and administrative services to WVI and WVV as well as to AAI, MHBC,
BAI, and NCBCI.
The Company purchased brewery equipment costing approximately $72,500 in
1994 from one of its shareholders. The Company also purchased brewing equipment
costing approximately $53,000 in 1995 from MHBC. In addition, for the years
ended December 31, 1996, 1995, and 1994, the Company paid approximately $0,
$15,000, and $21,500, respectively, to a shareholder, officer, and member of the
Board of Directors for marketing consulting services.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, the Company entered into a Strategic Alliance (the
"Alliance") with AAI, MHBC, BAI, NCBCI, and WVI. The Company, AAI, MHBC, BAI,
NCBCI, and WVI are collectively referred to as "Alliance members," and the
Company, AAI, MHBC, and BAI are collectively referred to as the "Cooperative
Brewers" and individually referred to as a "Cooperative Brewer." The purpose of
the Alliance is to promote and support the growth of all of the Alliance members
by increasing production at each Cooperative Brewer's facility and supporting
the entry of Nor'Wester products into new markets. To achieve this goal, each
Cooperative Brewer 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.
F-19
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES (CONTINUED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS (CONTINUED)
The Alliance is created through a Strategic Alliance Agreement between
Nor'Wester and AAI, MHBC 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.
Under the terms of the Cooperative Brewing Agreements, each cooperative
brewer 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 use of AAI
and MHBC in producing Nor'Wester's beer. To the extent that this equipment is
not needed for the production of Nor'Wester beers, AAI and MHBC may, upon notice
to Nor'Wester, use this equipment to produce their 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 purchases totaled $1,375,000, which is 27% of the
Company's cost of goods sold. Because of the pricing terms surrounding
cooperative brewing discussed above, sales of cooperative-brewed beer resulted
in reduced margins for the Company. In addition, a significant portion of the
beer brewed by AAI and MHBC and purchased by the Company was determined to be
unusable. Accordingly, both AAI and MHBC ceased cooperative brewing of
Nor'Wester beers in January 1997.
F-20
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES (CONTINUED)
ADVANCES TO AFFILIATES
In connection with the Cooperative Brewing Agreements with AAI and MHBC
described above, Nor'Wester advanced $250,000 to each of AAI and MHBC in
December 1995 for the purchase of ingredients and packaging materials for the
cooperative brewers' initial production of Nor'Wester's products. In 1996, the
Company advanced $100,000, $250,000 and $50,000 to AAI, MHBC and WVI,
respectively, for cooperative brewing purchases and for operating expenses.
These advances remain outstanding although the cooperative brewing agreement has
been terminated. Because these advances will eventually be eliminated when the
proposed merger occurs, as discussed in Note 12, these advances have been
classified as current receivables from affiliates at December 31, 1996.
JOINT VENTURE AGREEMENT
On March 5, 1996, the Company entered into a joint venture agreement with
NCBCI. Under the terms of the agreement, the Company contributed $4,000,000 in
cash and equipment which was used to construct and operate a brewery in Saratoga
Springs, New York, as well as certain intangible assets for a 61% interest in
the joint venture known as North Country Joint Venture, LLC (NCJV). The Company
also advanced $2,550,000 to the joint venture. NCBCI was to repay the Company
$2,550,000 in cash by October 1996 for its 39% of the joint venture in
accordance with the agreement. NCBCI did not repay the Company by the date
required per the agreement.
Accordingly, NCBCI's rights to NCJV terminated and Nor'Wester became the
100% owner of NCJV. NCBCI owned 39% of NCJV for the first nine months of the
year. Accordingly, the minority interest share in the first-year loss of NCJV is
included in the accompanying statement of operations. Because Nor'Wester owned
100% of NCJV at December 31, 1996, no minority interest is recorded in the
accompanying balance sheet. The Saratoga Springs brewery makes up approximately
57% of the Company's net fixed assets, and it contributed approximately $154,000
in net revenues since production began in September 1996. The Saratoga Springs
brewery has generated losses totaling approximately $979,000 since its
inception. The losses are primarily related to start-up expenses and a low level
of production during 1996.
RECEIVABLES FROM AFFILIATES
The Company has not been repaid for a significant portion of the services
provided and cash advanced to the affiliated companies. Accordingly, the
Company has recorded on the accompanying balance sheet receivables from
affiliates aggregating $1,798,350. Because these receivables are expected to
be eliminated or received in cash after the expected merger with UBA occurs
(see Note 12), these receivables have been classified as current at December
31, 1996. Receivables from each of the affiliated companies are as follows:
F-21
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES (CONTINUED)
WVV............................................................. $ 33,814
WVI............................................................. 323,590
AAI............................................................. 570,090
MHBC............................................................ 703,446
BAI............................................................. 72,179
NCBCI........................................................... 95,231
---------
$1,798,350
---------
---------
These balances are not expected by management to be fully collected in cash.
Instead, a portion will be collected if the assets of MHBC are sold subsequent
to December 31, 1996, and the remainder will be considered when the companies
are merged into the new company expected to be formed (see Note 12).
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has signed five-year leases for its brewery and pub facilities
in Oregon and New York which expire on January 31, 2000 and February 15, 2002,
respectively. The term of the lease in Oregon is renewable for an additional 10
years. The New York lease has three five-year renewal options. The Company has
also entered into a one-year lease, which has a one-year renewal option for
storage in Oregon. Annual payments under this lease are $10,800. Annual payments
under the leases total $178,740 plus net charges for property taxes, fire
insurance, and utilities. Rent payments are adjusted annually based on increases
in the consumer price index, limited to no more than a four percent annual
increase. The Company paid lease consideration of $50,000 in 1995 to hold the
New York facility until construction began. This payment was capitalized and is
being amortized over a period of five years.
Approximate future minimum lease payments for both facilities, including
payments under the renewal terms, are:
1997............................................................ $ 178,740
1998............................................................ 178,740
1999............................................................ 167,940
2000............................................................ 167,940
2001............................................................ 167,940
Thereafter...................................................... 1,226,417
---------
$2,087,717
---------
---------
F-22
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expenses aggregated approximately $190,000, $91,000, and $82,000 for
the years ended December 31, 1996, 1995, and 1994, respectively, and are
allocated between cost of goods sold and selling, general and administrative
expenses in the accompanying statement of operations.
The Company has entered into agreements with independent distributors for
the distribution of the Company's products throughout the United States of
America. These agreements contain normal distribution provisions and are
cancelable by either the Company or the distributors.
In addition, due to the nature of the industry the Company operates in, the
Company is exposed to certain hazards and liability risks resulting from brewery
operations which could impact the Company negatively.
IMPAIRMENT OF ASSETS AT MHBC
The Company has assets with a net book value of approximately $400,000
located in Denver, Colorado at the MHBC brewery for use by MHBC for cooperative
brewing. Subsequent to December 31, 1996, the management of MHBC formulated a
plan to sell the operating assets of MHBC or to pursue contract brewing
opportunities. Potential buyers may wish to purchase assets owned by Nor'Wester
located at the MHBC brewery. Management of the Company and of MHBC intend to
reimburse Nor'Wester in cash at net book value for any of the Company's assets
which are sold. The financial statements do not include any adjustments to
reflect the outcome of this uncertainty.
11. SIGNIFICANT CUSTOMERS
In 1996, the Company sold approximately 47% of its products to wholesale
distributors located in Oregon. Sales to the Company's largest customers
represented 16% of total revenues. For the year ended December 31, 1995, sales
to the Company's largest customer represented 19% of total revenues,
respectively. For the year ended December 31, 1994, sales to the Company's
largest customer represented 28% of total revenues.
12. PROPOSED MERGER AND INVESTMENT BY UBA
Subsequent to December 31, 1996 the Company and its subsidiary (NCJV) along
with its affiliates (WVI, AAI, MHBC 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
F-23
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
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).
All principal and interest related to the bridge loans is secured by the
assets of North Country Joint Venture, the Company's wholly-owned subsidiary,
and by the Company's ownership interest in North Country Joint Venture.
Repayment of all principal and interest is guaranteed personally by the
Company's president.
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, (vi) extension of the Company's $1 million revolving line of credit
through September 30, 1997 (see Note 4); and the lender shall have waived any
defaults under the line of credit agreement and the line of credit shall have
been converted to a term loan (see Note 5), and (vii) 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-24
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 consolidated financial statements have been restated
to revise the Company's share of the net losses sustained by North Country Joint
Venture, LLC, which was purchased by the Company in October 1996 from WVI, an
affiliated company, and classify the Company's non-revolving credit facility as
a current liability as the Company is not in compliance with its debt covenants,
and to classify advances to affiliates as cash used for financing activities.
The effects of these restatements on the consolidated financial statements are
summarized below:
AS OF AND FOR THE YEAR
ENDED
DECEMBER 31, 1996
--------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
------------ ------------
Consolidated balance sheet:
Receivables from affiliates..................................... $1,575,853 $ 1,798,350
Current portion of long-term debt and capital leases............ 285,318 1,938,709
Long-term debt and capital leases............................... 1,664,796 11,405
Accumulated deficit............................................. (2,506,808) (2,284,311)
Consolidated statement of operations:
Selling, general and administrative expenses.................... 4,768,056 4,545,559
Net loss........................................................ (2,974,423) (2,751,926)
Net loss per share.............................................. (.80) (0.74)
Consolidated statement of cash flows:
Net cash used for investing activities.......................... 8,971,605 7,873,255
Net cash provided by financing activities....................... 9,817,248 8,718,898
F-25
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 80,543 $ 252,049
Accounts receivable.............................................................. 592,813 606,642
Income tax receivable............................................................ 103,761 103,761
Receivable from affiliated companies............................................. 1,928,984 1,798,350
Inventories...................................................................... 830,902 720,507
Marketing supplies............................................................... 77,982 77,530
Other current assets, net........................................................ 336,912 221,223
------------- -------------
Total current assets............................................................. 3,951,897 3,780,062
Property and equipment, net........................................................ 11,787,919 11,968,471
Other non-current assets, net...................................................... 65,000 40,000
------------- -------------
Total assets....................................................................... $ 15,804,816 $ 15,788,533
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit................................................................... $ 1,041,000 $ 1,041,000
Current portion of long-term debt and capital lease.............................. 3,689,289 3,088,709
Accounts payable................................................................. 2,356,868 2,427,073
Container deposits............................................................... 127,396 130,921
Accrued payroll and other liabilities............................................ 223,266 309,256
------------- -------------
Total current liabilities........................................................ 7,437,819 6,996,959
Long-term debt and capital lease................................................... 10,825 11,405
------------- -------------
Total liabilities................................................................ 7,448,644 7,008,364
Shareholders' equity:
Common stock, no par value -- 10,000,000 shares authorized, 3,711,097 and
3,711,097 shares outstanding................................................... 11,064,480 11,064,480
Accumulated Deficit................................................................ (2,708,308) (2,284,311)
------------- -------------
Total shareholders' equity......................................................... 8,356,172 8,780,169
------------- -------------
Total liabilities and shareholders' equity......................................... $ 15,804,816 $ 15,788,533
------------- -------------
------------- -------------
The accompanying notes are an integral part of this financial statement.
F-26
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------ ------------
Gross sales........................................................................... $ 1,317,212 $ 1,554,845
Less: excise taxes.................................................................... (63,365) (75,059)
------------ ------------
Net sales............................................................................. 1,253,847 1,479,786
Cost of sales......................................................................... 980,409 968,267
------------ ------------
Gross profit.......................................................................... 273,438 511,519
Selling, general and administrative expenses.......................................... 578,838 475,471
------------ ------------
Income (loss) from operations......................................................... (305,400) 36,048
Interest and other income, net........................................................ (118,597) 38,321
------------ ------------
Income (loss) before income taxes and minority interest............................... (423,997) 74,369
Provision for income taxes............................................................ -- (29,004)
------------ ------------
Income (loss) before minority interest................................................ (423,997) 45,365
Minority interest..................................................................... -- 17,692
------------ ------------
Net income (loss)..................................................................... $ (423,997) $ 63,057
------------ ------------
------------ ------------
Net income (loss) per common share.................................................... $ (0.11) $ 0.02
------------ ------------
------------ ------------
Weighted average number of common shares outstanding.................................. 3,696,041 3,651,554
------------ ------------
------------ ------------
The accompanying notes are an integral part of this financial statement.
F-27
NOR'WESTER BREWING COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
-------------------------
1997 1996
----------- ------------
Cash flows from operating activities:
Net income........................................................................... $ (423,997) $ 63,057
Minority interest in loss from joint venture......................................... -- (17,692)
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 209,707 67,742
Changes in assets and liabilities:
Accounts receivable.............................................................. 13,829 (126,284)
Inventories...................................................................... (110,395) 14,732
Other current assets............................................................. (116,141) 239,957
Other non-current assets......................................................... (25,000) 102,521
Accounts payable................................................................. (70,205) (391,715)
Accrued liabilities and container deposits....................................... (89,515) (259,992)
----------- ------------
Net cash (used for) provided by operating activities................................. (611,717) (307,674)
Cash flows from investing activities
Purchases of property and equipment.................................................. (29,155) (928,938)
----------- ------------
Net cash used for investing activities............................................... (29,155) (928,938)
Cash flows from financing activities:
Advances to affiliates............................................................... (130,634) (218,966)
Borrowings (repayments) on long-term debt and line of credit......................... 600,000 (268,718)
Net proceeds from stock offering..................................................... -- 7,689,840
----------- ------------
Net cash provided by financing activities.............................................. 469,366 7,202,156
----------- ------------
Net increase (decrease) in cash and cash equivalents................................... (171,506) 5,965,544
Cash and cash equivalents:
Beginning of period.................................................................. 252,049 276,807
----------- ------------
End of period........................................................................ $ 80,543 $ 6,242,351
----------- ------------
----------- ------------
The accompanying notes are an integral part of this financial statement.
F-28
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Company's consolidated financial statements enclosed herein are
unaudited and, because of the seasonal nature of the business and the varying
schedule of its special sales efforts, these results are not necessarily
indicative of the results to be expected for the entire year. In the opinion of
management, the interim financial statements reflect all adjustments, consisting
of only normal recurring items which are necessary for a fair presentation of
the results for the periods presented. The accompanying financial statements
have been prepared in accordance with GAAP and SEC guidelines applicable to
interim financial information which require management to make certain estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates. The accompanying financial statements and related notes should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1996.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has recorded
significant losses in the current year, has negative working capital of
$3,485,922, is not in compliance with its debt covenants, and has limited access
to capital with which to fund future operations. There can be no assurance that
the Company will produce and sell its products on a profitable basis to sustain
operations. Such factors, among others, raise substantial doubt as to its
ability to continue as a going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) restructure bank facilities and loan covenants to
ensure loans will not be called and which may allow for additional operating
lines; (v) hire and retain high-quality employees familiar with the brewing
industry, (vi) use available bridge loans from a proposed investor (see Proposed
Merger note) to fund operations until new strategies result in positive cash
flows and improved profitability, and; (vii) use of proceeds from the
disposition of duplicative and/or unutilized assets created by the proposed
merger. Management believes these plans will result in the Company sustaining
operations as a going concern for next 12 months.
As part of the plans, the Company entered into an investment agreement to be
merged with other affiliated companies and convert its stock into shares of a
new publicly traded entity as discussed in the Proposed Merger note.
STATEMENT OF CASH FLOWS
The Company considers short-term investments which are highly liquid, have
maturities of fewer than three months and are readily convertible into cash to
be cash equivalents.
During the quarter ended March 31, 1996 the North Country Brewing
Company, Inc. ("NCBCI") entered into a joint venture agreement with the
Company relating to the ownership and operation of a brewery in Saratoga
Springs, New York. NCBCI financed its minority interest in the joint venture
with a short-term note payable in the amount of $2,550,000 to the joint
venture. NCBCI has failed to make payment on the
F-29
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STATEMENT OF CASH FLOWS (CONTINUED)
note and its interest in the joint venture has been terminated. This non-cash
transaction has been excluded from the accompanying statement of cash flows.
INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
Beer-making and packaging materials................................ $ 520,806 $ 460,423
Work-in-process.................................................... 74,933 75,553
Finished goods..................................................... 235,163 184,531
---------- ------------
$ 830,902 $ 720,507
---------- ------------
---------- ------------
PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
Land and improvements.......................................... $ 243,072 $ 243,071
Leasehold improvements......................................... 2,359,098 2,338,391
Equipment...................................................... 10,004,764 9,612,828
Construction in progress....................................... 164,303 547,792
------------- -------------
12,771,237 12,742,082
Less accumulated depreciation.................................. (983,318) (773,611)
------------- -------------
$ 11,787,919 $ 11,968,471
------------- -------------
------------- -------------
SHAREHOLDERS' EQUITY
The Company is authorized to issue 10 million shares of its common stock.
Each share of common stock entitles the holder to one vote. At its discretion,
the Board of Directors may declare dividends on shares of common stock, although
the Board does not anticipate paying dividends in the foreseeable future. During
1996, the Company completed a public offering of 1,115,000 shares of common
stock at $7.00 per share. The underwriters for the offering exercised an
over-allotment option for an additional 172,500 shares of common stock at $7.00
per share. Net proceeds to the Company totaled approximately $7,693,000, net of
selling commissions and offering expenses of approximately $1,320,000. In
January 1996, the shareholders of the Company authorized 15 million shares of
preferred stock to be available for issuance, the terms of which the Board of
Directors have the authority to establish. There are no current agreements or
understandings for the issuance of any shares of preferred stock.
NET LOSS PER SHARE
Net loss per common share is calculated based on the weighted average number
of common shares and common share equivalents outstanding during the three month
periods ended March 31, 1997 and 1996. Outstanding options to purchase shares of
the Company's common shares have not been included in the calculation for the
quarter ended March 31, 1997 as their effect would be anti-dilutive.
F-30
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LINE OF CREDIT AND NOTES PAYABLE
The Company had a $1,000,000 revolving bank line of credit bearing
interest at the bank's reference rate plus 0.5% (8.75% at March 31, 1997)
which expired December 31, 1996 and subsequently extended to September 30,
1997. The line is secured by the Company's assets and contains certain
covenants and restrictions (see Proposed Merger note). At March 31, 1997
$1,000,000 was outstanding under this line of credit. In addition, the
Company's North Country subsidiary had $41,000 outstanding on a separate line
of credit bearing interest at 9.75% at March 31, 1997. The Company has a
$250,000 loan payable to its president bearing interest at 10.5%. Repayment
of the loan is required upon completion of the proposed merger with UBA (see
Proposed Merger note). The Company has a $1.5 million bridge loan payable to
UBA, bearing interest at 11.25%, related to an investment agreement the
Company entered into during the three months ended March 31, 1997 (see
Proposed Merger note). The Company has a $1,842,351 bank term loan which
bears interest at the bank's reference rate plus 0.5% (8.63% at March 31,
1997) and is payable in equal monthly installments over seven years. At March
31, 1997, $1,842,351 was borrowed under this facility. This non-revolving
credit facility and the revolving credit facility discussed above are secured
by the Company's assets and contain covenants which require the Company to
maintain financial ratios and prohibit the Company from making any dividend
payments without the bank approval. At March 31, 1997, the Company was not in
compliance with certain loan covenants relating to both the non-revolving
credit facility and the revolving credit facility. The Company is involved in
discussions with the lender in order to (i) renew the $1 million revolving
line of credit facility to mature on the earlier of September 30, 1997, or 10
days following closing of the investment by UBA (see Proposed Merger note)
and (ii) waive the loan covenants associated with theses loans so long as the
Company remains in compliance with all terms of the investment agreement and
achieves reasonable progress toward closing the investment with UBA.
Subsequent to March 31, 1997, the bank notified the Company that the
non-revolving credit facility would also be due on September 30, 1997.
However, final approval of amendment to the lender's loan agreements has not
yet been received. If final approval is not received or if received but the
Company subsequently violates the terms of the amendment, then the Company
would be in default of its loans which could lead to foreclosure and sale of
all or an important part of the Company's assets. Such an event would have a
material adverse impact on the Company's business, financial condition and
results of operations. The Company is obligated under the provisions of a
capital lease to make monthly payments of $248 through the year 2002.
STOCK INCENTIVE AND STOCK GRANT PLANS
In 1993, the Board of Directors established a pool of 128,482 shares of
the Company's common stock for a stock incentive plan for issuance to
employees, consultants, distributors and their employees, and directors of
the Company pursuant to the exercise of stock options granted under the plan
or stock grants or stock sales. Administration of the plan, including
determination of the number of shares to be issued, the term of exercise of
any option, the option exercise price, and type of options to be granted,
lies with the Board of Directors or a duly authorized committee of the Board
of Directors. In January 1996, the shareholders of the Company approved an
increase to the number of shares available under the Company's stock
incentive plan to 360,000 shares. In January 1996, the shareholders also
approved the adoption of a non-employee director's stock option plan and the
reservation of 40,000 shares thereunder. As of March 31, 1997, options for a
total of 266,539 shares have been awarded, net of cancellations. Options have
vesting periods ranging from two years to ten years. Exercise prices range
from $1.99 per share to $3.25 per share with a weighted average exercise
price per share of $3.09. No options have been exercised through March 31,
1997. During the quarter ended March 31, 1997, options for 140,000 shares of
the Company's common stock were issued with an exercise price of $3.25 per
share. In addition, during the quarter ended March 31, 1997, the Company
adjusted the exercise price to $3.25 for all previously issued and
outstanding options with an exercise price in excess of $3.25. Subsequent to
March 31, 1997 the company re-priced all outstanding options to $1.75. A
total of 126,539 options were re-priced. No compensation expense has
F-31
STOCK INCENTIVE AND STOCK GRANT PLANS (CONTINUED)
been recorded as a result of granting any of the options as all such options
were granted with an exercise price equal to the market price on the date of
grant. Options granted by the Company are expected to be converted to options
of the new company expected to be formed in the consolidation of the Company
and its affiliates (See Proposed Merger note). The options will be converted
at the same conversion rate as the conversion of common stock discussed in
the Pending Consolidation note.
INCOME TAXES
No benefit for income taxes was recognized for the quarters ended March 31,
1997 and 1996 in the accompanying statement of operations as there can be no
assurance that the Company will generate taxable income in the future against
which such benefits could be realized. At March 31, 1997, the Company had a net
operating loss carryforward aggregating approximately $4.6 million for federal
income tax purposes, which may be used to offset future taxable income, if any.
The annual utilization of this carryforward may be limited if the Company
undergoes the ownership change anticipated by management (see Proposed Merger
note ) or fails to meet continuity of business requirements defined by the
Internal Revenue Code. The Company's net operating loss carryforwards begin
expiring in 2013.
RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president, Jim Bernau, partially owns and controls Willamette
Valley Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc.
Microbreweries across America (WVI), a company organized to establish
microbreweries throughout the United States. Additionally, Mr. Bernau is the
president of each of the following subsidiaries of WVI: Aviator Ales, Inc.
(AAI); Mile High Brewing Company (MHBC); Bayhawk Ales, Inc. (BAI); and North
Country Brewing Company, Inc. (NCBCI); development stage companies located in
Washington, Colorado, California and New York, respectively. As a result of
certain arrangements between the Company and its affiliates, as well as Mr.
Bernau's positions with and/or ownership interests in each of these companies,
inherent conflicts of interest exist with respect to the pricing of services,
the sharing of resources and allocation of Mr. Bernau's time.
RELATED PARTY TRANSACTIONS
For the three months ended March 31,1996, the Company purchased human
resources and other administrative services from affiliated companies, under a
general services agreement at a total cost of $12,150. For the three months
ended March 31, 1997, the Company performed these services internally. For the
three months ended March 31, 1996, the Company purchased stock and sales support
services from an affiliated company, Willamette Valley Vineyards, Inc., for
$3,600. For the three months ended March 31, 1997, the Company performed these
services internally. Under the general services agreement, the Company provided
services such as accounting, sales management and executive oversight to WVI and
it's subsidiaries and WVV. The Company charged affiliates $48,567 for such
services for the three months ended March 31, 1997 and $60,075 for the three
months ended March 31, 1996.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
The Company has entered into a Strategic Alliance (the "Alliance") with AAI,
MHBC, BAI, NCBCI, and WVI. The Company, AAI, MHBC, and BAI are individually
referred to as a "Cooperative Brewer." The purpose of the Alliance is to promote
and support the growth of all of the Alliance members by increasing production
at each Cooperative Brewer's facility and supporting the entry of Nor'Wester
products into new markets. To achieve this goal, each Cooperative Brewer agreed
to cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. However, due to the fact that Nor'Wester's
Portland
F-32
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS (CONTINUED)
Brewery is not currently operating at capacity and it is not attempting to
develop other regional markets for its products, the Cooperative Brewing
Agreements are not being utilized. Should the consolidation occur as planned
(see Proposed Merger note), the Strategic Alliance and agreements thereunder
will terminate. In connection with the Cooperative Brewing Agreement with AAI
and MHBC described above, Nor'Wester advanced $250,000 to each of AAI and
MHBC during 1995 for the purchase of ingredients and packaging materials for
the cooperative brewer's initial production of Nor'Wester's products. In
1996, the Company advanced $100,000 and $350,000 to AAI and MHBC,
respectively, for the cooperative brewing purchases and operating expenses.
In addition, the Company provided a loan of $35,000 to Bayhawk Ales, Inc.
("BAI") for the purchase of a grain silo and milling system to reduce
cooperative brewing costs. At March 31, 1997 these advances remain
outstanding. Because management expects these advances will eventually be
eliminated when the proposed merger occurs, as discussed in the Proposed
Merger note, these advances have been classified as current receivables from
affiliates at March 31, 1997.
JOINT VENTURE AGREEMENT AND PRINCIPLES OF CONSOLIDATION
In 1996, the Company entered into a joint venture agreement with NCBI for
the purpose of constructing, owning and operating a brewery in Saratoga
Springs, New York (the "Saratoga Springs Brewery"). Under the terms of this
agreement, the Company contributed $4,000,000 in cash and equipment which was
used to construct and operate the brewery, as well as certain intangible
assets for a 61% interest in the joint venture known as North Country Joint
Venture, LLC (NCJV). The Company also advanced $2,550,000 to the joint
venture. NCBCI was to repay the Company $2,550,000 in cash by October 1996
for its 39% of the joint venture in accordance with the agreement. NCBI did
not repay the Company. Accordingly, NCBCI's rights to NCJV terminated and
Nor'Wester became the 100% owner of NCJV. Because Nor'Wester owned 100% of
NCJV at March 31, 1997, no minority interest is recorded in the accompanying
balance sheet or statement of operations. The Saratoga Springs brewery makes
up approximately 57% of the Company's net fixed assets.
RECEIVABLES FROM AFFILIATES
The Company has not been repaid for a significant portion of the services
provided and cash advanced to the affiliated companies. Accordingly, the Company
has recorded on the accompanying balance sheet receivables from affiliates
aggregating $1.9 million. Because these receivables are expected to be
eliminated or received in cash after the proposed merger with UBA occurs (see
Proposed Merger note), these receivables have been classified as current at
March 31, 1997. Receivables from each of the affiliated companies are as
follows:
WVV............................................................. $ 21,093
WVI............................................................. 379,275
AAI............................................................. 629,857
MHB............................................................. 735,134
BAI............................................................. 67,497
NCBI............................................................ 96,128
---------
$1,928,984
---------
---------
These balances are not expected by management to be fully collected in cash.
Instead, a portion is expected to be collected if the assets of MHBC are sold
subsequent to March 31, 1997, and the remainder are expected to be eliminated
when the companies are merged into the new company expected to be formed (see
Proposed Merger note).
F-33
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into five-year operating lease arrangements for
brewery and pub facilities in Oregon and New York which expire on January 31,
2000 and February 15, 2002, respectively. The term of the lease in Oregon is
renewable for an additional 10 years. The New York lease has three five-year
renewal options. Annual payments under the leases total $178,740 (totaling
approximately $2,078,717, including payments under renewal terms, over the terms
of the leases) plus net charges for property taxes, fire insurance, and
utilities. Rent payments are adjusted annually based on increases in the
consumer price index, limited to no more than a four percent annual increase.
The Company paid lease consideration of $50,000 in 1995 to hold the New York
facility until construction began. This payment was capitalized and is being
amortized over a period of five years.
Significant Customers--A significant portion of the Company's sales are to
distributors located in Oregon.
PROPOSED MERGER, BRIDGE LOAN, AND SUBSEQUENT INVESTMENT BY UBA
PROPOSED MERGER AND INVESTMENT BY UBA
During the quarter ended March 31, 1997, the Company, along with its
affiliates (WVI, AAI, MHBC 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 merge into a company to be known as United Craft Brewers (UCB). This proposed
merger will result in the issuance of newly registered shares of UCB common
stock in exchange for shares of Nor'Wester, WVI and its subsidiaries. The merger
and share exchange will require approval by the Boards of Directors and
shareholders of each of the entities. Following the merger, all shareholders in
the Nor'Wester /WVI alliance will hold shares in UCB, a company which is
intended to be listed for trading on the Nasdaq National Market system under the
symbol ALES. 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.................................................................... 1.00000:1
WVI........................................................................... 1.99159:1
AAI........................................................................... 2.98739:1
BAI........................................................................... 1.99159:1
MHBC.......................................................................... 2.98739:1
Following the proposed 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 31, 1997, $1.5 million 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.
All principal and interest related to the bridge loans is secured by the
assets of North Country Joint Venture, Nor'Wester's wholly-owned subsidiary, and
by Nor'Wester's ownership interest in North Country Joint Venture. Repayment of
all principal and interest is guaranteed personally by the Company's president.
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)
F-34
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPOSED MERGER, BRIDGE LOAN, AND SUBSEQUENT INVESTMENT BY UBA (CONTINUED)
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, (vi) extension of Nor'Wester's
$1 million revolving line of credit through September 30, 1997 and the lender
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.
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 subsidiaries would own the remaining 45% of UCB.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") which are effective for fiscal
years ending after December 15, 1997. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
RENEGOTIATION OF MERGER AND INVESTMENT BY UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and adverse
conditions with 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 the
Proposed Merger note. The renegotiation will reflect a significantly lower
valuation for the affiliated companies, a reduction in the total amount of cash
to be invested by UBA to $5.5 million and a reduction of UBA's percentage
ownership position in UCB to 40% following consolidation. It is anticipated that
the $2.75 million bridge loan 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.
F-35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Willamette Valley, Inc. Microbreweries across America
(A Development Stage Company)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Willamette
Valley, Inc. Microbreweries across America (a development stage company) and its
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996 and for the period from inception (December 2, 1993) through December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company which has only
a limited and unprofitable operating history, has negative working capital of
$2,914,247 and has limited access to capital with which to fund future
operations. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Subsequent to December 31, 1996,
the management of Mile High Brewing Company (MHBC), a majority-owned subsidiary
of the Company, formalized and approved a plan to sell the operating assets of
MHBC or to pursue contract brewing opportunities. Accordingly, the assets have
been reported at estimated fair value at December 31, 1996 and management has
recorded an impairment loss of $1,018,879 in the accompanying statement of
operations for the year ended December 31, 1996. Such factors, among others,
raise substantial doubt about its ability to continue as a going concern.
As discussed in Note 12 to the financial statements, the Company and its
subsidiaries entered into an investment agreement subsequent to December 31,
1996 to be merged with other affiliated companies and convert their stock into
shares of a new publicly traded entity.
F-36
To the Board of Directors and Shareholders of
Willamette Valley, Inc. Microbreweries across America
(A Development Stage Company)
Page 2
Willamette Valley, Inc. Microbreweries across America is a member of a group
of affiliated companies and, as disclosed in the financial statements, has
extensive transactions and relationships with members of the group. Because
of these relationships, it is possible that the terms of these transactions
are not the same as those that would result from transactions among wholly
unrelated parties.
As discussed in Note 14 to the financial statements, the Company has
restated its 1996 financial statements to revise the Company's share of the net
losses sustained for the period from January 1, 1996 to September 30, 1996 by
North Country Joint Venture, LLC, which was sold by the Company in October 1996
to Nor'Wester Brewing Company, Inc., an affiliated company, and to reduce the
impairment loss by the amount of future estimated operating losses initially
included therein relating to a contract brewing arrangement of Mile High Brewing
Company, a majority-owned subsidiary of the Company. Such losses will be
recorded in 1997 as incurred.
PRICE WATERHOUSE LLP
Portland, Oregon
March 21, 1997, except as to Notes 13 and 14, which are as of March 24, 1997,
and Note 1 (third paragraph only) which is as of June 23, 1997
F-37
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
--------------------------------
1996 1995
----------------- -------------
(RESTATED--NOTE 14)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 90,492 $ 1,117,134
Accounts receivable......................................................... 211,078 123,026
Receivables from affiliates (Note 8)........................................ -- 198,569
Inventories (Notes 2 and 11)................................................ 349,870 368,656
Prepaid expenses and other current assets................................... 8,170 215,712
----------------- -------------
Total current assets...................................................... 659,610 2,023,097
Property and equipment, net (Notes 3 and 11).................................. 5,124,746 5,460,152
Deposits for the purchase of equipment........................................ -- 51,000
Other non-current assets...................................................... -- 161,177
----------------- -------------
Total assets.................................................................. $ 5,784,356 $ 7,695,426
----------------- -------------
----------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations (Note 4)...................................................... $ 73,328 $ 19,522
Accounts payable............................................................ 1,470,891 406,797
Accrued liabilities......................................................... 149,650 220,870
Container deposits.......................................................... 34,922 --
Reserve for impairment loss (Note 11)....................................... 50,000 --
Payable to affiliated companies (Note 8).................................... 1,795,066 22,698
----------------- -------------
Total current liabilities................................................. 3,573,857 669,887
Long-term debt and capital lease obligations (Note 4)......................... 298,888 108,415
Advance from affiliate (Note 8)............................................... -- 700,000
Deferred rent (Note 9)........................................................ 70,103 91,328
----------------- -------------
3,942,848 1,569,630
----------------- -------------
Minority interest............................................................. 283,706 1,871,191
----------------- -------------
Commitments (Notes 9, 12 and 13)
Shareholders' equity (Notes 6, 7, 12 and 13):
Common stock, $.01 par value, 10,000,000 shares authorized, 4,860,996 and
4,850,796 shares issued and outstanding................................... 48,610 48,508
Additional paid-in capital.................................................. 5,453,712 5,686,386
Deficit accumulated during development stage................................ (3,944,520) (1,480,289)
----------------- -------------
Total shareholders' equity................................................ 1,557,802 4,254,605
----------------- -------------
Total liabilities and shareholders' equity.................................... $ 5,784,356 $ 7,695,426
----------------- -------------
----------------- -------------
The accompanying notes are an integral part of these financial statements.
F-38
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
CUMULATIVE
AMOUNTS FROM
INCEPTION
YEAR ENDED (DECEMBER 2,
DECEMBER 31, 1993) TO
-------------------------------- DECEMBER 31,
1996 1995 1996
----------------- ------------- -------------
(RESTATED--NOTE 14)
Revenues:
Gross sales of beer and related retail products
(Notes 8 and 10)............................................. $ 3,967,975 $ 582,908 $ 4,594,582
Less excise taxes.............................................. (208,471) (25,194) (233,665)
----------------- ------------- -------------
Net sales........................................................ 3,759,504 557,714 4,360,917
Management services to affiliated companies (Note 8)............. 109,800 653,776 893,190
----------------- ------------- -------------
3,869,304 1,211,490 5,254,107
----------------- ------------- -------------
Cost of sales:
Cost of beer and related retail products......................... 4,148,847 615,518 4,787,853
Management services to affiliated companies (Note 8)............. 109,800 570,507 799,527
----------------- ------------- -------------
4,258,647 1,186,025 5,587,380
----------------- ------------- -------------
Gross (deficit) margin........................................... (389,343) 25,465 (333,273)
Selling, general and administrative expenses (Note 8)............ 2,229,018 2,176,410 4,715,974
Estimated impairment loss (Note 11).............................. 1,018,879 -- 1,018,879
Write-off of stock offering costs (Note 6)....................... 461,969 -- 461,969
----------------- ------------- -------------
Loss from operations............................................. (4,099,209) (2,150,945) (6,530,095)
Interest income (expense)........................................ (34,801) 175,984 224,589
Other expense.................................................... (183,316) -- (183,316)
----------------- ------------- -------------
Loss before income taxes and minority interest in losses of
consolidated subsidiary companies.............................. (4,317,326) (1,974,961) (6,488,823)
Income taxes (Note 5)............................................ -- -- --
----------------- ------------- -------------
Loss before minority interest in losses of consolidated
subsidiary companies........................................... (4,317,326) (1,974,961) (6,488,823)
Minority interest in losses of consolidated subsidiary
companies...................................................... 1,853,095 644,119 2,544,303
----------------- ------------- -------------
Net loss as a development stage company.......................... $ (2,464,231) $ (1,330,842) (3,944,520)
----------------- ------------- -------------
Net loss per common share........................................ $ (0.51) $ (0.27) $ (1.10)
----------------- ------------- -------------
----------------- ------------- -------------
Weighted average number of common shares outstanding............. 4,852,513 4,850,796 3,602,166
----------------- ------------- -------------
----------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-39
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (DECEMBER 2, 1993) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
ADDITIONAL COMMON DURING
COMMON STOCK PAID-IN STOCK DEVELOPMENT
SHARES AMOUNT CAPITAL SUBSCRIPTION STAGE TOTAL
------------ --------- ------------ ----------- ------------- -------------
Balances, December 2, 1993.............. -- $ -- $ -- $ -- $ -- $ --
WVI common stock subscription........... 3,353,826 33,538 77,573 (111,111) -- --
------------ --------- ------------ ----------- ------------- -------------
Balances, December 31, 1993............. 3,353,826 33,538 77,573 (111,111) -- --
Proceeds from WVI common stock issuance
to founders ($0.03 per share)......... -- -- -- 111,111 -- 111,111
Net proceeds from WVI common stock
offerings ($1.65 per share)........... 1,496,970 14,970 2,164,607 -- -- 2,179,577
Interest in net proceeds from offerings
of majority-owned subsidiary
company............................... -- -- 2,611,633 -- -- 2,611,633
Net loss................................ (149,447) (149,447)
------------ --------- ------------ ----------- ------------- -------------
Balances, December 31, 1994............. 4,850,796 48,508 4,853,813 -- (149,447) 4,752,874
Interest in net proceeds from offerings
of majority-owned subsidiary
company............................... -- -- 832,573 -- -- 832,573
Net loss................................ -- -- -- -- (1,330,842) (1,330,842)
------------ --------- ------------ ----------- ------------- -------------
Balances, December 31, 1995............. 4,850,796 48,508 5,686,386 -- (1,480,289) 4,254,605
Shares granted to employees............. 10,200 102 20,298 -- -- 20,400
Decrease in interest in majority-owned
subsidiary company.................... -- -- (252,972) -- -- (252,972)
Net loss................................ -- -- -- -- (2,464,231) (2,464,231)
------------ --------- ------------ ----------- ------------- -------------
Balance, December 31, 1996
(Restated--Note 14)................... 4,860,996 $ 48,610 $ 5,453,712 $ -- $ (3,944,520) $ 1,557,802
------------ --------- ------------ ----------- ------------- -------------
------------ --------- ------------ ----------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-40
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
CUMULATIVE
AMOUNTS FROM
INCEPTION
YEAR ENDED (DECEMBER 2,
DECEMBER 31, 1993) TO
-------------------------------- DECEMBER 31,
1996 1995 1996
----------------- ------------- -------------
(RESTATED-NOTE 14)
Cash flows from operating activities:
Net loss....................................................... $ (2,464,231) $ (1,330,842) $ (3,944,520)
Minority interest in losses of consolidated subsidiary
companies.................................................... (1,853,095) (644,119) (2,544,303)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation................................................... 441,154 217,672 667,863
Deferred rent.................................................. 22,152 91,328 113,480
Write-down of assets due to impairment loss.................... 1,018,879 -- 1,018,879
Shares of WVI and subsidiary company granted to employees...... 33,782 10,870 44,652
Changes in assets and liabilities:
Accounts receivable.......................................... (88,052) (119,393) (211,078)
Receivables from affiliates.................................. 198,569 (190,640) --
Other receivables............................................ -- 32,813 --
Inventories.................................................. (167,914) (343,984) (536,570)
Prepaid expenses and other current assets.................... 207,542 (208,908) (8,170)
Accounts payable............................................. 1,064,094 281,145 1,470,891
Accrued liabilities and container deposits................... (36,298) 41,859 184,572
----------------- ------------- -------------
Net cash used by operating activities.......................... (1,623,418) (2,162,199) (3,744,304)
----------------- ------------- -------------
Cash flows from investing activities:
Deposits for equipment......................................... (51,000) (40,000) (51,000)
Purchases of property and equipment, net of disposals.......... (347,744) (4,524,871) (5,995,776)
Purchase of other non-current assets........................... -- (146,583) (161,172)
----------------- ------------- -------------
Net cash used by investing activities............................ (398,744) (4,711,454) (6,207,948)
----------------- ------------- -------------
Cash flows from financing activities:
Increase in advances and other payables to affiliates.......... 1,072,368 722,698 1,795,066
Principal payments on capital lease obligations................ (76,848) (11,041) (87,889)
Proceeds from WVI and subsidiary company stock offerings....... -- 1,462,443 8,335,567
----------------- ------------- -------------
Net cash provided by financing activities........................ 995,520 2,174,100 10,042,744
----------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents............. (1,026,642) (4,699,553) 90,492
Cash and cash equivalents at beginning of period................. 1,117,134 5,816,687 --
----------------- ------------- -------------
Cash and cash equivalents at end of period....................... $ 90,492 $ 1,117,134 $ 90,492
----------------- ------------- -------------
----------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-41
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Willamette Valley, Inc. Microbreweries across America (WVI) is a development
stage company formed on December 2, 1993 to establish a series of microbreweries
throughout the United States using a consumer-owned capitalization plan and
certain marketing strategies. Each microbrewery will produce and sell
high-quality ales marketed under a label developed specifically for each
microbrewery. WVI plans to establish each microbrewery as a subsidiary and
expects to retain control and a substantial interest in each microbrewery
following completion of the microbrewery's initial public offering. As of
December 31, 1996, WVI has established four microbreweries, three of which have
raised capital in public offerings of their stock and have begun producing beer.
In July 1994, WVI began providing management services to its subsidiaries and to
other affiliated companies (see Note 8).
The Company was organized under the laws of the State of Delaware. From the
date of inception (December 2, 1993) through December 31, 1996, WVI's efforts
have been directed primarily toward organizing and issuing a public offering of
shares of its common stock and providing support to its subsidiaries in their
efforts to raise additional capital and to build and equip their breweries.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. WVI is a development
stage company which has only a limited and unprofitable operating history, has
negative working capital of $2,914,247 and has limited access to capital with
which to fund future operations. There can be no assurance that WVI or its
subsidiaries will produce and sell its products on a profitable basis to sustain
operations. Such factors, among others, raise substantial doubt as to the
Company's ability to continue as a going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Note 12) to fund operations until new strategies result in
positive cash flows and improved profitability, and; (vi) use of proceeds from
the disposition of duplicative and/or unutilized assets created by the proposed
merger. Management believes these plans will result in the Company sustaining
operations as a going concern for next 12 months.
As part of the plans, subsequent to December 31, 1996, the Company entered
into an investment agreement to be merged with other affiliated companies and
convert its stock into shares of a new publicly traded entity as discussed in
Note 12. Management intends to streamline its operations and gain efficiencies
as a result of the proposed merger and investment.
F-42
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which require management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities as of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of WVI and its
four subsidiaries, Aviator Ales, Inc. (AAI); Mile High Brewing Company (MHBC);
Bayhawk Ales, Inc. (BAI); and North Country Brewing Company Inc. (NCBCI)
(collectively, "the Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
MINORITY INTEREST
The minority interest represents the minority shareholders' share of the
equity and net losses of AAI, MHBC, and BAI. The minority shareholders'
interests in AAI, MHBC, and BAI are approximately 49%, 49% and 43%,
respectively, at December 31, 1996. The minority shareholders' interests in AAI,
MHBC, and BAI were approximately 35%, 49%, and 43%, respectively, at December
31, 1995. There is no minority interest in the accounts of NCBCI as it is a
wholly owned subsidiary of WVI.
On March 4, 1996, the board of directors of WVI authorized WVI to contribute
2,129,871 of its 4,845,455 shares in AAI to AAI for no consideration in
contemplation of a stock offering. AAI has retired these shares. This
transaction reduced WVI's ownership in AAI from approximately 65% to
approximately 51%.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes the purchase price of materials, direct labor and an
allocation of indirect production costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method, beginning at the time the
assets are placed in operation, as follows:
Leasehold improvements.............................................. 5-15 years
Machinery and equipment............................................. 5-15 years
Expenditures for repairs and maintenance are charged to expense as incurred,
and expenditures for additions and betterments are capitalized. Leasehold
improvements are depreciated over the shorter of the life of the asset or the
lease.
F-43
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER NONCURRENT ASSETS
The Company has capitalized the fees and related legal costs of organization
which are included in other noncurrent assets in the accompanying balance sheet.
These items were written off in 1996 based on the proposed merger as described
in Note 12 as these intangible assets no longer have future value.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this approach, deferred income taxes are
calculated for the expected future tax consequences of temporary differences
between the book basis and tax basis of the Company's assets and liabilities.
WVI will file a consolidated tax return with NCBCI; AAI, MHBC, and BAI will
file stand-alone federal and state tax returns.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to its
customers. Sales are recorded as trade accounts receivable and no collateral is
required. Management service revenues are recorded as provided and are billed on
a monthly basis.
OTHER EXPENSE
Other expense consists primarily of costs incurred by the Company's
subsidiaries related to attempted public stock offerings. These offerings were
not successful, and the related costs have been recorded as other expenses in
the accompanying statement of operations.
NET LOSS PER COMMON SHARE
Net loss per common share is calculated based on the weighted average number
of common shares outstanding after giving effect to shares granted to employees
throughout the periods presented. No common stock equivalents with a dilutive
effect were outstanding during the periods presented. Shares held in escrow are
included in the weighted average number of common shares outstanding.
STATEMENT OF CASH FLOWS
The Company considers short-term investments which are highly liquid, are
readily convertible into cash, and have original maturities of fewer than three
months to be cash equivalents for the purposes of cash flows. For the year ended
December 31, 1996, the Company paid no income taxes and paid interest of
$72,180. For the year ended December 31, 1995, the Company paid no income taxes
and paid interest of approximately $9,300. During 1995, the Company obtained
$88,000 of equipment under capital lease obligations; these non-cash
transactions have been excluded from the accompanying statement of cash flows.
The minority interest in subsidiary companies includes adjustments related to
the stock offerings of the subsidiary companies; such non-cash adjustments are
not included in the accompanying statement of cash flows.
F-44
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the
respective recorded balances, as the recorded assets and liabilities are stated
at amounts expected to be realized or paid, or carry interest rates commensurate
with current rates for instruments with a similar duration and degree of risk.
LONG-LIVED ASSETS
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). Under FAS 121,
property is carried at cost unless estimated future undiscounted cash flows
from the operation of such property are less than cost in which case the
carrying value is reduced to fair value (see Note 11).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation" in 1996. SFAS 123 was
issued by the Financial Accounting Standards Board in October 1995, and allows
companies to choose whether to account for stock-based compensation under the
current intrinsic method as prescribed in Accounting Principles Board Opinion
Number 25 (APB 25) or use the fair value method prescribed in SFAS 123. The
Company has selected to continue to follow the provisions of APB 25. The impact
of adoption has not had a significant effect on the Company's financial position
or results of operations (see Note 7).
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform with 1996 presentation. These reclassifications have no impact on
previously reported results of operations or shareholders' equity.
2. INVENTORIES
Inventories consist of:
DECEMBER 31,
1996 1995
---------- ----------
Raw materials......................................................... $ 190,114 $ 76,042
Work-in-process....................................................... 38,898 71,267
Finished goods........................................................ 76,858 181,974
Retail inventory...................................................... 44,000 39,373
---------- ----------
$ 349,870 $ 368,656
---------- ----------
---------- ----------
F-45
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
1996 1995
------------ ------------
Land and improvements............................................. $ 2,480,139 $ 2,196,516
Brewery equipment................................................. 3,838,112 3,112,557
Office furniture and equipment.................................... 166,267 313,756
Vehicles.......................................................... 40,740 41,223
Construction in progress.......................................... 53,460 20,175
------------ ------------
6,578,718 5,684,227
Less accumulated depreciation..................................... (621,731) (224,075)
Impairment loss................................................... (832,241) --
------------ ------------
$ 5,124,746 $ 5,460,152
------------ ------------
------------ ------------
At December 31, 1996 property and equipment includes $88,000 of equipment
held under capital leases with related accumulated amortization aggregating
$10,909.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of a $50,000 note payable to an individual, issued
in connection with the purchase of land in the state of Washington. The note
bears interest at 9% and requires quarterly interest payments. The note is
secured by the land and is payable in a lump sum in June 1999.
The Company has entered into certain capital lease obligations related to
the acquisition of equipment including a bottling line for use at MHBC. These
leases bear interest at rates ranging from 9% - 15% and require monthly payments
of principal and interest. The leases are secured by the equipment and mature in
1998 and 2000.
Future minimum payments under the Company's capital lease obligations are as
follows:
PRINCIPAL INTEREST TOTAL
---------- --------- ----------
1997....................................................... $ 73,328 $ 31,660 $ 104,988
1998....................................................... 78,153 23,280 101,433
1999....................................................... 83,539 14,538 98,077
2000....................................................... 87,196 5,227 92,423
---------- --------- ----------
$ 322,216 $ 74,705 $ 396,921
---------- --------- ----------
---------- --------- ----------
F-46
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Pre-tax loss was attributable to operations entirely within the United
States. For the periods ended December 31, 1996 and 1995, there were no current
or deferred provisions for income taxes.
The benefit for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory graduated federal rate due to the
following:
YEAR ENDED DECEMBER 31,
1996 1995
------------- -----------
Statutory graduated federal rate.................................. 34.0% 34.0%
State taxes, net of federal benefit............................... 4.4 4.4
Reserve of net deferred tax asset................................. (38.4) (38.4)
------------- -----------
--% --%
------------- -----------
------------- -----------
Deferred tax assets (liabilities) consist of:
DECEMBER 31,
1996 1995
------------- -----------
Federal and state net operating loss carryforwards................ $ 3,705,000 $ 704,000
Expenses not currently deductible................................. 468,000 28,000
Fixed assets...................................................... (175,000) (70,000)
Deferred tax asset valuation allowance............................ (3,998,000) (662,000)
------------- -----------
$ -- $ --
------------- -----------
------------- -----------
As of December 31, 1996, WVI and its subsidiaries had net operating loss
carryforwards aggregating approximately $6 million for federal and state
purposes, which may be used to offset future taxable income, if any. However,
based on the estimated current fair market value of each entity included in the
proposed consolidation (see Note 13) the net loss carryforward may be limited.
6. SHAREHOLDERS' EQUITY
WVI is authorized to issue 10,000,000 shares of its common stock. Each share
of common stock entitles the holder to one vote. In December 1993, WVI received
$111,111 in stock subscriptions from its founding shareholders in exchange for
3,353,826 shares of unregistered common stock. The cash was received in 1994.
In connection with WVI's initial stock offering under Oregon securities
laws, WVI agreed to place in escrow 3,353,826 of its shares of common stock.
These shares will be released from escrow to WVI's founders when WVI satisfies
one or more certain earnings requirements or establishes a bona fide over-
the-counter trading market for its common stock and maintains a bid price equal
to or greater than a stipulated benchmark price for 26 or more consecutive
weeks. Unless released pursuant to
F-47
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
these conditions, the 3,353,826 shares shall remain in escrow until
unconditionally released in 25% increments on October 31, 2000, 2001, 2002,
and 2003. The shares, while in escrow, entitle WVI's founders to the same
rights and privileges as all other shareholders of common stock, except for
certain rights relating to transferability and liquidation. Based on the
ownership change anticipated by management described in Note 12, the shares
will not be released from escrow, and all shares will be converted to shares
of the new Company.
During 1994, WVI sold 1,496,970 shares of its common stock at $1.65 per
share pursuant to a Regulation A public offering filed with the U.S. Securities
and Exchange Commission (SEC). Cash proceeds from this offering, net of offering
expenses of $290,424, aggregated $2,179,577 during 1994.
During 1996 AAI and MHBC attempted their second direct public offerings to
sell common stock. The offerings have failed to raise the minimum escrow
amounts, and AAI is no longer soliciting investors, and MHBC has elected to
terminate its offering and return funds held in escrow to investors.
Accordingly, the costs of $461,969 related to these offerings have been expensed
in the current year.
7. STOCK INCENTIVE PLAN
WVI has adopted a 1993 Stock Incentive Plan (the "Plan") and has reserved
591,851 shares of its common stock thereunder. The Plan provides for the grant
of incentive stock options to employees of the Company and non-qualified stock
options, stock sales and stock grants to employees, directors and consultants of
the Company at fair market value. During 1996, the Company granted 10,200 shares
to employees. The $20,400 value of these shares is included in selling, general
and administrative expenses in the accompanying statement of operations.
During 1994, the Company granted a total of 125,000 options under the Plan
at an exercise price of $1.65 per share which approximated fair market value at
the date of grant.
During 1995, 122,500 options were granted under the plan at an exercise
price of $2.00 per share which approximated fair market value at the date of
grant. These options vest ratably over ten years. Of these, 41,500 were
subsequently canceled. In 1996, an additional 70,000 options were granted at an
exercise price of $1.95, which approximates fair market value at the date of
grant. Of these, 15,000 and 40,000 options vest ratably over ten and five years,
respectively, beginning one year after the date of grant. The remaining 15,000
options were subsequently canceled. As of December 31, 1996, there were no
options exercised, vested options were 18,000, and options outstanding were
185,000.
F-48
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK INCENTIVE PLAN (CONTINUED)
The Company has elected to account for its stock-based compensation under
Accounting Principles Board Opinion 25. The Company has determined that the pro
forma effects of applying SFAS 123 would not have a material effect on the
results of operations for 1996 and 1995. This determination was made using the
Black-Scholes option pricing model. The weighted average assumptions used for
stock option grants for 1996 and 1995 were a risk-free interest rate of 6.78%
and 7.11%, respectively, an expected dividend yield of 0% and 0%, respectively,
an expected life of 6.66 years and 10 years, respectively, and an expected
volatility of 57% and 54%, respectively. The weighted average fair value of
stock options granted in 1996 and 1995 was $1.20 and $1.46, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1996 and 1995, the total value of the options granted
was computed to be $65,960 and $116,520, respectively, which would be amortized
on a straight-line basis over the vesting period of the options.
Note that all options granted by the Company are expected to be converted to
options of the new company expected to be formed at the same conversion rate as
the conversion of common stock as discussed in Note 12.
AAI, MHBC, and BAI each have similar stock incentive plans and each of these
subsidiaries has granted options thereunder.
8. RELATED PARTIES
NATURE OF RELATED PARTIES
WVI's president partially owns and controls Willamette Valley Vineyards
(WVV), a winery in Oregon, and Nor'Wester Brewing Company, Inc. (Nor'Wester), a
microbrewery in Oregon. WVI's president is also the president of AAI, MHBC, BAI,
and NCBCI. As a result of certain arrangements between WVI and its affiliates,
as well as WVI's president's positions with and/or ownership interests in each
of these companies, inherent conflicts of interest exist with respect to the
pricing of services, the sharing of resources and the allocation of the
president's time.
RELATED PARTY TRANSACTIONS
From January through June of 1994, WVV provided the Company with management
services on a cost-plus-fee basis. These services consisted of accounting,
marketing, administrative, and stock transfer services. The cost of such
services aggregated approximately $77,000, of which approximately $4,000 was
included in 1994 selling, general and administrative expenses, and approximately
$73,000 was charged directly to additional paid-in capital as a component of
stock offering cost. Beginning in July 1994, such management services were
performed by WVI's employees. From July through December 1994, and for the year
ended December 31, 1995, WVI charged WVV and Nor'Wester for these services on a
cost-plus basis. The revenues and costs related to these services are shown
separately as management services in the accompanying consolidated
F-49
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTIES (CONTINUED)
statement of operations. In 1996, WVI began contracting for certain
management services under a general services agreement between WVI, WVV and
Nor'Wester.
In September 1995, MHBC paid for certain brewing equipment which was
ultimately sold to Nor'Wester for approximately $53,000. As a result of this
transaction, MHBC was owed approximately $52,000 from Nor'Wester at December 31,
1995.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, WVI's subsidiaries entered into a Strategic Alliance (the
"Alliance") with Nor'Wester. Nor'Wester, AAI, MHBC, BAI, NCBCI, and WVI are
collectively referred to as "Alliance members," and AAI, MHBC, and BAI are
collectively referred to as the "Cooperative Brewers" and individually referred
to as a "Cooperative Brewer." The purpose of the Alliance is to promote and
support the growth of all of the Alliance members by increasing production at
each Cooperative Brewer's facility and supporting the entry of Nor'Wester
products into new markets. To achieve this goal, each Cooperative Brewer agreed
to cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewers' network of distributors. The terms of the Strategic Alliance Agreement
and the Cooperative Brewing Agreements are four years, unless earlier terminated
under limited circumstances, which include material breach in the case of the
Cooperative Brewing Agreements. The Agreements are subject to renewal. Pricing
for the purchase of beer produced under the Cooperative Brewing Agreement is at
the lesser of cost plus 10% or Nor'Wester's average cost of production at its
Nor'Wester Brewery, plus a mark-up of 10%. The Agreement provides that no
Alliance member will use the proprietary information or technology of another
Alliance member to produce any beer with a flavor profile or appearance that is
substantially similar to such Alliance member's beer. With the consent of all
Alliance members, additional parties may be added to the Alliance.
Under the terms of the Cooperative Brewing Agreements, the Company's
subsidiaries will produce Nor'Wester beer, in the amounts and packaging as
specified in firm orders submitted by Nor'Wester on a periodic basis. Each
Cooperative Brewer's production of Nor'Wester beer must comply with
specifications concerning recipes, quality control procedures, flavor profile
and appearance. Nor'Wester has a right to reject beer not meeting its
specifications.
Nor'Wester has acquired certain specified brewing equipment for the
subsidiaries' use in producing Nor'Wester's beer. To the extent that this
equipment is not needed for the production of Nor'Wester beers, the subsidiaries
may, upon notice to Nor'Wester, use this equipment to produce their own beer
subject to the payment of an agreed-upon lease fee. Certain brewing equipment
acquired by Nor'Wester was purchased by the Company in 1995.
F-50
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTIES (CONTINUED)
The Cooperative Brewing Agreement requires that the Cooperative Brewer
maintain the equipment supplied by Nor'Wester, that Nor'Wester insure this
equipment, and that the Cooperative Brewer and Nor'Wester each indemnify the
other for damages and losses in connection with the Agreement. Nor'Wester may,
at its cost, remove or replace its equipment at any time if market conditions or
other circumstances make such action desirable to Nor'Wester.
Cooperative brewing revenues totaled $1,375,000, which is 36% of the
Company's net revenues. Because of the pricing terms surrounding cooperative
brewing discussed above and the fact that the Company's costs to produce beer
were higher than Nor'Wester's costs to produce beer, cooperative brewing sales
resulted in significant negative gross margins for the Company. In addition, a
significant portion of the beer brewed by the Company and sold to Nor'Wester was
determined to be unusable. Subsequent to December 31, 1996, the cooperative
brewing agreement was canceled with the consent of all Alliance members.
ADVANCES FROM AFFILIATES
In connection with the Cooperative Brewing Agreement with Nor'Wester
described above, Nor'Wester advanced $250,000 each to AAI and MHBC in December
1995 for the purchase of ingredients and packaging materials for the
subsidiaries' initial production of Nor'Wester's products. These advances are
unsecured and do not bear interest. In 1996, Nor'Wester advanced an additional
$100,000 and $250,000 respectively, to AAI and MHBC. An additional $50,000 was
advanced directly to WVI. Because management plans to merge the Company into a
new Company (see Note 12), management believes these advances will be paid
partially in 1997, and the remainder will be considered in the conversions of
the companies' shares into shares of the new Company expected to be formed.
These advances remain outstanding as a current payable although the
cooperative brewing agreement has been terminated. Because these advances will
eventually be eliminated when the proposed merger occurs, as discussed in Notes
12 and 13, these advances have been classified as current at December 31, 1996.
9. COMMITMENTS
WVI's subsidiaries have entered into agreements with several independent
distributors for the distribution of the Company's products. These agreements
contain normal distribution provisions and are cancelable by either the
subsidiaries or the distributors.
The Companies have entered into operating lease arrangements for equipment
and facilities. Approximate future minimum lease payments are as follows:
F-51
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
YEAR ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------
1997.......................................................................... $ 260,000
1998.......................................................................... 264,000
1999.......................................................................... 269,000
2000.......................................................................... 276,000
2001.......................................................................... 293,000
Thereafter.................................................................... 3,630,000
------------
$ 4,992,000
------------
------------
The terms of certain of the leases allowed for no lease payments to be made
during the initial months of the lease term, and contain escalating payments.
The Company is recording lease expense on the straight-line method over the
lease term; accordingly, deferred rent has been recorded in the accompanying
balance sheet. Rent expense during 1996 and 1995 related to these leases
aggregated approximately $312,000 and $194,000, respectively, and is allocated
between cost of sales and selling, general and administrative expenses in the
accompanying statement of operations.
In addition, due to the nature of the industry the Company operates in, the
Company is exposed to certain hazards and liability risks resulting from brewery
operations which could impact the Company negatively.
10. SIGNIFICANT CUSTOMERS
Virtually all of the Company's products are sold in the states of Colorado,
Washington, and California. Sales to distributors in the Pacific Northwest were
21% of gross beer sales in 1996. Sales to the Company's two largest customers
(excluding cooperative brewing) for the years ended December 31, 1996 and 1995
totaled 25% and 42%, respectively.
11. IMPAIRMENT OF MHBC ASSETS
Subsequent to December 31, 1996, the management of MHBC developed a plan to
sell the operating assets of MHBC or to pursue contract brewing opportunities.
Accordingly, and pursuant to SFAS 121, such assets were reduced to their
estimated fair value as of December 31, 1996. Management's estimate of this
write-down of approximately $969,000 is based on a pending offer from an
unaffiliated buyer. In addition, management estimates the cost to dispose of the
assets to be approximately $50,000, and this amount is recorded in the financial
statements as of December 31, 1996 as part of the impairment loss. While
management searches for other potential buyers, MHBC is operating on a limited
basis as a contract brewer for a local brewery and is looking for other contract
brewing opportunities. No definitive agreement has been reached, but management
has received an offer of approximately $2 million in exchange for all of MHBC's
property and equipment at the brewery and assumption of the facility lease.
F-52
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PROPOSED MERGER AND INVESTMENT FROM UBA
Subsequent to December 31, 1996, the Company along with its subsidiaries
(AAI, MHBC and BAI) and affiliate (Nor'Wester) entered into an investment
agreement with United Breweries of America, Inc. (UBA), an entity controlled by
the UB Group of Bangalore, India. The agreement provides for Nor'Wester, WVI,
AAI, MHBC and BAI to consolidate into a company to be known as United Craft
Brewers, Inc. (UCB). This merger will result in the issuance of newly registered
shares of UCB common stock in exchange for shares of Nor'Wester, WVI and its
subsidiaries. The merger and share exchange will require approval by the Boards
of Directors and shareholders of each of the entities. Following consolidation,
all shareholders in the Nor'Wester/WVI alliance will hold shares in UCB, a
company which is intended to be listed for trading on the Nasdaq National Market
system under the symbol ALES. Proposed exchange ratios for each of the entities
are as follows, based on an average closing price of $2.63 for Nor'Wester's
common stock for the 20 trading days immediately preceding execution of the
merger:
COMPANY EXCHANGE RATIO
- ------------------------------------------------------------------------------ --------------
Nor'Wester.................................................................... 1:1
WVI........................................................................... 1.99159:1
AAI........................................................................... 2.98739:1
BAI........................................................................... 1.99159:1
MHBC.......................................................................... 2.98739:1
Following the merger, UBA has proposed to invest $8.63 million in exchange
for a 45% equity interest in the new entity, UCB. Of the $8.63 million proposed
investment by UBA, $2.75 million is in the form of bridge loans conditionally
available to Nor'Wester during the consolidation phase. As of March 21, 1997,
$1,500,000 has already been loaned to Nor'Wester, the majority of which has been
advanced to North Country. At closing, it is anticipated that the bridge loans
will be converted into shares of UCB and the remaining $5.88 million cash
investment will be made directly in shares of UCB (see Note 13).
The closing of the proposed investment remains subject to (i) approval by
the shareholders of each of the companies, (ii) achievement of certain operating
results at each of the breweries, (iii) maintenance of certain operating
conditions and covenants, including that there shall be no material adverse
change in the businesses of the affiliated breweries taken as a whole, (iv)
approval by federal and state liquor control agencies, (v) registration with the
U.S. Securities and Exchange Commission of UCB shares to be exchanged in the
merger, and (vi) such other customary conditions for transactions of this type.
Immediately following the proposed investment by UBA, UBA would own 45% and
the Company's president would own 10% of UCB. The public shareholders of
Nor'Wester, WVI, and WVI's subsidiaries would own the remaining 45% of UCB (see
Note 13).
F-53
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS
In light of lower than anticipated 1996 results, lower than anticipated
first quarter 1997 sales and other operating results and adverse conditions
within the craft beer industry in general, representatives of UBA and management
and the investment bankers of the affiliated companies are in the process of
renegotiating the terms of the UBA investment discussed in Note 12. The
renegotiation will reflect a significantly lower valuation and a change in the
exchange ratios for the affiliate companies, a reduction in the total amount of
cash to be invested by UBA to $5.5 million and a reduction of UBA's percentage
ownership position in UCB to 40% following the consolidation. It is anticipated
that the $2.75 million bridge loan amount will not be reduced. The existing
shareholders in the affiliated Companies would retain a 60% interest in UCB. The
exact distribution of ownership interests among shareholders of the affiliated
companies has not yet been determined. Management will soon seek Board approval
by each of the affiliated companies of any renegotiated terms. Failure of the
parties to reach a mutually agreeable renegotiated investment agreement could
lead to a loss of the bridge loans and the remainder of the UBA investment which
would materially and adversely affect the Company's financial condition and
results of operations. There can be no assurance that the proposed merger will
be completed or that the Company and its subsidiaries will obtain the capital
needed to sustain operations.
14. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying 1996 consolidated financial statements have been restated
to revise the Company's share of the net losses sustained for the period from
January 1 to September 30, 1996 by North Country Joint Venture, LLC, which was
sold by the Company in October 1996 to Nor'Wester, an affiliated company.
In addition, the accompanying 1996 consolidated financial statements have
been restated to reduce the impairment loss by the amount of future estimated
operating losses initially included therein relating to a contract brewing
arrangement of MHBC. Such losses will be recorded by MHBC in 1997 as incurred.
The effects of these restatements on the consolidated financial statements are
summarized below:
F-54
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
Consolidated balance sheet
Reserve for impairment loss................................... $ 338,000 $ 50,000
Payables to affiliated companies.............................. 1,572,569 1,795,066
Minority interest............................................. 142,585 283,706
Deficit accumulated during the development stage.............. (3,868,902) (3,944,520)
Consolidated statement of operations:
Impairment loss............................................... 1,306,879 1,018,879
Other expense................................................. (422,788) (183,316)
Minority interest in losses of consolidated subsidiary
companies................................................... 1,944,216 1,853,095
Net loss...................................................... (2,388,613) (2,464,231)
Net loss per share............................................ (0.49) (0.51)
F-55
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. CONSOLIDATING INFORMATION
The following presents the consolidating balance sheet and statement of
operations of the Company.
WVI CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
------------------------------------------------------------------------------------------
(RESTATED--NOTE 14)
WVI
WVI BAI AAI MHBC NCBCI ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents.... $ -- $ 40,954 $ 19,218 $ 30,320 $ -- $ -- $ 90,492
Accounts receivable.......... -- 64,349 61,529 85,200 -- -- 211,078
Receivables from
affiliates................. -- -- -- -- -- -- --
Inventories.................. -- 23,692 326,178 -- -- -- 349,870
Prepaid and other
current assets............. -- -- -- 8,170 -- -- 8,170
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total current assets......... -- 128,995 406,925 123,690 -- -- 659,610
Property and
equipment, net............. 63,556 802,798 2,258,392 2,000,000 -- 5,124,746
Investment in affiliates..... 300,000 -- -- -- -- (300,000) --
----------- ----------- ----------- ----------- ---------- ------------ ------------
$ 363,556 $ 931,793 $ 2,665,317 $ 2,123,690 $ -- $ (300,000) $5,784,356
----------- ----------- ----------- ----------- ---------- ------------ ------------
----------- ----------- ----------- ----------- ---------- ------------ ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current portion of long-term
debt and capital lease
obligations................ $ -- $ -- $ 4,058 $ 69,270 $ -- $ -- $ 73,328
Accounts payable............. 9,859 36,798 607,570 816,664 -- -- 1,470,891
Accrued liabilities.......... 59,721 16,780 44,516 15,633 13,000 -- 149,650
Container deposits........... -- 19,339 15,583 -- -- -- 34,922
Reserve for
impairment loss............ -- 50,000 -- 50,000
Payables to affiliated
companies.................. (1,333,974) 291,586 881,012 1,834,547 121,895 -- 1,795,066
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total current
liabilities.............. (1,264,394) 364,503 1,552,739 2,786,114 134,895 -- 3,573,857
Long-term debt and capital
lease obligations.......... -- -- 57,664 241,224 -- -- 298,888
Deferred rent................ -- -- 70,103 -- -- -- 70,103
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total liabilities............ (1,264,394) 364,503 1,680,506 3,027,338 134,895 -- 3,942,848
----------- ----------- ----------- ----------- ---------- ------------ ------------
Minority interest............ -- -- -- -- -- 283,706 283,706
----------- ----------- ----------- ----------- ---------- ------------ ------------
Shareholders' equity:
Common stock................. 48,610 2,201 5,332 4,694 -- (12,227) 48,610
Additional paid-in capital... 2,261,734 1,427,982 2,582,553 2,252,274 -- (3,070,831) 5,453,712
Deficit accumulated during
development stage.......... (682,394) (862,893) (1,603,074) (3,160,616) (134,895) 2,499,352 (3,944,520)
----------- ----------- ----------- ----------- ---------- ------------ ------------
1,627,950 567,290 984,811 (903,648) (134,895) (583,706) 1,557,802
----------- ----------- ----------- ----------- ---------- ------------ ------------
$ 363,556 $ 931,793 $ 2,665,317 $ 2,123,690 $ -- $ (300,000) $5,784,356
----------- ----------- ----------- ----------- ---------- ------------ ------------
----------- ----------- ----------- ----------- ---------- ------------ ------------
F-56
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. CONSOLIDATING INFORMATION (CONTINUED)
WVI CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------
(RESTATED--NOTE 14)
WVI
WVI BAI AAI MHBC NCBCI ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ---------- ------------ ------------
Revenues:
Gross sales................ $ -- $ 461,549 $ 1,905,511 $ 1,600,915 $ -- $ $3,967,975
Less excise taxes.......... -- (41,611) (81,434) (85,426) -- (208,471)
----------- ----------- ----------- ----------- ---------- ------------ ------------
Net sales................ -- 419,938 1,824,077 1,515,489 -- 3,759,504
Management services........ 266,775 -- -- -- -- (156,975) 109,800
----------- ----------- ----------- ----------- ---------- ------------ ------------
266,775 419,938 1,824,077 1,515,489 -- (156,975) 3,869,304
----------- ----------- ----------- ----------- ---------- ------------ ------------
Cost of sales:
Cost of goods sold......... 364,450 1,879,062 1,905,335 -- 4,148,847
Management services........ 266,775 -- -- -- -- (156,975) 109,800
----------- ----------- ----------- ----------- ---------- ------------ ------------
266,775 364,450 1,879,062 1,905,335 -- (156,975) 4,258,647
----------- ----------- ----------- ----------- ---------- ------------ ------------
Gross (deficit) margin....... -- 55,488 (54,985) (389,846) -- -- (389,343)
Selling, general and
administrative expenses.... 247,285 339,766 851,352 790,615 -- 2,229,018
Impairment loss.............. -- -- -- 1,018,879 -- -- 1,018,879
Write-off of stock offering
costs...................... -- -- 249,871 212,098 -- -- 461,969
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) from
operations................. (247,285) (284,278) (1,156,208) (2,411,438) -- -- (4,099,209)
Interest income (expense).... 16,261 (11,606) (1,498) (37,958) -- (34,801)
Other expense................ (308,605) 4,342 -- 17,124 103,823 (183,316)
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) before
income taxes and
minority interest.......... (539,629) (291,542) (1,157,706) (2,432,272) 103,823 -- (4,317,326)
Income taxes................. -- -- -- -- -- -- --
Minority interest............ -- -- -- -- -- 1,853,095 1,853,095
----------- ----------- ----------- ----------- ---------- ------------ ------------
Net loss................. $ (539,629) $ (291,542) $(1,157,706) $(2,432,272) $ 103,823 $1,853,095 $(2,464,231)
----------- ----------- ----------- ----------- ---------- ------------ ------------
----------- ----------- ----------- ----------- ---------- ------------ ------------
F-57
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 24,569 $ 90,492
Trade accounts receivable......................................................... 269,679 211,078
Inventories....................................................................... 324,097 349,870
Other current assets.............................................................. 57,066 8,170
------------- -------------
Total current assets............................................................ 675,411 659,610
Property and equipment, net....................................................... 5,033,490 5,124,746
Other non-current assets.......................................................... 8,169
------------- -------------
Total assets.................................................................... $ 5,717,070 $ 5,784,356
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 1,665,130 $ 1,470,891
Accrued liabilities............................................................... 208,662 184,572
Payable to affiliated companies................................................... 1,940,988 1,795,066
Reserve for impairment loss....................................................... 50,000 50,000
Current portion of long-term debt................................................. 75,372 73,328
------------- -------------
Total current liabilities....................................................... 3,940,152 3,573,857
Long-term debt...................................................................... 273,708 298,888
Deferred Rent....................................................................... 78,602 70,103
------------- -------------
Total liabilities............................................................... 4,292,462 3,942,848
Minority interest................................................................... 120,066 283,706
Shareholders' equity:
Common stock, $.01 par value--10,000,000 shares authorized, 4,860,996 shares
issued outstanding.............................................................. 48,610 48,610
Additional paid-in capital........................................................ 5,453,712 5,453,712
Deficit accumulated during development stage........................................ (4,197,780) (3,944,520)
------------- -------------
Total shareholders' equity.................................................... 1,304,542 1,557,802
------------- -------------
Total liabilities and shareholders' equity.................................... $ 5,717,070 $ 5,784,356
------------- -------------
------------- -------------
F-58
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH CUMULATIVE AMOUNTS
31, FROM INCEPTION
-------------------------- (DECEMBER 2, 1993)
1997 1996 TO MARCH 31, 1997
------------ ------------ -------------------
Gross sales...................................................... $ 408,054 $ 434,648 $ 5,002,636
Less: excise taxes............................................... (22,638) (24,624) (256,303)
Net sales........................................................ 385,416 410,024 4,746,333
Management services.............................................. -- -- 893,190
------------ ------------ -------------------
385,416 410,024 5,639,523
------------ ------------ -------------------
Cost of beer and related retail products......................... 463,882 597,144 5,251,735
Cost of management services...................................... -- -- 799,527
------------ ------------ -------------------
463,882 597,144 6,051,262
------------ ------------ -------------------
Gross deficit.................................................... (78,466) (187,120) (411,739)
Selling, general and administrative expenses..................... 327,917 525,057 5,043,891
Write-off of stock offering costs.............................. -- -- 461,969
Estimated impairment loss...................................... -- -- 1,018,879
------------ ------------ -------------------
Loss from operations............................................. (406,383) (712,177) (6,936,478)
Other income (expense), net...................................... (10,517) (4,789) 30,755
------------ ------------ -------------------
Loss before minority interest.................................... (416,900) (716,966) (6,905,723)
Minority interest................................................ 163,640 226,679 2,707,943
------------ ------------ -------------------
Net loss......................................................... $ (253,260) $ (490,287) $ (4,197,780)
------------ ------------ -------------------
------------ ------------ -------------------
Net loss per common share........................................ $ (0.05) $ (0.10) $ (1.14)
------------ ------------ -------------------
------------ ------------ -------------------
Weighted average number of common shares outstanding............. 4,860,996 4,850,796 3,674,790
------------ ------------ -------------------
------------ ------------ -------------------
F-59
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED MARCH FROM INCEPTION
31, (DECEMBER 2, 1993)
------------------------- TO
1997 1996 MARCH 31, 1997
----------- ------------ --------------------
Cash flows from operating activities:
Net loss...................................................... (253,260) (490,287) (4,197,780)
Minority interest in losses of consolidated subsidiaries...... (163,640) (226,679) (2,707,943)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization............................... 94,823 105,498 762,686
Deferred rent............................................... 8,499 121,979
Write-down of assets due to impairment loss................. -- -- 1,018,879
Shares of WVI and subsidiaries granted to
employees................................................. -- -- 44,652
Changes in assets and liabilities:
Trade accounts receivable................................. (58,601) (106,131) (269,679)
Receivables from affiliates............................... 153,322
Inventories............................................... 25,773 (67,480) (510,797)
Other current assets...................................... (48,896) 66,633 (57,066)
Accounts payable.......................................... 194,239 (165,619) 1,665,130
Accrued liabilities....................................... 24,090 (36,886) 208,662
----------- ------------ -----------
Net cash used for operating activities........................ (176,973) (767,629) (3,921,277)
Cash flows from investing activities
Deposits made................................................. -- (117,886) (51,000)
Purchases of property and equipment, net of disposals......... (3,567) (83,040) (5,999,343)
Change in other non-current assets............................ (8,169) 148,187 (169,341)
----------- ------------ -----------
Net cash used for investing activities........................ (11,736) (52,739) (6,219,684)
Cash flows from financing activities:
Increase (decrease in advances and other payables to
affiliates.................................................. 145,922 (5,006) 1,940,988
Proceeds from stock offerings of WVI and subsidiaries......... -- -- 8,335,567
Increase in stock offering costs.............................. (4,263)
Payments on long-term debt and capital leases................. (23,136) (16,368) (111,025)
----------- ------------ -----------
Net cash provided by (used for) financing activities............ 122,786 (25,637) 10,165,530
----------- ------------ -----------
Net decrease in cash and cash equivalents....................... (65,923) (846,005) 24,569
Cash and cash equivalents:
Beginning of period........................................... 90,492 1,117,134 --
----------- ------------ -----------
End of period................................................. $ 24,569 $ 271,129 $ 24,569
----------- ------------ -----------
----------- ------------ -----------
F-60
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Company's financial statements enclosed herein are unaudited and,
because of the seasonal nature of the business and the varying schedule of its
special sales efforts, these results are not necessarily indicative of the
results to be expected for the entire year. In the opinion of management, the
interim financial statements reflect all adjustments, consisting of only normal
recurring items which are necessary for a fair presentation of the results for
the periods presented. The accompanying financial statements have been prepared
in accordance with GAAP and SEC guidelines applicable to interim financial
information which require management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. The
accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1996.
The Company is a development stage company formed on December 2, 1993 to
establish a series of microbreweries throughout the United States using a
consumer-owned capitalization plan and certain marketing strategies. From the
date of inception (December 2, 1993) through March 31, 1997, the Company's
efforts have been directed primarily toward organizing and issuing a public
offering of its common stock and providing support to its subsidiaries in their
efforts to raise additional capital and to build and equip their breweries.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $3,624,741 and has limited access to capital to fund future
operations. There can be no assurance that the Company will produce and sell its
products on a profitable basis to sustain operations. Such factors, among
others, raise substantial doubt as to the Company's ability to continue as a
going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Proposed Merger note) to fund operations until new strategies
result in positive cash flows and improved profitability, and; (vi) use proceeds
from the disposition of duplicative and/or unutilized assets created by the
proposed merger Management believes these plans will result in the Company
sustaining operations as a going concern for the next 12 months.
As part of the plan, the Company entered into an investment agreement to be
merged with other affiliated companies and convert its stock into shares of a
new publicly traded entity as discussed in the Proposed Merger note.
F-61
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
Raw materials...................................................... $ 191,362 $ 190,114
Work-in-process.................................................... 57,221 38,898
Finished goods..................................................... 35,320 76,858
Retail products.................................................... 40,194 44,000
---------- ------------
$ 324,097 $ 349,870
---------- ------------
---------- ------------
PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Land and improvements............................................ $ 2,480,139 $2,480,139
Brewery equipment................................................ 3,895,622 3,891,572
Office furniture and equipment................................... 165,784 166,267
Vehicles......................................................... 40,740 40,740
------------ ------------
6,582,285 6,578,718
Less accumulated depreciation.................................... (716,554) (621,731)
Write down to fair value......................................... (832,241) (832,241)
------------ ------------
$ 5,033,490 $5,124,746
------------ ------------
------------ ------------
INCOME TAXES
No benefit for income taxes was recognized for the periods ended March 31,
1997 and 1996 in the accompanying statement of operations as there can be no
assurance that the Company will generate taxable income in the future against
which such benefit could be realized. Accumulated net operating loss
carryforwards at March 31, 1997 and December 31, 1996 were approximately $6.2
million and $6 million, respectively.
STOCK INCENTIVE AND STOCK GRANT PLANS
During 1994, the Board of Directors established a pool of 591,851 shares of
the Company's common stock for a stock incentive plan for issuance to employees,
directors, and consultants of the Company pursuant to the exercise of stock
options granted under the plan or stock grants or stock sales. Administration of
the plan, including determination of the number of shares to be issued, the term
of exercise of any option, the option exercise price, and type of options to be
granted, lies with the Board of Directors or a duly authorized committee of the
Board of Directors.
F-62
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
STOCK INCENTIVE AND STOCK GRANT PLANS (CONTINUED)
As of March 31, 1997, options for a total of 587,500 shares have been
awarded, net of cancellations. Options have vesting periods ranging from five
years to ten years.
No compensation expense has been recorded as a result of granting any of the
options as all such options were granted with an exercise price equal to the
market price on the date of grant.
Options granted by the Company are expected to be converted to options of
the new company expected to be formed in the consolidation of the Company and
its affiliates at the same conversion rate as the conversion of common stock
discussed in the Pending Consolidation note.
RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president, Jim Bernau, 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 the following subsidiaries of
the Company: Aviator Ales, Inc. (AAI); Mile High Brewing Company (MHBC); Bayhawk
Ales, Inc. (BAI); and North Country Brewing Company, Inc. (NCBCI); companies
located in Washington, Colorado and California, respectively. As a result of
certain arrangements between the Company and its affiliates, as well as Mr.
Bernau's positions with and/or ownership interests in each of these companies,
inherent conflicts of interest exist with respect to the pricing of services,
the sharing of resources and allocation of the Company president's time.
RELATED PARTY TRANSACTIONS
For the three months ended March 31, 1997, the Company has contracted with
Nor'Wester to provide management and administrative services to the Company and
its subsidiaries. During the quarter ended March 31, 1997 the Company and its
subsidiaries purchased $47,067 worth of services from Nor'Wester. For the three
months ended March 31, 1996, the Company provided certain management and
administrative services, including operational oversight and human resources, to
affiliated companies, charging a total of $16,125. In 1996, the Company
purchased services from Nor'Wester at a cost of $21,590 per month and with WVV
to provide stock transfer and sales support services at a cost of $2,800 per
month.
The Company has entered into a Strategic Alliance (the "Alliance") with AAI,
MHBC, BAI, NCBCI, and Nor'Wester. AAI, MHBC, and BAI are individually referred
to as a "Cooperative Brewer." The purpose of the Alliance is to promote and
support the growth of all of the Alliance members by increasing production at
each Cooperative Brewer's facility and supporting the entry of Nor'Wester
products into new markets. To achieve this goal, each Cooperative Brewer agreed
to cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. However, due to the fact that Nor'Wester's
Portland Brewery is not currently operating at full capacity and the fact that
attempting to develop other regional markets for its products has not yielded
significant results, the Cooperative Brewing Agreements are not being utilized.
Should the consolidation occur as planned (see Proposed Merger and Investment by
UBA note), the Strategic Alliance and agreements thereunder will terminate.
F-63
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NET LOSS PER SHARE
Net loss per common share is calculated based on the weighted average number
of common shares outstanding. Founder shares held in escrow are included in the
weighted average number of common shares outstanding. Common stock equivalents
are excluded from the loss per share calculation as their effect is
anti-dilutive.
PROPOSED MERGER AND INVESTMENT BY UBA
During the quarter ended March 31, 1997, the Company, along with its
affiliates (Nor'Wester, AAI, MHBC 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 merge into a company to be known as United Craft Brewers (UCB). This
proposed merger will result in the issuance of newly registered shares of UCB
common stock in exchange for shares of Nor'Wester, WVI and its subsidiaries. The
merger and share exchange will require approval by the Boards of Directors and
shareholders of each of the entities. Following the merger, all shareholders in
the Nor'Wester/WVI alliance will hold shares in UCB, a company which is intended
to be listed for trading on the NASDAQ National Market system under the symbol
ALES. 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.................................................................... 1.00000:1
WVI........................................................................... 1.99159:1
AAI........................................................................... 2.98739:1
BAI........................................................................... 1.99159:1
MHBC.......................................................................... 2.98739:1
Following the proposed 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 31, 1997, $1.5 million 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.
All principal and interest related to the bridge loans is secured by the
assets of North Country Joint Venture, Nor'Wester's wholly-owned subsidiary, and
by Nor'Wester's ownership interest in North Country Joint Venture. Repayment of
all principal and interest is guaranteed personally by the Company's president.
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, (vi) extension of Nor'Wester's $1 million
revolving line of credit through September 30, 1997 and the lender shall have
waived any defaults under the line of credit agreement and
F-64
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
the line of credit shall have been converted to a term loan and (vii) 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 subsidiaries would own the remaining 45% of UCB.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") which are effective for fiscal
years ending after December 15, 1997. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
RENEGOTIATION OF MERGER AND INVESTMENT BY UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and adverse
conditions with the craft beer industry in general, representatives of UBA and
management and the investment bankers of the affiliated companies are in the
process of re-negotiating the terms of the UBA investment discussed in the
Proposed Merger note. The re-negotiation will reflect a significantly lower
valuation for the affiliated companies, a reduction in the total amount of cash
to be invested by UBA to $5.5 million and a reduction of UBA's percentage
ownership position in UCB to 40% following consolidation. It is anticipated that
the $2.75 million bridge loan 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 re-negotiated terms. Failure of the
parties to reach a mutually agreeable re-negotiated 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.
F-65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Aviator Ales, Inc.
(A Development Stage Company)
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Aviator Ales, Inc. (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
(February 14, 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
$1,145,814 and has limited access to capital with which to fund future
operations. Such factors, among others, raise substantial doubt about its
ability to continue as a going concern. 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.
As discussed in Note 11 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.
Aviator Ales, Inc. 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.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1997, except as to Note 12, which is
as of March 24, 1997, and Note 1 (third paragraph only),
which is as of June 23, 1997
F-66
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 19,218 $ 226,401
Accounts receivable, trade......................................................... 61,529 48,870
Inventories (Note 2)............................................................... 326,178 244,273
Prepaid and other current assets................................................... -- 57,912
------------- ------------
Total current assets........................................................... 406,925 577,456
Property and equipment, net (Notes 3 and 4).......................................... 2,258,392 2,153,851
Other noncurrent assets.............................................................. -- 16,361
------------- ------------
Total assets................................................................... $ 2,665,317 $ 2,747,668
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation........................................ $ 4,058 $ --
Accounts payable................................................................... 607,570 202,312
Accrued liabilities................................................................ 44,516 29,552
Container deposits................................................................. 15,583 --
Payables to parent and affiliated companies (Note 8)............................... 881,012 28,111
------------- ------------
Total current liabilities...................................................... 1,552,739 259,975
Mortgage note payable and capital lease payable (Note 4)............................. 57,664 50,000
Advance from affiliate (Note 8)...................................................... -- 250,000
Deferred rent (Note 10).............................................................. 70,103 47,951
------------- ------------
1,680,506 607,926
------------- ------------
Commitments and contingencies (Notes 10, 11 and 12)
Shareholders' equity (Notes 6, 7 , 11 and 12):
Common stock, $.001 par value, 10,000,000 shares authorized, 5,331,775 and
7,460,226 shares issued and outstanding.......................................... 5,332 7,461
Additional paid-in capital......................................................... 2,582,553 2,577,649
Deficit accumulated during the development stage................................... (1,603,074) (445,368)
------------- ------------
Total shareholders' equity..................................................... 984,811 2,139,742
------------- ------------
Total liabilities and shareholders' equity........................................... $ 2,665,317 $ 2,747,668
------------- ------------
------------- ------------
The accompanying notes are an integral part of these financial statements.
F-67
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
CUMULATIVE
AMOUNTS FROM
INCEPTION
(FEBRUARY 14,
YEAR ENDED DECEMBER 31, 1994) TO
-------------------------- DECEMBER 31,
1996 1995 1996
------------- ----------- -------------
Gross sales (Notes 8 and 9)............................................ $ 1,905,511 $ 186,818 $ 2,136,027
Less excise taxes...................................................... (81,434) (4,852) (86,286)
------------- ----------- -------------
Net sales.............................................................. 1,824,077 181,966 2,049,741
Cost of goods sold (Note 8)............................................ 1,879,062 165,006 2,067,555
------------- ----------- -------------
Gross margin (deficit)................................................. (54,985) 16,960 (17,814)
Selling, general and administrative expenses (Note 8).................. 851,352 490,646 1,452,228
Write-off of stock offering costs (Note 6)............................. 249,871 -- 249,871
------------- ----------- -------------
Loss from operations................................................... (1,156,208) (473,686) (1,719,913)
Other income (expense):
Interest (expense) income............................................ (1,498) 79,046 116,839
------------- ----------- -------------
Loss before income taxes............................................... (1,157,706) (394,640) (1,603,074)
Income taxes (Note 5).................................................. -- -- --
------------- ----------- -------------
Net loss as a development stage company................................ $ (1,157,706) $ (394,640) $(1,603,074)
------------- ----------- -------------
------------- ----------- -------------
Net loss per common share.............................................. $ (0.20) $ (0.07) (0.34)
------------- ----------- -------------
------------- ----------- -------------
Weighted average number of common shares outstanding................... 5,685,642 5,326,209 4,766,959
------------- ----------- -------------
------------- ----------- -------------
The accompanying notes are an integral part of these financial statements.
F-68
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 14, 1994) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
---------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------- --------- ------------ ------------- -------------
Balances, February 14, 1994.................. -- $ -- $ -- $ -- $ --
Stock issued to Willamette Valley, Inc.
($0.02 per share).......................... 4,845,455 4,846 95,154 -- 100,000
Proceeds from stock offering ($1.10 per
share)..................................... 2,609,091 2,609 2,471,631 -- 2,474,240
Net loss..................................... -- -- -- (50,728) (50,728)
----------- --------- ------------ ------------- -------------
Balances, December 31, 1994.................. 7,454,546 7,455 2,566,785 (50,728) 2,523,512
Shares granted to distributors (Note 6)...... 5,680 6 10,864 -- 10,870
Net loss..................................... -- -- -- (394,640) (394,640)
----------- --------- ------------ ------------- -------------
Balances, December 31, 1995.................. 7,460,226 7,461 2,577,649 (445,368) 2,139,742
Shares granted to employees.................. 1,500 1 2,774 2,775
Shares retired (Note 6)...................... (2,129,951) (2,130) 2,130 -- --
Net loss..................................... -- -- -- (1,157,706) (1,157,706)
----------- --------- ------------ ------------- -------------
Balances, December 31, 1996.................. 5,331,775 $ 5,332 $ 2,582,553 $ (1,603,074) $ 984,811
----------- --------- ------------ ------------- -------------
----------- --------- ------------ ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-69
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
CUMULATIVE
AMOUNTS FROM
INCEPTION
(FEBRUARY 14,
YEAR ENDED DECEMBER 31, 1994) TO
---------------------------- DECEMBER 31,
1996 1995 1996
------------- ------------- -------------
Cash flows from operating activities:
Net loss as a development stage company............................ $ (1,157,706) $ (394,640) $(1,603,074)
Reconciliation of net loss to cash used by operating activities:
Shares granted to employees and distributors..................... 2,775 10,870 13,645
Depreciation and amortization.................................... 137,146 45,580 182,726
Deferred rent.................................................... 22,152 47,951 70,103
Changes in current assets and current liabilities:
Accounts receivable............................................ (12,659) (48,870) (61,529)
Inventories.................................................... (81,905) (233,788) (326,178)
Prepaid and other assets....................................... 57,912 (25,142) --
Accounts payable............................................... 405,258 179,758 607,570
Accrued liabilities and container deposits..................... 30,547 29,552 60,099
------------- ------------- -------------
Net cash used by operating activities................................ (596,480) (388,729) (1,056,638)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures............................................... (229,965) (2,096,559) (2,379,161)
Decrease (increase) in other non-current assets.................... 16,361 (15,587) (235)
------------- ------------- -------------
Net cash used by investing activities................................ (213,604) (2,112,146) (2,379,396)
------------- ------------- -------------
Cash flows from financing activities:
Sale of common stock to parent company............................. -- -- 100,000
Net proceeds from common stock offering............................ -- -- 2,474,240
Net borrowings and advances from parent and affiliated companies... 602,901 236,499 881,012
------------- ------------- -------------
Net cash provided by financing activities............................ 602,901 236,499 3,455,252
------------- ------------- -------------
Net decrease in cash................................................. (207,183) (2,264,376) 19,218
Cash and cash equivalents, beginning of period....................... 226,401 2,490,777 --
------------- ------------- -------------
Cash and cash equivalents, end of period............................. $ 19,218 $ 226,401 $ 19,218
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-70
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Aviator Ales, Inc. (the Company) is a development stage company established
to produce and sell hand-crafted ales in the State of Washington. The Company
was organized under the laws of the State of Delaware. Prior to January 1996,
the Company's name was Seattle Brewing Company. From the date of inception
(February 14, 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, building and equipping its brewery, and developing a
marketable beer. The brewery began producing and selling beer in September 1995;
however, in 1996 was brewing at only 19% of its expected capacity. 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% and 65%, respectively, of the Company's common
stock; see also Note 6.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $1,145,814 and has limited access to capital to fund future
operations. There can be no assurance that the Company will produce and sell its
products on a profitable basis to sustain operations. Such factors, among
others, raise substantial doubt as to the Company's ability to continue as a
going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Note 11) to fund operations until new strategies result in
positive cash flows and improved profitability, and; (vi) use of proceeds from
the disposition of duplicative and/or unutilized assets created by the proposed
merger. Management believes these plans will result in the Company sustaining
operations as a going concern for next 12 months.
As part of the plans, subsequent to December 31, 1996, the Company entered
into an investment agreement to be merged with other affiliated companies and
convert its stock into shares of a new publicly traded entity as discussed in
Note 11.
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.
F-71
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment 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.
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.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted the statement in fiscal 1996; however, the adoption has not had a
significant impact on the Company's financial statements. Note that management
expects all of the Company's long-lived assets to be used by the newly formed
public Company (see Note 11).
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 the proposed merger
as described in Note 11, 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 the shares retired in March
1996 and 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.
F-72
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $1,498. For the year ended December 31, 1995, the Company paid no
income taxes and paid interest of $4,500. In 1996, the Company purchased
equipment valued at $11,722 under a capital lease. This non-cash transaction
has also been excluded from the accompanying statement of cash flows.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Except as discussed in Note 8 under advances from affiliates, the fair
market values of the Company's recorded financial instruments approximate 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.
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 shareholders' equity.
2. INVENTORIES
Inventories consist of:
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Raw materials......................................................... $ 180,145 $ 48,589
Work-in-process....................................................... 35,414 30,100
Finished goods........................................................ 72,186 147,992
Retail inventory...................................................... 38,433 17,592
---------- ----------
$ 326,178 $ 244,273
---------- ----------
---------- ----------
F-73
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
Land and improvements............................................. $ 695,486 $ 642,275
Brewery equipment................................................. 1,708,998 1,527,269
Office furniture and equipment.................................... 16,910 10,162
Vehicles.......................................................... 19,490 19,490
------------ ------------
2,440,884 2,199,196
Less accumulated depreciation..................................... (182,492) (45,345)
------------ ------------
$ 2,258,392 $ 2,153,851
------------ ------------
------------ ------------
4. MORTGAGE NOTE PAYABLE AND CAPITAL LEASE PAYABLE
Long-term debt consists of a $50,000 note payable to an individual, issued
in connection with the purchase of land, and a capital lease liability relating
to equipment. The note bears interest at 9.0% and requires quarterly interest
payments. The note is secured by the land and is payable in a lump sum in June
1999. The capital lease bears interest at 9.4% and is payable in equal
instalments of $416 per month through August 1999. Future minimum payments on
the capital lease are as follows:
PRINCIPAL INTEREST TOTAL
--------- --------- ---------
1997.......................................................... $ 4,058 $ 933 $ 4,991
1998.......................................................... 4,457 534 4,991
1999.......................................................... 3,207 115 3,322
--------- --------- ---------
$ 11,722 $ 1,582 $ 13,304
--------- --------- ---------
--------- --------- ---------
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-74
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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%
Reserve of net operating loss carryforward assets............................. (34.0) (34.0)
--------- ---------
--% --%
--------- ---------
--------- ---------
Deferred tax assets (liabilities) consist of:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
Federal net operating loss carryforwards............................ $ 679,000 $ 175,000
Expenses not currently deductible................................... 24,000 15,000
Fixed assets........................................................ (163,000) (60,000)
Deferred tax asset valuation allowance.............................. (540,000) (130,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
As of December 31, 1996, the Company had a net operating loss carryforward
aggregating approximately $2,002,000 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 11) 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 February 1994,
the Company received $100,000 cash from WVI in exchange for 4,845,455 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 4,845,455 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 4,845,455
shares were to remain in escrow until unconditionally released in 25% increments
on April 5, 2001, 2002, 2003 and 2004. Based on the
F-75
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
ownership change anticipated by management described in Note 11, 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, the Company sold 2,609,091 shares of its common stock at $1.10
per share pursuant to a Form SB-2 public offering filed with the U.S. Securities
Exchange Commission (SEC). Cash proceeds from this offering, net of offering
expenses of $395,760, aggregated $2,474,240.
During 1996 and 1995, the Company granted a total of 1,500 and 5,680 shares,
respectively, to employees and/or third-party distributors of the Company's
products. The Company recorded $2,775 and $10,870 of expense related to these
grants which is included in selling, general and administrative expenses in the
accompanying financial statements for the years ended December 31, 1996 and
1995, respectively.
On March 4, 1996, the board of directors of WVI authorized WVI to
contribute 2,129,871 of its 4,845,455 shares in the Company to the Company
for no consideration in contemplation of the stock offering discussed in the
following paragraph; the Company has retired these shares. This transaction
reduced WVI's ownership in the Company from approximately 65% to
approximately 51%. Also in 1996, an additional 80 shares were retired.
During 1996, the Company attempted its second direct public stock offering
to sell up to 820,000 shares of common stock at $1.85 per share. The offering
has failed to raise the minimum escrow amount, and the Company is no longer
soliciting investors. Accordingly, the costs of $249,871 related to the offering
have been expensed in the current year.
See Notes 11 and 12 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 January 1995, the Company granted
55,000 options to employees under the Plan. The options are exercisable over a
ten-year period at an exercise price of $1.10 per share, which approximated fair
market value at the date of grant. The options vest ratably over the ten-year
term beginning one year from the date of grant. In 1996, the Company granted
89,000 options to employees under the Plan. Of these, 78,000 options vest over a
ten-year term, 5,000 vest over a five-year term, and 6,000 were canceled. These
options have an exercise price of $1.85 per share, which approximated the fair
market value at the date of grant. As of December 31, 1996, options exercised
were 0, vested options were 14,300, and options outstanding were 138,000.
F-76
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK INCENTIVE PLAN (CONTINUED)
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 5.61%
and 7.87%, respectively, an expected dividend yield of 0% and 0%, respectively,
an expected life of 9.77 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 $1.33 and $0.82, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1996 and 1995, the total value of the options granted
was computed to be $110,242 and $45,230, 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 11.
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 Mile High Brewing Company (MHBC) and Bayhawk Ales, Inc. (BAI),
and fully owns North Country Brewing Company, Inc. (NCBCI), companies located in
Colorado, 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 $128,000 and $169,000, 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 $881,000 and $278,000, at
December 31, 1996 and 1995, respectively, to affiliated companies.
F-77
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTIES (CONTINUED)
Additionally, in 1996, WVI advanced the Company $240,000 to be used for
short-term financing purposes. Because of the anticipated ownership change
discussed in Note 11, management does not expect to repay this advance. Instead
the advances are being considered in determining the purchase price and stock
conversion ratios being used in the transaction. These advances are included in
payables to parent and affiliated companies balance at December 31, 1996.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, the Company entered into a Strategic Alliance (the
"Alliance") with Nor'Wester, MHBC, BAI, NCBCI, and WVI. The Company, Nor'Wester,
MHBC, BAI, NCBCI, and WVI are collectively referred to as "Alliance members,"
and the Company, MHBC, and BAI are collectively referred to as the "Cooperative
Brewers," and individually referred to as a "Cooperative Brewer." The purpose of
the Alliance is to promote and support the growth of all of the Alliance members
by increasing production at each Cooperative Brewer's facility and supporting
the entry of Nor'Wester products into new markets. To achieve this goal, each
Cooperative Brewer 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 Company, MHBC, 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.
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 Aviator's
use in producing Nor'Wester's beer. To the extent that this equipment is not
needed for the production of Nor'Wester beers, Aviator 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.
F-78
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTIES (CONTINUED)
Cooperative brewing revenues totaled $544,000, which is 30% of the Company's
net revenues. Because of the pricing terms surrounding cooperative brewing
discussed above and the fact that the Company's costs to produce beer were
higher than Nor'Wester's costs to produce beer, cooperative brewing sales
resulted in significant negative gross margins for the Company. In addition, a
significant portion of the beer brewed by the Company and sold to Nor'Wester was
determined to be unusable. Accordingly, the Company ceased its cooperative
brewing of Nor'Wester beers in January 1997.
Subsequent to December 31, 1996, the cooperative brewing agreement was
canceled with the consent of all Alliance members.
ADVANCES FROM AFFILIATE
In connection with the Cooperative Brewing Agreement with Nor'Wester
described above, Nor'Wester advanced $100,000 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. Because of the anticipated ownership change discussed in Note 11,
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 and therefore are classified as current payables.
9. SIGNIFICANT CUSTOMERS
Approximately 45% and 58% of the Company's sales were to wholesale
distributors located in the Pacific Northwest for the years ended December 31,
1996 and 1995, respectively. Sales to the Company's largest customer (excluding
cooperative brewing) represented approximately 29% and 30% 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 Washington. These
agreements contain normal distribution provisions and are cancelable by either
the Company or the distributors. During 1995, the Company entered into a
twenty-year operating lease arrangement with optional renewal terms for its
production facility in Woodinville, Washington. Approximate minimum lease
payments are as follows:
F-79
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS (CONTINUED)
YEAR ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------
1997.......................................................................... $ 117,000
1998.......................................................................... 117,000
1999.......................................................................... 117,000
2000.......................................................................... 119,000
2001.......................................................................... 127,000
Thereafter.................................................................... 2,068,000
------------
$ 2,665,000
------------
------------
The terms of this lease allowed for no lease payments to be made during the
initial five months of the lease term, and contain escalating payments beginning
in 2000. The Company is recording lease expense on the straight-line method over
the lease term; accordingly, deferred rent has been recorded in the accompanying
balance sheet. Rent expense including common area charges during 1996 and 1995
related to this lease aggregated approximately $174,000 and $67,000,
respectively, and is allocated between cost of sales and selling, general and
administrative expenses in the accompanying statement of operations.
11. PROPOSED MERGER AND INVESTMENT FROM UBA
Subsequent to December 31, 1996, the Company along with its parent (WVI)
and its affiliates (Nor'Wester, MHBC 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
F-80
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. PROPOSED MERGER AND INVESTMENT FROM UBA (CONTINUED)
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 12).
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 12).
12. 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 11. 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.
F-81
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ -- $ 19,218
Accounts receivable............................................................... 190,544 61,529
Inventories....................................................................... 292,392 326,178
Marketing supplies................................................................ 25,746 --
------------- -------------
Total current assets.............................................................. 508,682 406,925
Property and equipment, net......................................................... 2,222,645 2,258,392
------------- -------------
Total assets........................................................................ $ 2,731,327 $ 2,665,317
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation....................................... $ 4,154 $ 4,058
Accounts payable.................................................................. 729,867 607,570
Accrued liabilities............................................................... 35,182 44,516
Container deposits................................................................ 24,609 15,583
Payable to parent and affiliated companies........................................ 942,251 881,012
------------- -------------
Total current liabilities......................................................... 1,736,063 1,552,739
Mortgage note payable and capital lease obligation.................................. 56,262 57,664
Deferred rent....................................................................... 78,602 70,103
------------- -------------
1,870,927 1,680,506
------------- -------------
Commitments
Shareholders' equity:
Common stock, $.001 par value--10,000,000 shares authorized,
5,331,775 and 5,331,775 shares outstanding...................................... 5,332 5,332
Additional paid-in capital........................................................ 2,582,553 2,582,553
Deficit accumulated during the development stage.................................... (1,727,485) (1,603,074)
------------- -------------
860,400 984,811
------------- -------------
Total liabilities and shareholders' equity.......................................... $ 2,731,327 $ 2,665,317
------------- -------------
------------- -------------
The accompanying notes are an integral part of this financial statement.
F-82
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED MARCH FROM INCEPTION
31, (DECEMBER 2, 1993)
------------------------ TO
1997 1996 TO MARCH 31, 1997
----------- ----------- --------------------
Gross sales..................................................... $ 298,632 $ 274,105 $ 2,434,659
Less: excise taxes.............................................. (15,486) (15,355) (101,772)
----------- ----------- -----------
Net sales....................................................... 283,146 258,750 2,332,887
Cost of sales................................................... 294,825 329,640 2,362,380
----------- ----------- -----------
Gross profit (deficit).......................................... (11,679) (70,890) (29,493)
Selling, general and administrative expenses.................... 110,637 157,019 1,562,865
Write-off of stock offering costs............................. -- -- 249,871
----------- ----------- -----------
Loss from operations............................................ (122,316) (227,909) (1,842,229)
Other income (expense)
Interest income (expense)..................................... (2,095) 807 114,744
----------- ----------- -----------
(2,095) 807 114,744
----------- ----------- -----------
Net loss........................................................ $ (124,411) $ (227,102) $ (1,727,485)
----------- ----------- -----------
----------- ----------- -----------
Net loss per common share....................................... $ (0.02) $ (0.03) $ (0.36)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of common shares
outstanding................................................... 5,331,775 6,864,533 4,801,848
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of this financial statement.
F-83
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED MARCH FROM INCEPTION
31, (DECEMBER 2, 1993)
------------------------ TO
1997 1996 TO MARCH 31, 1997
----------- ----------- --------------------
Cash flows from operating activities:
Net loss....................................................... $ (124,411) $ (227,102) (1,727,485)
Reconciliation of net loss to net cash used for operating
activities:
Depreciation and amortization................................ 39,314 39,100 222,040
Increase in deferred rent.................................... 8,499 8,501 78,602
Shares of stock granted to employees......................... -- -- 13,645
Changes in assets and liabilities:
Accounts receivable........................................ (129,015) (71,982) (190,544)
Inventories................................................ 33,786 (8,585) (292,392)
Marketing supplies......................................... (25,746) -- (25,746)
Accounts payable........................................... 122,297 (108,952) 729,867
Accrued liabilities and other liabilities.................. (308) 18,526 59,791
----------- ----------- -----------
Net cash used for operating activities......................... (75,584) (350,494) (1,132,222)
Cash flows from investing activities:
Purchases of property and equipment............................ (3,471) (113,973) (2,382,632)
Increase in other non-current assets........................... -- -- (235)
----------- ----------- -----------
Net cash used for investing activities......................... (3,471) (113,973) (2,382,867)
Cash flows from financing activities:
Increase in advances and other payables to affiliates.......... 61,239 243,724 942,251
Proceeds from stock offerings.................................. 2,574,240
Payments on capital lease obligations.......................... (1,402) -- (1,402)
Increase in deferred stock offering costs...................... -- (10,513) --
----------- ----------- -----------
Net cash (used for) provided by financing activities............. 59,837 233,211 3,515,089
----------- ----------- -----------
Net decrease in cash and cash equivalents........................ (19,218) (231,256) --
Cash and cash equivalents:
Beginning of period............................................ 19,218 226,401 --
----------- ----------- -----------
End of period.................................................. $ -- $ (4,855) $ --
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of this financial statement.
F-84
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Company's financial statements enclosed herein are unaudited and,
because of the seasonal nature of the business and the varying schedule of its
special sales efforts, these results are not necessarily indicative of the
results to be expected for the entire year. In the opinion of management, the
interim financial statements reflect all adjustments, consisting of only normal
recurring items which are necessary for a fair presentation of the results for
the periods presented. The accompanying financial statements have been prepared
in accordance with GAAP and SEC guidelines applicable to interim financial
information which require management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. The
accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1996.
The Company is a development stage company established to produce and sell
hand-crafted ales in the State of Washington. From the date of inception
(February 14, 1994) through March 31, 1997, the Company's efforts have been
directed primarily toward organizing and issue a public offering of shares of
its common stock, building and equipping its brewery, and developing a
marketable beer.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $1,227,381 and has limited access to capital to fund future
operations. There can be no assurance that the Company will produce and sell its
products on a profitable basis to sustain operations. Such factors, among
others, raise substantial doubt as to the Company's ability to continue as a
going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Proposed Merger note) to fund operations until new strategies
result in positive cash flows and improved profitability, and; (vi) use proceeds
from the disposition of duplicative and/or unutilized assets created by the
proposed merger Management believes these plans will result in the Company
sustaining operations as a going concern for the next 12 months.
As part of the plan, the Company entered into an investment agreement to be
merged with other affiliated companies and convert its stock into shares of a
new publicly traded entity as discussed in the Proposed Merger note.
F-85
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
Raw materials...................................................... $ 166,441 $ 180,145
Work-in-process.................................................... 53,721 35,414
Finished goods..................................................... 32,036 72,186
Retail products.................................................... 40,194 38,433
---------- ------------
$ 292,392 $ 326,178
---------- ------------
---------- ------------
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Land and improvements............................................ $ 695,486 $ 695,486
Brewery equipment................................................ 1,712,565 1,708,998
Office furniture and equipment................................... 16,910 16,910
Vehicles......................................................... 19,490 19,490
------------ ------------
2,444,451 2,440,884
Less accumulated depreciation.................................... (221,806) (182,492)
$ 2,222,645 $2,258,392
------------ ------------
------------ ------------
SHAREHOLDERS' EQUITY
The Company is authorized to issue 10 million shares of its common stock.
Each share of common stock entitles the holder to one vote. At its discretion,
the Board of Directors may declare dividends on share of common stock, although
the Board does not anticipate paying dividends in the foreseeable future. In
February 1994, the Company received $100,000 cash from WVI in exchange for
4,845,455 shares of unregistered stock. In March 1996, 2,129,871 of those shares
were contributed back to the Company for no consideration and subsequently
retired.
NET LOSS PER SHARE
Net loss per common share is calculated based on the weighted average number
of common shares and common share equivalents outstanding during the three month
periods ended March 31, 1997 and 1996. Shares owned by the Company's parent,
WVI, are held in escrow and are included in the weighted average number of
common shares outstanding. Outstanding options to purchase shares of the
Company's common shares have not been included in the calculations as their
affect would be anti-dilutive.
STOCK INCENTIVE AND STOCK GRANT PLANS
During 1994, the Board of Directors established a pool of 250,000 shares of
the Company's common stock for a stock incentive plan for issuance to employees,
directors, and consultants of the Company pursuant to
F-86
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the exercise of stock options granted under the plan or stock grants or stock
sales. Administration of the plan, including determination of the number of
shares to be issued, the term of exercise of any option, the option exercise
price, and type of options to be granted, lies with the Board of Directors or
a duly authorized committee of the Board of Directors.
As of March 31, 1997, options for a total of 138,000 shares have been
awarded, net of cancellations. Options have vesting periods ranging from five
years to ten years.
No compensation expense has been recorded as a result of granting any of the
options as all such options were granted with an exercise price equal to the
market price on the date of grant.
Options granted by the Company are expected to be converted to options of
the new company expected to be formed in the consolidation of the Company and
its affiliates at the same conversion rate as the conversion of common stock
discussed in the Proposed Merger note.
INCOME TAXES
No benefit for income taxes was recognized for the quarters ended March 31,
1997 and 1996 in the accompanying statement of operations as there can be no
assurance that the Company will generate taxable income in the future against
which such benefits could be realized.
At March 31, 1997, the Company had a net operating loss carryforward
aggregating approximately $2 million for federal income tax purposes, which may
be used to offset future taxable income, if any. The annual utilization of this
carryforward may be limited if the Company undergoes the ownership change
anticipated by management (see Proposed Merger note ) or fails to meet
continuity of business requirements defined by the Internal Revenue Code. The
Company's net operating loss carryforward expires in 2013.
RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president, Jim Bernau, partially owns and controls Willamette
Valley Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc., and
Nor'Wester Brewing Company, Inc. (Nor'Wester), a microbrewery in Oregon; as well
as WVI. Additionally, the Company's president is the president of each of the
following subsidiaries of WVI: Aviator Ales, Inc. (AAI); Mile High Brewing
Company (MHBC); Bayhawk Ales, Inc. (BAI); and North Country Brewing Company,
Inc. (NCBCI); development stage companies located in Washington, Colorado and
California, respectively. As a result of certain arrangements between the
Company and its affiliates, as well as Mr. Bernau's positions with and/or
ownership interests in each of these companies, inherent conflicts of interest
exist with respect to the pricing of services, the sharing of resources and
allocation of the Company president's time.
RELATED PARTY TRANSACTIONS
The Company purchased management and administrative services from WVI at a
total cost of $13,842 and $24,630 for the three months ended March 31, 1997 and
1996, respectively. WVI contracts for certain of these services under a general
services agreement between WVI and Nor'Wester.
F-87
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
RELATED PARTIES (CONTINUED)
Strategic Alliance and Cooperative Brewing Agreements The Company has
entered into a Strategic Alliance (the "Alliance") with Nor'Wester, MHBC, BAI,
NCBCI, and WVI. The Company, MHBC, and BAI are individually referred to as a
"Cooperative Brewer." The purpose of the Alliance is to promote and support the
growth of all of the Alliance members by increasing production at each
Cooperative Brewer's facility and supporting the entry of Nor'Wester products
into new markets. To achieve this goal, each Cooperative Brewer agreed to
cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. However, due to the fact that Nor'Wester's
Portland Brewery is not currently operating at full capacity and the fact that
attempting to develop other regional markets for its products has not yielded
significant results, the Cooperative Brewing Agreements are not being utilized.
Should the consolidation occur as planned (see Proposed Merger note), the
Strategic Alliance and agreements thereunder will terminate.
In connection with the Cooperative Brewing Agreement described above, the
Company received an advance from Nor'Wester of $250,000 during 1995 for the
purchase of ingredients and packaging materials for the cooperative brewer's
initial production of Nor'Wester's products. In 1996, the Company received an
advance of $100,000 from Nor'Wester for cooperative brewing purchases and
operating expenses. These advances remain outstanding although the
cooperative brewing agreement has been terminated. As a result of the
administrative services purchased from WVI and the advances received from
Nor'Wester, the Company has advances and loans payable to affiliates of
$942,251 at March 31, 1997. Because management expects these advances will
eventually be eliminated when the proposed merger occurs, as discussed in the
Proposed Merger and Investment by UBA note, these advances have been
classified as current payables to affiliates at March 31, 1997.
COMMITMENTS
The Company has entered into a twenty-year operating lease arrangement with
optional renewal terms for its production facility in Woodinville, Washington.
Annual payments under the lease are approximately $117,000 , plus common area
charges, and escalate over the term of the lease beginning in 2000 (totaling
approximately $2,665,000 over the term of the lease).
PROPOSED MERGER AND INVESTMENT BY UBA
During the quarter ended March 31, 1997, the Company, along with its
affiliates (Nor'Wester, WVI, MHBC 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 merge into a company to be known as United Craft
Brewers (UCB). This proposed merger will result in the issuance of newly
registered shares of UCB common stock in exchange for shares of Nor'Wester,
WVI and its subsidiaries. The merger and share exchange will require approval
by the Boards of Directors and shareholders of each of the entities.
Following the merger, all shareholders in the Nor'Wester /WVI alliance will
hold shares in UCB, a company which is intended to be listed for trading on
the NASDAQ National Market system under the symbol ALES. 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:
F-88
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
COMPANY EXCHANGE RATIO
- --------------------------------------------------------------------------------- -----------
Nor'Wester....................................................................... 1.00000:1
WVI.............................................................................. 1.99159:1
AAI.............................................................................. 2.98739:1
BAI.............................................................................. 1.99159:1
MHBC............................................................................. 2.98739:1
Following the proposed 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 31, 1997, $1.5 million 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. All principal
and interest related to the bridge loans is secured by the assets of North
Country Joint Venture, Nor'Wester's wholly-owned subsidiary, and by Nor'Wester's
ownership interest in North Country.
Joint Venture. Repayment of all principal and interest is guaranteed
personally by the Company's president. 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, (vi) extension of Nor'Wester's $1
million revolving line of credit through September 30, 1997 and the lender 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.
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 subsidiaries would own the remaining 45% of UCB.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") which are effective for fiscal
years ending after December 15, 1997. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
RENEGOTIATION OF PROPOSED MERGER AND INVESTMENT BY UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and adverse
conditions with the craft beer industry in general, representatives of UBA and
management and the investment bankers of the affiliated companies are in the
process of re-negotiating the terms of the UBA investment discussed in the
Proposed Merger note. The re-negotiation will reflect a significantly lower
valuation for the affiliated companies, a reduction in the total amount of
F-89
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
cash to be invested by UBA to $5.5 million and a reduction of UBA's
percentage ownership position in UCB to 40% following consolidation. It is
anticipated that the $2.75 million bridge loan 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 re-negotiated
terms. Failure of the parties to reach a mutually agreeable re-negotiated
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.
F-90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Bayhawk Ales, Inc.
(A Development Stage Company)
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Bayhawk Ales, Inc. (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
(February 14, 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 and has limited access to capital
with which to fund future operations. Such factors, among others, raise
substantial doubt about its ability to continue as a going concern. 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.
As discussed in Note 10 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.
Bayhawk Ales, Inc. 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.
PRICE WATERHOUSE LLP
Portland, Oregon
March 21, 1997, except as to Note 11,
which is as of March 24, 1997, and Note 1 (third
paragraph only), which is as of June 23, 1997
F-91
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash................................................................................ $ 40,954 $ 302,247
Accounts receivable................................................................. 64,349 26,405
Inventories (Note 2)................................................................ 23,692 37,620
Other current assets................................................................ -- 12,165
------------ ------------
Total current assets.............................................................. 128,995 378,437
Property and equipment, net (Note 3).................................................. 802,798 876,213
Other noncurrent assets............................................................... -- 6,998
------------ ------------
Total assets...................................................................... $ 931,793 $ 1,261,648
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 36,798 $ 9,249
Accrued liabilities................................................................. 16,780 36,482
Container deposits.................................................................. 19,339 --
Payables to affiliated companies (Note 7)........................................... 291,586 13,995
Current portion of note payable to parent company (Note 7).......................... -- 26,000
------------ ------------
Total current liabilities......................................................... 364,503 85,726
Note payable to parent company (Note 7)............................................... -- 321,000
------------ ------------
364,503 406,726
------------ ------------
Commitments (Notes 9, 10 and 11)
Shareholders' equity (Notes 5, 6, 10 and 11):
Common stock, $.001 par value, 10,000,000 shares authorized, 2,200,814 and 2,198,444
shares issued and outstanding..................................................... 2,201 2,198
Additional paid-in capital.......................................................... 1,427,982 1,424,075
Deficit accumulated during the development stage.................................... (862,893) (571,351)
------------ ------------
567,290 854,922
------------ ------------
Total liabilities and shareholders' equity............................................ $ 931,793 $ 1,261,648
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-92
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
CUMULATIVE
AMOUNTS FROM
INCEPTION
(FEBRUARY 14,
YEAR ENDED DECEMBER 31, 1994 TO
-------------------------- DECEMBER 31,
1996 1995 1996
------------ ------------ -------------
Gross revenues (Notes 7 and 8)......................................... $ 461,549 $ 179,592 $ 641,141
Less excise taxes...................................................... (41,611) (16,425) (58,036)
------------ ------------ -------------
Net revenues........................................................... 419,938 163,167 583,105
Cost of goods sold (Note 7)............................................ 364,450 229,856 594,306
------------ ------------ -------------
Gross margin (deficit)................................................. 55,488 (66,689) (11,201)
Selling, general and administrative expenses (Note 7).................. 339,766 418,661 853,403
------------ ------------ -------------
Loss from operations................................................... (284,278) (485,350) (864,604)
Net interest income (expense).......................................... (11,606) 8,298 (2,631)
Other income........................................................... 4,342 -- 4,342
------------ ------------ -------------
Loss before income taxes............................................... (291,542) (477,052) (862,893)
Income taxes (Note 4).................................................. -- -- --
------------ ------------ -------------
Net loss as a development stage company................................ $ (291,542) $ (477,052) $ (862,893)
------------ ------------ -------------
------------ ------------ -------------
Net loss per common share.............................................. $ (0.13) $ (0.28) $ (0.48)
------------ ------------ -------------
------------ ------------ -------------
Weighted average number of common shares outstanding................... 2,200,814 1,709,513 1,784,443
------------ ------------ -------------
------------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-93
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 14, 1994) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
--------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- --------- ------------ ----------- ------------
Balances, February 14, 1994...................... -- $ -- $ -- $ -- $ --
Stock issued to Willamette Valley, Inc.
Microbreweries across America ($0.08 per
share)......................................... 1,249,811 1,250 98,750 -- 100,000
Net loss......................................... -- -- -- (94,299) (94,299)
---------- --------- ------------ ----------- ------------
Balances, December 31, 1994...................... 1,249,811 1,250 98,750 (94,299) 5,701
Proceeds from stock offering ($1.65 per share)
(Note 5)....................................... 948,633 948 1,325,325 -- 1,326,273
Net loss......................................... -- -- -- (477,052) (477,052)
---------- --------- ------------ ----------- ------------
Balances, December 31, 1995...................... 2,198,444 2,198 1,424,075 (571,351) 854,922
Stock issued to employees (Note 5)............... 2,370 3 3,907 -- 3,910
Net loss......................................... -- -- -- (291,542) (291,542)
---------- --------- ------------ ----------- ------------
Balances, December 31, 1996...................... 2,200,814 $ 2,201 $ 1,427,982 $(862,893) $ 567,290
---------- --------- ------------ ----------- ------------
---------- --------- ------------ ----------- ------------
The accompanying notes are an integral part of these financial statements.
F-94
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
CUMULATIVE
AMOUNTS FROM
INCEPTION
YEAR ENDED (FEBRUARY 14,
DECEMBER 31, 1994) TO
------------------------- DECEMBER 31,
1996 1995 1996
----------- ------------ -------------
Cash flows from operating activities:
Net loss as a development stage company............................... $ (291,542) $ (477,052) $ (862,893)
Reconciliation of net loss to cash used for operating activities:
Depreciation and amortization....................................... 52,614 64,358 116,972
Stock granted to employees.......................................... 3,910 -- 3,910
Changes in current assets and current liabilities:
Accounts receivable............................................... (37,944) (26,405) (64,349)
Inventories....................................................... 13,928 (28,966) (23,692)
Other current assets.............................................. 12,165 (8,639) --
Accounts payable.................................................. 27,549 (64,652) 36,798
Accrued expenses and container deposits........................... (363) (18,379) 36,119
----------- ------------ -------------
Net cash used for operating activities.................................. (219,683) (559,735) (757,135)
----------- ------------ -------------
Cash flows from investing activities:
Capital expenditures.................................................. (25,996) (66,796) (964,393)
Cash received for assets disposed..................................... 53,795 -- 53,795
Cash paid for other noncurrent assets................................. -- (2,823) (9,172)
----------- ------------ -------------
Net cash provided by (used for) investing activities.................... 27,799 (69,619) (919,770)
----------- ------------ -------------
Cash flows from financing activities:
Sale of common stock to parent company................................ -- -- 100,000
Proceeds from common stock offering................................... -- 1,403,480 1,326,273
Deferred stock offering costs......................................... -- -- --
Net borrowings (repayments to) parent and affiliated companies........ (69,409) (498,884) 291,586
----------- ------------ -------------
Net cash provided by (used for) financing activities.................... (69,409) 904,596 1,717,859
----------- ------------ -------------
Net (decrease) increase in cash......................................... (261,293) 275,242 40,954
Cash, beginning of period............................................... 302,247 27,005 --
----------- ------------ -------------
Cash, end of period..................................................... $ 40,954 $ 302,247 $ 40,954
----------- ------------ -------------
----------- ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-95
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Bayhawk Ales, Inc. (the Company) is a development stage company organized
under the laws of the State of Delaware. From the date of inception (February
14, 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, building and equipping its brewery, and developing a marketable
beer. The brewery began producing and selling beer in January 1995; however, in
1996 was brewing at only 39% of its expected capacity. Prior to January 1996,
the Company's name was Orange County Brewing Company. The Company's facility is
in a McCormick and Schmick's Restaurant located in Irvine, California. 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 57% of the Company's common stock.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $235,508 and has limited access to capital to fund future
operations. There can be no assurance that the Company will produce and sell its
products on a profitable basis to sustain operations. Such factors, among
others, raise substantial doubt as to the Company's ability to continue as a
going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Note 10) to fund operations until new strategies result in
positive cash flows and improved profitability, and; (vi) use of proceeds from
the disposition of duplicative and/or unutilized assets created by the proposed
merger. Management believes these plans will result in the Company sustaining
operations as a going concern for next 12 months.
As part of the plans, 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 (see Notes 10 and 11).
F-96
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment 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.
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.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted the statement in fiscal 1996; however, the adoption has not had a
significant impact on the Company's financial statements. Note that management
expects all of the Company's long-lived assets to be used by the newly formed
public Company (see Note 10).
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 the 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.
F-97
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$16,500. For the year ended December 31, 1995, the Company paid no income taxes
or interest. In 1996, the Company sold equipment with a net book value of
$74,250 to North Country Brewing Company.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Except as discussed in Note 7 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.
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 ending
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 6).
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements to
conform with 1996 presentation. These reclassifications have no impact on
previously reported results of operations or shareholders' equity.
2. INVENTORIES
Inventories consist of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Raw materials........................................................... $ 9,969 $ 9,081
Work-in-process......................................................... 3,484 14,835
Finished goods.......................................................... 4,672 12,067
Retail inventory........................................................ 5,567 1,637
--------- ---------
$ 23,692 $ 37,620
--------- ---------
--------- ---------
F-98
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
-----------------------
1996 1995
----------- ----------
Leasehold improvements............................................... $ 277,546 $ 270,267
Equipment............................................................ 634,040 664,490
Office furniture and equipment....................................... 4,644 3,640
----------- ----------
916,230 938,397
Less accumulated depreciation........................................ (113,432) (62,184)
----------- ----------
$ 802,798 $ 876,213
----------- ----------
----------- ----------
4. 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.
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........................................ 6.1 6.1
Reserve of net operating loss carryforward assets.......................... (40.1) (40.1)
--------- ---------
--% --%
--------- ---------
--------- ---------
Deferred tax assets (liabilities) consist of:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
Federal net operating loss carryforwards............................ $ 339,000 $ 185,000
Fixed assets........................................................ (60,000) (12,000)
Deferred tax asset valuation allowance.............................. (279,000) (173,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
F-99
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had a net operating loss carryforward
aggregating approximately $996,000 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 10) 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.
5. 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 February 1994,
the Company received $100,000 cash from WVI in exchange for 1,249,811 shares of
unregistered common stock.
During 1995, the Company sold 948,633 shares of its common stock at $1.65
per share, pursuant to a Regulation A public offering filed with the U.S.
Securities Exchange Commission (SEC). Cash proceeds from this offering, net of
offering expenses of approximately $235,000, aggregated $1,326,273.
During 1996 and 1995, the Company granted a total of 2,370 and 0 shares,
respectively, to employees and/or third-party distributors of the Company's
products. The Company recorded $3,910 and $0 of expense related to these grants
which is included in selling, and general and administrative expenses in the
accompanying financial statements for the years ended December 31, 1996 and
1995, respectively. See Notes 10 and 11 for discussion of the planned ownership
change.
6. 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 December 1995, the Company granted
a total of 40,000 options, 20,000 of which were subsequently canceled, under the
Plan at an exercise price of $1.73 per share, which approximated fair market
value at the date of grant. The options vest ratably over the five-year term
beginning December 20, 1996. In 1996, the Company granted 50,000 and 5,000
options to employees under the Plan at an exercise price of $1.20 and $1.65 per
share, respectively. These options vest ratably over 10 years beginning one year
from the date of grant. As of December 31, 1996, no options have been exercised,
vested options were 14,000, and options outstanding were 75,000.
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 6.09%
F-100
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK INCENTIVE PLAN (CONTINUED)
and 5.56%, respectively, an expected dividend yield of 0% and 0%, respectively,
an expected life of 10 years and 5 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 $0.91 and $0.92, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1996 and 1995, the total value of the options granted
was computed to be $50,280 and $18,320, 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 10.
7. 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 Mile High Brewing Company (MHBC) and Aviator Ales, Inc. (AAI),
and fully owns North Country Brewing Company, Inc. (NCBCI), companies located in
Colorado, Washington, 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 $41,000 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 $292,000 and $361,000, at December 31, 1996 and 1995,
respectively, to affiliated companies.
F-101
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTIES (CONTINUED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, the Company entered into a Strategic Alliance (the
"Alliance") with Nor'Wester, MHBC, AAI, NCBCI, and WVI. The Company, Nor'Wester,
MHBC, AAI, NCBCI, and WVI are collectively referred to as "Alliance members,"
and the Company, MHBC, and AAI 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 Company, MHBC, and AAI. The terms of the Strategic
Alliance Agreement and the Cooperative Brewing Agreements are four years, unless
earlier terminated under limited circumstances, which include material breach in
the case of the Cooperative Brewing Agreements. The Agreements are subject to
renewal. Pricing for the purchase of beer produced under the Cooperative Brewing
Agreement is at the lesser of cost plus 10% or Nor'Wester's average cost of
production at its Nor'Wester Brewery, plus a mark-up of 10%. The Agreement
provides that no Alliance member will use the proprietary information or
technology of another Alliance member to produce any beer with a flavor profile
or appearance that is substantially similar to such Alliance member's beer. With
the consent of all Alliance members, additional parties may be added to the
Alliance.
Under the terms of the Cooperative Brewing Agreements, the Company 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 Bayhawk's
use in producing Nor'Wester's beer. To the extent that this equipment is not
needed for the production of Nor'Wester beers, Bayhawk 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.
F-102
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTIES (CONTINUED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS (CONTINUED)
Cooperative brewing revenues totaled $34,000, which is 8% 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 negative gross margins for the Company.
Subsequent to December 31, 1996, the cooperative brewing agreement was
canceled with the consent of all Alliance members.
ADVANCES FROM AFFILIATES
During 1994 and 1995, WVI advanced $1,353,823 to the Company to construct,
equip and operate its brewery. As of December 31, 1996, the remaining balance
payable to WVI is $250,188 which has been converted into a promissory note
issued to WVI. The note bore interest at 8% beginning on January 1, 1996 and was
secured by all of the Company's assets. The terms of the note provided that
payments of $4,600, including principal and interest were paid monthly. Because
of the anticipated ownership change discussed in Note 10, 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. As such, the entire balance is considered to be payable currently.
8. SIGNIFICANT CUSTOMERS
Approximately 85% of the Company's sales were to wholesale distributors
located in California for the year ended December 31, 1996. In 1995, all sales
were to distributors located in California. Sales to the Company's largest
customer (excluding cooperative brewing) represented approximately 94% and 77%
of gross sales for the years ended December 31, 1996 and 1995, respectively.
9. COMMITMENTS
The Company has entered into agreements with several independent
distributors for the distribution of the Company's products. These agreements
contain normal distribution provisions and are cancelable by either the Company
or the distributors.
During 1995, the Company entered into a 15-year operating lease arrangement
with two five-year renewal terms for its brewery in Irvine, California.
Approximate minimum lease payments are as follows:
F-103
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
1997............................................................................ $ 36,000
1998............................................................................ 36,000
1999............................................................................ 36,000
2000............................................................................ 36,000
2001............................................................................ 36,000
Thereafter...................................................................... 288,000
----------
$ 468,000
----------
----------
Rent expense, including common area charges during 1996 and 1995 related to
this lease, aggregated approximately $40,000 and $42,000, respectively, and is
allocated between cost of sales and selling, general and administrative expenses
in the accompanying statement of operations.
10. PROPOSED MERGER AND INVESTMENT BY UBA
Subsequent to December 31, 1996, the Company along with its parent (WVI)
and its affiliates (Nor'Wester, AAI and MHBC) 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
F-104
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
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 11).
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 11).
11. 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
10. 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.
F-105
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
ASSETS
Current assets:
Cash............................................................................... $ 20,843 $ 40,954
Accounts receivable................................................................ 56,739 64,349
Inventories........................................................................ 31,705 23,692
Other current assets............................................................... 2,707 --
------------ ------------
Total current assets............................................................... 111,994 128,995
Property and equipment, net.......................................................... 789,985 802,798
------------ ------------
Total assets......................................................................... $ 901,979 $ 931,793
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 39,844 $ 36,798
Accrued liabilities................................................................ 22,329 16,780
Container deposits................................................................. 29,623 19,339
Payable to parent and affiliated companies, net.................................... 304,193 291,586
------------ ------------
Total current liabilities.......................................................... 395,989 364,503
Shareholders' equity:
Common stock, $.001 par value--10,000,000 shares authorized, 2,200,814 and
2,200,814 shares outstanding..................................................... 2,201 2,201
Additional paid-in capital......................................................... 1,427,982 1,427,982
Deficit accumulated during the development stage..................................... (924,193) (862,893)
------------ ------------
Total shareholders' equity........................................................... 505,990 567,290
------------ ------------
Total liabilities and shareholders' equity........................................... $ 901,979 $ 931,793
------------ ------------
------------ ------------
The accompanying ntoes are an integral part of this financial statement
F-106
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED MARCH FROM INCEPTION
31, (DECEMBER 2, 1993)
-------------------------- TO
1997 1996 TO MARCH 31, 1997
------------ ------------ --------------------
Gross sales..................................................... $ 92,652 $ 55,928 $ 733,793
Less: excise taxes.............................................. (5,451) (4,862) (63,487)
------------ ------------ -----------
Net sales....................................................... 87,201 51,066 670,306
Cost of sales................................................... 88,110 93,834 682,416
------------ ------------ -----------
Gross deficit................................................... (909) (42,768) (12,110)
Selling, general and administrative expenses.................... 60,598 66,646 914,001
------------ ------------ -----------
Loss from operations............................................ (61,507) (109,414) (926,111)
Interest income (expense)....................................... 207 (1,582) (2,424)
Other income (expense).......................................... -- -- 4,342
------------ ------------ -----------
Net loss........................................................ $ (61,300) $ (110,996) $ (924,193)
------------ ------------ -----------
------------ ------------ -----------
Net loss per common share....................................... $ (0.03) $ (0.05) $ (0.51)
------------ ------------ -----------
------------ ------------ -----------
Weighted average number of common shares
outstanding................................................... 2,200,814 2,200,814 1,818,202
------------ ------------ -----------
------------ ------------ -----------
The accompanying notes are an integral part of this financial statement
F-107
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED FROM INCEPTION
MARCH 31, (DECEMBER 2, 1993)
----------------------- TO
1997 1996 MARCH 31, 1997
---------- ----------- --------------------
Cash flows from operating activities:
Net loss......................................................... $ (61,300) $ (110,996) $ (924,193)
Reconciliation of net loss to net cash provided by operating
activities:
Depreciation and amortization.................................. 12,813 15,253 129,785
Shares of common stock issued to employees..................... -- -- 3,910
Changes in assets and liabilities:
Accounts receivable.......................................... 7,610 (27,538) (56,739)
Inventories.................................................. (8,013) 4,943 (31,705)
Other current assets......................................... (2,707) (7,074) (2,707)
Accounts payable............................................. 3,046 8,555 39,844
Accrued liabilities and container deposits................... 15,833 1,123 51,952
---------- ----------- -----------
Net cash used for operating activities........................... (32,718) (115,734) (789,853)
Cash flows from investing activities:
Purchases of property and equipment, net of disposals............ -- (3,584) (910,598)
Purchases of other no-current assets............................. -- -- (9,172)
---------- ----------- -----------
Net cash used for investing activities........................... -- (3,584) (919,770)
Cash flows from financing activities:
Increase in advances and other payables to affiliates............ 12,607 13,985 304,193
Proceeds from common stock offerings............................. -- -- 1,426,273
Increase in stock offering costs................................. (4,263)
---------- ----------- -----------
Net cash (used) provided by financing activities................... 12,607 9,722 1,730,466
---------- ----------- -----------
Net decrease in cash and cash equivalents.......................... (20,111) (109,596) 20,843
Cash and cash equivalents:
Beginning of period.............................................. 40,954 302,247 --
---------- ----------- -----------
End of period.................................................... $ 20,843 $ 192,651 $ 20,843
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of this financial statement.
F-108
BAYHAWK ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Company's financial statements enclosed herein are unaudited and,
because of the seasonal nature of the business and the varying schedule of its
special sales efforts, these results are not necessarily indicative of the
results to be expected for the entire year. In the opinion of management, the
interim financial statements reflect all adjustments, consisting of only normal
recurring items which are necessary for a fair presentation of the results for
the periods presented. The accompanying financial statements have been prepared
in accordance with GAAP and SEC guidelines applicable to interim financial
information which require management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. The
accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB/A.
The Company is a development stage company established to produce and sell
hand-crafted ales in the State of California. From the date of inception
(February 14, 1994) through March 31, 1997, the Company's efforts have been
directed primarily toward organizing and issue a public offering of shares of
its common stock, building and equipping its brewery, and developing a
marketable beer.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $283,995 and has limited access to capital to fund future
operations. There can be no assurance that the Company will produce and sell its
products on a profitable basis to sustain operations. Such factors, among
others, raise substantial doubt as to the Company's ability to continue as a
going concern.
In light of significant losses and negative working capital the Company has
developed and is implementing plans for the continuation of the business. In
particular, the Company has taken steps to: (i) reduce or eliminate cooperative
brewing arrangements which proved to be inefficient and costly; (ii) eliminate
national roll-out programs in favor of stepped-up regional sales and marketing
efforts; (iii) negotiate with past-due creditors which could involve extended
terms and payment plans; (iv) hire and retain high-quality employees familiar
with the brewing industry, (v) use available bridge loans from a proposed
investor (see Proposed Merger note) to fund operations until new strategies
result in positive cash flows and improved profitability, and; (vi) use proceeds
from the disposition of duplicative and/or unutilized assets created by the
proposed merger Management believes these plans will result in the Company
sustaining operations as a going concern for the next 12 months.
As part of the plan, the Company entered into an investment agreement to be
merged with other affiliated companies and convert its stock into shares of a
new publicly traded entity as discussed in the Proposed Merger note.
F-109
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
Raw materials....................................................... $ 24,921 $ 9,969
Work-in-process..................................................... 3,500 3,484
Finished goods...................................................... 3,284 10,239
----------- ------------
$ 31,705 $ 23,692
----------- ------------
----------- ------------
PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
Leasehold improvements............................................ $ 277,546 $ 277,546
Equipment......................................................... 634,523 634,040
Office furniture and equipment.................................... 4,161 4,644
----------- ------------
916,230 916,230
Less accumulated depreciation..................................... (126,245) (113,432)
----------- ------------
$ 789,985 $ 802,798
----------- ------------
----------- ------------
SHAREHOLDERS' EQUITY
The Company is authorized to issue 10 million shares of its common stock.
Each share of common stock entitles the holder to one vote. At its discretion,
the Board of Directors may declare dividends on share of common stock, although
the Board does not anticipate paying dividends in the foreseeable future. In
February 1994, the Company received $100,000 from WVI in exchange for 1,249,811
shares of unregistered common stock.
During 1995, the Company sold 948,633 shares of its common stock at $1.65
per share, pursuant to a Regulation A public offering filed with the Securities
and Exchange Commission. Cash proceeds from this offering, net of offering
expenses of approximately $235,000, aggregated $1,326,273.
NET LOSS PER SHARE
Net loss per common share is calculated based on the weighted average number
of common shares and common share equivalents outstanding during the three month
periods ended March 31, 1997 and 1996. Outstanding options to purchase shares of
the Company's common shares have not been included in the calculations as their
effect would be anti-dilutive.
F-110
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STOCK INCENTIVE AND STOCK GRANT PLANS
During 1994, the Board of Directors established a pool of 250,000 shares of
the Company's common stock for a stock incentive plan for issuance to employees,
directors, and consultants of the Company pursuant to the exercise of stock
options granted under the plan or stock grants or stock sales. Administration of
the plan, including determination of the number of shares to be issued, the term
of exercise of any option, the option exercise price, and type of options to be
granted, lies with the Board of Directors or a duly authorized committee of the
Board of Directors.
As of March 31, 1997, options for a total of 75,000 shares have been
awarded, net of cancellations. Options have vesting periods ranging from five
years to ten years. Exercise prices range from $1.20 per share to $1.73 per
share with a weighted average exercise price per share of $1.37. No options have
been exercised through March 31, 1997. Subsequent to March 31, 1997 all options
were repriced to $1.75 per share.
No compensation expense has been recorded as a result of granting any of the
options as all such options were granted with an exercise price equal to the
market price on the date of grant.
Options granted by the Company are expected to be converted to options of
the new company expected to be formed in the consolidation of the Company and
its affiliates at the same conversion rate as the conversion of common stock
discussed in the Pending Consolidation note.
INCOME TAXES
No benefit for income taxes was recognized for the quarters ended March 31,
1997 and 1996 in the accompanying statement of operations as there can be no
assurance that the Company will generate taxable income in the future against
which such benefits could be realized.
At March 31, 1997, the Company had a net operating loss carryforward
aggregating approximately $900,000 for federal income tax purposes, which may be
used to offset future taxable income, if any. The annual utilization of this
carryforward may be limited if the Company undergoes the ownership change
anticipated by management (see Proposed Merger note ) or fails to meet
continuity of business requirements defined by the Internal Revenue Code. The
Company's net operating loss carryforwards beginning expiring in 2010.
RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president, Jim Bernau, partially owns and controls Willamette
Valley Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc., and
Nor'Wester Brewing Company, Inc.(Nor'Wester), a microbrewery in Oregon; as well
as WVI. Additionally, Mr. Bernau is the president of each of the following
subsidiaries of WVI: Aviator Ales, Inc. (AAI); Mile High Brewing Company (MHBC);
Bayhawk Ales, Inc. (BAI); and North Country Brewing Company, Inc. (NCBCI);
development stage companies located in Washington, Colorado and California,
respectively. As a result of certain arrangements between the Company and its
affiliates, as well as Mr. Bernau's positions with and/or ownership interests in
each of these companies, inherent conflicts of interest exist with respect to
the pricing of services, the sharing of resources and allocation of the Company
president's time.
F-111
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
RELATED PARTIES (CONTINUED)
RELATED PARTY TRANSACTIONS
The Company purchased management and administrative services from WVI at a
total cost of $9,609 and $7,275 for the three months ended March 31, 1997 and
1996, respectively. WVI contracts for certain of these services under a general
services agreement between WVI and Nor'Wester.
Strategic Alliance and Cooperative Brewing Agreements The Company has
entered into a Strategic Alliance (the "Alliance") with AAI, Nor'Wester, MHBC,
NCBCI, and WVI. Nor'Wester, AAI, MHBC, and BAI are individually referred to as a
"Cooperative Brewer." The purpose of the Alliance is to promote and support the
growth of all of the Alliance members by increasing production at each
Cooperative Brewer's facility and supporting the entry of Nor'Wester products
into new markets. To achieve this goal, each Cooperative Brewer agreed to
cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. During January, 1997, AAI and MHBC ceased
cooperative brewing of Nor'Wester beers.
As a result of the administrative services purchased and loans provided by
WVI and the loan received from Nor'Wester, the Company has advances and loans
payable to affiliates of $304,193 at March 31, 1997. Because management expects
these advances and loan will eventually be eliminated when the proposed merger
occurs, as discussed in the Pending Consolidation note, these advances have been
classified as current payables to affiliates at March 31, 1997.
COMMITMENTS
The Company has entered into a fifteen-year operating lease arrangement with
two five-year optional renewal terms for its production facility in Irvine,
California. Annual payments under the lease are $36,000 (totaling approximately
$468,000 over the term of the lease), plus common area charges.
PROPOSED MERGER AND INVESTMENT BY UBA
During the quarter ended March 31, 1997, the Company, along with its
affiliates (Nor'Wester, WVI, MHBC and AAI) entered into an investment
agreement with United Breweries of America, Inc. (UBA), an entity controlled
by the UB Group of Bangalore, India. The agreement provides for Nor'Wester,
WVI, AAI, MHBC and BAI to merge into a company to be known as United Craft
Brewers (UCB). This proposed merger will result in the issuance of newly
registered shares of UCB common stock in exchange for shares of Nor'Wester,
WVI and its subsidiaries. The merger and share exchange will require approval
by the Boards of Directors and shareholders of each of the entities.
Following the merger, all shareholders in the Nor'Wester /WVI alliance will
hold shares in UCB, a company which is intended to be listed for trading on
the NASDAQ National Market system under the symbol ALES. 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.................................................................... 1.00000:1
WVI........................................................................... 1.99159:1
AAI........................................................................... 2.98739:1
BAI........................................................................... 1.99159:1
MHBC.......................................................................... 2.98739:1
F-112
AVIATOR ALES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
Following the proposed 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 31, 1997, $1.5 million 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.
All principal and interest related to the bridge loans is secured by the
assets of North Country Joint Venture, the Company's wholly-owned subsidiary,
and by the Company's ownership interest in North Country Joint Venture.
Repayment of all principal and interest is guaranteed personally by the
Company's president.
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, (vi) extension of Nor'Wester's $1 million
revolving line of credit through September 30, 1997 and the lender 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.
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 subsidiaries would own the remaining 45% of UCB.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129")which are effective for fiscal
years ending after December 15, 1997. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
RENEGOTIATION OF PROPOSED MERGER AND INVESTMENT BY UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and adverse
conditions with 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 the
Proposed Merger note. The re-negotiating will reflect a significantly lower
valuation for the affiliate companies, a reduction in the total amount of cash
to be invested by UBA to $5.5 million and a reduction of UBA's percentage
ownership position in UCB to 40% following consolidation. It is anticipated that
the $2.75 million bridge loan 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 re-negotiated terms. Failure of the
parties to reach a mutually agreeable re-negotiated 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 Renegotiation of Proposed Merger and
Investment by UBA (Continued) assurance that the proposed merger will be
completed or that the Company will obtain the capital needed to sustain
operations.
F-113
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. Accordingly, the assets have been reported at estimated
fair market 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-114
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 21, 1997, except as to Notes 13 and 14,
which are as of March 24, 1997, and Note 1 (third paragraph only),
which is as of June 23, 1997
F-115
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
--------------------------------
1996 1995
------------------ ------------
(RESTATED--NOTE
14)
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
------------------ ------------
------------------ ------------
The accompanying notes are an integral part of these financial statements.
F-116
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
CUMULATIVE
AMOUNTS FROM
YEAR ENDED DECEMBER 31, INCEPTION (JUNE 8,
-------------------------------- 1994 TO DECEMBER
1996 1995 31, 1996
------------------ ------------ ------------------
(RESTATED--NOTE (RESTATED--NOTE
14) 14)
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
Estimated 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
------------------ ------------ ------------------
------------------ ------------ ------------------
The accompanying notes are an integral part of these financial statements.
F-117
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (JUNE 8, 1994) TO DECEMBER 31, 1996
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
--------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- --------- ------------ ------------- -------------
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)
---------- --------- ------------ ------------- -------------
---------- --------- ------------ ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-118
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
CUMULATIVE
AMOUNTS FROM
YEAR ENDED DECEMBER 31, INCEPTION
--------------------------------- (JUNE 8, 1994 TO
1996 1995 DECEMBER 31, 1996
------------------ ------------- ------------------
(RESTATED--NOTE (RESTATED--NOTE
14) 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
Estimated 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
------------------ ------------- ------------------
------------------ ------------- ------------------
The accompanying notes are an integral part of these financial statements.
F-119
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, building and 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 accompanying financial statements have been prepared assuming the
Company will continue as a going concern. 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 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 (see Note 11). Such factors, among others, raise substantial doubt as to
the Company's ability to continue as a going concern.
Subsequent to December 31, 1996, the Company's management developed a plan
to sell all of the operating assets of the Company or to pursue contract brewing
opportunities in an effort to improve the cash flows of the Company. Until
management's plans are finalized, the Company intends to use advances from an
affiliated brewery's bridge loans from a proposed investor to help finance
activities (see Note 12).
As part of the plan, 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 and proceeds derived from the
disposition of unutilized assets.
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-120
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-121
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-122
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-123
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
YEAR ENDED 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-124
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-125
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-126
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTIES (CONTINUED)
ADVANCES FROM PARENT AND AFFILIATE (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-127
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTIES (CONTINUED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS (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.
F-128
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS (CONTINUED)
During 1995, the Company entered into a 15-year operating lease arrangement
with optional renewal terms for its production facility in Denver, Colorado. As
disclosed in Note 1, management plans to dispose of its assets or subcontract
the facility including these assets. In doing so, management plans to assign the
lease during 1997. However, minimum future lease payments according to the lease
are as follows:
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 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-129
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-130
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 effect of this restatement
on the financial statements are summarized as 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:
Estimated 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-131
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,726 $ 30,320
Accounts receivable............................................................... 22,396 85,200
Other current assets.............................................................. 8,564 8,170
------------- -------------
Total current assets.............................................................. 34,686 123,690
Property and equipment, net......................................................... 1,966,667 2,000,000
Other non-current assets, net....................................................... 8,169 --
------------- -------------
Total assets........................................................................ $ 2,009,522 $ 2,123,690
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. 863,359 816,664
Reserve for impairment loss....................................................... 50,000 50,000
Other accrued liabilities......................................................... 24,533 15,633
Payables to parent and affiliated companies....................................... 1,843,915 1,834,547
Current portion of capital lease obligation....................................... 71,218 69,270
------------- -------------
Total current liabilities......................................................... 2,853,025 2,786,114
Capital lease....................................................................... 217,446 241,224
------------- -------------
3,070,471 3,027,338
------------- -------------
Commitments
Shareholders' equity:
Common stock, $.001 par value - 10,000,000 shares authorized, 4,693,787 and
4,690,167 shares outstanding.................................................... 4,694 4,694
Additional paid-in capital........................................................ 2,252,274 2,252,274
Deficit accumulated during the development stage.................................... (3,317,917) (3,160,616)
------------- -------------
(1,060,949) (903,648)
------------- -------------
Total liabilities and shareholders' equity.......................................... $ 2,009,522 $ 2,123,690
------------- -------------
------------- -------------
The accompanying notes are an integral part of this financial statement.
F-132
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
CUMULATIVE AMOUNTS
THREE MONTHS ENDED MARCH 31, FROM INCEPTION
------------------------------ (JUNE 8, 1994)
1997 1996 TO MARCH 31, 1997
-------------- -------------- -------------------
Gross sales................................................. 16,770 104,614 1,834,183
Less: excise taxes.......................................... (1,701) (4,407) (91,044)
-------------- -------------- -------------------
Net sales................................................... 15,069 100,207 1,743,139
Cost of sales............................................... 80,947 173,669 2,206,938
-------------- -------------- -------------------
Gross profit (deficit)...................................... (65,878) (73,462) (463,799)
Selling, general and administrative expenses................ 91,423 160,070 1,674,338
write-off of stock offering costs......................... -- -- 212,098
estimated impairment loss................................. 1,018,879
-------------- -------------- -------------------
Loss from operations........................................ (157,301) (233,532) (3,369,114)
Other income (expense):
Other income (expense).................................... -- -- 34,073
Interest income (expense)................................. -- (775) 17,124
-------------- -------------- -------------------
-- (775) 51,197
Net loss.................................................... $ (157,301) $ (234,307) $ (3,317,917)
-------------- -------------- -------------------
-------------- -------------- -------------------
Net loss per common share................................... $ (0.03) $ (0.05) $ (0.77)
-------------- -------------- -------------------
-------------- -------------- -------------------
Weighted average number of common shares outstanding........ 4,693,787 4,690,167 4,282,973
-------------- -------------- -------------------
-------------- -------------- -------------------
The accompanying notes are an integral part of this financial statement.
F-133
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH CUMULATIVE AMOUNTS
31, FROM INCEPTION
-------------------------- (JUNE 8, 1994) TO
1997 1996 MARCH 31, 1997
------------ ------------ -------------------
Cash flows from operating activities:
Net loss....................................................... $ (157,301) $ (234,307) $ (3,317,917)
Reconciliation of net loss to net cash used for operating
activities:
Depreciation and amortization................................ 33,333 42,500 301,249
Increase in deferred rent.................................... -- 4,683 43,377
Write-down of assets due to impairment loss.................. -- -- 1,018,879
Shares of stock granted to employees......................... -- -- 6,697
Changes in assets and liabilities:
Accounts receivable........................................ 62,804 (9,717) (22,396)
Inventories................................................ -- (63,837) (186,700)
Other current assets....................................... (394) 26,037 (8,564)
Accounts payable........................................... 46,695 (21,339) 863,359
Accrued liabilities........................................ 8,900 (385) 24,533
------------ ------------ -------------------
Net cash provided by (used for) operating activities............. (5,963) (256,365) (1,277,483)
Cash flows from investing activities:
Purchases of property and equipment, net of disposals.......... -- (89,627) (2,581,190)
Increase in other non-current assets........................... (8,169) (22,338) (140,608)
------------ ------------ -------------------
Net cash used for investing activities......................... (8,169) (111,965) (2,721,798)
Cash flows from financing activities:
Increase in deferred stock offering costs...................... -- (19,284) --
Increase in advances and other payables to affiliates.......... 9,368 33,407 1,843,915
Proceeds from public stock offerings........................... -- -- 2,250,271
Principal payments on capital lease............................ (21,830) (13,013) (91,179)
------------ ------------ -------------------
Net cash (used for) provided by financing activities............. (12,462) 1,110 4,003,007
------------ ------------ -------------------
Net decrease in cash and cash equivalents........................ (26,594) (367,220) 3,726
Cash and cash equivalents:
Beginning of period............................................ 30,320 379,691 --
------------ ------------ -------------------
End of period.................................................. $ 3,726 $ 12,471 $ 3,726
------------ ------------ -------------------
------------ ------------ -------------------
The accompanying notes are an integral part of this financial statement.
F-134
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Company's financial statements enclosed herein are unaudited and,
because of the seasonal nature of the business and the varying schedule of its
special sales efforts, these results are not necessarily indicative of the
results to be expected for the entire year. In the opinion of management, the
interim financial statements reflect all adjustments, consisting of only normal
recurring items which are necessary for a fair presentation of the results for
the periods presented. The accompanying financial statements have been prepared
in accordance with GAAP and SEC guidelines applicable to interim financial
information which require management to make certain estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. The
accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1996.
The Company is a development stage company established to produce and sell
hand-crafted ales in the State of Colorado. From the date of inception (June 8,
1994) through March 31, 1997, the Company's efforts have been directed primarily
toward organizing and issue a public offering of shares of its common stock,
building and equipping its brewery, and developing a marketable beer.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company is a development stage
company which has a limited and unprofitable operating history, has negative
working capital of $2,818,339, has limited access to capital 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.
Such factors, among others, raise substantial doubt as to the Company's ability
to continue as a going concern.
The Company's management has developed a plan to sell all of the operating
assets of the Company or to pursue contract brewing opportunities in an effort
to improve the cash flows of the Company. Until management's plans are
finalized, the Company intends to use advances from an affiliated brewery's
bridge loans from a proposed investor to help finance activities (see Proposed
Merger note).
As part of the plan, the Company entered into an investment agreement to be
merged with other affiliated companies and convert its stock into shares of a
new publicly traded entity. The Company currently has no source of capital other
than the proposed investor and proceeds derived from the disposition of
unutilized assets (see Proposed Merger note).
F-135
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Building and improvements........................................ $ 1,558,070 $1,558,070
Brewery equipment................................................ 1,495,074 1,495,074
Office furniture and equipment................................... 25,274 25,274
Vehicles......................................................... 21,250 21,250
------------ ------------
3,099,668 3,099,668
Less accumulated depreciation.................................... (300,760) (267,427)
Write down to fair value......................................... (832,241) (832,241)
------------ ------------
$ 1,966,667 $2,000,000
------------ ------------
------------ ------------
SHAREHOLDERS' EQUITY
The Company is authorized to issue 10 million shares of its common stock.
Each share of common stock entitles the holder to one vote. At its discretion,
the Board of Directors may declare dividends on share of common stock, although
the Board does not anticipate paying dividends in the foreseeable future. In
February 1994, the Company received $100,000 from WVI in exchange for 2,391,985
shares of registered 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 unregistered 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 ownership change anticipated by management described in the
Pending Consolidation note, 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 U.S.
Securities Exchange and Commission (SEC). Cash proceeds from this offering, net
of offering expenses of $377,729, aggregated $2,150,271.
NET LOSS PER SHARE
Net loss per common share is calculated based on the weighted average number
of common shares and common share equivalents outstanding during the three month
periods ended March 31, 1997 and 1996. Outstanding options to purchase shares of
the Company's common shares have not been included in the calculations as their
effect would be anti-dilutive.
F-136
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STOCK INCENTIVE AND STOCK GRANT PLANS
During 1994, the Board of Directors established a pool of 250,000 shares of
the Company's common stock for a stock incentive plan for issuance to employees,
consultants, directors, and consultants of the Company pursuant to the exercise
of stock options granted under the plan or stock grants or stock sales.
Administration of the plan, including determination of the number of shares to
be issued, the term of exercise of any option, the option exercise price, and
type of options to be granted, lies with the Board of Directors or a duly
authorized committee of the Board of Directors.
No compensation expense has been recorded as a result of granting any of the
options as all such options were granted with an exercise price equal to the
market price on the date of grant.
Options granted by the Company are expected to be converted to options of
the new company expected to be formed in the consolidation of the Company and
its affiliates at the same conversion rate as the conversion of common stock
discussed in the Pending Consolidation note.
INCOME TAXES
No benefit for income taxes was recognized for the quarters ended March 31,
1997 and 1996 in the accompanying statement of operations as there can be no
assurance that the Company will generate taxable income in the future against
which such benefits could be realized.
At March 31, 1997, the Company had a net operating loss carryforward
aggregating approximately $3 million for federal income tax purposes, which may
be used to offset future taxable income, if any. The annual utilization of this
carryforward may be limited if the Company undergoes the ownership change
anticipated by management (see Pending Consolidation note) or fails to meet
continuity of business requirements defined by the Internal Revenue Code. The
Company's net operating loss carryforwards begin expiring in 2010.
RELATED PARTIES
NATURE OF RELATED PARTIES
The Company's president, Jim Bernau, partially owns and controls Willamette
Valley Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc., and
Nor'Wester Brewing Company, Inc. (Nor'Wester), a microbrewery in Oregon; as well
as WVI. Additionally, Mr. Bernau is the president of each of the following
subsidiaries of WVI: Aviator Ales, Inc. (AAI); MHBC; Bayhawk Ales, Inc. (BAI);
and North Country Brewing Company, Inc. (NCBCI); development stage companies
located in Washington, Colorado and California, respectively. As a result of
certain arrangements between the Company and its affiliates, as well as the
Company president's positions with and/or ownership interests in each of these
companies, inherent conflicts of interest exist with respect to the pricing of
services, the sharing of resources and allocation of the Company president's
time.
RELATED PARTY TRANSACTIONS
The Company purchased management and administrative services from WVI at a
total cost of $14,757 and $26,280 for the three months ended March 31, 1997 and
1996, respectively. WVI contracts for certain of these services under a general
services agreement between WVI and Nor'Wester.
F-137
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
The Company has entered into a Strategic Alliance (the "Alliance") with AAI,
Nor'Wester, BAI, NCBCI, and WVI. Nor'Wester, AAI, MHBC, and BAI are individually
referred to as a "Cooperative Brewer." The purpose of the Alliance is to promote
and support the growth of all of the Alliance members by increasing production
at each Cooperative Brewer's facility and supporting the entry of Nor'Wester
products into new markets. To achieve this goal, each Cooperative Brewer agreed
to cooperatively brew Nor'Wester's products, and to support the entry of these
products into new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. During January, 1997, AAI and MHBC ceased
cooperative brewing of Nor'Wester beers.
During 1995, WVI loaned $800,000 to the Company to fund operations and
purchase capital assets. This loan was not repaid in accordance with its
original terms and the full amount became due and payable during 1996. As a
result of the administrative services purchased from WVI and the loans received
from WVI, the Company has advances and loans payable to affiliates of $1,843,915
at March 31, 1997. Because management expects these advances will eventually be
eliminated when the proposed merger occurs, as discussed in the Pending
Consolidation note, these advances have been classified as current payables to
affiliates at March 31, 1997.
IMPAIRMENT OF ASSETS
Subsequent to December 31, 1996, the Company's management developed a Plan
to sell the operating assets of the Company or to pursue contract brewing
opportunities. 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 the Company's property and equipment at the brewery and
assumption of the facility lease.
PROPOSED MERGER AND INVESTMENT BY UBA
During the quarter ended March 31, 1997, the Company, along with its
affiliates (Nor'Wester, WVI, MHBC and AAI) entered into an investment
agreement with United Breweries of America, Inc. (UBA), an entity controlled
by the UB Group of Bangalore, India. The agreement provides for Nor'Wester,
WVI, AAI, MHBC and BAI to merge into a company to be known as United Craft
Brewers (UCB). This proposed merger will result in the issuance of newly
registered shares of UCB common stock in exchange for shares of Nor'Wester,
WVI and its subsidiaries. The merger and share exchange will require approval
by the Boards of Directors and shareholders of each of the entities.
Following the merger, all shareholders in the Nor'Wester /WVI alliance will
hold shares in UCB, a company which is intended to be listed for trading on
the NASDAQ National Market system under the symbol ALES. 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.................................................................... 1.00000:1
WVI........................................................................... 1.99159:1
AAI........................................................................... 2.98739:1
BAI........................................................................... 1.99159:1
MHBC.......................................................................... 2.98739:1
F-138
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
Following the proposed 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 31, 1997, $1.5 million 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.
All principal and interest related to the bridge loans is secured by the
assets of North Country Joint Venture, the Company's wholly-owned subsidiary,
and by the Company's ownership interest in North Country Joint Venture.
Repayment of all principal and interest is guaranteed personally by the
Company's president.
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, (vi) extension of Nor'Wester's $1 million revolving line of credit
through September 30, 1997 and the lender 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.
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 subsidiaries would own the remaining 45% of UCB.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128") and Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") which are effective for fiscal
years ending after December 15, 1997. The Company believes the implementation of
these statements will not have a material effect on its results of operations or
financial statement disclosures.
RENEGOTATION OF PROPOSED MERGER AND INVESTMENT BY UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and adverse
conditions with 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 the
Proposed Merger note. The re-negotiating will reflect a significantly lower
valuation for the affiliate companies, reduction in the total amount of cash to
be invested by UBA to $5.5 million and a reduction of UBA's percentage ownership
position in UCB to 40% following consolidation. It is anticipated that the $2.75
million bridge loan 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 re-negotiated terms. Failure of the parties to reach
a mutually agreeable re-negotiated investment agreement could lead to a loss of
the bridge loans and the remainder of the UBA investment which would materially
F-139
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
RENEGOTATION OF PROPOSED MERGER AND INVESTMENT BY UBA (CONTINUED)
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.
F-140
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mendocino Brewing Company, Inc.
We have audited the accompanying balance sheets of Mendocino Brewing Company,
Inc., as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the two years ended
December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mendocino Brewing Company,
Inc., as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the two years ended December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has significant costs associated with the
construction of its new brewery and other debt that will become due in 1997.
While the Company is presently pursuing various strategies, it does not have any
current commitments for additional capital or financing to meet the payment
demands, if made. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Moss Adams LLP
Santa Rosa, California
January 31, 1997, except for Note 2,
as to which the date is March 31, 1997
F-141
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 494,800 $ 1,696,100
Accounts receivable 317,400 458,900
Inventories 380,500 256,200
Prepaid expenses 58,600 47,100
Refundable income taxes 71,900 -
Deferred income taxes 23,100 15,500
------------- -----------
Total current assets 1,346,300 2,473,800
------------- -----------
PROPERTY AND EQUIPMENT 9,270,300 3,954,100
------------- -----------
OTHER ASSETS
Label development costs, net of amortization 17,400 15,100
Deferred stock offering costs 202,000 11,400
Deposits and other assets 304,100 59,600
Deferred income taxes 4,500 -
------------- -----------
528,000 86,100
------------- -----------
Total assets $ 11,144,600 $ 6,514,000
------------- -----------
------------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
F-142
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEETS (CONTINUED)
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 600,000 $ -
Accounts payable 567,600 105,700
Accrued wages and related expense 118,200 129,800
Accrued construction costs 744,500 1,182,300
Accrued liabilities 16,100 22,300
Accrued profit sharing - 30,000
Income taxes payable - 34,200
Current maturities of long-term debt 2,765,400 10,400
Current maturities of obligation under capital lease 151,300 -
------------- ------------
Total current liabilities 4,963,100 1,514,700
LONG-TERM DEBT, less current maturities - 554,900
OBLIGATION UNDER CAPITAL LEASE, less
current maturities 1,863,000 -
DEFERRED INCOME TAXES 18,100 20,200
------------- ------------
Total liabilities 6,844,200 2,089,800
------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with aggregate
liquidation preference of $227,600; 227,600 shares
authorized, issued and outstanding 227,600 227,600
Common stock, no par value; 20,000,000 shares authorized,
2,322,222 shares issued and outstanding 3,869,600 3,869,600
Retained earnings 203,200 327,000
------------- ------------
Total stockholders' equity 4,300,400 4,424,200
------------- ------------
Total liabilities and stockholders' equity $ 11,144,600 $ 6,514,000
------------- ------------
------------- ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
F-143
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
SALES
$ 4,004,700 $ 3,735,100
LESS EXCISE TAXES 165,000 168,600
------------ ----------
NET SALES
3,839,700 3,566,500
COST OF GOODS SOLD 1,909,700 1,846,500
------------ ----------
GROSS PROFIT 1,930,000 1,720,000
------------ ----------
OPERATING EXPENSES
Retail Operating 738,200 649,200
Marketing 682,300 277,800
General and administrative 681,900 610,300
------------ ----------
2,102,400 1,537,300
------------ ----------
INCOME (LOSS) FROM OPERATIONS (172,400) 182,700
------------ ----------
OTHER INCOME (EXPENSE)
Interest income 11,600 132,800
Other income (expense) (41,200) 14,800
Interest expense - (3,700)
------------ ----------
(29,600) 143,900
------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES (202,000) 326,600
PROVISION FOR (BENEFIT FROM) INCOME TAXES (78,200) 152,900
------------ ----------
NET INCOME (LOSS) $ (123,800) $ 173,700
------------ -----------
------------ -----------
EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.08
------------ ----------
------------ ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,322,222 2,307,074
------------ ----------
------------ ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
F-144
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
SERIES A
PREFERRED STOCK COMMON STOCK
----------------------- ------------------------ RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
-------- ---------- --------- ------------ ---------- ------------
Balance, December 31, 1994 227,600 $ 227,600 2,220,445 $ 3,342,400 $ 153,300 $ 3,723,300
Issuance of common stock - - 101,777 527,200 - 527,200
Net income - - - - 173,700 173,700
-------- ---------- --------- ------------ ---------- ------------
Balance, December 31, 1995 227,600 227,600 2,322,222 3,869,600 327,000 4,424,200
Net loss - - - - (123,800) (123,800)
-------- ---------- --------- ------------ ---------- ------------
Balance, December 31, 1996 227,600 $ 227,600 2,322,222 $ 3,869,600 $ 203,200 $ 4,300,400
-------- ---------- --------- ------------ ---------- ------------
-------- ---------- --------- ------------ ---------- ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
F-145
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (123,800) $ 173,700
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 51,900 49,300
Loss (gain) on sale of assets (3,600) 500
Deferred income taxes (14,200) 20,600
Changes in:
Accounts receivable 141,500 (165,000)
Inventories (124,300) (54,200)
Prepaid expenses (11,500) (33,600)
Refundable income taxes (71,900) -
Accounts payable 461,900 (39,000)
Accrued wages and related expense (11,600) 45,600
Accrued liabilities (6,200) 1,700
Accrued profit sharing (30,000) (15,000)
Income taxes payable
(34,200) 21,800
---------- ------------
Net cash provided by operating activities 224,000 6,400
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (4,817,500) (2,923,300)
Other assets (255,600) (16,400)
Proceeds from sale of fixed assets 10,300 500
---------- ------------
Net cash used by investing activities (5,062,800) (2,939,200)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 600,000 -
Borrowings on long term debt 2,502,800 -
Principal payments on long-term debt (302,800) (11,700)
Reimbursement from obligation under capital lease 1,523,800 -
Payments on obligation under capital lease (57,900) -
Accrued construction costs (437,800) 1,182,300
Proceeds from sale of common stock - 568,900
Deferred stock offering costs (190,600) (11,400)
---------- ------------
Net cash provided by financing activities 3,637,500 1,728,100
---------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,201,300) (1,204,700)
CASH AND CASH EQUIVALENTS, beginning of year 1,696,100 2,900,800
---------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 494,800 $ 1,696,100
---------- ------------
---------- ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
F-146
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS - Mendocino Brewing Company, located in Hopland,
California, operates a microbrewery producing beer and malt beverages for the
specialty beer market, and a brew pub and gift store. The majority of sales are
in California.
INVENTORIES - Inventories are stated at the lower-of-average cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated or amortized using straight-line and accelerated methods over the
assets' estimated useful lives. Capitalized interest was $214,900 and $15,200 in
1996 and 1995, respectively. Costs of maintenance and repairs are charged to
expense as incurred; significant renewals and betterments are capitalized.
Estimated useful lives are as follows:
Machinery and equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Leasehold improvements 7 - 30 years
AMORTIZATION - Label development costs are amortized on the straight-line method
over a one-year period.
DEFERRED STOCK OFFERING COSTS - Deferred stock offering costs consist of legal
and other costs incurred as part of the Company's public offering of common
stock.
DEPOSITS AND OTHER ASSETS - Deposits and other assets consist primarily of
refundable deposits on the planned acquisition of brewing equipment during 1997.
CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject
the Company to credit risk consist principally of trade receivables and
interest-bearing deposits in excess of FDIC limits. The Company's
interest-bearing deposits are placed with major financial institutions.
Wholesale distributors account for substantially all accounts receivable;
therefore, this concentration risk is limited due to the number of distributors
and state laws regulating the financial affairs of distributors of alcoholic
beverages.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes", which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under FAS 109, the Company is allowed to currently
recognize future tax deductions of expenses previously recorded for financial
reporting purposes.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
current maturity of three months or less to be cash equivalents.
EARNINGS PER SHARE - Earnings per share were computed by dividing net income by
the weighted average number of common shares outstanding. There were no common
stock equivalents.
- --------------------------------------------------------------------------------
F-147
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. The amounts
estimated could differ from actual results.
ADVERTISING - Advertising costs are expensed as incurred. Advertising expenses
for the years ended December 31, 1996 and 1995, were $93,900 and $42,000,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Long-term debt: Based on the borrowing rates currently available to the Company
for loans with similar terms and average maturities, the fair value of long-term
debt approximates cost.
ACCRUED CONSTRUCTION COSTS - Accrued construction costs consist of expenses
incurred for the construction of the new brewery including equipment.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1995
financial statements to conform to the 1996 presentation.
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLANS
In September 1995, the Company began construction of its new brewery with an
expected completion date of mid-1996. The brewery was to be paid by a
combination of financing and the proceeds from the Company's initial public
stock offering. At the outset of construction, the projected total cost of the
project, including land, building, equipment and other costs, was $9,200,000.
The project is nearing completion, with the expectation that the Company will
begin brewing and selling beer in April 1997. However, due to a change
increasing the size and capacity of the brewery, cost overruns, and time delays,
the cost rose to an expected total of $11,400,000. The project is being paid for
and financed as follows:
- - $3,300,000 proceeds from the initial stock offering
- - $2,700,000 construction loan to bank. The bank has provided a commitment
letter to convert the debt to permanent financing.
- - $2,100,000 in equipment financing as a capital lease
- - $800,000 to an individual for the acquisition of land. The current balance
of $262,600 is due in September 1997.
- - $600,000 bank line of credit secured by accounts receivable and inventory,
maturing April 1997.
- - $900,000 to the general contractor.
- --------------------------------------------------------------------------------
F-148
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLANS (CONTINUED)
- - $550,000 of estimated remaining costs are associated with Phase II of the
project and are expected to be deferred until funds are available to pay
for this work
- - $136,000 from funds collected from the current stock offering through March
31, 1997
- - $314,000 balance is due to the general contractor and other vendors with no
current source of funding other than future operations
While the Company is pursuing various strategies, as outlined below, it does not
have any current commitments for additional capital or financing to meet the
payment demands of the obligations due in 1997, if those demands are made.
Management's plans to meet these obligations include the following strategies:
- - Sales are expected to increase substantially with the opening of the
brewery resulting in positive cash flow from operations
- - Increase efforts to attract investors to its current public stock offering
- - Negotiate extensions of due dates for debt due in 1997
- - Actively pursue other sources of equity or debt financing through the
identification of a strategic alliance or joint venture partner
If management is unsuccessful in fully realizing its plans, there may be
uncertainty about the Company's ability to continue as a going concern. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE 3 - INVENTORIES
1996 1995
---------- -----------
Raw Materials $ 121,800 $ 91,400
Work-in-process 81,700 89,500
Finished goods 139,800 37,200
Merchandise 37,200 38,100
---------- -----------
$ 380,500 $ 256,200
---------- -----------
---------- -----------
- --------------------------------------------------------------------------------
F-149
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
1996 1995
------------ -----------
Construction in progress $ 5,719,600 $ 921,700
Equipment in progress 2,573,600 2,031,800
Land 810,900 810,900
Machinery and equipment 557,500 537,900
Leasehold improvements 129,000 129,000
Furniture and fixtures 19,800 19,800
------------ -----------
9,810,400 4,451,100
Less accumulated depreciation and amortization 540,100 497,000
------------ -----------
$ 9,270,300 $ 3,954,100
------------ -----------
------------ -----------
NOTE 5 - LINE OF CREDIT
The Company has available a $600,000 line of credit with interest at the bank's
index rate plus 1.5%. The bank's commitment under the line of credit matures
April 1997. The agreement is secured by accounts receivable and inventory.
NOTE 6 - LONG-TERM DEBT
1996 1995
------------ -----------
Note payable (construction loan) to bank, with interest at the
banks interest rate plus 2%; maturing June 1997; secured by
substantially all of the Company's assets $ 2,202,800 $ -
Note payable to contractor, with interest at 12%; due the later
of January 31, 1997 or 30 days after completion of the
brewery; secured by common stock and a second deed of trust
on the brewery and subordinated to bank debt 300,000 -
Note payable to an individual, due in monthly payments of
$2,380, including interest at 9%; maturing June 1997, with
a balloon payment of $260,500; secured by real property and
subordinated to bank debt 262,600 489,100
- --------------------------------------------------------------------------------
F-150
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (CONTINUED)
1996 1995
----------- ----------
Note payable to an individual, due in full December 1998, including
accrued interest at 9%, secured by real property - 76,200
----------- ----------
2,765,400 565,300
Less current maturities 2,765,400 10,400
----------- ----------
$ - $ 554,900
----------- ----------
----------- ----------
NOTE 7 - OBLIGATION UNDER CAPITAL LEASE
During the year the Company entered into a capital lease agreement with a
financial institution for the assets related to the brewing equipment in
progress. The total assets under the capital lease are $2,073,000. The agreement
is secured by the new brewery equipment.
Future minimum lease payments for equipment under this capital lease agreement
are as follows:
Year Ending December 31,
------------------------
1997 $ 346,600
1998 378,100
1999 378,100
2000 378,100
2001 378,100
Thereafter 1,280,400
------------
3,139,400
Less amounts representing interest 1,125,100
------------
Present value of minimum lease payments 2,014,300
Less current maturities 151,300
------------
$ 1,863,000
------------
------------
- --------------------------------------------------------------------------------
F-151
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 8 - PROFIT-SHARING PLAN
The Company has a profit-sharing retirement plan under which it may make
employer contributions at the discretion of the Board of Directors, although no
such contributions are required. Employer contributions vest over a period of
six years. The plan covers substantially all full-time employees meeting certain
minimum age and service requirements. Contributions were $0 and $30,000 for the
years ended December 31, 1996 and 1995, respectively.
NOTE 9 - COMMITMENTS
The Company leases its facilities under a noncancellable operating lease
expiring August 2004. The monthly lease payment is $2,068, to be adjusted
annually by increases in the Consumer Price Index, as defined in the lease
agreement. Additionally, the Company leases certain equipment under a
noncancellable operating lease which expires in 1997. Total rent expense was
$50,700 and $34,000 for the years ended December 31, 1996 and 1995,
respectively. Future minimum lease payments are as follows:
Year Ending December 31,
------------------------
1997 $ 26,800
1998 24,800
1999 24,800
2000 24,800
2001 24,800
Thereafter 66,100
----------
$ 192,100
----------
----------
EMPLOYMENT AGREEMENTS - Five key employees have employment agreements that
provide, in part, a minimum annual base salary; stock options (see Note 12); and
severance benefits that include 18 to 36 months of salary continuance and, if
severance occurs within one year of a change in control, as defined, a lump sum
benefit of from $250,000 to $500,000.
The aggregate annual base salary for the five key employees is $317,100. The
total lump sum benefit the Company is obligated to pay in the event of a defined
change in control is $1,750,000.
KEG MANAGEMENT AGREEMENT - In January 1997, the Company entered into a keg
management agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar provides half-barrel kegs for which the Company pays a filling fee.
The agreement is effective April 1, 1997, for a five year period. Mendocino
Brewing Company has the option to terminate the agreement with 30 days notice.
If terminated, the Company is required to purchase a certain number of kegs from
MicroStar.
- --------------------------------------------------------------------------------
F-152
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 10 - BREWERY CONSTRUCTION
In late 1995, the Company began construction of it's new brewery in Ukiah,
California. At this time, the total cost of the brewery including land, building
and equipment is estimated to be $11.4 million. Funding for the brewery is from
a combination of proceeds from the stock sale, private party financing for the
land, bank financing for the building and a capital lease for the equipment.
Test brewing is expected to begin in April.
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON STOCK
Before January 1, 1994, the Company conducted business in the form of a limited
partnership. On January 3, 1994, the Company issued 1,722,222 shares of no-par
value common stock to the partnership in exchange for the assets of the
partnership. The partnership distributed the stock to its partners on January 3,
1994. Also during 1994, the Company began selling, in a public offering, shares
of no-par value common stock. As of December 31, 1995, 600,000 shares of stock
had been sold at $6 per share for total gross proceeds of $3,600,000. These
proceeds were reduced by $286,700 of offering costs. All shares of stock
authorized to sell in the first public offering have been issued.
Subsequent to December 31, 1996, the Company began offering an additional
600,000 shares of stock for sale in a second offering.
PREFERRED STOCK
The Company has authorized 2,000,000 shares of preferred stock, of which 227,600
have been designated as Series A. At the time of the incorporation of the
partnership, the Company issued 227,600 shares of non-voting, no-par value
Series A Preferred Stock in exchange for partnership assets. The partnership
distributed the Series A Preferred Stock to it's partners on January 3, 1994.
Series A shareholders are entitled to receive cash dividends and/or liquidation
proceeds equal in the aggregate to $1.00 per share before any cash dividends are
paid on the Common Shares or any other series of Preferred Shares. When the
entire Series A dividend/liquidation proceeds have been paid, the Series A
Shares shall automatically be canceled and cease to be outstanding.
NOTE 12 - STOCK OPTION PLAN
Under the 1994 Stock Option Plan, the Company may issue options to purchase up
to 200,000 shares of the Company's Common Stock. The plan provides for both
incentive stock options, as defined in Section 422 of the Internal Revenue Code,
and options that do not qualify as incentive stock options. The Plan shall
terminate upon the earlier of (a) the tenth anniversary of its adoption by the
Board or (b) the date on which all shares are available for issuance under the
Plan have been issued.
The exercise price of incentive options must be no less then the fair-market
value of such stock at the date the option is granted, while the exercise price
of nonstatutory options will be no less than 85% of the fair-market value per
share on the date of grant. With respect to options granted to a person
possessing more than 10% of the combined voting power of all classes of the
Company's stock, the exercise price will be no less than 110% of the fair-market
value of such share at the grant date. As of December 31, 1996, no options had
been granted, exercised, or canceled under the Plan.
- --------------------------------------------------------------------------------
F-153
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTION PLAN (CONTINUED)
In January 1997, the Company granted 70,000 options to five key employees
ranging in price from $8.38 to $9.21 per share. The options become exercisable
at 20% a year and expire between five and ten years. The Company also granted an
option to the Company's president to purchase 12,500 shares at $8.80. The option
expires in 2002.
NOTE 13 - INCOME TAXES
1996 1995
---------- ----------
Current
Federal $ - $ 103,700
State 800 28,600
Benefit of net operating loss carryback (64,800) -
---------- ----------
(64,000) 132,300
---------- ----------
Deferred
Current (7,600) (3,700)
Non-current (6,600) 24,300
---------- ----------
(14,200) 20,600
---------- ----------
$ (78,200) $ 152,900
---------- ----------
---------- ----------
The difference between the actual income tax provision and the tax provision
computed by applying the statutory federal income tax rate to earnings before
taxes is attributable to the following:
1996 1995
---------- ----------
Income tax provision (benefit) at 34% $ (68,700) $ 105,300
State taxes 800 28,100
Adjustment due to lower federal rates 5,000 (1,100)
Recognition of future tax (deductions) (15,300) 20,600
---------- ----------
$ (78,200) $ 152,900
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
F-154
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
1996 1995
---------- ----------
Inventories $ 3,200 $ 3,000
Accruals 21,700 13,700
Other (1,800) (1,200)
---------- ----------
Current deferred tax asset $ 23,100 $ 15,500
---------- ----------
---------- ----------
Depreciation and amortization $ (2,900) $ -
Benefit of net operating loss carryforward 7,400 -
---------- ----------
Non-current deferred tax asset $ 4,500 -
---------- ----------
---------- ----------
Depreciation and amortization $ 25,300 $ 21,000
Other (7,200) (800)
---------- ----------
Non-current deferred tax liability $ 18,100 $ 20,200
---------- ----------
---------- ----------
At December 31, 1996, the Company has available for carryforward approximately
$85,000 of California net operating losses that expire in 2011. The benefit from
this loss carryforward has been recorded, resulting in a deferred tax asset. A
valuation allowance is not provided since the Company believes it is more likely
than not that the loss carryforwards will be utilized.
NOTE 14 - SEGMENT INFORMATION
The Company's business segments are brewing operations and a retail
establishment known as the Hopland Brewery. A summary of each segment is as
follows:
YEAR ENDING DECEMBER 31, 1996
--------------------------------------------------------
BREWING HOPLAND CORPORATE
OPERATIONS BREWERY AND OTHER TOTAL
------------ ----------- ------------ ------------
Sales $ 3,067,300 $ 937,400 $ - $ 4,004,700
Operating profits 591,100 (81,600) - 509,500
Identifiable assets 9,873,600 97,900 1,173,100 11,144,600
Depreciation and amortization 26,200 7,800 17,900 51,900
Capital expenditures 5,339,800 - 19,500 5,359,300
- --------------------------------------------------------------------------------
F-155
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
YEAR ENDING DECEMBER 31, 1995
---------------------------------------------------------
BREWING HOPLAND CORPORATE
OPERATIONS BREWERY AND OTHER TOTAL
------------ ---------- ---------- -------------
Sales $ 2,775,500 $ 959,600 $ - $ 3,735,100
Operating profits 758,400 34,600 - 793,000
Identifiable assets 4,633,900 109,500 1,770,600 6,514,000
Depreciation and amortization 30,700 8,300 10,300 49,300
Capital expenditures 3,655,900 25,500 3,900 3,685,300
NOTE 15 - STATEMENT OF CASH FLOWS
Supplemental cash flow information includes the following:
1996 1995
---------- ----------
Cash paid during the year for:
Interest $ 180,400 $ 18,900
Income taxes $ 60,700 $ 113,500
Non-cash investing and financing activities for the year ended December 31,
1996, consisted of a note payable that was refinanced, and acquiring fixed
assets of $548,500 through a capital lease.
NOTE 16 - MAJOR CUSTOMERS
Sales to the top five customers totaled $1,788,900 and $1,941,000 for the years
ended December 31, 1996 and 1995, respectively representing 58% and 70% of
brewing operation sales.
- --------------------------------------------------------------------------------
F-156
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents...................................................... $ 290,523
Accounts receivable............................................................ 386,825
Inventories.................................................................... 261,434
Prepaid expenses............................................................... 20,361
Refundable income taxes........................................................ 71,900
Deferred income taxes.......................................................... 23,100
----------
Total Current Assets:...................................................... 1,054,143
----------
Property and Equipment......................................................... 10,674,128
----------
Other Assets
Label development costs, net of amortization................................... 11,605
Deferred offering costs........................................................ 317,222
Deposits and other assets...................................................... 290,100
Deferred income taxes.......................................................... 4,500
----------
Total Other Assets:........................................................ 623,427
----------
Total Assets:.............................................................. $12,351,698
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit................................................................. $ 600,000
Accounts payable............................................................... 728,072
Accrued wages and related expense.............................................. 126,314
Accrued construction costs..................................................... 1,048,901
Accrued liabilities............................................................ 29,795
Notes payable.................................................................. 3,326,757
Current maturities of obligation under capital lease........................... 172,739
----------
Total Current Liabilities:................................................. 6,032,578
Long term debt--less current maturities........................................ 1,988,047
Deferred income taxes.......................................................... 18,100
----------
Total Liabilities:......................................................... 8,038,725
Stockholders' Equity
Common stock, no par value; 20,000,000 shares authorized; 2,338,218 shares
issued and outstanding....................................................... 4,005,532
Preferred stock, 2,000,000 shares authorized, 227,600 of which are designated
Series A, no par value, with aggregate liquidation preference of $227,600;
227,600 Series A shares issued and outstanding............................... 227,600
Retained earnings.............................................................. 79,841
----------
Total Stockholders' Equity:................................................ 4,312,973
----------
Total Liabilities and Stockholders' Equity:................................ $12,351,698
----------
----------
The accompanying notes are an integral part of these financial statements
F-157
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
--------------------------
1997 1996
------------ ------------
Sales................................................................................. $ 1,051,487 $ 683,945
Less excise taxes..................................................................... 46,914 52,911
------------ ------------
Net sales............................................................................. 1,004,573 631,034
Cost of goods sold.................................................................... 576,240 324,739
------------ ------------
Gross profit.......................................................................... 428,333 306,295
------------ ------------
Operating expenses
Retail operating.................................................................... 165,844 180,203
Marketing and distribution.......................................................... 203,235 92,990
General and administrative.......................................................... 188,940 156,338
------------ ------------
558,019 429,531
------------ ------------
Loss from operations.................................................................. (129,686) (123,236)
Other income (expense)
Interest income..................................................................... 2,146 10,550
Other income (expense).............................................................. 5,260 669
Interest expense.................................................................... (150)
------------ ------------
7,256 11,219
------------ ------------
Loss before income taxes.............................................................. (122,430) (112,017)
Provision for income taxes............................................................ 800 800
------------ ------------
Net Loss.............................................................................. $ (123,230) $ (112,817)
------------ ------------
------------ ------------
Loss per share........................................................................ $ (0.05) $ (0.05)
------------ ------------
------------ ------------
Weighted average common shares outstanding............................................ 2,329,783 2,322,222
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-158
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................................... $ (123,230) $ (112,817)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization................................................... 15,395 11,250
Changes in:
Accounts receivable............................................................. 9,353 208,803
Inventories..................................................................... 119,068 (192,455)
Prepaid expenses and taxes...................................................... (26,621) (5,247)
Accounts payable................................................................ 160,514 32,450
Accrued wages and related expense............................................... 8,046 (31,496)
Accrued liabilities............................................................. 13,692 2,318
Income taxes payable............................................................ -- (34,200)
------------- -------------
Net cash provided (used) by operating activities:................................. 176,217 (121,394)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold improvements...................... (1,413,459) (1,254,225)
Deposits and other assets......................................................... -- (23,736)
------------- -------------
Net cash used by investing activities: (1,413,459) (1,277,961)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing............................................ 561,393 400,000
Principal payments on long-term debt.............................................. -- (2,316)
Proceeds from obligation under capital lease...................................... 182,671 --
Payments on obligation under long-term lease...................................... (36,158) --
Accrued construction costs........................................................ 304,432 (117,961)
Proceeds from sale of common stock................................................ 135,963 --
Deferred stock offering costs..................................................... (115,264) --
------------- -------------
Net cash provided by financing activities:........................................ 1,033,037 226,656
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS............................................... (204,205) (1,172,699)
CASH AND CASH EQUIVALENTS, beginning of period...................................... 494,728 1,696,109
------------- -------------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 290,523 $ 523,410
------------- -------------
------------- -------------
Supplemental cash flow information includes the following:
Cash paid during the period for
Interest........................................................................ $ 133,254 $ 10,988
Income taxes.................................................................... $ -- $ 52,500
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-159
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. It is believed, however, that the disclosures are adequate to make
the information presented not misleading.
The financial statements, in the opinion of management, reflect all
adjustments necessary to fairly state the financial position and the results of
operations. These results are not necessarily to be considered indicative of the
results for the entire year.
2. GOING CONCERN AND MANAGEMENT'S PLANS
In September 1995, the Company began construction of its new brewery with an
expected completion date of mid-1996. The brewery was to be paid by a
combination of financing and the proceeds from the Company's initial public
stock offering. At the outset of construction, the projected total cost of the
project, including land, building, equipment and other costs, was $9,200,000.
The project is nearing completion, and the Company began brewing and selling
beer in May 1997. However, due to a change increasing the size and capacity of
the brewery, cost overruns, and time delays, the cost rose to an expected total
of $12,000,000. The project is being paid for and financed as follows:
- $3,300,000 proceeds from the initial stock offering
- $2,700,000 construction loan to bank. The bank has provided a commitment
letter to convert the debt to permanent financing.
- $1,800,000 in equipment financing as a capital lease
- $800,000 to an individual for the acquisition of land. The current balance
of $261,000 is due in June 1997.
- $600,000 bank line of credit secured by accounts receivable and inventory,
maturing in August 1997.
- $900,000 to the general contractor, due 30 days after completion of the
project
- $1,639,000 of estimated remaining costs are expected to be provided as a
result of the Company's proposed alliance with The UB Group of Bangalore,
India
On May 2, 1997, the Company signed a letter of intent with The UB Group of
Bangalore, India for an alliance and possible merger, at which time the UB Group
paid the Company a $250,000 refundable deposit secured by shares of Company
stock pledged by the Company's Chief Executive Officer and Chief Financial
Officer. If the Company fails to consummate an alliance with The UB Group, there
may be uncertainty about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
F-160
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SHORT-TERM BORROWING
The Company has a $600,000 term line of credit from a bank with variable
interest at the bank's index rate plus 1.5%, maturing August 31, 1997. The
note is secured by receivables and inventory. The seller of the Company's
Ukiah land has a note, secured by a third priority deed of trust on the land,
with a remaining principal balance as of March 31, 1997 of approximately
$261,000 at 9% annual interest payable in monthly installments of principal
and interest of $2,380 with the balance due at maturity on June 27, 1997.
4. RENEGOTIATION OF LONG-TERM DEBT
In June 1997 the Company renegotiated its capital lease to retroactively
reduce the amount of the lease commitment from approximately $2.1 million to
$1.8 million. The excess of lease payments previously paid over the recalculated
lease payments has been credited against future payments.
5. DIRECT PUBLIC OFFERING
On November 6, 1996, the Company filed a registration statement with the
Securities and Exchange Commission to sell 600,000 shares of its no par value
common stock at a proposed offering price of $8.50 per share. As of March 31,
1997, the Company had received and accepted subscriptions for 15,996 shares
($135,966). The Company suspended the offering in May 1997 in light of the
letter of intent with The UB Group as discussed at Note 2 above.
F-161
ANNEX A
[INVESTMENT AGREEMENT]
A-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT AGREEMENT
DATED JANUARY 30, 1997
BY AND AMONG
NOR'WESTER BREWING COMPANY, INC.
NORTH COUNTRY JOINT VENTURE, LLC
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
AND VARIOUS SUBSIDIARIES
JAMES W. BERNAU
AND
UNITED BREWERIES OF AMERICA, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
------
I. DEFINITIONS................................................................1
II. THE PURCHASE AND TRANSFER OF EQUITY SECURITIES..........................9
2.1 Purchase and Transfer of Equity Securities.......................10
2.2 Closing..........................................................10
2.3 Legends..........................................................11
2.4 Additional Agreements............................................11
III. REPRESENTATIONS AND WARRANTIES OF THE CONSTITUENT
CORPORATIONS AND BERNAU................................................11
3.1 Authorized and Outstanding Shares of Capital Stock...............11
3.2 Authorization and Issuance of Equity Securities..................12
3.3 Securities Laws..................................................13
3.4 Corporate Existence; Compliance with Law.........................13
3.5 Subsidiaries.....................................................13
3.6 Corporate Power; Authorization; Enforceable Obligations..........13
3.7 Financial Statements.............................................14
3.8 Projections......................................................15
3.9 Ownership of Property............................................16
3.10 Material Contracts...............................................17
3.11 Environmental Protection.........................................17
3.12 Labor Matters....................................................18
3.13 Other Ventures...................................................18
3.14 Taxes............................................................19
3.15 No Litigation....................................................19
3.16 Brokers..........................................................20
3.17 Employment and Labor Agreements..................................20
3.18 Patents, Trademarks, Copyrights and Licenses.....................20
3.19 Full Disclosure..................................................20
3.20 No Material Adverse Effect.......................................21
3.21 ERISA............................................................23
3.22 Registration Rights..............................................24
3.23 Liquor Consents and Permits......................................25
3.24 SEC Documents....................................................25
3.25 Major Customers and Suppliers....................................25
3.26 Acquisitions; Capital Expenditures...............................25
3.27 Related Party Transactions.......................................26
3.28 Title of Transfer Shares.........................................26
3.29 Manipulation.....................................................26
3.30 Consent..........................................................26
3.31 No Conflict......................................................26
IV. PURCHASER'S REPRESENTATIONS AND WARRANTIES.............................27
4.1 Corporate Existence..............................................27
4.2 Investment Intention.............................................27
4.3 Investment Experience............................................27
4.4 Access to Information............................................27
i
Page
------
4.5 Corporate Power; Authorization; Enforceable Obligations..........27
V. PRE-CLOSING COVENANTS.....................................................28
5.1 Operation of Business............................................28
5.2 Agreements.......................................................30
5.3 Notification.....................................................30
5.4 No Inconsistent Action...........................................31
5.5 No Solicitation..................................................31
5.6 Financial Statements.............................................31
5.7 Access to Information Concerning Properties and Records..........31
5.8 Consents, Filings and Satisfaction of Conditions.................32
5.9 Consolidation; Stockholder Meeting; Proxy
Materials; Registration Statement................................32
5.10 Related Party Transactions.......................................33
5.11 Restriction on Transfer Shares...................................33
5.12 Restriction on Borrowings by Bernau..............................34
VI. CONDITIONS PRECEDENT....................................................34
6.1 Conditions of Purchaser with respect to the Closing..............34
6.2 Conditions of UCB with respect to the Closing....................37
VII. ADDITIONAL COVENANTS....................................................39
7.1 Bridge Loans; Interim Financing..................................39
7.2 Right of First Offer.............................................40
7.3 Percentage Ownership.............................................41
7.4 No Securities Senior to Common Stock.............................41
7.5 Permitted Acquisitions or Investments............................41
7.6 Sales of Assets..................................................41
7.7 Books and Records................................................42
7.8 Financial and Other Information..................................42
7.9 Communication with Accountants...................................43
7.10 Tax Compliance...................................................43
7.11 Insurance........................................................44
7.12 Agreements.......................................................44
7.13 Employee Loans...................................................44
7.14 Capital Structure................................................44
7.15 Transactions with Affiliates.....................................45
7.16 Guaranteed Indebtedness..........................................45
7.17 Restricted Payments..............................................45
7.18 Employee Plans...................................................46
7.19 Environmental Matters............................................47
7.20 Maintenance of Existence and Conduct of Business.................47
7.21 Mergers..........................................................47
7.22 Liquidation......................................................48
7.23 Hostile Acquisition..............................................48
7.24 Access to Books and Records......................................48
7.25 Auditors.........................................................48
7.26 Employees........................................................48
7.27 Release of Bernau's Guarantees...................................48
ii
Page
------
7.28 Business Opportunities...........................................49
7.29 Termination of Certain Covenants.................................49
VIII. TERMINATION............................................................49
8.1 Termination......................................................49
IX. INDEMNIFICATION........................................................50
9.1 Indemnification..................................................50
X. MISCELLANEOUS.............................................................52
10.1 Notices..........................................................52
10.2 Binding Effect; Benefits.........................................55
10.3 Amendment........................................................55
10.4 Parties in Interest; Assignment..................................56
10.5 Remedies.........................................................56
10.6 Applicable Law...................................................56
10.7 Section and Other Headings.......................................57
10.8 Severability.....................................................57
10.9 Counterparts.....................................................57
10.10 Nondisclosure of Confidential Information........................57
10.11 Publicity........................................................57
10.12 Entire Agreement.................................................58
10.13 Fees and Expenses................................................58
10.14 Exhibits and Schedules...........................................58
10.15 Construction.....................................................58
iii
SCHEDULES
Schedule
- --------
1.0 - List of WVI Subsidiaries
3.1(a)(1) - Capitalization of Nor'Wester
3.1(a)(2) - Pro Forma Capitalization of Nor'Wester after Consolidation
3.1(b)(1) - Capitalization of WVI and WVI Subsidiaries
3.1(b)(2) - Pro Forma Capitalization of WVI and WVI Subsidiaries after
Consolidation
3.1(c) - List of 5% Stockholders of Constituent Corporations - actual and
pro forma basis
3.1(d) - Consolidation Exchange Ratios
3.5 - Subsidiaries of Constituent Corporations
3.6 - Constituent Corporations' Governmental Filings
3.7 - Financial Statements of Constituent Corporations
3.7(c) - Off-Balance Sheet Liabilities
3.8 - Constituent Corporations' Projections
3.9(a) - Constituent Corporations' Real Property
3.9(b) - Constituent Corporations' Leases
3.9(e) - Constituent Corporations' Consents Required
3.10 - Constituent Corporations' Material Contracts
3.11(c) - Constituent Corporations' Environmental Protection
3.12 - Constituent Corporations' Labor Disputes
3.13 - Constituent Corporations' Joint Ventures
3.14 - Constituent Corporations' Taxes
3.15 - Constituent Corporations' Litigation
3.16 - Constituent Corporations' Broker's Fees
3.17 - Constituent Corporations' Management Contracts
3.18 - Constituent Corporations' Intellectual Property
3.19 - Constituent Corporations' Full Disclosure
3.20 - Constituent Corporations' Absence of Changes or Events
3.21 - Constituent Corporations' Benefit Plans
3.22 - Constituent Corporations' Registration Rights
3.23 - Constituent Corporations' Governmental Approvals
3.25 - Constituent Corporations' Major Customers and Suppliers
3.26 - Constituent Corporations' Acquisitions and Capital Expenditures
3.28 - Bernau's Pledges of Shares
3.30 - Consents required for transfer of Bernau's Shares
3.31 - Conflicts with Transfer of Bernau's Shares
4.5 - Purchaser's Governmental Filings
5.1(b) - Options to be Granted by Constituent Corporations
6.1(l)(i) - Terms of Bernau's Employment Agreement
6.1(n) - Projections regarding Gross Sales and Net Income
7.27 - Bernau Guarantees
iv
EXHIBITS
Exhibit
- -------
2.4(a) - Stockholder's Agreement
2.4(b) - Guaranty
5.9(a)(i) - Form of Certificate of Incorporation for United Craft Brewers,
Inc.
5.9(a)(ii) - Form of Bylaws for United Craft Brewers, Inc.
6.1(a) - Form of opinion of counsel for Bernau and Constituent
Corporations
6.2(h) - Form of opinion of Orrick, Herrington & Sutcliffe LLP
v
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (the "Agreement"), dated as of January 30, 1997 by
and among Nor'Wester Brewing Company, Inc. ("Nor'Wester"), North Country
Joint Venture, LLC ("North Country"), Willamette Valley, Inc. Microbreweries
Across America ("WVI") and each of the entities identified in Schedule 1.0
hereto (collectively, the "WVI Subsidiaries"), James W. Bernau ("Bernau") and
United Breweries of America, Inc. (the "Purchaser").
W I T N E S S E T H:
WHEREAS, Nor'Wester, North Country, WVI and the WVI Subsidiaries desire
to consolidate so that each of such companies become a wholly owned
subsidiary of United Craft Brewers, Inc. ("UCB") and the shareholders of each
of such companies become shareholders in UCB (referred to herein as the
"Consolidation").
WHEREAS, Nor'Wester desires, upon the terms and conditions hereinafter
provided, to form UCB for purposes of the Consolidation and cause UCB to
issue and sell to the Purchaser shares of its equity securities;
WHEREAS, Purchaser desires, upon the terms and conditions hereinafter
provided, to purchase from UCB shares of its equity securities; and
WHEREAS, Bernau, on his own behalf and on behalf of UCB, desires to
transfer certain of the shares in UCB he will receive in the Consolidation to
Purchaser in order to, among other things, induce the investment by the
Purchaser contemplated by this Agreement.
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained and intending to be legally bound hereby, it is agreed
as follows:
I. DEFINITIONS
"Affiliate" shall mean, with respect to any Person, (i) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, 5% or more of the Stock having ordinary
voting power in the election of directors of such Person or (ii) each Person
that controls, is controlled by or is under common control with such Person
or any Affiliate of such Person. For the purpose of this definition,
"control" of a Person shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of its
management or policies, whether through the ownership of voting securities,
by contract or otherwise. The term "Affiliated" shall have meanings
correlative to the foregoing.
"Ancillary Agreements" shall mean Bernau's Employment Agreement, the
Production Agreement, the Registration Rights Agreement, the Security
Agreement, the Stockholder's Agreement, the Services Agreement and any other
document or instrument delivered at the Closing in connection therewith.
"Bernau's Employment Agreement" shall have the meaning set forth in
Section 6.1(l)(i).
"Bridge Loans" shall have the meaning set forth in Section 7.1.
"Bridge Loan Shares" shall have the meaning set forth in Section 2.1.
"Business Day" shall mean a day of the year on which banks are not
required or authorized to close in New York City.
"Capital Expenditures" shall mean all payments for any fixed assets or
improvements, or for replacements, substitutions or additions thereto, that
have a useful life of more than one year and which are required to be
capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of any
property (whether real, personal or mixed, by such Person as lessee that, in
accordance with GAAP, either would be required to be classified and accounted
for as a capital lease on a balance sheet of such Person or otherwise be
disclosed as a capital lease in a note to such balance sheet, other than, in
the case of UCB or a Subsidiary of UCB, any such lease under which UCB or
such Subsidiary is the lessor.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in
respect of such Capital Lease or otherwise be disclosed in a note to such
balance sheet.
"Charges" shall mean all federal, state, county, city, municipal, local,
foreign or other governmental (including, without limitation, PBGC) taxes at
the time due and payable, levies, assessments, charges, liens, claims or
encumbrances upon or relating to (i) each of the Constituent Corporations'
employees, payroll, income or gross receipts, (ii) each of the Constituent
Corporations' ownership or use of any of its assets, or (iii) any other
aspect of each of the Constituent Corporations' business.
"Closing" shall have the meaning set forth in Section 2.2.
2
"Closing Date" shall have the meaning set forth in Section 2.2.
"Common Stock" shall initially mean the common stock, $0.001 par value
per share, of UCB and shall thereafter mean any shares of any class or
classes of capital stock resulting from any reclassification or
reclassifications thereof or otherwise issued, which have no preference in
respect of dividends or of amounts payable in the event of voluntary or
involuntary liquidation, dissolution or winding up of UCB and which are not
subject to redemption by UCB.
"Confidential Information" shall have the meaning set forth in Section
10.10.
"Consolidation" shall mean the transactions whereby each of the
Constituent Corporations becomes a wholly-owned subsidiary of UCB, all as
more fully described in Section 5.9 hereof.
"Constituent Corporations" shall mean Nor'Wester, North Country, WVI,
the WVI Subsidiaries and, when formed, UCB collectively and Nor'Wester, North
Country, WVI, the WVI Subsidiaries and, when formed, UCB are each
individually referred to herein as a "Constituent Corporation".
"Diluted Basis" shall mean that, for purposes of calculating ownership
of the Common Stock, all outstanding options, warrants or other rights to
acquire Common Stock or securities convertible or exchangeable into Common
Stock shall be valued using the "treasury stock method" as promulgated by the
SEC. Notwithstanding the foregoing, options to purchase Common Stock to be
granted to Bernau pursuant to the terms of the Bernau Employment Agreement
shall not be considered outstanding for purposes of calculating ownership of
the Common Stock.
"Environmental Laws" shall mean all federal, state and local laws,
statutes, ordinances and regulations, now or hereafter in effect, and in each
case as amended or supplemented from time to time, and any judicial or
administrative interpretation thereof, including any applicable judicial or
administrative order, consent decree or judgment, relative to the applicable
property, relating to the regulation and protection of human health, safety,
the environment and natural resources (including, without limitation, ambient
air, surface water, groundwater, wetlands, land surface or subsurface strata,
wildlife, aquatic species and vegetation). Environmental Laws include but
are not limited to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended (42 U.S.C. Section 9601 ET SEQ.)
("CERCLA"); the Hazardous Material Transportation Act, as amended (49 U.S.C.
Section 1801 ET SEQ.); the Federal Insecticide, Fungicide, and Rodenticide
Act, as amended (7 U.S.C. Section 136 ET SEQ.); the Resource Conservation and
Recovery Act, as amended (42 U.S.C. Section 6901 ET SEQ.) ("RCRA"); the Toxic
Substance Control Act, as amended (15 U.S.C. Section 2601 ET SEQ.); the Clean
Air Act, as amended
3
(42 U.S.C. Section 649 ET SEQ.); the Federal Water Pollution Control Act, as
amended (33 U.S.C. Section 1251 ET SEQ.); the Occupational Safety and Health
Act, as amended (29 U.S.C. Section 651 ET SEQ.) ("OSHA"); and the Safe
Drinking Water Act, as amended (42 U.S.C. Section 3001 ET SEQ.), and all
analogous state and local counterparts or equivalents and any transfer of
ownership, notification or approval statutes.
"Environmental Liabilities and Costs" shall mean all liabilities,
obligations, responsibilities, remedial actions, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all fees, disbursements and expenses of
counsel, experts and consultants and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of
any claim, suit, action or demand by any person or entity, whether based in
contract, tort, implied or express warranty, strict liability, criminal or
civil statute or common law (including, without limitation, any thereof
arising under any Environmental Law, permit, order or agreement with any
Governmental Authority) and which relate to any health or safety condition
regulated under any Environmental Law or in connection with any other
environmental matter or release or disposal of any Hazardous Substance or the
presence of a hazardous substance or threatened release or disposal of any
Hazardous Substance.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
(or any successor legislation thereto), as amended from time to time and any
regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to the Constituent
Corporations, any trade or business (whether or not incorporated) under
common control with any Constituent Corporation and which, together with any
Constituent Corporation, are treated as a single employer within the meaning
of Section 414(b), (c), (m) or (o) of the IRC.
"Existing Advance" shall have the meaning set forth in Section 7.1.
"Financials" shall mean the financial statements referred to in Section
3.7 hereof.
"Fiscal Year" shall mean the calendar year. Subsequent changes of the
fiscal year of any of the Constituent Corporations shall not change the term
"Fiscal Year," unless the Purchaser shall consent in writing to such changes.
"Fully Diluted Basis" shall mean that, for purposes of calculating
ownership of the Common Stock, all outstanding options, warrants or other
rights to acquire Common Stock or securities convertible or exchangeable into
Common Stock shall be assumed to be exercised, converted and exchanged into
the shares of Common Stock into which they, pursuant to their terms, may
4
then or thereafter upon the passage of time be exercised, converted or
exchanged. Notwithstanding the foregoing, options to purchase Common Stock
to be granted to Bernau pursuant to the terms of the Bernau Employment
Agreement shall not be considered outstanding for purposes of calculating
ownership of the Common Stock.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as in effect from time to time.
"Group" shall mean any Group as defined by Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act.
"Guaranteed Indebtedness" shall mean, as to any Person, any obligation
of such Person guaranteeing any indebtedness, lease, dividend, or other
obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner including, without limitation, any obligation or
arrangement of such Person (a) to purchase or repurchase any such primary
obligation, (b) to advance or supply funds (i) for the purchase or payment of
any such primary obligation or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet condition of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect
thereof.
"Guaranty" shall have the meaning set forth in Section 2.4(b).
"Hazardous Material" shall mean any substance, chemical, compound,
product, solid, gas, liquid, waste, byproduct, pollutant, contaminant or
material which is hazardous or toxic, and includes, without limitation, (a)
asbestos, polychlorinated biphenyls and petroleum (including crude oil or any
fraction thereof) and (b) any such material classified or regulated as
"hazardous" or "toxic" pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1966, 42 U.S.C. Sections 8591 ET SEQ.,
Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42
U.S.C. Sections 6901 ET SEQ., Federal Water Pollution Control Act, as amended
by the Clean Water Act of 1977, 33 U.S.C. Sections 1251 ET SEQ., Clean Air
Act of 1966, as amended, 42 U.S.C. Sections 6491 ET SEQ., Toxic Substances
Control Act of 1976, 15 U.S.C. Sections 2601 ET SEQ., or Hazardous Materials
Transportation Act, 49 U.S.C. App. Sections 1801 ET SEQ.
"Indebtedness" of any Person shall mean (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services (including, without limitation, reimbursement and all other
obligations with respect to surety
5
bonds, letters of credit and bankers' acceptances, whether or not matured,
but not including obligations to trade creditors incurred in the ordinary
course of business), (ii) all indebtedness created or arising under any
conditional sale or other title retention agreements with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), (iv) all Capital Lease Obligations,
(v) all Guaranteed Indebtedness, (vi) all Indebtedness referred to in clause
(i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien upon or in property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person
has not assumed or become liable for the payment of such Indebtedness and
(vii) all liabilities under Title IV of ERISA.
"Initial Loan" shall have the meaning set forth in Section 7.1.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and any
successor thereto.
"IRS" shall mean the Internal Revenue Service, or any successor thereto.
"Kingfisher Brands" shall mean the Kingfisher, Sun Lager and Taj Mahal
beer brands.
"Lien" shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any lease or title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing,
and the filing of, or agreement to give, any financing statement perfecting a
security interest under the Uniform Commercial Code or comparable law of any
jurisdiction).
"Material Adverse Effect" shall mean a material adverse effect on the
business, assets, operations, prospects or financial or other condition of
the Constituent Corporations taken as a whole.
"Material Contracts" shall mean (i) all of each Constituent
Corporation's contracts, agreements, leases or other instruments to which
each Constituent Corporation is a party or by which each Constituent
Corporation or its properties are bound, which involves payments by or to
such Constituent Corporation of more than $25,000 or which extends for a term
of more than a year from the date hereof, (ii) all of each Constituent
Corporation's loan agreements, bank lines of credit agreements, indentures,
6
mortgages, deeds of trust, pledge and security agreements, factoring
agreements, conditional sales contracts, letters of credit or other debt
instruments, (iii) all operating or capital leases for equipment to which
each Constituent Corporation is a party which involves payments by or to such
Constituent Corporation of more than $25,000, (iv) all noncompetition and
similar agreements to which each Constituent Corporation is a party, (v) all
guarantees by each Constituent Corporation, (vi) all contracts and agreements
between each Constituent Corporation and the wholesalers of its respective
products and (vii) all other contracts, oral or written, that each
Constituent Corporation considers to be material to the business, assets,
operations, prospects or financial or other condition of such Constituent
Corporation taken as a whole.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which any Constituent Corporation or any
ERISA Affiliate is making, is obligated to make, has made or been obligated
to make, contributions on behalf of participants who are or were employed by
any of them.
"Nor'Wester" shall mean Nor'Wester Brewing Company, Inc. an Oregon
corporation.
"North Country" shall mean North Country Joint Venture, LLC, a limited
liability corporation organized under the laws of the state of Oregon.
"Notice" shall have the meaning set forth in Section 7.2(b)(i).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"Pension Plan" shall mean an employee pension benefit plan, as defined
in Section (3)(2) of ERISA (other than a Multiemployer Plan), which is not an
individual account plan, as defined in Section 3(34) of ERISA, and which any
Constituent Corporation, or, if a Title IV Plan, any ERISA Affiliate
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any of them.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department
thereof).
"Plan" shall mean, with respect to any Constituent Corporation or any
ERISA Affiliate, at any time, an employee benefit plan, as defined in Section
3(3) of ERISA, which any such
7
Constituent Corporation maintains, contributes to or has an obligation to
contribute to on behalf of participants who are or were employed by any of
them.
"Production Agreement" shall have the meaning set forth in Section
6.1(l)(ii).
"Projections" shall mean the projections referred to in Section 3.8
hereof.
"Purchase Shares" shall have the meaning set forth in Section 2.1 hereof.
"Qualified Plan" shall mean an employee pension benefit plan, as defined
in Section 3(2) of ERISA, which is intended to be tax-qualified under Section
401(a) of the IRC, and which any Constituent Corporation or any ERISA
Affiliate maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by any of them.
"Registration Rights Agreement" shall have the meaning set forth in
Section 6.1(l)(iii).
"Representatives" shall have the meaning set forth in Section 10.10.
"Restricted Payment" shall mean (i) the declaration or payment of any
dividend or the occurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of UCB's Stock or
(ii) any payment on account of the purchase, redemption or other retirement
of UCB's Stock or any other payment or distribution made in respect of any
Stock of UCB, either directly or indirectly.
"Retiree Welfare Plan" shall refer to any Welfare Plan providing for
continuing coverage or benefits for any participant or any beneficiary of a
participant after such participant's termination of employment, other than
continuation coverage provided pursuant to Section 4980B of the IRC and at
the sole expense of the participant or the beneficiary of the participant.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 3.24.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Security Agreement" shall have the meaning set forth in Section
6.1(l)(iv).
8
"Services Agreement" shall have the meaning set forth in Section
6.1(l)(v).
"Stockholder's Agreement" shall have the meaning set forth in Section
2.4(a).
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests, rights, participations or other equivalents
(regardless of how designated) of or in a corporation, partnership or
equivalent entity whether voting or nonvoting, including, without limitation,
common stock, preferred stock, or any other "equity security" (as such term
is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by
the SEC under the Securities Exchange Act).
"Subsidiary" shall mean, with respect to any Person, (a) any corporation
of which an aggregate of more than 50% of the outstanding Stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether, at the time, Stock of any other class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person and/or one or more
Subsidiaries of such Person, and (b) any partnership or other entity in which
such Person and/or one or more Subsidiaries of such Person shall have an
interest (whether in the form of voting or participation in profits or
capital contribution) of more than 50%.
"Title IV Plan" shall mean a Pension Plan, other than a Multiemployer
Plan, which is covered by Title IV of ERISA.
"Transactions" shall have the meaning set forth in Section 3.6.
"Transfer Shares" shall have the meaning set forth in Section 2.1.
"UCB" shall mean United Craft Brewers, Inc., a Delaware corporation
formed for the purpose of being the holding company resulting from the
Consolidation whose Subsidiaries consist of the Constituent Corporations.
"Withdrawal Liability" shall mean, at any time, the aggregate amount of
the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase
in contributions pursuant to Section 4243 of ERISA with respect to all
Multiemployer Plans.
"WVI Subsidiaries" shall mean each of the entities identified in
Schedule 1.0 hereto.
II. THE PURCHASE AND TRANSFER OF EQUITY SECURITIES
9
2.1 PURCHASE AND TRANSFER OF EQUITY SECURITIES. Subject to the terms
and conditions set forth in this Agreement, (i) the Purchaser agrees to
subscribe for and purchase from UCB, and Nor'Wester agrees to cause UCB to
issue and sell to the Purchaser, 2,237,681 shares of Common Stock, equal to
17.19% of UCB's outstanding Common Stock on a Diluted Basis after giving
effect to the Consolidation, for $5,882,653 (the "Purchase Shares") and
2,497,184 shares of Common Stock, equal to 19.18% of UCB's outstanding Common
Stock on a Diluted Basis after giving effect to the Consolidation, upon the
automatic conversion of the Bridge Loans (the "Bridge Loan Shares"), and (ii)
Bernau agrees to transfer to Purchaser 1,124,195 shares of Common Stock,
equal to 8.63% of UCB's outstanding Common Stock on a Diluted Basis after
giving effect to the Consolidation (the "Transfer Shares") in consideration
for (a) forestalling any potential lawsuits from current shareholders of the
Constituent Corporations and thus supporting the financial viability of UCB
on an ongoing basis, (b) inducing the investment by the Purchaser
contemplated by this Agreement, thus protecting Bernau's investment in the
Constituent Corporations, and (c) protecting Bernau's goodwill and general
business reputation, all as more fully described in Section 2.2 hereof.
After giving effect to the Consolidation, the Purchase Shares, the Bridge
Loan Shares and the Transfer Shares shall collectively total 45% of the
outstanding Common Stock of UCB on a Diluted Basis.
2.2 CLOSING. The closing of the purchase and sale and transfer of the
Common Stock described in Section 2.1 (the "Closing") shall take place at the
offices of Orrick, Herrington & Sutcliffe LLP, Old Federal Reserve Bank
Building, 400 Sansome Street, San Francisco, California 94111, commencing at
9:30 a.m. local time on a date within five Business Days following the last
special meeting of shareholders of the Constituent Corporations at which
approval by the shareholders of the Constituent Corporations of this
Agreement, the Consolidation and the transactions contemplated hereby and
thereby is duly obtained or as soon thereafter is practicable or such other
date as Nor'Wester and the Purchaser may mutually determine (the "Closing
Date").
On the Closing Date, (i) Bernau shall deliver to the Purchaser
certificates representing the Transfer Shares to be transferred to the
Purchaser registered in the Purchaser's name (subject to the requirements of
Section 10.4) and in such denominations as the Purchaser requests and (ii)
Nor'Wester shall cause UCB to deliver to the Purchaser certificates
representing the Purchase Shares and the Bridge Loan Shares, registered in
the Purchaser's name (subject to the requirements of Section 10.4) and in
such denominations as the Purchaser requests against delivery by the
Purchaser of the purchase price therefor consisting of (a) a certified or
bank check in the name of UCB in the amount of $5,882,653 and (b) the
automatic conversion of $2.75 million of indebtedness pursuant to the Bridge
Loans.
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2.3 LEGENDS. Each certificate representing the shares acquired by the
Purchaser at the Closing shall bear a legend substantially in the following
form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 ("THE ACT"). THESE SECURITIES MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED UNLESS THE COMPANY'S TRANSFER AGENT RECEIVES
EVIDENCE SATISFACTORY TO IT THAT SUCH SALE, PLEDGE OR TRANSFER
COMPLIES WITH THE REQUIREMENTS OF EACH SUBSECTION OF RULE 144 UNDER
THE ACT, OTHER THAN SUBSECTION (D) OF SUCH RULE."
The legend described in this Section 2.3 shall be removed promptly, and UCB
shall issue to the Purchaser a new certificate for any of the shares acquired
by the Purchaser at the Closing (or pursuant to Section 7.2), that have been
sold in a sale registered under the Securities Act and with respect to which
a prospectus meeting the requirements of Section 10 of the Securities Act is
available or with respect to which Purchaser has provided to UCB an opinion
of counsel, satisfactory in the reasonable judgment of UCB, that the public
sale, transfer or assignment thereof may be made without registration under
the Securities Act.
2.4 ADDITIONAL AGREEMENTS. On the date hereof, (a) Bernau
simultaneously herewith delivers to the Purchaser the Stockholder's Agreement
between Bernau and the Purchaser dated the date of this Agreement and duly
executed by Bernau, a copy of which is attached hereto as Exhibit 2.4(a) (the
Stockholder's Agreement); and (b) Purchaser simultaneously herewith delivers
to Nor'Wester a Guaranty from UB International Ltd. to each of the
Constituent Corporations dated the date of this Agreement and duly executed
by UB International Ltd., a copy of which is attached hereto as Exhibit
2.4(b) (the "Guaranty").
III. REPRESENTATIONS AND WARRANTIES OF THE CONSTITUENT CORPORATIONS AND
BERNAU.
With regard to Sections 3.1 through 3.27, each Constituent Corporation
and Bernau, jointly and severally, make, and with regard to Sections 3.28
through 3.31, Bernau only makes, the following representations and warranties
to the Purchaser, each and all of which shall survive the execution and
delivery of this Agreement and the Closing hereunder:
3.1 AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK. The authorized
capital stock of Nor'Wester consists of 10,000,000 shares of Common Stock, no
par value per share, and 15,000,000 shares of Preferred Stock, no par value
per share. Schedules 3.1(a)(1) and (2) set forth the number of shares of
11
Common Stock and Preferred Stock of Nor'Wester authorized and outstanding and
subject to options, respectively, as of the date hereof. Schedules 3.1(b)(1)
and (2) set forth the number of shares of Common Stock and Preferred Stock of
WVI, North Country and each of the WVI Subsidiaries that is authorized and
outstanding and subject to options, respectively, as of the date hereof. All
of the issued and outstanding shares are, and as of the Closing Date will be,
validly issued, fully paid and non-assessable. A list of all of the holders
who beneficially own in excess of five percent (5%) of the outstanding shares
of Common Stock and Preferred Stock of each of the Constituent Corporations,
indicating the number of shares of Common Stock and Preferred Stock,
respectively, owned by each such holder on the date hereof and to be owned by
each such holder after the Consolidation, is set forth on Schedule 3.1(c).
Schedule 3.1(d) sets forth the ratio at which existing shares and options of
each Constituent Corporation will be converted into shares of UCB in
connection with the Consolidation and sets forth the number of shares of
Common Stock of UCB to be outstanding and the percentage ownership on a
Diluted Basis of the stockholders thereof. Except as set forth on Schedules
3.1(a)(2) and 3.1(b)(2), (i) there is no existing option, warrant, call,
commitment or other agreement to which any Constituent Corporation is a party
requiring, and there are no convertible securities of any Constituent
Corporation outstanding which upon conversion would require, the issuance of
any additional share of Stock of any Constituent Corporation or other
securities convertible into shares of equity securities of any Constituent
Corporation, and (ii) there are no agreements to which any Constituent
Corporation is a party or, to the best knowledge of any Constituent
Corporation, to which such Constituent Corporation is not a party, in each
case, among, between or with any of the stockholders of any Constituent
Corporation with respect to the voting or transfer of the Stock of the
Constituent Corporations or with respect to any other aspect of any
Constituent Corporation's affairs. Schedules 3.1(a)(2) and 3.1(b)(2) set
forth complete, correct and accurate statements of the option terms, exercise
price and identity of the optionee with respect to each outstanding stock
option or other stock incentive of each of the Constituent Corporations.
There are no stockholders' preemptive rights or rights of first refusal or
other similar rights with respect to the issuance of Stock by any Constituent
Corporation, other than pursuant to this Agreement.
3.2 AUTHORIZATION AND ISSUANCE OF EQUITY SECURITIES. Nor'Wester and
Bernau shall take all necessary corporate action to cause, and shall cause,
UCB to take all necessary corporate action to duly authorize the issuance of
the Common Stock hereunder. Upon delivery to the Purchaser of certificates
therefor against payment in accordance with the terms hereof, the Common
Stock to be issued to the Purchaser hereunder will be validly issued and
fully paid and nonassessable, free and clear of all Liens and preemptive
rights. The Purchase Shares and the Bridge Loan Shares to be issued to the
Purchaser by UCB, together with the Transfer Shares to be transferred to the
Purchaser by Bernau, on the Closing will collectively represent 45.00000% of
the outstanding shares of Common Stock of UCB on a Diluted Basis
12
after giving effect to the Consolidation. Upon Closing, Bernau will
beneficially own 10.000005% of the outstanding shares of Common Stock of UCB
on a Diluted Basis after giving effect to the Consolidation and except as set
forth in Bernau's Employment Agreement, Bernau will have no options, warrants
or other rights to acquire the Common Stock or other Stock of UCB.
3.3 SECURITIES LAWS. In reliance on the investment representations
contained in Section 4.1, the offer, issuance, sale and delivery of the
Common Stock, as provided in this Agreement, are exempt from the registration
requirements of the Securities Act and all applicable state securities laws,
and are otherwise in compliance with such laws. Neither the Constituent
Corporations, Bernau nor any Person acting on their behalf has taken or will
take any action (including, without limitation, any offering of any
securities of the Constituent Corporations under circumstances which would
require the integration of such offering with the offering of the Common
Stock hereunder under the Securities Act) which might subject the offering,
issuance or sale of the Common Stock hereunder to the registration and
prospectus delivery requirements of Section 5 of the Securities Act.
3.4 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each Constituent
Corporation (i) is a corporation duly organized, validly existing and, to the
extent a Delaware corporation, in good standing under the laws of the state
of its organization; (ii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership or
lease of property or the conduct of its business requires such qualification
(except for jurisdictions in which such failure to so qualify or to be in
good standing would not have a Material Adverse Effect); (iii) has the
requisite corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the
property it operates under lease, and to conduct its business as now,
heretofore and proposed to be conducted; (iv) has all material licenses,
permits, consents or approvals from or by, and has made all material filings
with, and has given all material notices to, all governmental authorities
having jurisdiction or other Persons, to the extent required for such
ownership, operation and conduct; (v) is in compliance with its certificate
or articles of incorporation and by-laws; and (vi) is in material compliance
with all applicable provisions of law.
3.5 SUBSIDIARIES. Except as set forth in Schedule 3.5, there exist no
subsidiaries of any of the Constituent Corporations.
3.6 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by each of the Constituent Corporations
of this Agreement, the Ancillary Agreements to which it is a party, the
Consolidation, and all instruments and documents to be delivered by each
Constituent
13
Corporation, to the extent it is a party thereto, hereunder and thereunder,
and the consummation of the other transactions contemplated by any of the
foregoing (collectively referred to as the "Transactions"): (i) are within
each Constituent Corporations corporate power; (ii) have been duly authorized
by all necessary or proper corporate action on the part of each Constituent
Corporation (except for shareholder approval); (iii) are not in contravention
of any provision of each Constituent Corporation's articles of incorporation
or by-laws; (iv) will not violate any law or regulation, or any order or
decree of any court or governmental instrumentality; (v) will not conflict
with or result in the breach or termination of, constitute a default under or
accelerate any performance required by, any indenture, mortgage, deed of
trust, lease, agreement or other instrument to which each Constituent
Corporation is a party or by which each Constituent Corporation or any of its
respective property is bound; (vi) will not result in the creation or
imposition of any Lien upon any of the property of the Consolidated
Corporation; and (vii) except for the filings described on Schedule 3.6
hereto, do not require the consent or approval of, or any filing with, any
governmental authority or any other Person. This Agreement has been duly
executed and delivered by each Constituent Corporation and constitutes a
legal, valid and binding obligation of each Constituent Corporation,
enforceable against it in accordance with its terms. This Agreement has
been, and as of their respective dates and at the Closing Date each of the
Ancillary Agreements shall have been, duly executed and delivered by the
Constituent Corporations, and each is or shall then (as appropriate)
constitute a legal, valid and binding obligation of each Constituent
Corporation to the extent it is a party thereto, enforceable against it in
accordance with its terms. Bernau has full right, power and authority to
enter into the Transactions and the execution, delivery and performance by
Bernau of the Transactions will not result in a breach or violation by Bernau
of any of the terms or provisions of, or constitute a default by Bernau
under, any indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or instrument to
which Bernau is a party or by which Bernau or any of his properties is bound,
any statute, or any judgment, decree, order, rule or regulation of any court
or governmental agency or body applicable to Bernau or any of his properties.
3.7 FINANCIAL STATEMENTS.
(a) The pro forma balance sheet of the Constituent Corporations on
a consolidated basis as of September 30, 1996, a copy of which has been
furnished to Purchaser prior to the date of this Agreement, has been prepared
in accordance with GAAP and is based on the unaudited balance sheet of the
Constituent Corporations as of September 30, 1996, adjusted for the
Consolidation and as if the purchase and transfer of the Common Stock
contemplated hereby had occurred as at the date of such balance sheet and
presents fairly on a pro forma basis the
14
position of the Constituent Corporations on a consolidated basis at such date
assuming the events specified in this paragraph had actually occurred on such
date.
(b) All of the following balance sheets and statements of income
and retained earnings of each Constituent Corporation, copies of which are
attached hereto as Schedule 3.7, have been, except as noted therein, prepared
in conformity with GAAP consistently applied throughout the periods involved
and present fairly the financial position of each Constituent Corporation in
each case as the dates thereof, and the results of operations and cash flows
for the periods then ended (and as to the unaudited interim financial
statements, subject to normal year-end audit adjustments not material in
amount):
(i) the unaudited balance sheet of each Constituent
Corporation as at September 30, 1996, and the related statements of
income, retained earnings and cash flows for the nine months ending
on such date; and
(ii) the audited balance sheets of each Constituent
Corporation as at December 31, 1995, as at December 31, 1994 and as
at December 31, 1993, and the related statements of income, retained
earnings and cash flows for the year then ended, with the opinion
thereon of Price Waterhouse LLP.
(c) Except as set forth in Schedule 3.7(c), each Constituent
Corporation has no obligations, contingent or otherwise, including, without
limitation, liabilities for charges, long-term leases or unusual forward or
long-term commitments which are not reflected in the balance sheets of each
Constituent Corporation, other than those that are both incurred in the
ordinary course of business and are immaterial in amount.
3.8 PROJECTIONS. The projections of the Constituent Corporation's, on
a consolidated basis, annual operating budgets, balance sheets and cash flow
statements for the fiscal years ending on December 31, 1996, 1997, and 1998
(the "Projections"), attached hereto as Schedule 3.8, disclose all material
assumptions made in formulating such Projections. To the knowledge of Bernau
and each Constituent Corporation no facts will exist which should result in
any material change in any of such Projections. The Projections will be
based upon reasonable estimates and assumptions, all of which Bernau and each
Constituent Corporation in good faith will believe to be reasonable and fair
in light of current conditions, will be prepared on the basis of the
assumptions stated therein, and will reflect the good faith estimate of each
Constituent Corporation of the results of operations and other information
projected therein.
15
3.9 OWNERSHIP OF PROPERTY.
(a) Each Constituent Corporation owns good and marketable fee
simple title to all of the real estate described on Schedule 3.9(a) hereto
(subject to only those Liens disclosed on such Schedule 3.9(a)) and good,
valid and marketable leasehold interests in the leases described in Schedule
3.9(b) hereto, and good and marketable title to, or valid leasehold interests
in, all of its other properties and assets.
(b) All real property owned, leased, used or occupied by each
Constituent Corporation is set forth on Schedule 3.9(a) and 3.9(b),
respectively. The Constituent Corporations do not own any other real
property and are not a lessee or lessor under any leases, or a licensee or
licensor of real property, other than set forth therein. Each of such leases
is valid and enforceable in accordance with its terms and is in full force
and effect. Each Constituent Corporation has delivered to the Purchaser true
and complete copies of each of such leases set forth on Schedule 3.9(b) and
all documents affecting the rights or obligations of each Constituent
Corporation, including, without limitation, any non-disturbance and
recognition agreements, subordination agreements, attornment agreements and
agreements regarding the term or rental of any of the leases. Neither the
Constituent Corporation nor any other party to any such lease is in default
of its obligations thereunder or has delivered or received any notice of
default under any such lease, nor has any event occurred which, with the
giving of notice, the passage of time or both, would constitute a default
under any such lease.
(c) Except as disclosed on Schedule 3.9(b), each Constituent
Corporation is not obligated under or a party to, any option, right of first
refusal or any other contractual right to purchase, acquire, sell, assign or
dispose of any real property owned or leased by each Constituent Corporation.
(d) All real estate and improvements owned, leased, used or
occupied by each Constituent Corporation have adequate connections to all
necessary utilities and conform with all applicable zoning, building,
subdivision and other requirements of any governmental authority and all
restrictive covenants affecting such real estate and improvements except any
such failures to confirm that, singly or in the aggregate, would not have a
Material Adverse Effect. To the knowledge of each Constituent Corporation,
there are no presently pending or contemplated special tax assessment,
condemnation proceedings or nuisance claims affecting such real estate and
improvements.
(e) Except as set forth in Schedule 3.9(e), the consummation of
the Transactions, including the Closing, do not require the consent of any
lessor or licensor of any real property leased, licensed or used by each
Constituent Corporation.
16
3.10 MATERIAL CONTRACTS. Schedule 3.10 contains a true, correct and
complete list and description of all Material Contracts, whether oral or
written, and any amendments or supplements thereto or extensions thereof, and
each Constituent Corporation has made available to the Purchaser for its
review complete, current and accurate copies of each Material Contract
including any amendments or supplements thereto or extensions thereof or has
completely, currently and accurately described the terms of any oral
agreement, amendment, supplement or extension. Each Material Contract is a
valid and binding agreement of the Constituent Corporation enforceable
against such Constituent Corporation in accordance with its terms, and such
Constituent Corporation does not have any knowledge that any Material
Contract is not a valid and binding agreement against the other parties
thereto. Each Constituent Corporation has fulfilled all obligations required
pursuant to each Material Contract to have been performed by such Constituent
Corporation on its part. Each Constituent Corporation is not in default or
breach, nor to such Constituent Corporation's knowledge is any third party in
default or breach, under or with respect to any Material Contract.
3.11 ENVIRONMENTAL PROTECTION.
(a) Each Constituent Corporation and all real property owned,
leased or otherwise operated by each Constituent Corporation (each, a
"Facility") comply in material respects with any applicable Environmental Law;
(b) Each Constituent Corporation has all permits and
authorizations necessary from any government authorities for its operations
and the Facilities by any applicable Environmental Law;
(c) Except as set forth in Schedule 3.11(c), each Constituent
Corporation has not, and has no knowledge of any other person who has, caused
any release, threatened release or disposal of any Hazardous Material at any
Facility in any material quantity, and, to the knowledge of each Constituent
Corporation, the Facilities are not adversely affected by any release,
threatened release or disposal of a Hazardous Material originating or
emanating from any other property;
(d) Each Constituent Corporation has generated, treated, stored
or disposed of all Hazardous Materials in full compliance with applicable
Environmental Laws, except such non-compliances which in the aggregate have
no reasonable likelihood of having a Material Adverse Effect;
(e) Each Constituent Corporation has obtained and is in full
compliance with and in good standing under all permits required under
Environmental Laws, and the Consolidated Corporation has no knowledge of any
proceedings to substantially modify or to revoke any such permit, other than
those permits, the failure of which to obtain or have in effect, in the
17
aggregate, would have no reasonable likelihood of having a Material Adverse
Effect;
(f) There are no investigations; judicial or administrative
proceedings, pending litigation or, to each Constituent Corporation's
knowledge, threatened investigations, proceedings or litigation affecting or
relating to each Constituent Corporation or the Facilities relating to
Environmental Laws or Hazardous Materials.
(g) The Constituent Corporations have not received any
communication or notice (including, without limitation, requests for
information) indicating the potential of Environmental Liabilities and Costs
against any of the Constituent Corporations or the Facilities;
(h) Each Constituent Corporation has provided to the Purchaser or
made available to the Purchaser all environmental records, documents,
correspondence, analytical results, manifests, permits or other records
concerning the potential of Environmental Liabilities and Costs against any
Constituent Corporation or the Facilities that any Constituent Corporation
possesses.
3.12 LABOR MATTERS. There are no strikes or other labor disputes
against any Constituent Corporation pending or, to any Constituent
Corporation's knowledge, threatened. Hours worked by and payments made to
employees of each Constituent Corporation have not been in violation of the
Fair Labor Standards Act or any other applicable law dealing with such
matters. All payments due from each Constituent Corporation on account of
employee health and welfare insurance have been paid or accrued as a
liability on the books of such Constituent Corporation. None of the
Constituent Corporations have any obligation under any collective bargaining
agreement or similar agreement. There is no organizing activity involving
any Constituent Corporation pending or, to any Constituent Corporation's
knowledge, threatened by any labor union or group of employees. There are no
representation proceedings pending or threatened with the National Labor
Relations Board, and no labor organization or group of employees of any
Constituent Corporation has made a pending demand for recognition. Except as
set forth in Schedule 3.12, there are no complaints or charges against any
Constituent Corporation pending or, to any Constituent Corporation's
knowledge, threatened to be filed with any federal, state, local or foreign
court, governmental agency or arbitrator based on, arising out of, in
connection with, or otherwise relating to the employment or termination of
employment by any Constituent Corporation of any individual.
3.13 OTHER VENTURES. Except as set forth in Schedule 3.13, each
Constituent Corporation is not engaged in any joint venture or partnership
with any other Person.
18
3.14 TAXES. All federal, state, local and foreign tax returns, reports
and statements required to be filed by each Constituent Corporation have been
filed with the appropriate governmental authority and are complete and
accurate. Except as set forth on Schedule 3.14, all Charges and other
impositions shown thereon to be due and payable or required to be shown
thereon have been paid prior to the date on which any fine, penalty,
interest, late charge may be added thereto for nonpayment thereof, or any
such fine, penalty, interest, late charge or loss has been paid. Proper and
accurate amounts have been withheld by each Constituent Corporation from its
employees for all periods in full and complete compliance with the tax,
social security and unemployment withholding provisions of applicable
federal, state, local and foreign law and such withholdings have been timely
paid to the respective governmental agencies. None of the Constituent
Corporations have executed or filed with the IRS or any other governmental
authority any agreement or other document extending, or having the effect of
extending, the period for assessment or collection of any Charges. None of
the Constituent Corporations have filed a consent pursuant to IRC Section
341(f) or agreed to have IRC Section 341(f)(2) apply to any dispositions of
subsection (f) assets (as such term is defined in IRC Section 341(f)(4)).
None of the property owned by any Constituent Corporation is property which
any Constituent Corporation is required to treat as being owned by any other
Person pursuant to the provisions of IRC Section 168 (f)(8) of the Internal
Revenue Code of 1954, as amended, and in effect immediately prior to the
enactment of the Tax Reform Act of 1986 or is "tax-exempt use property"
within the meaning of IRC Section 168(h). None of the Constituent
Corporations have agreed or have been requested to make any adjustment under
IRC Section 481(a) by reason of a change in accounting method or otherwise.
None of the Constituent Corporations have any obligation under any written
tax sharing agreement. There are no Liens for or in respect of taxes upon
any assets of any Constituent Corporation, other than with respect to taxes
not yet due and payable. None of the Constituent Corporations have agreed to
indemnify any other party with respect to such party's tax liabilities. Each
of the Constituent Corporations does not now, and has never, filed federal,
state, local or foreign income tax returns on a consolidated, unitary or
other similar basis with one or more corporations, except with another
Constituent Corporation.
3.15 NO LITIGATION. Except as disclosed on Schedule 3.15, no action,
claim or proceeding is now pending or, to the knowledge of each Constituent
Corporation, threatened against such Constituent Corporation, at law, in
equity or otherwise, before any court, board, commission, agency or
instrumentality of any federal, state, or local government or of any agency
or subdivision thereof, or before any arbitrator or panel of arbitrators, nor
to the knowledge of each Constituent Corporation does a state of facts exist
which is reasonably likely to give rise to such proceedings.
19
3.16 BROKERS. Except as set forth on Schedule 3.16 and other than
Needham & Company, Inc. and Black & Company, no broker or finder acting on
behalf of any Constituent Corporation brought about the consummation of the
transactions contemplated pursuant to this Agreement, and none of the
Constituent Corporations have an obligation to any Person, in respect of any
finder's or brokerage fees in connection with the transaction contemplated by
this Agreement. Nor'Wester and WVI are solely responsible for the payment of
all fees and expenses of Needham & Company, Inc., Black & Company and any
other brokers or finders acting on behalf or at the request of any
Constituent Corporation.
3.17 EMPLOYMENT AND LABOR AGREEMENTS. Except as set forth on Schedule
3.17, there are no employment, consulting or management agreements covering
management of any Constituent Corporation and there are no collective
bargaining agreements or other labor agreements covering any employees of any
Constituent Corporation.
3.18 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Each Constituent
Corporation owns all licenses, patents, patent applications, copyrights,
service marks, trademarks, trademark applications, trade dress, trade
secrets, trade names and other intellectual property rights necessary to
continue to conduct its business as heretofore conducted by it, now conducted
by it and proposed to be conducted by it, including those trademarks listed,
together with Patent and Trademark Office application or registration
numbers, where applicable, or other similar information with respect to
filings made in countries other than the United States, where applicable, on
Schedule 3.18 hereto. Each Constituent Corporation conducts its businesses
without infringement, unfair competition or dilution or claim of
infringement, unfair competition or dilution of any license, patent,
copyright, service mark, trademark, trade name, trade secret or other
intellectual property right of others. To each Constituent Corporation's
knowledge, there is no infringement or claim of infringement by others of any
material license, patent, copyright, service mark, trademark, trade name,
trade dress, trade secret or other intellectual property right of any
Constituent Corporation.
3.19 FULL DISCLOSURE. Except as set forth on Schedule 3.19, no
information contained in this Agreement, the Financials, any Ancillary
Agreement or any schedules thereto prepared by any Constituent Corporation or
its representatives and furnished by or on behalf of any Constituent
Corporation pursuant to the terms of this Agreement, any Ancillary Agreement
or the other Transactions contains any untrue statement of an material fact
or, when taken as a whole, omits to state a material fact necessary to make
the statements contained herein or therein not misleading in light of the
circumstances under which they were made.
20
3.20 NO MATERIAL ADVERSE EFFECT. No event has occurred since September
30, 1996 which has had, or is reasonably likely to have, a Material Adverse
Effect. Since December 31, 1995 or September 30, 1996 except as otherwise
contemplated in this Agreement or as indicated in Schedule 3.20,
(i) Each Constituent Corporation has not sold leased,
transferred or assigned any of its assets, tangible or intangible, other
than for fair consideration in the ordinary course of business
consistent with past practice;
(ii) Each Constituent Corporation has not changed its
accounting methods, principles or practices;
(iii) Each Constituent Corporation has not increased the
compensation payable or to become payable to its officers or key
employees other than in the ordinary course of business consistent with
past practice;
(iv) Each Constituent Corporation has not increased any bonus,
insurance, pension or other employee benefit plan for or with any such
officers or key employees other than in the ordinary course of business
consistent with past practice;
(v) Each Constituent Corporation has not entered into any
agreement, commitment or transaction (including any borrowing, capital
expenditure or capital financing) except in the ordinary course of
business consistent with past practice;
(vi) Except for and between the Constituent Corporations, no
Constituent Corporation has granted or received any license or
sublicense or any rights under or with respect to any license, patent,
copyright, service mark, trademark, trade name, trade secret or other
intellectual property right of such Constituent Corporation;
(vii) Each Constituent Corporation has not declared, set aside
or paid any dividends or made any distribution with respect to its
capital stock (whether in cash or in kind) or redeemed, purchased or
otherwise acquired any of its capital stock;
(viii) Each Constituent Corporation has not experienced any
material damage, destruction or loss (whether or not covered by
insurance) to its property;
(ix) Except for and between the Constituent Corporations, no
Constituent Corporation has made any
21
capital investment in, any loan to, or any acquisition of the securities
or assets of, any other Person;
(x) Except for and between the Constituent Corporations, no
Constituent Corporation has cancelled, compromised, waived or released
any right or claim outside the ordinary course of business consistent
with past practice;
(xi) Each Constituent Corporation has not issued, sold or
otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon
conversion, exchange or exercise) any of its capital stock, other than
pursuant to any currently authorized stock option plans;
(xii) Each Constituent Corporation has not delayed or
postponed the payment of accounts payable or other labilities outside
the ordinary course of business consistent with past practice;
(xiii) Each Constituent Corporation has not incurred or become
subject to any material liability, outside the ordinary course of
business consistent with past practice;
(xiv) Each Constituent Corporation has not discharged or
satisfied any Lien on its properties or assets or, except in the
ordinary course of business consistent with past practice, paid any
material liability;
(xv) Each Constituent Corporation has not mortgaged, pledged
or subjected to any Lien any of its assets or properties except (A)
Liens for taxes not delinquent or for taxes being contested in good
faith by appropriate proceedings and as to which adequate financial
reserves have been established by such Constituent Corporation, and (B)
Liens (other than any Lien imposed by ERISA), created and maintained in
the ordinary course of business that are not material to such
Constituent Corporation in the aggregate, that would not have a Material
Adverse Effect and that would not adversely affect the operation of any
Facility and that constitute (aa) pledges or deposits under worker's
compensation laws, unemployment insurance laws, or similar legislation,
(bb) good faith deposits in connection with bids tenders, contracts or
leases to which such Constituent Corporation is a party for a purpose
other than borrowing money or obtaining credit, (cc) Liens imposed by
law, such as those of carriers, warehousemen and mechanics, payment of
the obligation secured thereby not yet being due, (dd) Liens securing
22
taxes, assessments or other governmental charges or levies not yet
subject to penalties for nonpayment or (ee) pledges or deposits to
secure public or statutory obligations of such Constituent Corporation
or surety, customs or appeal bonds to which such Constituent Corporation
is a party;
(xvi) Each Constituent Corporation has not committed to any of the
foregoing; and
3.21 ERISA.
(a) Each Constituent Corporation has no ERISA Affiliates other
than its Subsidiaries.
(b) Set forth on Schedule 3.21 is a complete and accurate list of
all plans maintained, contributed to or which there has been or currently is
an obligation to contribute to by each Constituent Corporation or any of its
Subsidiaries. Except as indicated otherwise in Schedule 3.21, none of the
Plans is a Pension Plan, Multiemployer Plan, Title IV Plan, Retiree Welfare
Plan or is or has been subject to Sections 4063 or 4064 or ERISA; and neither
each Constituent Corporation nor any Subsidiary has contributed, or been
obligated to contribute, to a Multiemployer Plan or Title IV Plan.
(c) Each of the Qualified Plans and the trust maintained pursuant
thereto are exempt from federal income taxation under Section 501 of the IRC,
and nothing has occurred with respect to the operation of such Qualified
Plans which could cause the loss of such qualifications or exemptions or the
imposition of any liability, penalty or tax under ERISA or the IRC.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any
of the Plans or by law (without regard to any waivers granted under Section
412 of the IRC), to any funds or trusts established thereunder or in
connection therewith have been made by the due date thereof (including any
valid extension), and all contributions for any period ending on or before
the Closing Date which are not yet due will have been paid or accrued on or
prior to the Closing Date.
(e) There is no material violation of ERISA with respect to the
filing of applicable reports, documents and notices regarding he Plans or any
tax-exempt trust related to any of the Plans with the Secretary of Labor and
the Secretary of the Treasury or the furnishing of such documents to the
participants or beneficiaries of the Plans.
(f) True, correct and complete copies of the following documents,
with respect to each of the Plans, have been made available or delivered to
the Purchaser by each Constituent
23
Corporation: (i) current plans and related trust documents, and amendments
thereto; (ii) the most recent Forms 5500, Forms 990, if applicable, and any
Forms 990T, 5329, 5330 that have been filed and any Forms 5558 that have been
filed for reasons other than extensions of time; (iii) the last IRS
determination letter; (iv) current summary plan descriptions; (v) written
communications to employee relating to the Plans, and (vi) written
descriptions of all not-written agreements relating to the Plans.
(g) There are no pending actions, claims or lawsuits which
have been asserted or instituted against the Plans, the assets of any of the
trusts under such Plans or the plan sponsor or the plan administrator, or
against any fiduciary of the Plans with respect to the operation of such
Plans (other than routine benefits claims), nor does each Constituent
Corporation or any of its Subsidiaries have knowledge of facts which could
form the basis for any such claim or lawsuit.
(h) The Plans have been maintained, in all material respects,
in accordance with their terms and with all provisions of ERISA and other
applicable federal and state laws and regulations, and neither each
Constituent Corporation nor any of its Subsidiaries or any "party in
interest" or "disqualified person" with respect to the Plans has engaged in a
"prohibited transaction" within the meaning of Section 4975 of the IRC or
Section 406 of ERISA. No fiduciary has any liability for breach of fiduciary
duty or any other failure to act or comply in connection with the
administration or investment of the assets of any Plan.
(i) Each Constituent Corporation and any of its Subsidiaries
which maintains a "group health plan" within the meaning of Section 5000 (b)
(1) of the IRC has complied with the notice and continuation requirements of
Section 4980B of the IRC, the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended, Part 6 of Subtitle B of Title I of ERISA and the
regulations thereunder and with the requirements of Section 5000 of the Code.
(j) No liability under any Plan has been funded nor has any
such obligation been satisfied with the purchase of a contract from an
insurance company that is not rated AA by Standard & Poor's Corporation and
the equivalent by each other nationally recognized rating agency.
(k) None of the Constituent Corporations nor any of their
Subsidiaries have any contract, plan or commitment, whether legally binding
or not, to create any additional Plan or to modify any existing Plan.
3.22 REGISTRATION RIGHTS. Except as set forth on Schedule 3.22, none of
the Constituent Corporations are under any obligation to register under the
Securities Act any of its
24
presently outstanding securities or any securities which may hereafter be
issued.
3.23 LIQUOR CONSENTS AND PERMITS. Set forth on Schedule 3.23 is a list
of all material licenses, permits, consents or approvals from or by , all
material filings required to be made with, and all material notices required
to be given to, all governmental authorities having jurisdiction, to the
extent required for each Constituent Corporation to own and operate its
properties, to lease the property it operates under lease, and to conduct its
business as now, heretofore and proposed to be conducted.
3.24 SEC DOCUMENTS. Each Constituent Corporation has furnished the
Purchaser with a true and complete copy of the SEC Documents. The SEC
Documents are all the documents (other than preliminary material) that each
Constituent Corporation has been required to file since January 1, 1995. As
of its filing date (and, with respect to any registration statement, the date
on which it or any post-effective amendment was declared effective), each SEC
Document was in compliance, in all material respects, with the applicable
requirements of the Securities Act and the Securities Exchange Act, contained
no untrue statement of a material fact and did not omit any statement of a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of each Constituent Corporation
included in the SEC Documents complied, at the time of filing with the SEC
(and, with respect to any registration statement, at the time it was declared
effective), as to form, in all material respects, with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved
(subject, in the case of the unaudited statements, to the omission of certain
footnotes) and fairly present, in all material respects (subject, in the case
of the unaudited statements, to normal, recurring year-end audit adjustments)
the consolidated financial position of each Constituent Corporation, as
applicable, as of the dates thereof and the consolidated results of their
operations for the periods presented.
3.25 MAJOR CUSTOMERS AND SUPPLIERS. Schedule 3.25 contains a complete
and correct list of the top 10 customers of each Constituent Corporation and
the top vendors or suppliers of each Constituent Corporation, in each case
for the Fiscal Year ended December 31, 1995, in terms of the aggregate dollar
purchases or aggregate dollars sales, as applicable.
3.26 ACQUISITIONS; CAPITAL EXPENDITURES. Except for existing
commitments which have been set forth on Schedule 3.26, none of the
Constituent Corporations has any existing commitments or agreements to
acquire any assets (including under
25
circumstances where such acquisition would be classified as a capital
expenditure under GAAP) or to make any capital expenditure or contribution in
any individual transaction or project where the purchase price, capital
expenditure or contribution required of any Constituent Corporation, directly
or indirectly, exceeds $100,000 or in transactions or projects where the
aggregate purchase price, capital expenditure or contribution exceeds
$200,000.
3.27 RELATED PARTY TRANSACTIONS. Except for loans amongst and between
the Constituent Corporations, all of the related party transactions between
Bernau and any Constituent Corporation and between any Constituent
Corporation and any other Constituent Corporation were made on terms no less
favorable to such Constituent Corporation than could have been obtained from
unaffiliated third parties and, except with respect to transactions involving
Mile High Brewing Company which has no independent directors, were approved
by a majority of the independent directors of any Constituent Corporation
which was a party thereto.
3.28 TITLE OF TRANSFER SHARES. Except as set forth in Schedule 3.28,
Bernau is the lawful owner of the Transfer Shares to be transferred by him
hereunder and upon delivery of such Transfer Shares, as provided herein,
Bernau will convey good and marketable title to such Transfer Shares, free
and clear of all liens, encumbrances, equities and claims whatsoever.
3.29 MANIPULATION. Bernau has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Securities Exchange Act
or otherwise, in stabilization or manipulation of the price of any security
of the Constituent Corporations to facilitate the transfer, sale or resale of
the Transfer Shares and has not effected any sales of shares of Common Stock
which, if effected by any of the Constituent Corporations, would be required
to be disclosed in response to Item 701 of Regulation S-K.
3.30 CONSENT. Except as set forth in Schedule 3.30, no consent,
approval, authorization or order of any court or governmental agency or body
is required for the consummation by Bernau of the transactions contemplated
herein, except such as may have been obtained under the Securities Act and
such as may be required under the blue sky laws of any jurisdiction in
connection with the transfer of the Transfer Shares by Bernau and such other
approvals as have been obtained.
3.31 NO CONFLICT. Except as set forth in Schedule 3.31, neither the
transfer of the Transfer Shares by Bernau nor the consummation of any other
of the transactions herein contemplated by Bernau or the fulfillment of the
terms hereof by Bernau will conflict with, result in a breach or violation
thereof, or constitute a default under any law or the terms of any indenture
26
or other agreement or instrument to which Bernau is a party or bound, or any
judgement, order or decree applicable to Bernau of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over Bernau.
IV. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Purchaser makes the following representations and warranties to the
Constituent Corporation, each and all of which shall survive the execution
and delivery of this Agreement and the Closing hereunder:
4.1 CORPORATE EXISTENCE. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
4.2 INVESTMENT INTENTION. Purchaser is purchasing the shares of Common
Stock specified in Section 2.1 for its own account, for investment purposes
and not with a view to the distribution thereof.
4.3 INVESTMENT EXPERIENCE. Purchaser represents that it is experienced
in evaluating and investing in securities of craft brewing companies in the
growth stage and acknowledges that it is able to fend for itself, can bear
the economic risk of its investment and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits
and risks of the investment in making the Bridge Loans.
4.4 ACCESS TO INFORMATION. In connection with Purchaser's loans to
Nor'Wester pursuant to the Bridge Loans, Purchaser acknowledges that it (a)
is familiar with the craft brewing industry in which the Constituent
Corporations do business, (b) has received all the information it considers
necessary or appropriate for deciding whether to advance monies pursuant to
the Bridge Loans, and (c) has had an opportunity to ask questions and has
received answers from the Constituent Corporations about their respective
businesses and the advances of monies hereunder and to obtain additional
information necessary to verify the accuracy of the information supplied or
to which the Purchaser had access. The foregoing, however, does not limit or
modify the representations and warranties of the Constituent Corporations and
Bernau in Section III of this Agreement. It is understood and agreed that
the Constituent Corporations have agreed to provide the Purchaser with
continuing access to information concerning the Constituent Corporations,
their business, management and financial affairs under Section 5.7 hereunder.
4.5 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by Purchaser of this Agreement, and the
other Transactions to which it is a party and all instruments and documents
to be delivered by Purchaser, to the extent that it is a party thereto,
hereunder and thereunder: (i) are within Purchaser's corporate power; (ii)
27
have been duly authorized by all necessary corporate action on the part of
Purchaser; (iii) are not in contravention of any provision of Purchaser's
articles of incorporation or by-laws; (iv) will not violate any law or
regulation, or any order or decree of any court or government
instrumentality; (v) will not conflict with or result in the breach or
termination of, constitute a default under or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or
other instrument to which Purchaser is a party or by which Purchaser or any
of this property is bound; (vi) will not result in the creation or imposition
of any Lien upon any of the property of Purchaser: and (vii) except for the
filings described on Schedule 4.5 hereto, do not require the consent or
approval of, or any filing with, any governmental authority or any other
Person. This Agreement has been duly executed and delivered by Purchaser and
constitutes a legal, valid and binding obligation of Purchaser, enforceable
against it in accordance with its terms. As of their respective dates and at
the Closing Date, the Ancillary Agreements to which Purchaser is a party
shall have been duly executed and delivered by Purchaser and each is or shall
then (as appropriate) constitute a legal, valid and binding obligation of
Purchaser, enforceable against it in accordance with its terms.
V. PRE-CLOSING COVENANTS.
With regard to Sections 5.1 through 5.10, each Constituent Corporation
hereby covenants and agrees as follows and Bernau agrees to use his
reasonable efforts to assist each Constituent Corporation in satisfying such
covenants, and as to Sections 5.11 and 5.12, Bernau hereby covenants and
agrees:
5.1 OPERATION OF BUSINESS.
(a) From the date hereof and through the Closing, each Constituent
Corporation shall, unless previously waived in writing by the Purchaser,:
(i) do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence,
and its rights and franchises;
(ii) timely make all payments required to be paid in the
amounts and on the dates as mutually agreed upon by the parties;
(iii) not incur any obligations or sell, dispose of or
transfer any assets other than in the ordinary course of business;
(iv) not incur any obligations on behalf of, or sell,
dispose of or transfer cash, monies or other assets or extend
guarantees or provide any other financial or other support, directly
or indirectly, to the Mile High Brewing
28
Company, except for management services in connection with the
preservation of the assets of the Mile High Brewing Company;
(v) continue to conduct its business in the brewing and
distributing of malt beverages substantially as now conducted or as
otherwise permitted hereunder and shall not engage in any material
respect in any other business;
(vi) at all times maintain, preserve and protect any
trademark or trade name acquired or owned by and currently being
utilized in product marketing by such Constituent Corporation or any
Subsidiary after the date hereof;
(vii) preserve all the remainder of its property, in use or
useful in the conduct of its business and keep the same in good
repair, working order and condition (taking into consideration
ordinary wear and tear) and from time to time, make, or cause to be
made, all necessary and proper repairs, renewals and replacements,
betterments and improvements thereto consistent with industry
practices, so that the business carried on in connection therewith
may be properly and advantageously conducted at all times, except to
the extent such property has become obsolete;
(viii) use its reasonable efforts to retain as employees the
individuals employed by such Constituent Corporation on the date
hereof;
(ix) not waive any material right under any Material Contract;
(x) not increase or modify, or agree to increase or
modify, the compensation, bonuses or other benefits or prerequisites
for employees of such Constituent Corporation, except in the
ordinary course of business consistent with past practice;
(xi) use its reasonable efforts in light of the
circumstances to preserve the operations, organization and
reputation of such Constituent Corporation intact, to preserve the
good will and business of such Constituent Corporation's customers,
suppliers and others having business relations with such Constituent
Corporation and to continue to conduct the financial operations of
such Constituent Corporation, including its credit and collection
policies, with no less effort, as in the prior conduct in the
business of such Constituent Corporation;
(xii) each Constituent Corporation shall continue to
maintain and carry its existing insurance; and
29
(xiii) maintain its books and records in accordance with
generally accepted accounting principles.
(b) From the date hereof and through the Closing, each Constituent
Corporation shall not (i) amend its Certificate of Incorporation or bylaws or
enter into, agree to enter into or effect any merger or consolidation; (ii)
make any change in the number of shares of its capital stock authorized,
issued or outstanding; and except as set forth on Schedule 5.1(b), grant or
issue any option, warrant or other right to purchase, or convert any
obligation into, shares of its capital stock, other than the issuance of
shares of common stock pursuant to outstanding options to purchase such
shares as set forth in Schedules 3.1(a)(2) and 3.1(b)(2); (iii) declare or
pay any dividends; or (iv) purchase or redeem any shares of its capital stock
or any other security. Notwithstanding the foregoing, each Constituent
Corporation may take such actions as are necessary to effect the
Consolidation.
5.2 AGREEMENTS. From and after the date hereof and through the Closing,
without the prior consent of the Purchaser, each Constituent Corporation will
not (a) amend or modify any of the material terms of any agreement listed on
Schedule 3.10 or (b) enter into any agreement which would become a Material
Contract and thus be required to be listed on Schedule 3.10, except in the
ordinary course of business consistent with past practices. The Constituent
Corporation shall promptly provide to the Purchaser true and complete copies
of all amendments, modifications and agreements referred to in this Section
5.2.
5.3 NOTIFICATION.
(a) Each Constituent Corporation and, to his knowledge, Bernau
shall give prompt notice to the Purchaser of the occurrence, or
non-occurrence, of any event which would be likely to cause any
representation or warranty herein to be untrue or inaccurate, or any
covenant, condition or agreement herein not to be complied with or satisfied
and, upon written consent of the Purchaser, each Constituent Corporation and
Bernau shall be entitled to update, modify, amend or replace any schedule
hereto in order to rectify any such inaccuracy or breach.
(b) Between the date of this Agreement and the Closing, each
Constituent Corporation shall keep the Purchaser reasonably informed of all
material operational matters and business developments known to each
Constituent Corporation with respect to the business of each Constituent
Corporation by providing reports twice a month to Purchaser of such material
operational matters in a manner reasonably satisfactory to the Purchaser. It
is anticipated that the Purchaser and the Constituent Corporations will agree
upon a format for such reports.
30
5.4 NO INCONSISTENT ACTION. None of the Constituent Corporations nor
Bernau shall take any action which is inconsistent with its obligations under
this Agreement or that would hinder or delay the consummation of the
transactions contemplated by this Agreement.
5.5 NO SOLICITATION. Neither Bernau nor any Constituent Corporation nor
any Constituent Corporation's employees or agents shall directly or
indirectly contact, solicit from, or negotiate with anyone other than the
Purchaser regarding the sale or potential sale of the assets, the business or
any equity interest in any Constituent Corporation. Each Constituent
Corporation and, to his knowledge, Bernau shall promptly notify the Purchaser
in writing if any such offer or proposal is made to them between the date of
this Agreement and the Closing.
5.6 FINANCIAL STATEMENTS. Within 20 days after the end of each month
until the Closing Date, each Constituent Corporation shall deliver to the
Purchaser unaudited consolidating statements of revenue and operations for
the month then ended, along with a balance sheet as of the end of such month.
Within 45 days after December 31, 1996, each Constituent Corporation shall
deliver to the Purchaser unaudited consolidating statements of operations for
such fiscal year, and the related balance sheets as at the end of such fiscal
year. Within 90 days after December 31, 1996, each Constituent Corporation
shall deliver to the Purchaser the financial statements referred to in the
foregoing sentence certified by Price Waterhouse LLP, independent certified
public accountant and including all adjustments made to each Constituent
Corporation's year-end audited balance sheets and related statements of
operations. All financial statements furnished pursuant to this Section
shall be true and complete and fairly present in all material respects the
financial condition and the results of operations of each Constituent
Corporation as of the dates and for the periods covered by such statements.
Each Constituent Corporation shall furnish to the Purchaser any and all other
information customarily prepared by each Constituent Corporation concerning
the financial condition of each Constituent Corporation that the Purchaser
may reasonably request.
5.7 ACCESS TO INFORMATION CONCERNING PROPERTIES AND RECORDS. Each
Constituent Corporation shall give to the Purchaser and the Purchaser's
appraisers, accountants, engineers, attorneys and other representatives, and
their lenders and prospective partners of the Purchaser, reasonable access
during normal business hours to all properties, equipment, books, accounts,
contracts and documents of or related to each Constituent Corporation, its
businesses and properties, to the extent that doing so does not materially
disrupt or interfere with the operations of such Constituent Corporation, and
each Constituent Corporation shall within a reasonable period of time furnish
or cause to be furnished to the Purchaser and its representatives all data
and information concerning the business,
31
properties of each Constituent Corporation as the Purchaser reasonably may
request.
5.8 CONSENTS, FILINGS AND SATISFACTION OF CONDITIONS. Subject to the
terms and conditions of this Agreement and to applicable law, each
Constituent Corporation shall use, and Bernau shall use reasonable efforts to
cause each Constituent Corporation to use, best efforts promptly to take or
cause to be taken all action and promptly to do or cause to be done all
things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the Transactions.
5.9 CONSOLIDATION; STOCKHOLDER MEETING; PROXY MATERIALS; REGISTRATION
STATEMENT.
(a) The Constituent Corporations shall enter into an agreement
whereby each Constituent Corporation shall become a wholly-owned subsidiary
of UCB, and the shareholders of each Constituent Corporation shall receive
shares in UCB consistent with the ratios and in the aggregate amounts set
forth in Schedule 3.1(d) all on terms reasonably satisfactory to the
Purchaser based upon consideration of applicable tax, legal, accounting and
other factors. All of the outstanding options to purchase common stock of
the Constituent Corporations shall have been assumed by UCB and such options
shall be exercisable for that number of UCB shares as is set forth on
Schedule 3.1(a)(2) and 3.1(b)(2) and based on the ratios set forth in
Schedule 3.1(d). The Constituent Corporations will take all necessary
actions to (i) cease having the securities of Nor'Wester, WVI and the WVI
Subsidiaries registered with the SEC after the Consolidation, (ii) register
the Common Stock of UCB with the SEC pursuant to the Securities Exchange Act
and (iii) list the Common Stock of UCB on the Nasdaq National Market. The
Constituent Corporations shall cause any shares of Common Stock of such
Constituent Corporations held in escrow by or subject to any restrictions on
transfer imposed by any state department or commission to be either released
from such escrow or restrictions or cancelled, as the case may be, so that
after the Consolidation none of the outstanding shares of Common Stock of UCB
shall be subject to any escrow or restriction by a state department or
commission. Attached hereto as Exhibits 5.9(a)(i) and 5.9(a)(ii),
respectively, are the form of Certificate of Incorporation and Bylaws to be
used in the formation of UCB.
(b) Each of the Constituent Corporations shall cause a meeting of
their respective stockholders to be duly called and held as soon as
reasonably practicable after the execution of this Agreement for the purpose
of voting on the approval and adoption of this Agreement and the
Consolidation, as applicable. The Directors of each of the Constituent
Corporations shall recommend approval and adoption of this Agreement and the
Consolidation by the respective stockholders. In connection with such
meeting, the Constituent Corporation (i) will promptly prepare and file with
the SEC the Preliminary Proxy Statement and
32
such other registration statements as the Constituent Corporation shall deem
necessary in connection with the transactions contemplated by the
Consolidation, (ii) will use all reasonable efforts to respond to the
comments of the SEC on the Preliminary Proxy Statement and will make any
further filings in connection therewith that may be necessary, proper or
advisable, and will use all reasonable efforts to cause the registration
statement of which the Definitive Proxy Statement/Prospectus is a part to be
declared effective by the SEC as soon as reasonably practicable, (iii) will
thereafter mail to its stockholders as promptly as practicable the Definitive
Proxy Statement/Prospectus and all other proxy materials as required for such
meeting, (iv) will use all reasonable efforts to obtain the necessary
approvals by the stockholders for each of the Constituent Corporations and
(v) will otherwise comply with all legal requirements applicable to such
meeting.
(c) The information in the Definitive Proxy Statement/Prospectus
relating to Bernau and each of the Constituent Corporations, as of the date
of its distribution to holders of stock in any of the Constituent
Corporations, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(d) The information in the Definitive Proxy Statement/Prospectus
provided by the Purchaser on the Purchaser at the date of the distribution of
the Definitive Proxy Statement/Prospectus to holders of stock in any of the
Constituent Corporations, will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
5.10 RELATED PARTY TRANSACTIONS. Neither Bernau nor any Constituent
Corporation shall engage in any transaction with any Constituent Corporation
which is on terms less favorable to such Constituent Corporation than can be
obtained form unaffiliated third parties and, except in the case of Mile High
Brewing Company so long as it does not have any independent directors, which
have not been approved by a majority of the independent directors of any
Constituent Corporation which is a party thereto.
5.11 RESTRICTION ON TRANSFER SHARES. Bernau shall not, directly or
indirectly: (a) except as contemplated herein, offer for sale, sell,
transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter
into any contract, option or other arrangement or understanding with respect
to or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all of the Transfer
Shares or any interest therein or (b) take any action that would
33
make any representation or warranty of Bernau contained in this Agreement
untrue or incorrect or have the effect of preventing or disabling Bernau from
performing his obligations under this Agreement.
5.12 RESTRICTION ON BORROWINGS BY BERNAU. Bernau's borrowings under the
Individual Loan Agreement with Bank of America Oregon dated February 20,
1996, shall not exceed $100,000.
VI. CONDITIONS PRECEDENT.
6.1 CONDITIONS OF PURCHASER WITH RESPECT TO THE CLOSING. The obligation
of Purchaser to purchase the Common Stock pursuant to Section 2.1 hereof is
subject to the following conditions:
(a) Purchaser shall have received favorable opinions of counsel to
Bernau and each of the Constituent Corporations, substantially in the form
attached hereto as Exhibit 6.1(a), and dated the Closing Date, it being
understood that to the extent that such opinions of counsel shall rely upon
any other opinion of counsel, each such other opinion shall be in form and
substance reasonably satisfactory to the Purchaser and shall provide that the
Purchaser may rely thereon.
(b) Purchaser shall have received resolutions of the board of
directors of each Constituent Corporation, certified by the Secretary or
Assistant Secretary of the Constituent Corporation, as of the Closing Date,
to be duly adopted and in full force and effect on such date, authorizing (i)
the consummation of each of the Transactions, including but not limited to,
the transactions contemplated by this Agreement and (ii) specific officers to
execute and deliver this Agreement and each Ancillary Agreement to which it
is a party.
(c) Purchaser shall have received governmental certificates,
dated the most recent practicable date prior to the Closing Date, with
telegram updates where available, showing that each Constituent Corporation
is organized and, to the extent a Delaware corporation, in good standing in
the jurisdiction of its organization and is qualified as a foreign
corporation and in good standing in all other jurisdictions in which it is
qualified to transact business.
(d) Purchaser shall have received a copy of the organizational
charter and all amendments thereto of each Constituent Corporation, including
but not limited to documents evidencing the Consolidation, certified as of a
recent date by the Secretary of State in the jurisdiction of its
organization, and copies of each Constituent Corporation's bylaws, certified
by the Secretary or Assistant Secretary of each Constituent Corporation as
true and correct as of the Closing Date.
34
(e) Purchaser shall have received certificates of the Secretary
or Assistant Secretary of each Constituent Corporation, dated the Closing
Date, as to the incumbency of the officers of each Constituent Corporation
executing this Agreement, each Ancillary Agreement to which it is a party,
the other documents in connection with the Transactions to which it is a
party and any other certificate or other document to be delivered pursuant
hereto or thereto.
(f) Purchaser shall have received a copy of each agreement or
plan or, if not available, a summary thereof, providing for employment,
severance, deferred payments, bonus payments or accruals, profit sharing
arrangements, stock option or stock appreciation rights, incentive payments,
pension or employment benefit contributions or similar payments or
arrangements for the benefit of each Constituent Corporation's management
personnel, in form and substance as has been approved by the Purchaser.
(g) All of the representations and warranties of each Constituent
Corporation and Bernau contained herein or in the Ancillary Agreements shall
be correct on and as of the date made and as of the Closing Date as though
made on and as of the Closing Date, each Constituent Corporation and Bernau
shall have complied with all of its or his obligations hereunder or
thereunder to be satisfied on or prior to the Closing Date, and the Purchaser
shall have received a certificate dated as of the Closing Date executed by
the chief executive officer and chief financial officer of each Constituent
Corporation, and a certificate dated as of the Closing Date executed by
Bernau, to that effect.
(h) All licenses, permits, consents or approvals from or by, and
all filings with and all notices to, all governmental authorities having
jurisdiction, to the extent required for Purchaser to purchase, and UCB to
sell, the Common Stock and for Purchaser, each Constituent Corporation to
consummate the other transactions contemplated by the Transactions, including
from the Oregon Liquor Control Commission, the U.S. Bureau of Alcohol,
Tobacco & Firearms, shall have been received or made.
(i) There shall have been no changes which have had a Material
Adverse Effect on the Constituent Corporations since the date hereof.
(j) No United States or state governmental authority or other
agency or commission thereof or any court of the Untied State or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered, and there shall not be threatened, instituted or pending before
the United States or state governmental authority or other agency or
commission thereof or any court of the United States or state court of
competent jurisdiction, any statute, rule, regulation, litigation,
proceeding, injunction or other order (whether
35
temporary, preliminary or permanent) that has or would have the effect of
making the consummation of the Transactions illegal, prohibiting consummation
of such transactions, seeking damages in connection with such transactions,
or otherwise seeking to challenge such transactions or impose limitations on
the ability of Purchaser to hold the Common Stock acquired by the Purchaser
at the Closing or to exercise its rights under any Ancillary Agreement or
other document in connection with the Transactions.
(k) The Board of Directors of UCB after the Consolidation shall be
composed of seven persons, all of whom shall have been duly elected,
consisting of (i) one person selected by Bernau, (ii) four persons selected
by the Purchaser, one of whom shall be Vijay Mallya who shall be Chairman of
the Board of Directors, and (iii) two outside directors who shall be mutually
satisfactory to Bernau and the Purchaser.
(l) Purchaser shall received copies of the following documents
duly executed by the other parties thereto:
(i) Bernau's Employment Agreement between UCB and Bernau
dated the Closing Date and in a form reasonably satisfactory to the
Purchaser, which agreement shall contain the terms set forth on
Schedule 6.1(l)(i) ("Bernau's Employment Agreement");
(ii) the Production Agreement between UCB and the Purchaser
dated the Closing Date and in a form satisfactory to the Purchaser
(the "Production Agreement");
(iii) the Registration Rights Agreement between UCB and the
Purchaser dated the Closing Date and in a form satisfactory to the
Purchaser (the "Registration Rights Agreement").
(iv) the Security Agreement between Bernau and the Purchaser
dated the Closing Date and in a form satisfactory to the Purchaser
(the "Security Agreement") in which Bernau pledges his shares as
security for his obligations incurred under this Agreement; and
(v) the Services Agreement between Vijay Mallya and UCB
dated the date of Closing Date and in a form satisfactory to the
Purchaser and UCB (the "Services Agreement") in which UCB agrees to
pay Vijay Mallya $126,000 per year for services rendered.
(m) The Consolidation shall have been completed on terms
reasonably satisfactory to the Purchaser based upon consideration of
applicable tax, legal, accounting and other factors.
36
(n) The pro forma net income and gross sales for the Constituent
Corporations combined, prepared in accordance with GAAP, for each month from
the date hereof through the Closing Date shall not decrease by more than 10%
on a cumulative basis from January 1, 1997 through the Closing Date from the
projections set forth on Schedule 6.1(n), and the net worth of the
Constituent Corporations combined, prepared in accordance with GAAP shall not
be less than $10.0 million as of the Closing Date and before taking into
account any write downs related to the sale of the assets of Bayhawk Ales,
Inc. and any gains related to the sale of the assets of Mile High Brewing
Company.
(o) All requisite consents of any third parties to the
transactions contemplated by this Agreement, including those set forth on
Schedules 3.6 and 3.30, shall have been obtained. All Material Contracts of
the Constituent Corporations shall be in full force and effect and the
consummation of the transactions contemplated hereby shall not have a
Material Adverse Effect on such Material Contracts.
(p) Purchaser shall have received the Transfer Shares as
contemplated by Section 2.2.
(q) The line of credit provided by Bank of America to Nor'Wester
which is scheduled to expire on December 31, 1996, shall have been extended
through September 30, 1997 on terms and conditions substantially similar to
those under the current line of credit and any loan covenants relating to the
line of credit or the term loan have not been violated, or if violated, have
been waived by Bank of America. At the Closing Date the line of credit will
be converted to a term loan.
(r) The Financial Consulting Agreement with Patriot Capital
Corp. dated August 26, 1996 and any agreements with The Money Source shall
have been terminated.
(s) A majority of the shareholders of each applicable
Constituent Corporation shall have voted in favor of release of all of the
shares of the Constituent Corporations held in escrow by the Department of
Consumer and Business Affairs of the State of Oregon and subject to
restrictions on transfer imposed by the California Corporations Commission
and each of the California Corporations Commission and the Department of
Consumer and Business Affairs of the State of Oregon shall have released all
of the shares of the Constituent Corporations held in escrow by or subject to
any restrictions of such commission or department, as the case may be.
(t) Purchaser shall have received such additional information
and materials as it may reasonably request, all in form and substance
satisfactory to Purchaser.
6.2 CONDITIONS OF UCB WITH RESPECT TO THE CLOSING. The obligation of
UCB to sell the Purchase Shares and the Bridge Loan
37
Shares and of Bernau to transfer the Transfer Shares pursuant to Section 2.1
hereof is subject to the following conditions:
(a) UCB shall have received copies of Bernau's Employment
Agreement, the Production Agreement, the Registration Rights Agreement, the
Stockholder's Agreement and the Services Agreement duly executed by the other
parties thereto.
(b) All of the representations and warranties of Purchaser
contained herein and in the Transactions shall be correct on and as of the
date made and as of the Closing Date as though made on and as of the Closing
Date, Purchaser shall have complied with all of its obligations hereunder and
thereunder to be satisfied on or prior to the Closing Date, and UCB shall
have received a certificate dated as of the Closing Date executed by an
officer of Purchaser to that effect.
(c) UCB shall have received resolutions of the Board of
Directors of Purchaser, certified by the Secretary or Assistant Secretary
thereof, as of the Closing Date, to be duly adopted and in full force and
effect on such date, authorizing (i) the consummation of each of the
transactions contemplated by this Agreement, and (ii) specific officers of
Purchaser to execute and deliver this Agreement and each Ancillary Agreement
to which Purchaser is a party.
(d) UCB shall have received resolutions of the Board of
Directors of the Purchaser, certified by the Secretary or Assistant Secretary
thereof, as of the Closing Date, to be duly adopted and in full force and
effect on such date, authorizing the purchase and acquisition by the
Purchaser of the Common Stock to be purchased and acquired by the Purchaser
pursuant to this Agreement.
(e) UCB shall have received certificates of the Secretary or an
Assistant Secretary of the Purchaser, dated the Closing Date, as to the
incumbency of the officers of the Purchaser executing this Agreement and each
Ancillary Agreement to which it is a party and any certificate or other
document to be delivered pursuant hereto or thereto.
(f) All licenses, permits, consents or approvals from or by,
and all filings with all notices to, all governmental authorities having
jurisdiction, to the extent required for Purchaser to purchase, and UCB to
sell, the Common Stock and for Purchaser and each Constituent Corporation to
consummate the other transactions contemplated by the Transactions, including
from the Oregon Liquor Control Commission and the U.S. Bureau of Alcohol,
Tobacco & Firearms, shall have been received or made.
(g) No United States or state governmental authority or other
agency or commission thereof or any court of the United States or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered, and there
38
shall not be threatened, instituted or pending before any United States or
state governmental authority or other agency or commission thereof or any
court of the United States or state court of competent jurisdiction, any
statute, rule regulation, litigation, proceeding, injunction or other order
(whether temporary, preliminary or permanent) that has or would have the
effect of making the consummation of the transactions described herein
illegal, prohibiting consummation of such transactions, seeking damages in
connection with such transactions, or otherwise seeking to challenge such
transaction or impose limitations on the ability of each Constituent
Corporation to exercise its rights under any of the Ancillary Agreements or
other document in connection with the Transactions.
(h) UCB shall have received a favorable opinion of Orrick,
Herrington & Sutcliffe LLP, Counsel to the Purchaser, dated the Closing Date
and substantially in the form attached hereto as Exhibit 6.2(h), it being
understood that to the extent that such opinions of counsel shall rely upon
any other opinion of counsel, each such other opinion shall be in form and
substance reasonably satisfactory to UCB and shall provide that UCB may rely
thereon.
(i) The sale of the shares of Common Stock hereunder shall have
been duly approved by the shareholders of UCB.
(j) Nor'Wester shall have received a fairness opinion from
Needham & Company, Inc. and WVI and each of the WVI Subsidiaries shall have
received a fairness opinion from Black & Company in connection with approval
by the Constituent Corporations of the Transactions, including the sale and
transfer of shares of Common Stock to the Purchaser hereunder.
VII. ADDITIONAL COVENANTS.
7.1 BRIDGE LOANS; INTERIM FINANCING.
Prior to the date of this Agreement, Purchaser has provided interim
financing to Nor'Wester in the form of bridge loans consisting of loans in
the amounts of $500,000 on October 31, 1996 (the "Initial Loan"), $150,000 on
November 8, 1996 and $250,000 on December 27, 1996 (together with the Initial
Loan, the "Existing Advance"), and will provide additional amounts as
contemplated by this Section 7.1 (collectively, the "Bridge Loans").
Purchaser agrees to provide interim financing in an aggregate amount up to
$2.75 million (including the Existing Advance) in amounts and on the dates to
be mutually agreed upon by the Purchaser and Nor'Wester, provided, that (i)
the parties enter into reasonably satisfactory documents similar to those
entered into in connection with the Initial Loan, including, but not limited
to a guarantee by Bernau; (ii) the Purchaser perfects a security interest in
the assets of North Country and the membership interests of North Country and
releases its security interests in Bernau's shares of Common Stock of
Willamette Valley
39
Vineyards; (iii) each time an advance of monies is made, neither Bernau nor
any of the Constituent Corporations is in breach of any representation,
warranty, covenant or other agreement under this Agreement; (iv) the Bridge
Loans have a maturity date 60 days after the date of termination of this
Agreement; and (v) if the parties are unable to agree in good faith as to the
timing and amounts of the advances pursuant to this Section 7.1, and such
failure to agree results in the interruption of the Constituent Corporations'
business, then the failure of the Constituent Corporations to meet the
projections set forth in Schedule 6.1(n) to the extent caused by such
interruption shall not entitle the Purchaser to refuse to close on the basis
that the condition set forth in Section 6.1(n) has not been satisfied.
7.2 RIGHT OF FIRST OFFER.
(a) Subject to the terms and conditions specified in this
Section 7.2, UCB hereby grants to the Purchaser, as long as it continues to
own securities representing at least 10% of the outstanding voting securities
of UCB, a right to participate in future sales by UCB of its Shares (as
hereinafter defined).
(b) Each time UCB proposes to offer any shares of, or securities
or other right convertible into or exercisable for any shares of, any class
of its capital stock ("Shares"), UCB shall first make an offering of a
portion of such Shares to the Purchaser in accordance with the following
provisions:
(i) UCB shall deliver a written notice ("Notice") to the
Purchaser stating (1) its bona fide intention to offer such Shares, (2) the
number of such Shares to be offered, and (3) the price and terms, if any,
upon which it proposes to offer such Shares.
(ii) Within 45 calendar days after receipt of the Notice,
the Purchaser may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
number of Shares that when added to the number of shares of Common Stock held
by the Purchaser (including for such calculation any shares issuable upon
conversion of any capital stock convertible into Common Stock) will give the
Purchaser 45% of the Common Stock of UCB on a Diluted Basis after giving
effect to the issuance of the Shares.
(iii) UCB may during the period following the expiration of
the 45-day period provided in subsection (ii) hereof, offer the remaining
unsubscribed portion of such Shares which the Purchaser has not elected to
purchase to any person or persons at a price not less than, and upon terms no
more favorable to the offeree than those specified in the Notice. If UCB
does not enter into an agreement for the sale of the Shares within 90 days of
the expiration of such 45-day period, or if such agreement is not consummated
within 120 days following the
40
expiration of such 45-day period, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first
reoffered to the Purchaser in accordance herewith.
7.3 PERCENTAGE OWNERSHIP. So long as the Purchaser continues to own
securities representing at least 10% of the then outstanding voting
securities of UCB, UCB shall not issue securities to any party which would
enable such party to exceed the percentage ownership of the voting securities
owned by the Purchaser. From time to time, the Purchaser shall be permitted
to request that UCB determine the percentage ownership of the outstanding
Common Stock held by the Purchaser or any other Person specified by the
Purchaser, as calculated on a Diluted Basis, and UCB shall promptly (but in
any event no later than five Business Days after such request is made) and
accurately provide the Purchaser with a written determination of the
percentage ownership of the outstanding Common Stock of the Purchaser or such
other Person, as calculated on a Diluted Basis, as of the date such request
is made with such verification and detail as reasonably requested by the
Purchaser. Such response given by UCB shall be binding on UCB for purposes
of determining the Purchaser's and UCB's rights and obligations under this
Agreement and the Ancillary Agreements as of the date such request is made.
7.4 NO SECURITIES SENIOR TO COMMON STOCK. UCB may not, without the
prior written consent of Purchaser, issue any securities (i) having
contractual rights, privileges or preferences which are senior to the
securities issued to the Purchaser or (ii) which by the terms of UCB's
Certificate of Incorporation are senior to the securities issued to the
Purchaser.
7.5 PERMITTED ACQUISITIONS OR INVESTMENTS. Unless waived in writing by
the Purchaser, UCB shall not, and shall not permit any of its Subsidiaries to
directly or indirectly in any transaction or related series of transactions,
acquire or invest in, whether for cash, debt, Stock, or other property or
assets or by guaranty of any obligation, any assets (other than cash or cash
equivalents) or business the aggregate purchase price of which in any such
transaction or related series of transactions exceeds 50% of the book value
of UCB's assets on the date of such acquisition or investment immediately
before giving effect thereto.
7.6 SALES OF ASSETS. Unless waived in writing by the Purchaser:
(a) UCB shall not, and shall not permit any Subsidiary of UCB to,
sell, lease, transfer, convey or otherwise dispose of assets in any
transaction or related series of transactions, which assets have an aggregate
book value exceeding 50% of the aggregate book value of UCB's assets on the
date of such sale,
41
lease, transfer, conveyance or disposition immediately before giving effect
thereto; PROVIDED, HOWEVER, that except as otherwise set forth herein, the
foregoing shall not prohibit any bona fide sale-leaseback transaction in
which all leases entered into by UCB or any Subsidiary of UCB in connection
with such transaction are Capital Leases. UCB shall not terminate any such
lease prior to its specified term and shall not amend or supplement any such
lease, if such amendment or supplement would cause such lease to be
classified or accounted for as other than a Capital Lease.
(b) UCB and its Subsidiaries shall not sell, transfer, convey,
license, pledge or otherwise dispose of any trademark or trade name acquired
or owned by any of them after the date hereof if 15% or more of the revenues
of UCB and its consolidated Subsidiaries for the preceding Fiscal Year were
attributable to sales of products using such trademark or trade name or any
trademark or trade name listed on Schedule 3.18.
7.7 BOOKS AND RECORDS. Unless waived in writing by the Purchaser, UCB
shall, and shall cause its Subsidiaries to, keep adequate records and books
of account with respect to their business activities, in which proper
entries, reflecting all of their financial transactions, are made in
accordance with GAAP consistently applied.
7.8 FINANCIAL AND OTHER INFORMATION. Unless waived in writing by the
Purchaser:
(a) MONTHLY STATEMENTS. UCB will deliver to the Purchaser as
soon as practicable after the end of each month, but in any event within 30
days thereafter: (i) an unaudited consolidated balance sheet of UCB and its
Subsidiaries as at the end of such month, (ii) unaudited consolidated
statements of income, retained earnings and changes in financial position of
UCB and its Subsidiaries for such month and for the portion of such year
ending with such month and (iii) a sales report for such month, which report
will show sales by product, by distributor and whether by bottle or draft in
each state in which UCB sells its products, in each case for such month and
for the portion of the Fiscal Year ending with such month and showing a
comparison of such year to date sales results with those of the previous
year, including growth figures for each product on a state by state basis.
(b) SEC FILINGS. UCB will deliver to the Purchaser, promptly
upon their becoming available, one copy of each report, notice or proxy
statement sent by UCB to its stockholders generally, and of each regular or
periodic report (pursuant to the Securities Exchange Act) and any
registration statement, prospectus or other writing (other than transmittal
letters) (including, without limitation, by electronic means) pursuant to the
Securities Act filed by UCB with (i) the SEC or (ii) any securities exchange
or the Nasdaq Stock Market on which shares of
42
Common Stock of UCB are listed or quoted. Prior to filing or making publicly
available any such report, notice, proxy statement, registration statement,
prospectus or other writing which references or makes any disclosure
concerning the Purchaser or its business, UCB shall provide the Purchaser a
reasonable opportunity to review such report, notice, proxy statement,
registration statement, prospectus or other writing and shall not make any
such reference or disclosure to the Purchaser or its business to which the
Purchaser reasonably objects, unless, in the reasonable opinion of counsel to
UCB failure to make such reference or disclosure would create a reasonable
risk of liability under the securities laws.
(c) PROJECTIONS. UCB will deliver to the Purchaser within 60
days prior to the beginning of each Fiscal Year:
(A) a projected consolidated balance sheet of UCB and its
Subsidiaries, for each month of such Fiscal Year;
(B) projected consolidated and consolidating cash flow
statements of UCB and its Subsidiaries, including summary details of
cash disbursements (including Capital Expenditures), for each month
of such Fiscal Year; and
(C) projected consolidated and consolidating income
statements of UCB and its Subsidiaries for each quarter of such
Fiscal Year;
together with appropriate supporting details.
(d) OTHER INFORMATION. UCB will deliver to the Purchaser such
other information with respect to UCB's or any of its Subsidiaries' business,
financial condition or prospects as the Purchaser may, from time to time,
reasonably request.
7.9 COMMUNICATION WITH ACCOUNTANTS. UCB authorizes the Purchaser to
communicate directly with its independent certified public accountants and
tax advisors and authorizes those accountants to disclose to the Purchaser
any and all financial statements and other supporting financial documents and
schedules including copies of any management letter with respect to the
business, financial condition and other affairs of UCB and any of its
Subsidiaries. At or before the Closing Date, UCB shall deliver a letter
addressed to such accountants and tax advisors instructing them to comply
with the provisions of this Section 7.9, a copy of which letter shall be
provided to the Purchaser at the Closing.
7.10 TAX COMPLIANCE. Unless waived in writing by the Purchaser, UCB
shall pay all transfer, excise or similar taxes (not including income or
franchise taxes) in connection with the issuance, sale, delivery or transfer
by UCB to the Purchaser of the Common Stock and shall indemnify and save the
Purchaser therefrom. UCB shall not be responsible for any taxes in
43
connection with the transfer by the Purchaser of the Common Stock. The
obligations of UCB under this Section 7.10 shall survive the payment and the
termination of this Agreement.
7.11 INSURANCE. Unless waived in writing by the Purchaser, UCB shall,
and shall cause each Subsidiary of UCB to, maintain insurance covering,
without limitation, fire, theft, burglary, public liability, property damage,
product liability, workers' compensation, key man insurance and insurance on
all property and assets, all in amounts customary for the industry. UCB
shall, and shall cause each of its Subsidiaries to, pay all insurance
premiums payable by them.
7.12 AGREEMENTS. Unless waived in writing by the Purchaser, UCB shall
perform, within all required time periods (after giving effect to any
applicable grace periods), all of its obligations and enforce all of its
rights under its credit agreements.
7.13 EMPLOYEE LOANS. Unless waived in writing by the Purchaser, UCB
shall not and shall not permit any Subsidiary of UCB to make or accrue any
loans or other advances of money to any employee of UCB or such Subsidiary
outside the ordinary course of business consistent with past practice or in
excess at any one time of $100,000 in the aggregate for all such loans, other
than such loans the principal amounts of which do not exceed in aggregate
$200,000 and are required to be repaid on or prior to 30 days after the date
such loans are made.
7.14 CAPITAL STRUCTURE. Unless waived in writing by the Purchaser:
(a) UCB shall not make or permit any Subsidiary of UCB to make
any changes in its capital structure by means of an amendment of its articles
of incorporation or bylaws (including, without limitation, in the terms of
its outstanding Stock) other than any increase in its authorized capital
stock.
(b) UCB shall issue, transfer or sell Common Stock for the
purposes of raising capital or in connection with any acquisition of any
property or business only, if in the good faith judgment of its board of
directors, such issuance, transfer or sale, in the light of the other
alternatives available to UCB to raise capital or effect such acquisition and
the relative costs of such alternatives, the financial and operational
flexibility provided to UCB as a result thereof, the effect of such
alternatives on the prices required to be paid by UCB in connection with any
such acquisition and the relative effect of the available alternatives on the
long-term returns to the shareholders of UCB, is in the best interests of UCB
and its shareholders.
(c) UCB shall not, and shall not permit any Subsidiary of UCB to,
issue or sell or agree to issue or sell any Stock to any Person engaged in
the business of brewing, producing or
44
distributing malt or any alcoholic beverages in North America or India or to
any Person known by UCB to be an Affiliate of any such Person other than (i)
to any Person, the gross revenues of which Person and all Persons known by
UCB to be an Affiliate of such Person resulting from the business of brewing,
producing or distributing malt or any other alcoholic beverages in North
America or India for the fiscal year preceding the date of such issuance do
not exceed $500,000 (which amount shall be increased on each January 1
beginning with January 1, 1997 by the percentage increase in the Consumer
Price Index (All Urban Consumers-U.S. City Average) for the preceding
calendar year), (ii) to any Person acquiring Stock in any underwritten public
offering of the Stock if UCB has not, directly or indirectly directed the
sale of Stock to such Person or (iii) to the Purchaser or an Affiliate of the
Purchaser.
(d) UCB shall not, pursuant to any agreement or the terms of any
Stock issued by UCB, give to any Person or Group the right to name or
designate members of the board of directors of UCB equal to or greater in
number than that number that the Purchaser is entitled to designate pursuant
to Section 6.1(l).
7.15 TRANSACTIONS WITH AFFILIATES. Unless waived in writing by the
Purchaser, UCB shall not and shall not permit any Subsidiary of UCB to enter
into or be a party to any transaction with any Affiliate of UCB or such
Subsidiary except (A) pursuant to the reasonable demands of UCB's or such
Subsidiary's business or any transaction reasonably related to a reasonable
and legitimate business objective of UCB, and, in either case, (x) in the
ordinary course of business consistent with past practice or (y) upon fair
and reasonable terms that are fully disclosed to the Purchaser and are no
less favorable to UCB or such Subsidiary than would be obtained in a
comparable arm's-length transaction with a Person not an Affiliate of UCB or
such Subsidiary (as determined by the vote of a majority of the independent
directors of the board of directors of UCB) or (B) as expressly contemplated
by the Transactions. The provisions of this Section 7.15 shall not apply to
any transaction between UCB and the Purchaser or any Subsidiary or Affiliate
of the Purchaser.
7.16 GUARANTEED INDEBTEDNESS. Unless waived in writing by the
Purchaser, UCB shall not and shall not permit any Subsidiary of UCB to incur
any Guaranteed Indebtedness except (i) by endorsement of instruments or items
of payment for deposit to the general account of UCB or such Subsidiary, and
(ii) for Guaranteed Indebtedness incurred for the benefit of UCB or any
Subsidiary of UCB if the primary obligation is permitted by this Agreement.
7.17 RESTRICTED PAYMENTS. Unless waived in writing by the Purchaser,
UCB shall not and shall not permit any Subsidiary of UCB to make any
Restricted Payments nor shall UCB permit any Subsidiary to make such payments
with respect to UCB's Stock;
45
7.18 EMPLOYEE PLANS. Unless waived in writing by the Purchaser:
(a) With respect to other than a Multiemployer Plan, for each
Qualified Plan hereafter adopted or maintained by UCB or any of its
Subsidiaries, UCB shall (A) seek, or cause its Subsidiaries to seek, and
receive determination letters from the IRS to the effect that such Qualified
Plan is qualified within the meaning of Section 401(a) of the IRC; and (B)
from and after the adoption of any such Qualified Plan, cause such plan to be
qualified within the meaning of Section 401(as) of the IRC and to be
administered in all material respects in accordance with the requirements of
ERISA and Section 401(a) of the IRC.
(b) With respect to each Welfare Plan hereafter adopted or
maintained by UCB or any of its Subsidiaries, UCB shall comply, or cause its
Subsidiaries to comply, with all requirements of Section 4980B and Section
5000 of the IRC and the regulations thereunder.
(c) UCB shall not, directly or indirectly, and shall not permit
its Subsidiaries to directly or indirectly by reason of an amendment or
amendments to, or the adoption of, one or more Title IV Plans, permit the
present value of all benefit liabilities, as defined in Title IV of ERISA
(using the actuarial assumptions utilized by the PBGC upon termination of a
plan), for which UCB or its Subsidiaries are responsible (A) to increase by
more than $50,000 after the date hereof; PROVIDED that this limitation shall
not be applicable to the extent that the fair market value of assets
allocable to such benefits, all determined as of the most recent valuation
date for each such Title IV Plan, is in excess of the benefit liabilities; or
(B) to increase to the extent security must be provided to any Title IV Plan
under Section 401(A)(29) of the IRC. Neither UCB nor any of its Subsidiaries
shall establish or become obligated under any new Retiree Welfare Plan, or
modify any existing Retiree Welfare Plan, which would reasonably be expected
to result in the present value of future liabilities under all such plans to
increase by more than $50,000 after the date hereof. Neither UCB nor any of
its Subsidiaries shall establish or become obligated to any new unfunded
Pension Plan, or modify any existing unfunded Pension Plan, which would
reasonably be expected to result in the present value of future liabilities
under all such plans to increase by more than $50,000 after the date hereof.
UCB shall not directly or indirectly, and shall not permit its Subsidiaries
to (a) satisfy any liability under any Qualified Plan by purchasing annuities
from an insurance company or (b) invest the assets of any Qualified Plan with
an insurance company, unless, in each case, such insurance company is rated
AA by Standard & Poor's Corporation and the equivalent by each other
nationally recognized rating agency at the time of the investment. Except as
otherwise expressly provided herein, for purposes of this paragraph present
values shall be determined in accordance with accepted financial practices.
46
(d) UCB, any of its Subsidiaries and any ERISA Affiliate shall
not contribute or become obligated to contribute to any Multiemployer Plan
where a withdrawal by such person from such plan could reasonably be expected
to result in a Withdrawal Liability in excess of $50,000 to UCB.
7.19 ENVIRONMENTAL MATTERS. Unless waived in writing by the Purchaser,
UCB shall and shall cause each of its Subsidiaries to comply in all material
respects with the Environmental Laws applicable to it and shall not cause,
directly or indirectly, or suffer to occur any one or more releases or
disposals of any Hazardous Material at any Facility which may result in
material Environmental Liabilities and Costs.
7.20 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINES. Unless waived in
writing by the Purchaser, UCB shall, and shall cause each of its Subsidiaries
to: (i) do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence, and its rights and franchises;
(ii) continue to conduct its business in the brewing and distributing of malt
beverages substantially as now conducted or as otherwise permitted hereunder
and shall not engage in any material respect in any other business; (iii) at
all times maintain, preserve and protect any trademark or trade name acquired
or owned by UCB or any Subsidiary of UCB after the date hereof if 15% or more
of the revenues of UCB and its consolidated Subsidiaries for the preceding
Fiscal Year were attributable to sales of products using such trademark or
trade name and all of its trademarks and trade names set forth on Schedule
7.6(c); (iv) preserve all the remainder of its property, in use or useful in
the conduct of its business and keep the same in good repair, working order
and condition (taking into consideration ordinary wear and tear) and from
time to time make, or cause to be made, all necessary and proper repairs,
renewals and replacements, betterments and improvements thereto consistent
with industry practices, so that the business carried on in connection
therewith may be properly and advantageously conducted at all times, except
to the extent such property is disposed of as permitted under Section 7.6 of
this Agreement or to the extent such property has become obsolete; and (v)
comply in all material respects with all applicable laws, rules, regulations
and orders of any governmental authority.
7.21 MERGERS. Unless waived in writing by the Purchaser, UCB shall not
consolidate, merge or engage in a share exchange with or into any other
corporation, other than (A) a merger of a subsidiary of UCB into UCB whereby
UCB is the surviving corporation or (B) a merger whereby (1) UCB will be the
surviving corporation in such merger, (2) the holders of UCB's outstanding
Common Stock and other securities entitled to ordinary voting power
immediately preceding such merger will, immediately after such merger, own
shares possessing more than 50% of the aggregate voting power and economic
rights of the outstanding capital stock of UCB, (3) no breach by UCB of any
covenant contained in this
47
Agreement or in any Ancillary Agreement or right on behalf of the Purchaser
to terminate any Ancillary Agreement shall exist immediately prior to or
immediately after such merger, (4) there will be no shares of any class or
classes of UCB's capital stock ranking prior to (either as to dividends or
upon voluntary or involuntary liquidation, dissolution or winding up) the
Common Stock after the merger, and (5) the only substantial business of the
company merging into UCB is producing or distributing beverages.
7.22 LIQUIDATION. Unless waived in writing by the Purchaser, UCB shall
not liquidate, wind up or dissolve itself.
7.23 HOSTILE ACQUISITION. Unless waived in writing by the Purchaser,
UCB shall not, nor shall it permit any of its Subsidiaries to, engage in any
unsolicited transaction for the control of another company which is not
approved by the board of directors of such company, whether by open market
purchases of the capital stock of such company, by offer for the capital
stock of such company or by solicitation of proxies or consents of the
shareholders of such company.
7.24 ACCESS TO BOOKS AND RECORDS. Unless waived in writing by the
Purchaser, UCB shall permit representatives of the Purchaser to visit and
inspect, at no charge to the Purchaser, any of the properties of UCB and its
Subsidiaries, to examine the corporate books and make copies or extracts
therefrom and to discuss the affairs, finances and accounts of UCB and its
Subsidiaries with the principal officers of UCB, all at such reasonable
times, upon reasonable notice and as often as the Purchaser may reasonably
request.
7.25 AUDITORS. Unless waived in writing by the Purchaser, UCB shall not
change its independent certified public accounting firm except to any
nationally recognized independent certified public accounting firm.
7.26 EMPLOYEES. UCB acknowledges that, except as may be explicitly
provided otherwise in this Agreement, UCB shall have complete responsibility
and authority concerning recognition of collective bargaining units within
its employees or those of its Subsidiaries, the determination as to whether
to enter into collective bargaining agreements or labor agreements with its
employees or those of its Subsidiaries, and the terms of any such agreement.
7.27 RELEASE OF BERNAU'S GUARANTEES. UCB shall use its best efforts to
cause Bernau to be released and UCB substituted as guarantor for those
obligations set forth on Schedule 7.27; provided that the lender thereof does
not seek additional security than that currently in place and that there is
not any cost implication to UCB. If UCB is unable to remove Bernau as a
guarantor for those obligations set forth on Schedule 7.27, then
48
UCB will provide Bernau with security in case Bernau is required to satisfy
any of the obligations set forth on Schedule 7.27.
7.28 BUSINESS OPPORTUNITIES. Except as set forth in the Production
Agreement, there shall be no limitations on the production, marketing, sale
and distribution of the Kingfisher Brands, which activities shall be the
exclusive right of the Purchaser. Any opportunity which the Purchaser
develops or becomes aware of relating to the production, marketing, sale and
distribution of microbrewed beverage products within North America (except
opportunities related to the Kingfisher Brands) shall be presented to UCB for
pursuit exclusively by UCB, and the Purchaser shall cooperate with UCB in the
pursuit of such opportunities. Once presented to UCB, the Board of Directors
of UCB shall determine within seven (7) days whether to pursue such
opportunity and shall enter into a definitive contract within 30 days of the
decision to pursue such opportunity and close such acquisition or investment
within 90 days of the decision to pursue such opportunity. If UCB is
unwilling or unable to pursue a particular opportunity within the time limits
prescribed in the preceding sentence, then the Purchaser will be free to
pursue such opportunity. The obligations of the Purchaser under this Section
7.28 shall cease upon the earlier of (i) the Purchaser owning less than 25%
of the Common Stock of UCB on a Fully Diluted Basis and not having a
representative on the Board of Directors of UCB or (ii) the Purchaser owning
less than 15% of the Common Stock of UCB on a Fully Diluted Basis.
7.29 TERMINATION OF CERTAIN COVENANTS. The obligations of UCB set forth
in Sections 7.2 through 7.26 shall terminate on the date on which the
Purchaser and all Subsidiaries of Purchaser do not hold, in aggregate 7.5% of
the outstanding Common Stock of UCB calculated on a Fully Diluted Basis.
VIII. TERMINATION.
8.1 TERMINATION.
(a) The parties hereto may terminate this Agreement as provided
below:
(i) Purchaser and Nor'Wester may terminate this Agreement by
mutual written consent at any time prior to the Closing.
(ii) This Agreement may be terminated by (A) the Purchaser by
giving written notice to Nor'Wester at any time prior to the Closing
in the event that any of Bernau or any of the Constituent
Corporations has breached any covenant in material respects or has
breached any representation or warranty contained in this Agreement
or any document relating to the Transactions, Purchaser has notified
Bernau or the Constituent Corporation of the breach and the breach
49
has continued without cure for a period of 10 days after the notice
of breach (if such breach is curable), (B) Nor'Wester by giving
written notice to the Purchaser at any time prior to the Closing in
the event that the Purchaser has breached any covenant in material
respects or has breached any representation or warranty contained in
this Agreement, Nor'Wester has notified the Purchaser of the breach
and the breach has continued without cure for a period of 10 days
after the notice of breach (if such breach is curable), or (C)
written notice from Nor'Wester to the Purchaser, or from the
Purchaser to Nor'Wester, at any time after August 31, 1997;
PROVIDED, HOWEVER, that the right to terminate this Agreement under
this subsection 8.1(a)(ii)(C) shall not be available to any party
whose failure to fulfill any obligation under this Agreement shall
have been the primary cause of, or resulted primarily in, the
failure of the Closing to occur on or before such date.
(b) In the event of a termination of this Agreement as
described in this Article VIII, all rights and obligations of each party
hereunder shall terminate without any liability of either party to the other
except for any liability of either party arising out of any breach of this
Agreement; PROVIDED HOWEVER, that Section 10.1, 10.2, 10.4, 10.5, 10.6, 10.7,
10.8, 10.9, 10.10, 10.12, 10.13, 10.14 and 10.15 shall survive termination.
IX. INDEMNIFICATION
9.1 INDEMNIFICATION.
(a) Each Constituent Corporation and Bernau, jointly and
severally, agrees to indemnify and hold harmless Purchaser, its officers,
directors and employees from and against any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs,
attorneys' fees, expenses and disbursements of any kind (including
Environmental Costs) which may be imposed upon, incurred by or asserted
against Purchaser, such officers, directors and employees in any matter
relating to or arising out of (i) any untrue representation, breach of
warranty or failure to perform any covenants by any Constituent Corporation
or Bernau contained herein, the Ancillary Agreements or in the other
Transactions to which any Constituent Corporation or Bernau is a party or in
any certificate or document delivered pursuant hereto or thereto, (ii) any
Environmental Law applicable to any Constituent Corporation, or (iii) any
liability of any Constituent Corporation or its Subsidiaries that is not
explicitly assumed by Purchaser hereunder, in the Ancillary Agreements or in
the Transactions; PROVIDED, HOWEVER, that except with regards to any breach
by Bernau of the representations and warranties contained in Sections 3.28
through 3.31 hereof or a breach of the covenants contained in Section 5.12,
the only
50
recourse that Purchaser may have against Bernau under this Agreement for
indemnification, contribution, reimbursement of expenses or breach of any
representation and warranty is limited to the shares in UCB held by Bernau
after the Consolidation, which are the subject of the Security Agreement,
excluding any shares of Common Stock received by Bernau as a result of the
exercise of options to purchase Common Stock granted pursuant to Bernau's
Employment Agreement.
(b) Purchaser agrees to indemnify and hold harmless Bernau and
each Constituent Corporation and its officers, directors and employees from
and against any liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, attorneys' fees, expenses and
disbursements of any kind which may be imposed upon, incurred by or asserted
against any Constituent Corporation and such officers, directors and
employees in any matter relating to or arising out of any untrue
representation, breach of warranty or failure to perform any covenants by the
Purchaser contained herein, in the Ancillary Agreements or in the other
Transactions to which the Purchaser is a party or in any certificate or
document delivered pursuant hereto or thereto.
(c) The foregoing indemnification provisions are in addition
to, and not in derogation of, any statutory, equitable or common law remedy
the Purchaser, Bernau, each Constituent Corporation and their respective
officers, directors and employees may have for breach or representation,
warranty or covenant.
(d) No claim may be brought under this Agreement against Bernau
based upon a breach of a representation or warranty contained herein, except
for a breach of a representation or warranty contained in Sections 3.28
through 3.31, unless written notice describing in reasonable detail the
nature and basis of such claim is given on or prior to the day that is one
year from the Closing Date.
(e) Bernau and the Constituent Corporations shall not be
obligated to indemnify the Purchaser unless and until the cumulative amount
of all losses incurred, suffered or paid by the Purchaser under this Section
9.1 exceeds $150,000 in the aggregate, whereupon the Purchaser shall be
entitled to indemnification hereunder for the full amount of all such losses
and shall thereafter be entitled to indemnification of losses as such losses
are incurred.
(f) The Purchaser shall not be obligated to indemnify the
Bernau and the Constituent Corporations unless and until the cumulative
amount of all losses incurred, suffered or paid by Bernau and the Constituent
Corporations under this Section 9.1 exceeds $150,000 in the aggregate,
whereupon Bernau and the Constituent Corporations shall be entitled to
indemnification hereunder for the full amount of all such losses and shall
51
thereafter be entitled to indemnification of losses as such losses are
incurred.
X. MISCELLANEOUS
10.1 NOTICES. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may
be given to or served upon any of the parties by another, or whatever any of
the parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent,
approval, declaration or other communication shall be in writing and either
shall be delivered in person with receipt acknowledged or by registered or
certified mail, return receipt requested, postage prepaid, or by telecopy and
confirmed by telecopy answerback addressed as follows:
IF TO NOR'WESTER AT:
Nor'Wester Brewing Company,
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
WITH A COPY TO:
Jack W. Schifferdecker, Jr.
Ater Wynne Hewitt Dodson & Skerritt
222 S.W. Columbia, Suite 1800
Portland, OR 97201
Telecopy Number: (503) 226-0079
IF TO NORTH COUNTRY AT:
Nor'Wester Brewing Company,
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
WITH A COPY TO:
Robert Craven
North Country Brewing Company
131 Excelsior Avenue
P.O. Box 376
Saratoga Springs, NY 12866
Telecopy Number: (518) 581-1804
52
and
Jack W. Schifferdecker, Jr.
Ater Wynne Hewitt Dodson & Skerritt
222 S.W. Columbia, Suite 1800
Portland, OR 97201
Telecopy Number: (503) 226-0079
IF TO WVI AT:
Willamette Valley, Inc. Microbreweries Across
America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
WITH A COPY TO:
Gordon R. Hanna
Donaldson, Albert, Tweet, Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
IF TO AVIATOR ALES, INC. AT:
Aviator Ales, Inc.
14316 NE 203rd Street
Woodinville, Washington 98072
Attention: Dusty Wyant
Telecopy Number: (206) 487-0847
WITH A COPY TO:
Willamette Valley, Inc. Microbreweries Across
America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet, Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
Willamette Valley, Inc. Microbreweries Across
America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
IF TO BAYHAWK ALES, INC. AT:
Bayhawk Ales, Inc.
2000 Main Street-Suite A
Irvine, CA 92714
Attention: David Voorhies
53
Telecopy Number: (714) 442-7566
WITH A COPY TO:
Willamette Valley, Inc. Microbreweries Across
America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet, Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
Willamette Valley, Inc. Microbreweries Across
America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
If to Mile High Brewing Company at:
Mile High Brewing Company
2401 Blake Street
Denver, CO 80205
Attention: John Carter
Telecopy Number: (303) 299-9192
WITH A COPY TO:
Willamette Valley, Inc. Microbreweries Across
America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet, Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
Willamette Valley, Inc. Microbreweries Across
America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
If to Bernau at:
James W. Bernau
8800 Enchanted Way, S.E.
Turner, OR 97392
Telecopy Number: (503) 588-8894
54
IF TO PURCHASER AT:
United Breweries of America, Inc.
One Harbor Drive, Suite 102
Sausalito, CA 94965
Attention: Vijay Mallya
Telecopy Number: (415) 289-1409
WITH A COPY TO:
Alan Talkington
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Building
400 Sansome Street
San Francisco, CA 94111
Telecopy Number: (415) 773-5759
The parties agree to send such notices to such other address as may be
substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice. Every notice, demand, request, consent, approval, declaration
or other communication hereunder shall be deemed, request, consent, approval,
declaration or other communication hereunder shall be deemed to have been
duly given or served on the date on which personally delivered, with receipt
acknowledged, telecopied and confirmed by telecopy answerback, or three (3)
Business Days after the same shall have been deposited, with the United
States mail.
10.2 BINDING EFFECT; BENEFITS. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties
to this Agreement and their respective successors and permitted assigns.
Nothing is this Agreement, express or implied, is intended or shall be
construed to give any person other than the parties to this Agreement or
their respective successors or assigns any legal or equitable right, remedy
or claim under or in respect of any agreement or any provision contained
herein.
10.3 AMENDMENT. Any amendment or waiver of any provision of this
Agreement, any Ancillary Agreement or the other Transactions or any consent
to any departure therefrom shall not be effective unless the same shall be in
writing and signed by Nor'Wester, Bernau and the Purchaser and shall
specifically refer to this Agreement or such Ancillary Agreement or such
Transaction. Except as provided in the preceding sentence, no action taken
pursuant to this Agreement, including, without limitation, any investigation
by or on behalf of any party, shall be deemed to constitute a waiver by the
party hereto of a breach of any provision of this Agreement shall not operate
or be construed as a waiver of any preceding or succeeding breach, and no
failure by either part to exercise any right or privilege hereunder shall be
deemed a waiver of such party's rights or privilege hereunder or
55
shall be deemed a waiver of such party's rights to exercise the same at any
subsequent time or times hereunder.
10.4 PARTIES IN INTEREST; ASSIGNMENT. Nothing contained in this
Agreement, express or implied, is intended to confer upon any person or
entity, other than the parties hereto and their permitted assignees and the
parties entitled to indemnification hereunder, any rights or remedies under
or by reason of this Agreement. No assignment of this Agreement or any
rights hereunder by any Constituent Corporation, Bernau or the Purchaser
shall be given any effect without the prior written consent of all of the
others; provided, however, that the Purchaser may, without the prior written
consent of any Constituent Corporation and Bernau, assign all of their rights
hereunder to one or more entities, 100% of the interests in which are owned
directly or indirectly by the Purchaser or otherwise controlled by Vijay
Mallya, provided that, notwithstanding any such assignment, the Purchaser
shall remain liable to perform all obligations of the Purchaser hereunder.
Subject to the foregoing sentence, this Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their respective successors
and assigns.
10.5 REMEDIES. Purchaser, Bernau and each Constituent Corporation, in
addition to being entitled to exercise all rights granted by law, including
recovery damages, will be entitled to specific performance of their rights
under this Agreement. Each Constituent Corporation, Bernau and Purchaser
agree that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by them of the provisions of this Agreement
and hereby agree to waive the defense in any action for specific performance
that a remedy at law would be adequate. Each party hereto shall be paid by
the other party hereto for any reasonable costs and expenses incurred by it
(including reasonable fees and expenses of counsel and whether incurred as a
result of negotiations, legal proceedings or otherwise) in connection with
the enforcement of its rights under the Transactions against such other party.
10.6 APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of California, without regard to the
principles thereof regarding conflict of laws; provided that to the extent
that the parties hereto (or their officers, directors and shareholders) are
required under the Oregon Business Corporation Act to comply with the Oregon
Business Corporation Act with respect to any matters arising under this
Agreement, nothing in this Section 10.6 shall be deemed to prohibit such
compliance or the reference to the Oregon Business Corporation Act for
purposes of determining the rights and obligations of the paries hereto (or
their officers, directors and shareholders). Each party to this Agreement
hereby consents to service of process in the County of San Francisco,
California and hereby agrees that all disputes relating to or arising under
this Agreement shall be the jurisdiction of the
56
state and federal courts located in the County of San Francisco, California.
10.7 SECTION AND OTHER HEADINGS. The section and other headings
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
10.8 SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Agreement shall not be in any way impaired.
10.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
10.10 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Without the prior
written consent of the Constituent Corporation, any information relating to
the Constituent Corporation provided to Purchaser in connection with, or as a
result of, its acquisition of the Common Stock which is either confidential,
proprietary, or otherwise not generally available to the public (but
excluding (a) information the Purchaser has obtained independently or from
third-party sources without the Purchaser's knowledge that the source has
violated any fiduciary duty or other duty not to disclose such information,
(b) information that otherwise becomes generally available to the public, or
(c) information known to Purchaser prior to its receipt of such information
in connection with, or as a result of, its purchase of Common Stock
hereunder) (the "Confidential Information") will be kept confidential by
Purchaser, using the same standard of care in safeguarding the Confidential
Information as Purchaser employs in protecting its own proprietary
information which Purchaser desires not to disseminate or publish and
Purchaser will instruct its directors, officers, and representatives
(collectively, "Representatives") as to keep such Confidential Information
confidential. It is understood (i) that such Representatives shall be
informed by Purchaser of the confidential nature of the Confidential
Information and (ii) that such Representatives shall be bound by the
provisions of this Section 10.10 as condition of receiving the Confidential
Information. Purchaser shall not use any such Confidential Information to
produce a malt beverage whose formula duplicates any formula for a malt
beverage disclosed by the Constituent Corporation to Purchaser.
10.11 PUBLICITY. Neither Purchaser nor the Constituent Corporation shall
issue any press release or make any public disclosure regarding this
Agreement or any of the transactions contemplated hereby without the prior
consent of the other party hereto; provided, however, that nothing in this
Section 10.11
57
shall be deemed to prohibit any party to this Agreement from making any
disclosure required by law.
10.12 ENTIRE AGREEMENT. This Agreement, the Ancillary Agreements and the
other documents contemplated by the Transactions constitute the entire
agreement among the parties hereto and supersede any prior understandings,
agreements or representations by or among the parties hereto, written or
oral, to the extent they are related in any way to the subject matter hereof.
10.13 FEES AND EXPENSES. Each of the parties hereto shall bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby; provided,
however, that Nor'Wester shall pay the costs and expenses (including
reasonable legal fees and expenses) incurred by the Purchaser in connection
with the Bridge Loans.
10.14 EXHIBITS AND SCHEDULES. The exhibits and schedules identified in
this Agreement are incorporated herein by reference and made a part hereof.
10.15 CONSTRUCTION. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
The word "including" shall mean including without limitation. If either
party has breached any representation, warranty or covenant contained herein
in any respect, the existence of another representation, warranty or covenant
related to the same subject matter (regardless of the relative levels of
specificity) that the party has not breached shall not detract from or
mitigate the breach of the former representation, warranty or covenant.
References of this Agreement shall mean this Investment Agreement,
including all amendments, modifications and supplements and any exhibits or
schedules to any of the foregoing, and shall refer to the Agreement as the
same may be in effect at the time such reference becomes operative.
58
IN WITNESS WHEREOF, Nor'Wester, North Country, WVI, the WVI Subsidiaries
and Bernau and the Purchaser have executed this Agreement as of the day and
year first above written.
NOR'WESTER BREWING COMPANY
By: /s/ JAMES W. BERNAU
------------------------
Name: James. W. Bernau
Title: President
NORTH COUNTRY BREWING COMPANY
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
Title: President
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS
AMERICA
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
Title: President
AVIATOR ALES, INC.
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
Title: President
BAYHAWK ALES, INC.
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
Title: President
MILE HIGH BREWING COMPANY
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
Title: President
59
JAMES W. BERNAU
By: /s/ JAMES W. BERNAU
-----------------------
Name: James W. Bernau
UNITED BREWERIES OF AMERICA, INC.
By: /s/ VIJAY MALLYA
-----------------------
Name: Vijay Mallya
Title: Chairman
60
AMENDMENT
This Amendment (the "Amendment") to (i) the Investment Agreement (the
"Investment Agreement") dated January 30, 1997, by and among Nor'Wester Brewing
Company, Inc. ("Nor'Wester"), North Country Joint Venture, LLC ("North
Country"), Willamette Valley, Inc. Microbreweries Across America ("WVI") and
each of the entities identified in Schedule 1.0 thereto (collectively, the "WVI
Subsidiaries"), James W. Bernau ("Bernau") and United Breweries of America, Inc.
("UBA"); (ii) the Credit Agreement (the "Credit Agreement") dated January 30,
1997, by and between Nor'Wester and UBA; and (iii) various exhibits and
schedules to the Investment Agreement and the Credit Agreement all as more fully
described below, is entered into as of May 14, 1997.
RECITALS
WHEREAS, certain of the parties entered into the Investment Agreement,
the Credit Agreement and certain related documents, instruments and agreements
on January 30, 1997; and
WHEREAS, the parties desire to amend the Investment Agreement, the
Credit Agreement and certain related documents, instruments and agreements.
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto agree as follows:
AGREEMENT
1. The definition of "Bridge Loan Shares" on page 2 of the
Investment Agreement shall be deleted.
2. On page 2 of the Investment Agreement, the following paragraph
shall be added after the definition of "Business Day" and before the definition
of "Capital Expenditures":
""Cancellation Shares" shall have the meaning set forth in Section
2.1."
3. The definition of "Diluted Basis" on page 3 of the Investment
Agreement shall be amended by adding the words "or to Vijay Mallya pursuant to
the Services Agreement" after the words "Employment Agreement" in the eighth
line of such definition.
4. Section 2.1 of the Investment Agreement shall be amended to read
in its entirety as follows:
"2.1 PURCHASE AND TRANSFER OF EQUITY SECURITIES. Subject to the
terms and conditions set forth in this Agreement, (i) the Purchaser agrees
to subscribe for and
purchase from UCB, and UCB agrees to issue and sell to the Purchaser,
1,047,619 shares of Common Stock (the "Purchase Shares"), for $5,500,000
and (ii) Bernau agrees to transfer to Purchaser 83,109 shares of Common
Stock (the "Transfer Shares"), and Bernau agrees to transfer to UCB 174,912
shares of Common Stock (the "Cancellation Shares"), in consideration for
(a) forestalling any potential lawsuits from current shareholders of the
Constituent Corporations and thus supporting the financial viability of UCB
on an ongoing basis, (b) inducing the investment by the Purchaser
contemplated by this Agreement, thus protecting Bernau's investment in the
Constituent Corporations, and (c) protecting Bernau's goodwill and general
business reputation, all as more fully described in Section 2.2 hereof.
After giving effect to the Consolidation and the other transactions
contemplated by this Agreement, the Purchase Shares and the Transfer Shares
shall collectively total 40.00% of the outstanding Common Stock of UCB on a
Diluted Basis."
5. The second paragraph of Section 2.2 of the Investment Agreement
shall be amended in its entirety to read as follows:
"On the Closing Date, (i) Bernau shall deliver to the Purchaser
certificates representing the Transfer Shares to be transferred to the
Purchaser registered in the Purchaser's name (subject to the requirements
of Section 10.4) and in such denominations as the Purchaser requests, (ii)
Bernau shall deliver to UCB certificates representing the Cancellation
Shares to be transferred to UCB registered in UCB's name and UCB shall take
all necessary corporate action to have such Cancellation Shares cancelled,
and (iii) UCB shall deliver to the Purchaser certificates representing the
Purchase Shares, registered in the Purchaser's name (subject to the
requirements of Section 10.4) and in such denominations as the Purchaser
requests against delivery by the Purchaser of the purchase price therefor
consisting of (a) a certified or bank check in the name of UCB in the
amount of $2,750,000 plus an amount equal to the difference between the
full amount of the $2,750,000 Bridge Loans and the actual amount loaned by
UBA under the Bridge Loans and (b) if all of the outstanding principal
amount due under the Bridge Loans has been repaid, a certified or bank
check in the name of UCB in the amount of $2,750,000, otherwise, by
contributing to UCB the aggregate principal amount due under the Bridge
Loans as of the Closing Date."
6. Section 2.4 of the Investment Agreement shall be amended by
adding the words "and Black & Company" after the words "hereof, (a) Bernau" on
the first line of that section and by adding the words ", Black & Company" after
the words "between Bernau" on the third line of that section.
7. Section 3.2 of the Investment Agreement shall be amended by (i)
replacing the words "Nor'Wester and Bernau shall take all necessary corporate
action to cause, and shall cause, UCB to" in the first and second lines of text
with the words "UCB shall"; (ii) by deleting the words "and the Bridge Loan
Shares" in the eighth and ninth lines of text; (iii) by replacing the number
"45.00000%" with the number "40.00%"; and (iii) by replacing the number
"10.000005%" with the number "10.00%".
2
8. Section 6.1(l)(v) shall be amended to read in its entirety as
follows:
"(v) the Employment Agreement between Vijay Mallya and UCB dated the
Closing Date and in a form satisfactory to the Purchaser and UCB (the
"Services Agreement") in which, among other things, UCB agrees to pay Vijay
Mallya $126,000 per year for services rendered and UCB grants Vijay Mallya
options to purchase shares of UCB Common Stock in an amount equal to 4% of
the oustanding Common Stock of UCB on a Fully Diluted Basis at an exercise
price of $5.25 per share."
9. Section 6.1(n) of the Investment Agreement shall be amended to
read in its entirety as follows:
"(n) The net worth of the Constituent Corporations combined, prepared
in accordance with GAAP shall not be less than $10.0 million as of the
Closing Date and before taking into account any write downs related to the
sale of the assets of Bayhawk Ales, Inc. and any gains related to the sale
of the assets of Mile High Brewing Company."
10. Section 6.1 of the Investment Agreement shall be amended by
adding a new section 6.1(u) which shall read in its entirety as follows:
"(u) UCB shall have received the Cancellation Shares as contemplated
by Section 2.2 and shall have cancelled the Cancellation Shares."
11. Section 6.1 of the Investment Agreement shall be amended by
adding a new section 6.1(v) which shall read in its entirety as follows:
"(v) If the Purchaser contributes the aggregate principal amount due
under the Bridge Loans as partial payment for the Purchase Shares as
described in Section 2.2, then the accrued interest up to and including the
Closing Date due under the Bridge Loans shall have been paid in cash to
Purchaser."
12. Section 6.2 of the Investment Agreement shall be amended by
deleting the words "and the Bridge Loan Shares" in the second and third lines of
text and adding the words "and the Cancellation Shares" after the words
"Transfer Shares" in the third line of text.
13. Section 7.28 of the Investment Agreement shall be amended by
adding the words "After the Closing Date, but not prior to such date, any" and
deleting the word "Any" at the beginning of the second sentence.
14. Section 10.13 of the Investment Agreement shall be amended by
adding the words "; provided, further, that all costs and expenses (including
legal fees and expenses) incurred by Purchaser in connection with the
Consolidation shall be reimbursed by Nor'Wester, or alternatively, Purchaser may
use funds from the Bridge Loans to pay such
3
costs and expenses. If this Agreement is terminated prior to Closing, all costs
and expenses (including legal fees and expenses) that have not been previously
reimbursed or funded through the Bridge Loans shall be added to the principal
amount outstanding under the Bridge Loans. In addition, all costs and expenses
incurred by the Purchaser relating to the possible acquisition of other
companies or other investment opportunities shall be reimbursed if the Closing
occurs and UCB is the acquiring company or the company making the investment."
after the words "the Bridge Loans" in the last line of that section.
15. Schedule 3.1(d) to the Investment Agreement shall be replaced in
its entirety by Revised Schedule 3.1(d), a copy of which is attached hereto as
ATTACHMENT A.
16. Schedule 6.1(l)(i) to the Investment Agreement shall be amended
by replacing the fourth bullet point with a new bullet point to read in its
entirety as follows:
"- Receive options to purchase shares of Common Stock in an amount
equal to 4% of the total number of shares outstanding on a Fully
Diluted Basis
- 25% of the shares vest upon Closing, remaining shares
subject to three year straight-line vesting
- Fully vest upon termination
- Exercisable up to 5 years following termination
- Exercise price equal to $5.25 per share"
17. Schedule 6.1(n) of the Investment Agreement shall be deleted.
18. Exhibit 2.4(a) to the Investment Agreement, the Stockholder's
Agreement, shall be deleted in its entirety and replaced with Revised Exhibit
2.4(a) to read in its entirety as set forth in ATTACHMENT B.
19. Exhibit 5.9(a)(i) to the Investment Agreement, the Form of
Certificate of Incorporation for United Craft Brewers, Inc., shall be deleted in
its entirety and replaced with Revised Exhibit 5.9(a)(i) to read in its entirety
as set forth in ATTACHMENT C.
20. Exhibit 5.9(a)(ii) to the Investment Agreement, the Form of
By-laws for United Craft Brewers, Inc., shall be deleted in its entirety and
replaced with Revised Exhibit 5.9(a)(ii) to read in its entirety as set forth in
ATTACHMENT D.
21. Exhibit 6.1(a) to the Investment Agreement shall be replaced in
its entirety by Revised Exhibit 6.1(a), a copy of which is attached hereto as
ATTACHMENT E.
22. Exhibit 6.2(h) to the Investment Agreement shall be replaced in
its entirety by Revised Exhibit 6.2(h), a copy of which is attached hereto as
ATTACHMENT F.
23. Each reference in the Credit Agreement to "Convertible Note"
shall be deleted and replaced with the term "Note", the definition of
Convertible Note set forth in
4
Section 1.01 of the Credit Agreement as so deleted and replaced shall be moved
so that the definition of "Note" immediately preceeds the definition of "North
Country", and the word "convertible" appearing in Section 2.03 of the Credit
Agreement shall be deleted.
24. Exhibit A to the Credit Agreement (the Form of Convertible
Promissory Note) shall be deleted in its entirety and replaced with a new
Exhibit A to the Credit Agreement (the Form of Note) to read in its entirety as
set forth on ATTACHMENT G.
25. Each reference in the Credit Agreement, the Security Agreement,
the Pledge Agreement and the Personal Guaranty to the "Investment Agreement"
shall be deemed to be a reference to the Investment Agreement as amended by this
Amendment.
26. Each reference in the Security Agreement, the Pledge Agreement
and the Personal Guaranty to the "Credit Agreement" shall be deemed to be a
reference to the Credit Agreement as amended by this Amendment.
27. The amendments effected above shall become effective on May 14,
1997, subject to (i) execution by each of the parties hereto in the space
provided below, (ii) receipt by UBA of an amended and restated Convertible
Promissory Note, duly executed by Nor'Wester, in the form of Exhibit A to the
Credit Agreement, as amended by this Amendment and (iii) receipt by Nor'Wester
of the Guarantor Consent, duly executed by UB International Ltd., in the form
set forth on ATTACHMENT H.
28. The parties hereby affirm that the Investment Agreement, the
Credit Agreement, the Security Agreement, the Pledge Agreement and the Personal
Guaranty as amended hereby, constitute the entire agreements among the parties
pertaining to the subject matters thereof and supersede all prior agreements and
understandings pertaining thereto.
29. The Investment Agreement, the Credit Agreement, the Security
Agreement, the Pledge Agreement and the Personal Guaranty as amended hereby,
remain in full force and effect.
30. United Craft Brewers, Inc., for the consideration set forth above
and in the Investment Agreement, hereby affirms its rights and obligations under
the Investment Agreement, as hereby amended, and agrees to comply with all of
its agreements thereunder or hereunder.
31. Unless otherwise defined herein, all capitalized terms used
herein and defined in the Investment Agreement or the Credit Agreement shall
have the respective meanings given to those terms in the Investment Agreement or
the Credit Agreement.
5
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date written above.
NOR'WESTER BREWING COMPANY
By: /s/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
NORTH COUNTRY BREWING COMPANY
By: /S/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS AMERICA
By: /s/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
AVIATOR ALES, INC.
By: /s/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
BAYHAWK ALES, INC.
By: /S/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
6
MILE HIGH BREWING COMPANY
By: /s/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
Title: President
JAMES W. BERNAU
By: /s/ James W. Bernau
-----------------------------------------
Name: James W. Bernau
UNITED BREWERIES OF AMERICA, INC.
By: /S/ Vijay Mallya
-----------------------------------------
Name: Vijay Mallya
Title: Chairman
UNITED CRAFT BREWERS, INC.
By: /s/ Vijay Mallya
-----------------------------------------
Name: Vijay Mallya
Title: Chairman and Chief Executive Officer
7
ANNEX B
[AGREEMENT AND PLAN OF MERGER]
B-1
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
------------
DATED AS OF
MAY 14, 1997
------------
BY AND AMONG
UNITED CRAFT BREWERS, INC.
AND
NOR'WESTER BREWING COMPANY, INC.
AVIATOR ALES, INC.
BAYHAWK ALES, INC.
MILE HIGH BREWING COMPANY
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 14, 1997 (this "Agreement"),
by and among United Craft Brewers, Inc., a Delaware corporation ("UCB"),
Nor'Wester Brewing Company, Inc., an Oregon corporation ("Nor'Wester"), Aviator
Ales, Inc., a Delaware corporation ("Aviator"), Bayhawk Ales, Inc., a Delaware
corporation ("Bayhawk), Mile High Brewing Company, a Delaware corporation ("Mile
High"), and Willamette Valley, Inc. Microbreweries Across America, an Oregon
corporation ("WVI") (collectively, Nor'Wester, Aviator, Bayhawk, Mile High and
WVI are the "Constituent Corporations").
RECITALS:
A. The Constituent Corporations, James W. Bernau ("Bernau"), and United
Breweries of America, Inc., a Delaware corporation ("UBA") entered into an
Investment Agreement dated January 30, 1997, as amended (the "Investment
Agreement"), pursuant to which the parties agreed upon the terms and conditions
of (i) the formation of UCB, (ii) the purchase of 1,047,619 shares of UCB Common
Stock by UBA, (iii) a series of bridge loans in the aggregate amount of
$2,750,000 from UBA to Nor'Wester, (iv) the transfer of 83,109 shares of UCB
Common Stock by Bernau to UBA, and (v) the transfer of 174,912 of UCB Common
Stock by Bernau to UCB for cancellation, (vi) the consolidation of the
Constituent Corporations whereby each Constituent Corporation shall become a
wholly-owned subsidiary of UCB, except for WVI which shall cease to exist upon
its merger with and into UCB.
B. Pursuant to the Investment Agreement, UBA has agreed to form UCB and
to cause UCB to take all action necessary to properly form, and to properly form
as UCB's wholly owned subsidiaries Nor'Wester Acquistion Sub, Inc. ("Sub1");
Aviator Acquisition Sub, Inc. ("Sub2"); Bayhawk Acquisition Sub, Inc. ("Sub3");
and Mile High Acquisition Sub, Inc. ("Sub4") (collectively the "UCB Acquisition
Subsidiaries").
C. The respective Boards of Directors of UCB and the Constituent
Corporations have each determined that it is in the best interest of their
respective corporations and their stockholders for the UCB Acquisition
Subsidiaries to merge with and into Nor'Wester, Aviator, Bayhawk and Mile High,
respectively, and for WVI to merge with and into UCB (each a "Merger," and
collectively, the "Consolidation"), pursuant to which each issued and
outstanding share of Common Stock of Nor'Wester, Aviator, Bayhawk, Mile High,
and WVI (except for shares of Aviator Common Stock, Bayhawk Common Stock, and
Mile High Common Stock owned by WVI, which shares shall be extinguished and in
exchange for which no UCB Common Stock or other consideration shall be paid)
will be converted into the number of shares of the Common Stock, par value $.001
per share, of UCB ("UCB Common Stock") determined in accordance with the
exchange ratios described in Section 3.1(a) of this Agreement (the "Exchange
Ratios").
D. The Board of Directors of UCB have approved and adopted the Investment
Agreement, this Agreement, the Mergers, the Consolidation, and the issuance of
UCB
1
Common Stock in connection herewith and agreed to cause the UCB Acquisition
Subsidiaries to take all action to be taken by the UCB Acquisition Subsidiaries,
and each of them, under this Agreement.
E. The respective Boards of Directors of the Constituent Corporations
have approved and adopted the Investment Agreement, this Agreement, the Mergers
and the Consolidation, and have resolved to recommend that their respective
stockholders approve this Agreement, the Mergers, and the Consolidation.
F. For federal income tax purposes, it is intended that the Mergers and
the Consolidation shall qualify as a reorganization within the meaning of
Section 368(a) or, alternatively, as a transaction qualifying for
non-recognition under Section 351 of the Internal Revenue Code of 1986 (the
"Code"), as amended.
NOW, THEREFORE, in consideration of the premises, the representations,
warranties and agreements herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
subject to the conditions set forth herein, the parties hereby agree as follows:
ARTICLE 1
THE CONSOLIDATION
1.1 THE MERGERS. At the Effective Time and subject to and upon the terms
and conditions of this Agreement, (i) Sub1 shall be merged with and into
Nor'Wester, (ii) Sub2 shall be merged with and into Aviator, (iii) Sub3 shall be
merged with and into Bayhawk, (iv) Sub4 shall be merged with and into Mile High,
and (v) WVI shall be merged with and into UCB, all in accordance with the
provisions of the Delaware General Corporation Law (the "DGCL") and, in the
cases of the merger of Sub1 with and into Nor'Wester and the merger of WVI with
and into UCB, in accordance with the Oregon Business Corporation Act (the
"OBCA"). Following the Mergers, UCB, Nor'Wester, Aviator, Bayhawk, and Mile
High shall continue as the surviving corporations under their current names (the
"Surviving Corporations") and the separate corporate existence of each of the
UCB Acquisition Subsidiaries and WVI shall cease.
1.2 EFFECTIVE TIME. Each Merger with respect to a particular Constituent
Corporation shall become effective on the date and at the time (the "Effective
Time") that the certificate of merger (the "Certificate of Merger"), which shall
be filed with the Secretary of State of the state of Delaware (the "Delaware
Secretary") and, with respect to the merger of Nor'Wester with and into Merger
Sub1, the articles of merger (the "Articles of Merger"), which shall be filed
with the Secretary of State of the state of Oregon (the "Oregon Secretary"), and
with respect to the Merger of WVI with and into UCB the Articles of Merger and
the Certificate of Merger, which shall be filed with the Oregon Secretary and
the Delaware Secretary, respectively, are filed with the Delaware Secretary and
the Oregon Secretary, as applicable, in each case on the Closing Date.
2
1.3 CLOSING. Subject to the fulfillment or waiver of the conditions set
forth in Article 6, the closing of the Mergers and the Consolidation (the
"Closing") shall take place (a) at the offices of Orrick, Herrington &
Sutcliffe, LLP, Old Federal Reserve Bank Building, 400 Sansome Street, San
Francisco, California, 94111, at 9:30 a.m. within five (5) business days
following the last meeting of stockholders of the Constituent Corporations at
which approval of the Mergers and the Consolidation is duly obtained, or (b) at
such other place and/or time and/or on such other date as the parties may
mutually determine.
1.4 ACTION BY UCB ACQUISITION SUBSIDIARIES. UCB shall form the UCB
Acquisition Subsidiaries as its wholly owned subsidiaries and thereafter shall
cause the UCB Acquisition Subsidiaries to take all action to be taken by the UCB
Acquisition Subsidiaries, and each of them, under this Agreement.
ARTICLE 2
TERMS OF THE MERGERS
2.1 EFFECTS OF THE MERGERS. The separate corporate existence of UCB,
Nor'Wester, Aviator, Bayhawk, and Mile High, with all their respective purposes,
objects, rights, privileges, powers, certificates and franchises, shall continue
unimpaired by the Mergers. At the Effective Time, the separate corporate
existence of the UCB Acquisition Subsidiaries and WVI shall cease, and the
Surviving Corporations shall succeed to all the properties and assets of the
Constituent Corporations and to all debts, choses in action and other interests
due or belonging to the Constituent Corporations and shall be subject to, and
responsible for, all the debts, liabilities and duties of the Constituent
Corporations with the effects provided by the applicable provisions of the DGCL
and the OBCA.
2.2 ARTICLES OF INCORPORATION AND BYLAWS.
(a) The respective Articles of Incorporation or Certificate of
Incorporation, as applicable, of UCB, Nor'Wester, Aviator, Bayhawk and Mile High
in effect immediately prior to the Effective Time shall be the Articles of
Incorporation or Certificate of Incorporation of the Surviving Corporations
until amended in accordance with the provisions of the DGCL or the OBCA, as
applicable.
(b) The respective Bylaws of UCB, Nor'Wester, Aviator, Bayhawk and
Mile High as in effect immediately prior to the Effective Time shall be the
Bylaws of the Surviving Corporations until duly amended in accordance with
applicable law, the Articles of Incorporation of the Surviving Corporations and
such Bylaws.
2.3 DIRECTORS. The initial directors of Sub1, Sub2, Sub3, and Sub4
immediately prior to the Effective Time shall be the Directors of Nor'Wester,
Aviator, Bayhawk, and Mile High, respectively, from and after the Effective Time
and shall hold office in accordance with the Articles of Incorporation and
Bylaws of the respective Surviving Subsidiary, from the Effective Time until
their respective successors are duly elected or appointed and qualified. From
and after the Effective Time, the Board of Directors of UCB
3
shall consist of those members as are determined in accordance with Section
6.1(k) of the Investment Agreement.
2.4 OFFICERS. The respective officers of Nor'Wester, Aviator, Bayhawk,
Mile High, and WVI shall resign immediately prior to the Effective Time and the
initial officers of each of the Surviving Corporations shall be appointed by the
initial directors of each of the Surviving Corporations and shall hold office in
accordance with the Articles of Incorporation and Bylaws of the respective
Surviving Corporation from the Effective Time until their respective successors
are duly elected or appointed and qualified.
ARTICLE 3
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
3.1 MANNER OF CONVERTING SHARES. Except as provided in Section 3.2 and
Section 3.3 of this Agreement, as of the Effective Time, by virtue of the
Mergers and without any action on the part of the holders of any shares of
Common Stock of the Constituent Corporations (the "Constituent Corporation
Stock") or the holders of any shares of Common Stock of the UCB Acquisition
Subsidiaries (the "Acquisition Subsidiary Stock") or the holders of UCB Common
Stock:
(a) Each share of Constituent Corporation Stock outstanding
immediately prior to the Effective Time (other than (i) Constituent Corporation
Stock held by WVI and (ii) Constituent Corporation Stock as to which dissenters'
rights, if available, shall have been exercised) shall be converted at the
Effective Time into the right to receive from UCB that number of fully-paid,
validly issued and non-assessable shares of UCB Common Stock in accordance with
the respective Exchange Ratios as set forth below:
Nor'Wester...................0.3333333 shares
WVI..........................0.0785714 shares
Aviator......................0.0523809 shares
Bayhawk......................0.0785714 shares
Mile High....................0.0523809 shares
(b) Each share of Acquisition Subsidiary Stock of Sub1, Sub2, Sub3,
and Sub4 outstanding immediately prior to the Effective Time shall be converted
into one share of Common Stock of Nor'Wester, Aviator, Bayhawk, and Mile High,
respectively.
(c) Except as provided in Section 3.3 of this Agreement, as of and
after the Effective Time, no holder of any Constituent Corporation Stock shall
have any rights as a holder of Constituent Corporation Stock, other than to
receive the consideration specified in this Section 3.1, as adjusted for any
fractional shares as provided in Section 3.5.
(d) If, prior to the Effective Time, UCB should split or combine the
UCB Common Stock, or pay a stock dividend or other stock distribution in UCB
Common Stock,
4
or otherwise change the UCB Common Stock into any other securities, or make any
other dividend or distribution with respect to the UCB Common Stock, then the
Exchange Ratios shall be approximately adjusted to reflect such split,
combination, dividend, or other distribution or change.
3.2 CANCELLATION OF STOCK. At the Effective Time, all shares of
Constituent Corporation Stock that are owned directly or indirectly by WVI shall
be cancelled without any consideration being payable therefore.
3.3 SHARES OF DISSENTING STOCKHOLDERS. Any shares of Constituent
Corporation Stock outstanding immediately prior to the Effective Time and held
by persons who are entitled under applicable law to exercise, and who have duly
exercised, their rights of appraisal with respect to any Merger ("Dissenting
Stockholders") shall not be converted as described in Section 3.1 of this
Agreement but shall become the right to receive the consideration as may be
determined to be due to such Dissenting Stockholders pursuant to the DGCL or the
OBCA, as applicable. Provided, however, that Constituent Corporation Stock
outstanding immediately prior to the Effective Time and outstanding at the
Effective Time held by any Dissenting Stockholder who shall, after the Effective
Time, withdraw his demand for appraisal or otherwise lose his right of appraisal
as provided in the applicable laws, shall be deemed to be converted into the
right to receive the consideration set forth in Section 3.1.
3.4 EXCHANGE OF CERTIFICATES.
(a) At the Effective Time, UCB shall make available to itself, or any
other entity appointed by UCB as a registrar, transfer agent and/or exchange
agent (the "Exchange Agent") the shares of UCB Common Stock issuable in
accordance with Section 3.1 of this Agreement; and, if applicable, pay to the
Exchange Agent any cash UCB is required to pay for fractional shares pursuant to
Section 3.5 of this Agreement (the "Exchange Fund"). Any shares of UCB Common
Stock or cash in the Exchange Fund and held by the Exchange Agent six months
after the Effective Time shall be returned to UCB no later than the fifth
business day after such sixth month anniversary. Thereafter, any holders of
Constituent Corporation Stock who have not complied with this Section shall look
only to UCB to receive the consideration set forth herein with respect to their
shares of Constituent Corporation Stock without interest thereon.
(b) The Exchange Agent shall make the payments provided for in this
Agreement out of the Exchange Fund, if applicable. The Exchange Fund shall be
used only for the purposes provided in this Agreement.
(c) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each record holder of an outstanding certificate or
certificate which immediately prior to the Effective Time represented shares of
Constituent Corporation Stock (the "Certificates"), a form letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing the shares of UCB Common
Stock
5
and the cash in lieu of fractional shares, if any, into which the shares of
Constituent Corporation Stock represented by such Certificates shall have been
converted pursuant to this Agreement. Upon proper surrender of a Certificate
for exchange and cancellation to the Exchange Agent, together with such properly
completed letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefore, as applicable, (i) a
certificate representing that number of whole shares of UCB Common Stock as
computed in accordance with Section 3.1 of this Agreement and (ii) a check
representing the amount of cash in lieu of fractional shares, if any, that such
holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of this Article 3, and the Certificate so surrendered
shall be cancelled.
(d) No dividends or other distributions declared or made after the
Effective Time on the UCB Common Stock shall be paid to the holder of any
unsurrendered Certificate until the holder of record of such Certificate shall
surrender such Certificate. Provided, however, that upon surrender of a
Certificate, but subject to the effect, if any, of applicable escheat and other
laws, there shall be paid to the holder of such Certificate, without interest,
the amount of dividends or distributions, if any, which theretofore became
payable, but which were not paid by reason of the foregoing, with respect to the
number of whole shares of UCB Common Stock represented by the Certificate(s)
issued upon such surrender.
(e) All UCB Common Stock delivered upon the surrender for exchange of
Constituent Corporation Stock in accordance with the terms hereof shall be
deemed to have been delivered in full satisfaction of all rights pertaining to
such Constituent Corporation Stock. After the Effective Time, there shall be no
further registration of transfers on the stock transfer books of the Constituent
Corporations of the Constituent Corporation Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented for any reason, they shall be canceled and exchanged
as provided in this Section 3.4(e).
3.5 FRACTIONAL SHARES. No certificate or scrip representing fractional
shares of UCB Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to enjoy any other rights of a stockholder of UCB. In lieu
thereof, each holder of Constituent Corporation Stock who would otherwise be
entitled to a fraction of a share of UCB Common Stock (after aggregating all
fractional shares of UCB Common Stock to be received by such holder) shall
receive from UCB an amount of cash (rounded to the nearest whole cent), without
interest, equal to the product of (i) such fraction multiplied by (ii) $5.25.
3.6 CONSTITUENT CORPORATION STOCK OPTION PLANS.
(a) Prior to the Effective Time, UCB shall take such action as may be
necessary to cause each unexpired and unexercised option to purchase shares of
Constituent Corporation Stock (each a "Constituent Corporation Option") under
the respective stock incentive or stock option plans of the Constituent
Corporations (the "Option Plans") which is not exercised or does not by its
terms terminate at or prior to the Effective Time, to be automatically converted
at the Effective Time into an option (a "UCB Option") to purchase a
6
number of shares of UCB Common Stock equal to the number of shares of Stock that
could have been purchased under the Constituent Corporation Option multiplied by
the applicable Exchange Ratio (rounded downward to the nearest whole share), at
a price per share of UCB Common Stock equal to the option exercise price
determined pursuant to the Constituent Corporation Option divided by the
applicable Exchange Ratio (rounded upward to the nearest whole cent). Each such
UCB Option shall otherwise be subject to the same terms and conditions as the
Constituent Corporation Option; provided, however, that there shall be no
accelerated exercisability of any Constituent Corporation Option solely as a
result of the Mergers. At the Effective Time, all references in the stock
option agreements to any of the Constituent Corporations shall be deemed to
refer to UCB. UCB shall (i) assume all of the Constituent Corporations'
obligations with respect to UCB Options as so amended, (ii) reserve for issuance
the number of shares of UCB Common Stock that will become subject to UCB Options
pursuant to this Section 3.6, (iii) from and after the Effective Time, upon
exercise of the UCB Options, make available for issuance all shares of UCB
Common Stock covered thereby, and (iv) promptly after the Effective Time, issue
to each holder of an outstanding Constituent Corporation Option a document
evidencing the foregoing assumption by UCB.
(b) It is the intention of the parties that the UCB Options assumed
by UCB qualify following the Effective Time of the Mergers as incentive stock
options as defined in Section 422 of the Code to the extent the Constituent
Corporation Options qualified as incentive stock options prior to the Effective
Time of the Mergers.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE CONSTITUENT CORPORATIONS
Each Constituent Corporation makes the following representations and
warranties to and for the benefit of each of the other Constituent Corporations
and UCB:
4.1 AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK. Schedule 4.1(a)
sets forth the number of shares of Common Stock and Preferred Stock of WVI,
Aviator, Bayhawk, and Mile High that is authorized and outstanding and subject
to options, respectively, as of the date hereof. All of the issued and
outstanding shares are, and as of the Closing Date will be, validly issued,
fully paid and non-assessable. A list of all of the holders who beneficially
own in excess of five percent (5%) of the outstanding shares of Common Stock and
Preferred Stock of each of the Constituent Corporations, indicating the number
of shares of Common Stock and Preferred Stock, respectively, owned by each such
holder on the date hereof and to be owned by each such holder after the
Consolidation, is set forth on Schedule 4.1(b). Except as set forth on Schedule
4.1(a), (i) there is no existing option, warrant, call, commitment or other
agreement to which any Constituent Corporation is a party requiring, and there
are no convertible securities of any Constituent Corporation outstanding which
upon conversion would require, the issuance of any additional share of Stock of
any Constituent Corporation or other securities convertible into shares of
equity securities of any Constituent Corporation, and (ii) there are no
agreements to which any
7
Constituent Corporation is a party or, to the best knowledge of any Constituent
Corporation, to which such Constituent Corporation is not a party, in each case,
among, between or with any of the stockholders of any Constituent Corporation
with respect to the voting or transfer of the Stock of the Constituent
Corporations or with respect to any other aspect of any Constituent
Corporation's affairs. Schedule 4.1(a) sets forth complete, correct and
accurate statements of the option terms, exercise price and identity of the
optionee with respect to each outstanding stock option or other stock incentive
of each of the Constituent Corporations. There are no stockholders' preemptive
rights or rights of first refusal or other similar rights with respect to the
issuance of Stock by any Constituent Corporation, other than pursuant to the
Investment Agreement.
4.2 AUTHORIZATION AND ISSUANCE OF EQUITY SECURITIES. UCB shall take all
necessary corporate action to duly authorize the issuance of the UCB Common
Stock hereunder. Upon delivery to the holders of Constituent Corporation Stock
certificates therefor in accordance with the terms hereof, the UCB Common Stock
to be issued to the holders of Constituent Corporation Stock hereunder will be
validly issued and fully paid and nonassessable, free and clear of all Liens and
preemptive rights.
4.3 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by each of the Constituent Corporations of
this Agreement, the Consolidation, and all instruments and documents to be
delivered by each Constituent Corporation hereunder, and the consummation of the
other transactions contemplated by any of the foregoing (collectively referred
to as the "Transactions"): (i) are within each Constituent Corporation's
corporate power; (ii) have been duly authorized by all necessary or proper
corporate action on the part of each Constituent Corporation (except for
shareholder approval); (iii) are not in contravention of any provision of each
Constituent Corporation's certificates or articles of incorporation or bylaws;
(iv) will not violate any law or regulation, or any order or decree of any court
or governmental instrumentality; (v) will not conflict with or result in the
breach or termination of, constitute a default under or accelerate any
performance required by, any indenture, mortgage, deed of trust, lease,
agreement or other instrument to which each Constituent Corporation is a party
or by which each Constituent Corporation or any of its respective property is
bound; (vi) will not result in the creation or imposition of any Lien upon any
of the property of the Consolidated Corporation; and (vii) except for the
filings described on Schedule 4.5 hereto, do not require the consent or approval
of, or any filing with, any governmental authority or any other Person. This
Agreement has been duly executed and delivered by each Constituent Corporation
and constitutes a legal, valid and binding obligation of each Constituent
Corporation, enforceable against it in accordance with its terms. This
Agreement has been duly executed and delivered by the Constituent Corporations,
and is a legal, valid and binding obligation of each Constituent Corporation to
the extent it is a party thereto, enforceable against it in accordance with its
terms.
8
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF UCB
UCB makes the following representations and warranties to and for the
benefit of each of the Constituent Corporations:
5.1 ORGANIZATION. UCB is a corporation duly organized and validly
existing under the laws of the State of Delaware. UCB has not filed articles of
dissolution and no corporate action to dissolve UCB has been taken. Complete
and correct copies as of the date hereof of the certificate of incorporation and
bylaws of UCB have been delivered to the Constituent Corporations.
5.2 CAPITALIZATION. The authorized capital stock of UCB consists of 25
million shares of Common Stock, par value $0.001 per share, 100 shares of which
are validly issued and outstanding, fully paid and nonassessable and are owned
by United Breweries of America, Inc. When issued in compliance with this
Agreement, the shares of UCB Common Stock received by the holders of Constituent
Corporation Stock will be validly issued, fully paid and non-assessable, and
will be free of any liens or encumbrances.
5.3 AUTHORITY RELATIVE TO THIS AGREEMENT.
5.3.1 UCB has the corporate power to enter into this Agreement and
to carry out its obligations hereunder.
5.3.2 The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by its Board of Directors and sole shareholder, and no other corporate
proceedings on the part of UCB are necessary to authorize this Agreement and the
transactions contemplated hereby.
5.3.3 This Agreement constitutes a valid and binding obligation of
UCB, enforceable against UCB in accordance with its terms except as enforcement
may be limited to bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought.
5.3.4 UCB is not subject to or obligated under any charter or
bylaw provision which would be breached or violated by its executing and
carrying out this Agreement.
5.4 UCB ACTION. The Board of Directors of UCB (at a meeting duly called
and held) has by the requisite vote of all Directors present (i) determined that
the Mergers and the Consolidation are advisable and in the best interest of UCB
and (ii) approved the Mergers in accordance with the provisions of the DGCL.
9
ARTICLE 6
CONDITIONS OF CLOSING
The obligations of each of the Constituent Corporations to effect the
Mergers and the Consolidation shall be subject to the fulfillment of the
following conditions:
6.1 STOCKHOLDER APPROVAL. This Agreement, the Mergers, and the other
transactions contemplated hereby shall have been approved and adopted by the
requisite affirmative vote of the holders of the Common Stock of each of the
Constituent Corporations entitled to vote thereon.
6.2 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of each Constituent Corporation contained in Article 4 and UCB in
Article 5 shall have been true in all material respects when made and shall be
true in all material respects on and as of the Effective Time as if made on and
as of such date.
6.3 CERTIFICATES. Each of the Constituent Corporations shall have
delivered to each of the other Constituent Corporations a certificate, dated as
of the Closing, signed by the President of each such Constituent Corporation
certifying as to the fulfillment of the conditions specified in this Article 6.
6.4 REGULATORY AND OTHER APPROVALS. All regulatory approvals and
consents, including those of the U.S. Bureau of Alcohol, Tobacco & Firearms and
state liquor authorities, required to consummate the transactions contemplated
hereby shall have been obtained and shall remain in full force and effect and
all statutory waiting periods, if any, shall have expired, and all other
material consents or approvals of any third party required in connection with
the consummation of the Mergers shall have been obtained.
6.5 FORM S-4. The registration statement on Form S-4 (the "Proxy
Statement/Prospectus") covering the UCB Common Stock to be issued in connection
with the Mergers and filed with the SEC shall have been declared effective by
the SEC and no stop order suspending the effectiveness of the Proxy
Statement/Prospectus shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the SEC.
6.6 NO INJUNCTIONS OR RESTRAINTS. No order, injunction, or decree issued
by any court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Mergers or any of the other
transactions contemplated by this Agreement shall be in effect.
6.7 DISSENTERS' RIGHTS. Holders of no more than that number of shares of
stock of any Constituent Corporation which equals an aggregate of 10% of all
outstanding shares of stock in such Constituent Corporation shall have validly
exercised and not withdrawn appraisal rights under the DGCL or OBCA, as
applicable; provided, however, that none of the Constituent Corporations shall
assert this condition unless UBA has indicated that it will not close the
purchase of UCB Common Stock under the Investment Agreement by asserting
non-fulfillment of the condition in Section 6.1(m) of the Investment Agreement
on the basis
10
that an unacceptably high number of Constituent Corporation Shareholders have
exercised dissenters' rights under the OBCA or the DGCC, as applicable.
6.8 COMPLIANCE WITH THE SECURITIES ACT. The Constituent Corporations
shall use their commercially reasonable efforts to cause each person who is an
"affiliate" as that term is used in paragraphs (c) and (d) of Rule 145 of the
Securities Act, of the Constituent Corporations (such person are identified on
Schedule 6.8 to this Agreement) to deliver to UCB at or prior to the Effective
Time a written agreement, substantially in the form of Exhibit 6.8 hereto, to
the effect that such affiliate will not offer to sell, transfer, or otherwise
dispose of any shares of UCB Common Stock issued in the Consolidation, except,
in each case, pursuant to an effective registration statement or in compliance
with Rule 145 under the Securities Act or in a transaction, which, in the
opinion of legal counsel satisfactory to UCB, is exempt from the registration
requirements of the Securities Act.
ARTICLE 7
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated by the parties hereto
upon written consent of the parties at any time prior to the Effective Time.
7.2 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Mergers by the stockholders of the
Constituent Corporations or UCB. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
ARTICLE 8
DEFINITIONS
"Acquisition Subsidiary Stock" shall have the meaning ascribed to it in
Section 3.1 of this Agreement.
"Articles of Merger" shall have the meaning ascribed to it in Section 1.1
of this Agreement.
"Certificates" shall have the meaning ascribed to it in Section 3.4(c) of
this Agreement.
"Certificates of Merger" shall have the meaning ascribed to it in Section
1.2 of this Agreement.
"Closing" shall have the meaning ascribed to it in Section 1.3 of this
Agreement.
"Code" shall have the meaning ascribed to it in Recital E of this
Agreement.
11
"Consolidation" shall have the meaning ascribed to it in Recital B of this
Agreement.
"Constituent Corporations" shall have the meaning ascribed to it in the
first paragraph of this Agreement.
"Constituent Corporation Option" shall have the meaning ascribed to it in
Section 3.6(a) of this Agreement.
"Constituent Corporation Stock" shall have the meaning ascribed to it in
Section 3.1 of this Agreement.
"DGCL" shall have the meaning ascribed to it in Section 1.1 of this
Agreement.
"Dissenting Shareholders" shall have the meaning ascribed to it in Section
3.3 of this Agreement.
"Effective Time" shall have the meaning ascribed to it in Section 1.2 of
this Agreement.
"Exchange Agent" shall have the meaning ascribed to it in Section 3.4(a) of
this Agreement.
"Exchange Fund" shall have the meaning ascribed to it in Section 3.4(a) of
this Agreement.
"Exchange Ratios" shall have the meaning ascribed to it Recital B of this
Agreement.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as in effect from time to time.
"Investment Agreement" shall have the meaning ascribed to it in Recital A
of this Agreement.
"IRS" shall mean the Internal Revenue Service, or any successor thereto.
"Lien" shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Uniform Commercial Code or comparable law of any jurisdiction).
"Merger" shall have the meaning ascribed to it in Recital B of this
Agreement.
"OBCA" shall have the meaning ascribed to it in Section 1.1 of this
Agreement.
12
"Person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Surviving Corporations" shall have the meaning ascribed to it in Section
1.1 of this Agreement.
"UCB" shall have the meaning ascribed to it in the first paragraph of this
Agreement.
"UCB Acquisition Subsidiaries" shall have the meaning ascribed to it in the
first paragraph of this Agreement.
"UCB Option" shall have the meaning ascribed to it in Section 3.6(a) of
this Agreement.
"UCB Common Stock" shall have the meaning ascribed to it in Recital B of
this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1 NOTICES. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whatever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or by registered or certified
mail, return receipt requested, postage prepaid, or by telecopy and confirmed by
telecopy answerback addressed as follows:
IF TO NOR'WESTER AT:
Nor'Wester Brewing Company,
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
13
WITH A COPY TO:
Jack W. Schifferdecker, Jr.
Ater Wynne Hewitt Dodson & Skerritt
222 S.W. Columbia, Suite 1800
Portland, OR 97201
Telecopy Number: (503) 226-0079
IF TO WVI AT:
Willamette Valley, Inc.
Microbreweries Across America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
WITH A COPY TO:
Gordon R. Hanna
Donaldson, Albert, Tweet,
Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
IF TO AVIATOR ALES, INC. AT:
Aviator Ales, Inc.
14316 NE 203rd Street
Woodinville, Washington 98072
Attention: Dusty Wyant
Telecopy Number: (206) 487-0847
WITH A COPY TO:
Willamette Valley, Inc.
Microbreweries Across America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet,
Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
Willamette Valley, Inc.
Microbreweries Across America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
14
Telecopy Number: (503) 232-2363
IF TO BAYHAWK ALES, INC. AT:
Bayhawk Ales, Inc.
2000 Main Street - Suite A
Irvine, CA 92714
Attention: David Voorhies
Telecopy Number: (714) 442-7566
WITH A COPY TO:
Willamette Valley, Inc.
Microbreweries Across America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet,
Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
Willamette Valley, Inc.
Microbreweries Across America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
IF TO MILE HIGH BREWING COMPANY AT:
Mile High Brewing Company
2401 Blake Street
Denver, CO 80205
Attention: John Carter
Telecopy Number: (303) 299-9192
WITH A COPY TO:
Willamette Valley, Inc.
Microbreweries Across America
c/o Gordon R. Hanna
Donaldson, Albert, Tweet,
Connolly, Hanna & Muniz
340 Vista Avenue, Suite 310
P.O. Box 968
Salem, OR 97308
and
15
Willamette Valley, Inc.
Microbreweries Across America
66 S.E. Morrison Street
Portland, OR 97214
Attention: James W. Bernau
Telecopy Number: (503) 232-2363
IF TO UNITED CRAFT BREWERS, INC. AT:
United Breweries of America, Inc.
One Harbor Drive, Suite 102
Sausalito, CA 94965
Attention: Vijay Mallya
Telecopy Number: (415) 289-1409
WITH A COPY TO:
Alan Talkington
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Building
400 Sansome Street
San Francisco, CA 94111
Telecopy Number: (415) 773-5759
The parties agree to send such notices to such other address as may be
substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice. Every notice, demand, request, consent, approval, declaration or
other communication hereunder shall be deemed, request, consent, approval,
declaration or other communication hereunder shall be deemed to have been duly
given or served on the date on which personally delivered, with receipt
acknowledged, telecopied and confirmed by telecopy answerback, or three (3)
Business Days after the same shall have been deposited, with the United States
mail.
9.2 BINDING EFFECT; BENEFITS. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties to this
Agreement and their respective successors and permitted assigns. Nothing is
this Agreement, express or implied, is intended or shall be construed to give
any person other than the parties to this Agreement or their respective
successors or assigns any legal or equitable right, remedy or claim under or in
respect of any agreement or any provision contained herein.
9.3 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Oregon, without regard to the principles
thereof regarding conflict of laws. Each party to this Agreement hereby
consents to service of process in Multnomah County, Oregon and hereby agrees
that all disputes relating to or arising under this Agreement shall be the
jurisdiction of the state and federal courts located in Multnomah County,
Oregon.
16
9.4 SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
9.5 SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision or provisions in every other respect and
the remaining provisions of this Agreement shall not be in any way impaired.
9.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
9.7 ENTIRE AGREEMENT. This Agreement and the other documents contemplated
by the Consolidation constitute the entire agreement among the parties hereto
and supersede any prior understandings, agreements or representations by or
among the parties hereto, written or oral, to the extent they are related in any
way to the subject matter hereof.
9.8 FEES AND EXPENSES. Each of the parties hereto shall bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby; provided, however,
that all costs and expenses (including legal fees and expenses) incurred by UCB
in connection with the Consolidation shall be reimbursed by Nor'Wester, or
alternatively, UCB may use funds from the bridge loans made pursuant to the
Investment Agreement to pay such costs and expenses.
9.9 EXHIBITS AND SCHEDULES. The exhibits and schedules identified in this
Agreement are incorporated herein by reference and made a part hereof.
9.10 CONSTRUCTION. Any reference to any federal, state, local or foreign
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The word
"including" shall mean including without limitation. If either party has
breached any representation, warranty or covenant contained herein in any
respect, the existence of another representation, warranty or covenant related
to the same subject matter (regardless of the relative levels of specificity)
that the party has not breached shall not detract from or mitigate the breach of
the former representation, warranty or covenant.
References of this Agreement shall mean this Agreement, including all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
17
IN WITNESS WHEREOF, UCB, Nor'Wester, Aviator, Bayhawk, Mile High, and WVI
have executed this Agreement as of the day and year first above written.
UNITED CRAFT BREWERS, INC., NOR'WESTER BREWING COMPANY, INC.,
a Delaware corporation a Oregon corporation
By: /s/ Vijay Mallya By: /s/ James W. Bernau
-------------------------- --------------------------
Name: Vijay Mallya Name: James W. Bernau
Its: Chairman and Chief Its: President
Executive Officer
AVIATOR ALES, INC., BAYHAWK ALES, INC.,
a Delaware corporation a Delaware corporation
By: /s/ James W. Bernau By: /s/ James W. Bernau
-------------------------- --------------------------
Name: James W. Bernau Name: James W. Bernau
Its: President Its: President
MILE HIGH BREWING COMPANY, WILLAMETTE VALLEY, INC.
a Delaware corporation MICROBREWERIES ACROSS AMERICA,
a Oregon corporation
By: /s/ James W. Bernau By: /s/ James W. Bernau
-------------------------- --------------------------
Name: James W. Bernau Name: James W. Bernau
Its: President Its: President
18
TABLE OF CONTENTS
ARTICLE 1
THE CONSOLIDATION
1.1 THE MERGERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 EFFECTIVE TIME.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 ACTION BY UBC ACQUISITION SUBSIDIARIES.. . . . . . . . . . . . . . . . 3
ARTICLE 2
TERMS OF THE MERGERS
2.1 EFFECTS OF THE MERGERS.. . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 ARTICLES OF INCORPORATION AND BYLAWS.. . . . . . . . . . . . . . . . . 3
2.3 DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 OFFICERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
3.1 MANNER OF CONVERTING SHARES. . . . . . . . . . . . . . . . . . . . . . 4
3.2 CANCELLATION OF STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 SHARES OF DISSENTING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . 5
3.4 EXCHANGE OF CERTIFICATES.. . . . . . . . . . . . . . . . . . . . . . . 5
3.5 FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 CONSTITUENT CORPORATION STOCK OPTION PLANS.. . . . . . . . . . . . . . 6
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE CONSTITUENT CORPORATIONS
4.1 AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK.. . . . . . . . . . 7
4.2 AUTHORIZATION AND ISSUANCE OF EQUITY SECURITIES. . . . . . . . . . . . 8
4.3 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. . . . . . . . 8
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF UCB
5.1 ORGANIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.2 CAPITALIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.3 AUTHORITY RELATIVE TO THIS AGREEMENT.. . . . . . . . . . . . . . . . . 9
5.4 UCB ACTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 6
CONDITIONS OF CLOSING
6.1 STOCKHOLDER APPROVAL.. . . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 REPRESENTATIONS AND WARRANTIES TRUE. . . . . . . . . . . . . . . . . . 10
6.3 CERTIFICATES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.4 REGULATORY AND OTHER APPROVALS.. . . . . . . . . . . . . . . . . . . . 10
6.5 FORM S-4.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.6 NO INJUNCTIONS OR RESTRAINTS.. . . . . . . . . . . . . . . . . . . . . 10
6.7 DISSENTERS' RIGHTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.8 COMPLIANCE WITH THE SECURITIES ACT.. . . . . . . . . . . . . . . . . . 11
ARTICLE 7
TERMINATION AND AMENDMENT
7.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.2 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 8
DEFINITIONS . . . . . . . . . . . . . 11
ARTICLE 9
MISCELLANEOUS
9.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9.2 BINDING EFFECT; BENEFITS.. . . . . . . . . . . . . . . . . . . . . . . 16
9.3 APPLICABLE LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.4 SECTION AND OTHER HEADINGS.. . . . . . . . . . . . . . . . . . . . . . 17
9.5 SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.6 COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.7 ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.8 FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.9 EXHIBITS AND SCHEDULES.. . . . . . . . . . . . . . . . . . . . . . . . 17
9.10 CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ii - TABLE OF CONTENTS
TABLE OF CONTENTS
SCHEDULES
SCHEDULE 4.1(a)*
AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK
OF CONSTITUENT CORPORATIONS
SCHEDULE 4.1(b)*
LIST OF BENEFICIAL HOLDERS OF 5% OR MORE OF SHARES
OF EACH CONSTITUENT CORPORATION
SCHEDULE 6.8*
LIST OF AFFILIATES OF CONSTITUENT CORPORATIONS
EXHIBITS*
* These Schedules and exhibits have been omitted pursuant to Item 601(b)(2)
of Regulation S-B.
iii - TABLE OF CONTENTS
ANNEX C
[FAIRNESS OPINION OF NEEDHAM & COMPANY, INC.]
C-1
[LETTERHEAD OF NEEDHAM & COMPANY, INC.]
May 12, 1997
Board of Directors
Nor'Wester Brewing Company, Inc.
66 S.E. Morrison Street
Portland, OR 97214
Gentlemen:
We understand that Nor'Wester Brewing Company, Inc. ("Nor'Wester"), United
Craft Brewers, Inc. ("UCB"), Aviator Ales, Inc. ("Aviator"), Bayhawk Ales, Inc.
("Bayhawk"), Mile High Brewing Company ("Mile High"), and Willamette Valley,
Inc. Microbreweries Across America ("WVI") propose to enter into an Agreement
and Plan of Merger, dated as of May , 1997 (the "Merger Agreement").
Nor'Wester, Aviator, Bayhawk, Mile High and WVI are referred to collectively as
the "Constituent Corporations." In addition, we understand that the Constituent
Corporations, North Country Joint Venture, LLC, James W. Bernau ("Bernau"), and
United Breweries of America, Inc. ("UBA") entered into an Investment Agreement
dated January 30, 1997, as proposed to be amended (as amended, the "Investment
Agreement"), pursuant to which, among other things, UBA would purchase, for an
aggregate purchase price of $5,500,000, 1,047,619 shares of common stock, par
value $.001 per share, of UCB ("UCB Common Stock"), Bernau would transfer 83,109
shares of UCB Common Stock to UBA, and Bernau would transfer to UCB for
cancellation 174,912 shares of UCB Common Stock (such transactions, the
"Investment"). Pursuant to the Merger Agreement, we understand that wholly-owned
subsidiaries of UCB will merge with and into Nor'Wester, Aviator, Bayhawk and
Mile High, and that WVI will merge with and into UCB (such transactions
collectively, the "Consolidation"); the completion of the Consolidation is a
condition precedent to the Investment. The terms of the Consolidation and the
Investment will be set forth more fully in the Merger Agreement and the
Investment Agreement.
Pursuant to the proposed Merger Agreement, we understand that at the
Effective Time (as defined in the Merger Agreement), each outstanding share of
common stock of the Constituent Corporations (other than shares held by WVI and
shares as to which dissenters' rights, if available, have been exercised), will
be converted into the right to receive a number of shares of UCB Common Stock
determined in accordance with the following exchange ratios: Nor'Wester,
0.3333333 shares (the "Nor'Wester Exchange Ratio"), WVI and Bayhawk, 0.0785714
shares, and Aviator and Mile High, 0.0523809 shares. We understand that after
the Consolidation and the Investment, on a Diluted Basis (as defined in the
Investment Agreement), UBA and Bernau will hold 40.0% and 10.0% of the
outstanding UCB Common Stock, respectively.
Nor'Wester Brewing Company, Inc.
May 12, 1997
Page 2 of 4
You have asked us to advise you as to the fairness, from a financial point
of view, to the shareholders of Nor'Wester (other than Bernau) of the
consideration to be received by such shareholders pursuant to the Merger
Agreement and the Investment Agreement. Needham & Company, Inc. as part of its
investment banking business is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations. We have acted as a financial advisor to Nor'Wester and WVI in
connection with the Consolidation and the Investment, and will receive a fee for
our services that is contingent upon the consummation of the Consolidation and
the Investment. In addition, Nor'Wester and WVI have agreed to indemnify us for
certain liabilities arising out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed the
Investment Agreement; (ii) reviewed a draft of the Amendment to the Investment
Agreement dated April 16, 1997; (iii) reviewed a draft of the Merger Agreement
dated April 21, 1997; (iv) reviewed certain other documents relating to the
Consolidation and the Investment, including drafts of the joint Proxy
Statement/Prospectus of UCB and the Constituent Corporations; (v) reviewed
certain publicly available information concerning Nor'Wester and the other
Constituent Corporations and certain other relevant financial and operating data
of Nor'Wester and the other Constituent Corporations made available from the
internal records of Nor'Wester and the other Constituent Corporations; (vi)
reviewed the historical stock prices and trading volumes of Nor'Wester's and, to
the extent available, the other Constituent Corporations' common stock; (vii)
held discussions with members of senior management of Nor'Wester and the other
Constituent Corporations concerning the current and future business prospects of
Nor'Wester and the other Constituent Corporations, including Nor'Wester's
management's views as to the anticipated adverse effects on Nor'Wester's
business, assets, liabilities, operations and prospects that management believes
would occur if Nor'Wester were not to enter into the Consolidation and the
Investment and Nor'Wester's liquidity and solvency concerns; (viii) held
discussions with members of senior management of UBA concerning the business
prospects of UCB, including such management's views as to the organization of
and strategies with respect to UCB; (ix) reviewed certain financial forecasts
and projections of Nor'Wester and the other Constituent Corporations prepared by
the respective managements of Nor'Wester and the other Constituent Corporations;
(x) compared certain publicly available financial data of companies whose
securities are publicly traded, which we deemed generally comparable to the
businesses of Nor'Wester and the other Constituent Corporations, to similar data
for Nor'Wester and the other Constituent Corporations; (xi) reviewed the
financial terms of certain other business combinations that we deemed generally
relevant; and (xii) performed and/or considered such other studies, analyses,
inquiries and investigations as we deemed appropriate.
In connection with our review and arriving at our opinion, we have not
assumed any responsibility to independently verify any of the foregoing
information, have relied on such information, and have assumed that (i) all such
information is complete and
Nor'Wester Brewing Company, Inc.
May 12, 1997
Page 3 of 4
accurate in all material respects, (ii) shareholders of Nor'Wester will not
recognize any gain or loss for federal income tax purposes as a result of the
Consolidation, (iii) the Consolidation will be accounted for as a 'purchase'
under generally accepted accounting principles, (iv) there have been no material
changes in Nor'Wester's or the other Constituent Corporations' assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to us and all material
liabilities (contingent or otherwise, known or unknown) of the Constituent
Corporations are as set forth in their respective financial statements, (iv) no
adjustments will be made to the respective exchange ratios or the number of
shares of UCB Common Stock to be issued, as set forth in the draft of the
Amendment to the Investment Agreement dated April 16, 1997 and the draft of the
Merger Agreement dated April 21, 1997, (v) the terms set forth in the executed
Merger Agreement will not differ materially from the proposed terms provided to
us in the draft Merger Agreement dated April 21, 1997, and (vi) the terms set
forth in the executed Amendment to the Investment Agreement will not differ
materially from the proposed terms provided to us in the draft Amendment dated
April 16, 1997. With respect to the financial forecasts of Nor'Wester and the
other Constituent Corporations provided to us by the respective managements of
Nor'Wester and the other Constituent Corporations, we have assumed for purposes
of our opinion that such forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgements of such
managements, at the time of preparation, of the future operating and financial
performance of Nor'Wester and the other Constituent Corporations and that the
strategic and operating benefits anticipated by such managements will be
realized from the Consolidation (it being noted that such managements did not,
due to the financial conditions of the Constituent Corporations, prepare
forecasts for each Constituent Corporation as an independent operating entity
assuming the Consolidation and Investment did not occur). We have not assumed
any responsibility for or made or obtained any independent evaluation, appraisal
or physical inspection of the assets or liabilities of Nor'Wester, any of the
other Constituent Corporations, UCB or UBA. Further, our opinion is based on
economic, monetary and market conditions existing as of the date hereof and, in
rendering this opinion, we have relied without independent verification on the
accuracy, completeness and fairness of all historical financial and other
information which was either publicly available or furnished to us by
Nor'Wester, the other Constituent Corporations, UCB and UBA. Our opinion as
expressed herein is limited to the fairness, from a financial point of view, to
the shareholders of Nor'Wester (other than Bernau) of the consideration to be
received by such shareholders pursuant to the Merger Agreement and the
Investment Agreement and does not address Nor'Wester's underlying business
decision to engage in the Consolidation and the Investment.
We are not expressing any opinion as to what the value of UCB Common Stock
will be when issued pursuant to the Consolidation or the Investment or the price
at which UCB Common Stock will trade at any time. Our opinion does not
constitute a recommendation to any shareholder of Nor'Wester as to how such
shareholder should vote on the proposed Consolidation and Investment. In the
ordinary course of our business, we may actively
Nor'Wester Brewing Company, Inc.
May 12, 1997
Page 4 of 4
trade the equity securities of Nor'Wester for our own account or for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of Nor'Wester and may not be
quoted or referred to or used for any purpose without our prior written consent,
except that this letter may be disclosed in connection with any registration
statement or proxy statement used in connection with the Consolidation and the
Investment so long as this letter is quoted in full in such registration
statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof the consideration to be received by the shareholders of Nor'Wester
(other than Bernau) pursuant to the Merger Agreement and the Investment
Agreement is fair to such shareholders from a financial point of view.
Very truly yours,
By: /s/ NEEDHAM & COMPANY, INC.
-----------------------------------------
Needham & Company, Inc.
ANNEX D
[FAIRNESS OPINION OF BLACK & COMPANY]
D-1
[LETTERHEAD]
May 12, 1997
The Board of Directors
Willamette Valley, Inc./Microbreweries Across America
66 SE Morrison Street
Portland, Oregon 97214
The Board of Directors
Aviator Ales, Inc.
14316 NE 203rd Street
Woodinville, WA 98072
The Board of Directors
Bayhawk Ales, Inc.
2000 Main Street, Suite A
Irvine, California 92714
The Board of Directors
Mile High Brewing Company
2401 Blake Street
Denver, Colorado 80205
Ladies and Gentlemen:
It is Black & Company's understanding that Willamette Valley,
Inc./Microbreweries Across America ("WVI"), Aviator Ales, Inc. ("AAI"),
Bayhawk Ales, Inc. ("Bayhawk") and Mile High Brewing Company ("Mile High")
entered into an Investment Agreement dated January 30, 1997, as amended as of
May 14, 1997 (the "Investment Agreement"), with United Breweries of America,
Inc. ("UBA"), James W. Bernau, North Country Joint Venture, LLC and
Nor'Wester Brewing Company, Inc. ("Nor'Wester"). Further, pursuant to the
Agreement and Plan of Merger dated May 14, 1997 ("the Merger Agreement"), we
understand that wholly-owned subsidiaries of United Craft Brewers, Inc.
("UCB") will merge with and into Nor'Wester, AAI, Bayhawk and Mile High and
WVI will be merged into UCB, and the current shareholders of Nor'Wester, WVI,
AAI, Bayhawk and Mile High will receive shares of UCB in exchange for their
current shares of Nor'Wester, WVI, AAI, Bayhawk and Mile High. Under the
terms of the Investment Agreement, UBA will invest $5.5 million in cash in
exchange for (on a Diluted Basis, as defined in the Investment Agreement) a
40% equity interest of UCB, after which James W. Bernau will
May 12, 1997
Page 2
own 10% and the former public shareholders of Nor'Wester, WVI,
AAI, Bayhawk and Mile High will own 50% of UCB (the transactions contemplated
by the Merger Agreement and the Investment Agreement being hereinafter
referred to collectively as the "Consolidation and Investment"). The terms and
conditions of the Consolidation and Investment are set forth more fully in
the Merger Agreement and the Investment Agreement.
Nor'Wester and WVI engaged Black & Company to act as their financial advisor
in connection with the Consolidation and Investment and to render opinions as
to the fairness, from a financial point of view, to the shareholders of each
WVI, AAI, Bayhawk and Mile High of the consideration to be received by such
holders in the Consolidation and Investment. Black & Company regularly is in
the business of advising managements and boards of directors of corporations
regarding their issuance of securities both in the private and public equity
and debt markets, including providing a range of likely market valuations for
such securities. Black & Company will receive a fee for services as financial
advisor and rendering this opinion, a portion of which is contingent upon the
consummation of the Consolidation and Investment, and Nor'Wester and WVI have
agreed to indemnify Black & Company for certain liabilities that may arise
from its role as financial advisor and out of the rendering of this opinion.
Black & Company has also acted as the managing underwriter in connection with
the initial public offering of Nor'Wester in January 1996 and as of May 7,
1997 approximately 476,025 shares of Nor'Wester Common Stock were held in
accounts over which Black & Company has investment discretion and 450,082
shares of Nor'Wester Common Stock are owned by Black & Company.
In arriving at its opinion, Black & Company has, among other things: (i)
reviewed the definitive, Merger Agreement and Investment Agreement; (ii)
reviewed certain other documents related to the Merger Agreement and
Investment Agreement, including drafts of the joint Proxy
Statement/Prospectus of UCB and Nor'Wester, WVI, AAI, Bayhawk and Mile High;
(iii) reviewed the publicly available information concerning Nor'Wester, WVI
AAI, Bayhawk and Mile High and certain other relevant financial operating
data made available to Black & Company from internal records of Nor'Wester,
WVI, AAI, Bayhawk and Mile High; (iv) discussed with certain members of the
management of Nor'Wester, WVI, AAI, Bayhawk and Mile High the business,
financial condition and prospects of those companies, including the views of
the respective managements of Nor'Wester, WVI, AAI; Bayhawk and Mile High as
to the anticipated adverse effects on the respective businesses, assets,
liabilities, operations and prospects of those companies that would occur if
Nor'Wester, WVI, AAI Bayhawk and Mile High were not to enter into the
Consolidation and Investment and the liquidity and solvency concerns of those
companies; (v) held discussions with members of senior management of UBA
concerning the business prospects of UCB, including such management's views
as to the organization of and strategies with respect to UCB; (vi) reviewed
certain financial and operating information, including certain financial
projections provided by the management relating to Nor'Wester, WVI, AAI
Bayhawk and Mile High; (vii) reviewed the recent reported prices and trading
activity for the common stock of certain other companies engaged in
businesses Black & Company considered comparable to those of AAI, Bayhawk and
Mile High and compared certain financial information for such comparable
companies with similar information for Nor'Wester, WVI, AAI, Bayhawk and Mile
High; (viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions; (ix)
May 12, 1997
Page 3
analyzed the range of possible outcomes of a liquidation of each of WVI, AAI,
Bayhawk and Mile High; and (x) performed and/or considered such other
analyses and examinations and considered such other information, financial
studies, analyses and investigations and financial, economic and market data
as Black & Company deemed relevant.
In connection with Black & Company's review and for purposes of its opinion,
Black & Company did not independently verify any of the foregoing information
and assumed (i) all such information is complete and accurate in all
materials respects, (ii) there have been no material changes in the assets,
financial condition, results of operations, business or prospects of
Nor'Wester, WVI, AAI, Bayhawk or Mile High since the respective dates of
their last financial statements made available to us and all material
liabilities (contingent or otherwise, known or unknown) of Nor'Wester, WVI,
AAI, Bayhawk or Mile High are as set forth in their respective financial
statements, and (iii) no adjustments will be made to the material terms of
the Consolidation and Investment from those set forth in the copies of the
definitive Investment Agreement delivered to us prior to this date. With
respect to the financial forecasts and projections of Nor'Wester, WVI, AAI,
Bayhawk and Mile High provided to us by the management of Nor'Wester, we have
assumed for purposes of our opinion that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of such management, at the time of preparation, of the future
operating and financial performance of Nor'Wester, WVI, AAI, Bayhawk and Mile
High and that the strategic and operating benefits anticipated by such
management will be realized from the Consolidation and Investment (it being
noted that such management did not, due to the financial conditions of WVI,
AAI, Bayhawk and Mile High, prepare forecasts for each of such corporations
as an independent operating entity assuming the Consolidation and Investment
did not occur). Black & Company did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of Nor'Wester,
WVI, AAI, Bayhawk or Mile High, nor did we conduct a physical inspection of
the properties and facilities of Nor'Wester, WVI, AAI, Bayhawk or Mile High
in connection with its opinion. Black & Company's opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of the opinion and any subsequent change in
such conditions would require a reevaluation of this opinion.
In rendering its opinion, Black & Company does not express any opinion or
make any determination as to what specific consideration should be paid for
the UCB Common Stock or received by the holders of WVI, AAI, Bayhawk and Mile
High Common Stock in connection with the Consolidation and Investment. The
opinion rendered by Black & Company is limited to the evaluation and
determination of whether the consideration to be received by the Common Stock
holders of each WVI, AAI, Bayhawk and Mile High is fair, from a financial
point of view, to each of such shareholders and does not address the
underlying business decision of WVI, AAI, Bayhawk or Mile High to engage in
the Consolidation and Investment. We are not expressing any opinion as to
what the value of UCB Common Stock will be when issued pursuant to the
Consolidation and Investment or the price at which UCB Common Stock will
trade at any time. Our opinion does not constitute a recommendation to any
shareholder of Nor'Wester, WVI, AAI, Bayhawk or Mile High as to how such
shareholder should vote on the proposed Consolidation and Investment.
May 12, 1997
Page 4
This letter and the opinion expressed herein are provided at the request and
for the information of the Boards of Directors of WVI, AAI, Bayhawk and Mile
High and may not be quoted or referred to or used for any other purpose
without our prior written consent, except that this letter may be disclosed
in connection with any registration statement of Form S-4 or proxy statement
used in connection with the Merger Agreement and the Investment Agreement so
long as this letter is quoted in full in such registration statement on Form
S-4 or proxy statement.
Based upon and subject to the foregoing, it is Black & Company's opinion
that, as of the date hereof: (i) the consideration to be received by the
shareholders of WVI (other than James W. Bernau) in the Consolidation and
Investment is fair to such shareholders from a financial point of view, (ii)
the consideration to be received by the shareholders of AAI in the
Consolidation and Investment is fair to such shareholders from a financial
point of view, (iii) the consideration to be received by the shareholders of
Bayhawk in the Consolidation and Investment is fair to such shareholders
from a financial point of view, and (iv) the consideration to be received by
the shareholders of Mile High in the Consolidation and Investment is fair to
such shareholders from a financial point of view.
Best regards,
BLACK & COMPANY, INC.
/s/ Laura Black
Laura Black
Senior Vice President
ANNEX E
[UCB CERTIFICATE OF INCORPORATION]
E-1
CERTIFICATE OF INCORPORATION
UNITED CRAFT BREWERS, INC.
FIRST: The name of this corporation is: UNITED CRAFT BREWERS, INC.
SECOND: The address of the registered office of the corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The name and mailing address of the incorporator of the
corporation is:
Scott D. Elliott
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, CA 94111
FOURTH: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FIFTH: Section 1. CLASSES AND NUMBER OF SHARES.
The total number of shares of all classes of stock which this
corporation shall have authority to issue is 27,000,000 shares which will
consist of Preferred Stock and Common Stock. The classes and the aggregate
number of shares of stock of each class which this corporation shall have
authority to issue are as follows:
(i) 25,000,000 shares of Common Stock, $0.001 par value per share
(hereinafter the "Common Stock");
(ii) 2,000,000 shares of Preferred Stock, $0.001 par value per share,
with such rights, privileges, restrictions and preferences as the Board of
Directors may authorize from time to time (hereinafter the "Preferred Stock").
SIXTH: Section 1. NUMBER OF DIRECTORS.
The number of directors which shall constitute the whole Board of
Directors of this corporation shall be as specified in the by-laws of this
corporation.
Section 2. CLASSIFIED BOARD OF DIRECTORS.
The directors shall be divided into three classes, with each class to
be as nearly equal in number as reasonably possible, and with the initial term
of office of the first class of directors to expire at the 1998 annual meeting
of stockholders, the initial term of office of the second class of directors to
expire at the 1999 annual meeting of stockholders and the initial term of office
of the third class of directors to expire at the 2000 annual meeting of
stockholders, in each case upon the election and qualification of their
successors. Commencing with the 1998 annual meeting of stockholders, directors
elected to succeed those directors whose terms have thereupon expired shall be
elected to a term of office to expire at the third succeeding annual meeting of
stockholders after their election, and upon the election and qualification of
their successors. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain or attain the
number of directors in each class as nearly equal as reasonably possible, but in
no case will a decrease in the number of directors shorten the term of any
incumbent director.
Section 3. VACANCIES.
Any vacancies in the Board of Directors for any reason and any newly
created directorship resulting by reason of any increase in the number of
directors may be filled only by the Board of Directors, acting by a majority of
the remaining directors then in office, although less than a quorum, or by a
sole remaining director, and any directors so appointed shall hold office until
the next election of the class for which such directors have been chosen and
until their successors are elected and qualified.
Section 4. REMOVAL OF DIRECTORS.
Except as may be provided in a resolution or resolutions providing for
any class or series of Preferred Stock pursuant to the Fifth Article hereof with
respect to any directors elected by the holders of such class or series, any
director, or the entire Board of Directors, may be removed from office at any
time, but only for cause, and only by the affirmative vote of the holders of at
least 66 2/3% of the voting power of all of the shares of capital stock of the
corporation then entitled to vote generally in the election of directors, voting
together as a single class.
Section 5. LIMITED LIABILITY.
To the fullest extent permitted by the General Corporation Law of the
State of Delaware (as such law currently exists or may hereafter be amended so
long as any such amendment authorizes action further eliminating or limiting the
personal liabilities of directors), a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director. Any repeal or modification of this
paragraph by the stockholders of the corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the corporation with respect to any act or omission occurring prior
to the time of such repeal or modification.
2
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware as the by-laws may provide. The books of the corporation may
be kept, subject to any provision contained in the statutes, outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the by-laws of the corporation. Stockholders shall
not be entitled to request the election of directors by written ballot unless a
by-law of the corporation shall authorize such a vote by written ballot. Except
as may be provided in a resolution or resolutions providing for any class or
series of Preferred Stock pursuant to the Fifth Article hereof, any action
required or permitted to be taken by the stockholders of the corporation must be
effected at a duly called annual or special meeting of such holders and may not
be effected by any consent in writing in lieu of a meeting by such holders.
Special meetings of stockholders of the corporation may be called only by the
Board of Directors pursuant to a resolution adopted by a majority of the members
of the Board of Directors then in office. Stockholders of the corporation shall
not have the right to request or call a special meeting of the stockholders.
For purposes of all meetings of stockholders, a quorum shall consist of 40% of
the shares entitled to vote at such meeting of stockholders, unless otherwise
required by law.
EIGHTH: The corporation hereby reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this
reservation. Except as may be provided in a resolution or resolutions
providing for any class or series of Preferred Stock, any such amendment,
alteration, change or repeal shall require the affirmative vote of both (a) a
majority of the members of the Board of Directors then in office and (b) a
majority of the voting power of all of the shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class; except that any proposal to amend, alter, change
or repeal the provisions of Section 2 or Section 4 of the Sixth Article, the
Seventh Article, this Eighth Article and the Ninth Article shall require the
affirmative vote of the holders of at least 66 2/3% of the voting power of
all of the shares of capital stock of the corporation then entitled to vote
generally in the election of directors, voting together as a single class.
NINTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind from time to time any or all of the by-laws of the
corporation; including by-law amendments increasing or reducing the
authorized number of directors. In addition, the stockholders of the
corporation may adopt, amend, alter, change or repeal any by-laws of the
corporation by the affirmative vote of the holders of at least 66 2/3% of the
voting power of all of the shares of capital stock of the corporation then
entitled to vote generally in the election of directors, voting together as a
single class (notwithstanding the fact that a lesser percentage may specified
by Delaware Law).
TENTH: In the event that any of the provisions of this Certificate of
Incorporation (including any provision within a single Section, paragraph or
sentence) are held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the fullest extent permitted by law.
3
The undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware does make this certificate, hereby declaring and
certifying that this is his act and deed and the facts herein stated are true,
and accordingly has hereunto set forth his hand this 15th day of April, 1997.
------------------------------
Scott D. Elliott
4
ANNEX F
[SECTIONS 60.551 THROUGH 60.594 OF
THE OREGON BUSINESS CORPORATION ACT]
F-1
OREGON REVISED STATUTES
TITLE 7. CORPORATIONS AND PARTNERSHIPS
CHAPTER 60. PRIVATE CORPORATIONS
DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
60.551. DEFINITIONS FOR 60.551 TO 60.594.
As used in ORS 60.551 to 60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in
the manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
60.554. RIGHT TO DISSENT.
(1) Subject to subsection (2) of this section, a shareholder is entitled
to dissent from, and obtain payment of the fair value of the shareholder's
shares in the event of, any of the following corporate acts:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the
merger or if the corporation is a subsidiary that is merged with its parent
under ORS 60.491;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder to a fraction of
a share if the fractional share so created is to be acquired for cash under
ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the
corporate action creating the shareholder's entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any
class or series if the shares of the class or series were registered on a
national securities exchange or quoted on the National Association of
Securities Dealers, Inc. Automated Quotation System as a National Market
System issue on the record date for the meeting of shareholders at which the
corporate action described in subsection (1) of this section is to be
approved or on the date a copy or summary of the plan of merger is mailed to
shareholders under ORS 60.491, unless the articles of incorporation otherwise
provide.
60.557. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares
regarding which the shareholder dissents and the shareholder's other shares
were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote.
PROCEDURE FOR EXERCISE OF RIGHTS
60.561. NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under ORS
60.554 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under ORS 60.551 to 60.594 and be accompanied by a copy of ORS 60.551
to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was
taken and send the shareholders entitled to assert dissenters' rights the
dissenters' notice described in ORS 60.567.
60.564. NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under ORS
60.554 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand
payment for the shareholder's shares if the proposed action is effectuated
and shall not vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.
60.567. DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under ORS
60.554 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
2
(c) Supply a form for demanding payment that includes the date of the
first announcement of the terms of the proposed corporate action to news
media or to shareholders and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571. DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in ORS 60.567 must
demand payment, certify whether the shareholder acquired beneficial ownership
of the shares before the date required to be set forth in the dissenters'
notice pursuant to ORS 60.567 (2)(c), and deposit the shareholder's
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
shares under subsection (1) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
60.574. SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
60.577. PAYMENT.
(1) Except as provided in ORS 60.584, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall
pay each dissenter who complied with ORS 60.571, the amount the corporation
estimates to be the fair value of the shareholder's shares, plus accrued
interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for
that year and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594.
60.581. FAILURE TO TAKE ACTION.
(1) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand procedure.
3
60.584. AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by ORS 60.577
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action,
it shall estimate the fair value of the shares plus accrued interest and
shall pay this amount to each dissenter who agrees to accept it in full
satisfaction of such demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares an explanation of
how the interest was calculated and a statement of the dissenter's right to
demand payment under ORS 60.587.
60.587. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of
interest due, and demand payment of the dissenter's estimate, less any
payment under ORS 60.577 or reject the corporation's offer under ORS 60.584
and demand payment of the dissenter's estimate of the fair value of the
dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or
offered under ORS 60.584 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60 days
after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within 30 days after the
corporation made or offered payment for the dissenter's shares.
JUDICIAL APPRAISAL OF SHARES
60.591. COURT ACTION.
(1) If a demand for payment under ORS 60.587 remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand under ORS 60.587 and petition the court under subsection (2)
of this section to determine the fair value of the shares and accrued
interest. If the corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office is located, or if the
principal office is not in this state, where the corporation's registered
office is located. If the corporation is a foreign corporation without a
registered office in this state, it shall commence the proceeding in the
county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the court order appointing them, or in any amendment to
the order. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
4
(b) The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ORS 60.584.
60.594. COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under ORS 60.591 shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of appraisers appointed by the court. The court shall assess the
costs against the corporation, except that the court may assess costs against
all or some of the dissenters, in amounts the court finds equitable, to the
extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and experts
of the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously or not in good faith with respect
to the rights provided by this chapter.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to counsel reasonable fees to be paid out of the amount
awarded the dissenters who were benefited.
5
ANNEX G
[SECTION 262 OF THE DELAWARE CORPORATE LAW]
G-1
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 Del. C. @ 262 (1996)
@ 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to @ 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of
a member of a nonstock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing an interest
in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to @ 251 (other than a merger effected pursuant to
@ 251(g) of this title), @ 252, @ 254, @ 257, @ 258, @ 263 or @ 264 of this
title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to vote
at the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval
the vote of the stockholders of the surviving corporation as provided in
subsection (f) of @ 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
@@ 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under @ 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply as nearly
as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient if
it reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to @ 228
or @ 253 of this title, each consitutent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constitutent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constitutent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constitutent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constitutent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger or
consolidation,
the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the record
date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by
2
the Court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate fully
in all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates upon
the surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of Chancery
may be enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall
be filed within the time provided in subsection (e) of this section, or if
such stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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