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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-QSB
__________________________________
Quarterly Report Pursuant to Section 13 or
15 (d) of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
Commission File Number 33-81536-LA
AVIATOR ALES, INC.
(Exact name of registrant as specified in charter)
Delaware 91-1633491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
__________________________________
14316 NE 203rd St.
Woodinville, Washington 98072
(206)-487-0717
(Address, including Zip code, and telephone number,
including area code, of registrant's principal
executive offices)
__________________________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
[X] YES [ ] NO
Transitional Small Business Disclosure Format
[ ] YES [X] NO
Number of shares of common stock outstanding as of
September 30, 1996 7,460,086 shares, $.001 par value
=======================================================
AVIATOR ALES, INC.
INDEX TO FORM 10-Q
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Part I - Financial Information
Item 1 -- Financial Statements
Balance Sheet - September 30, 1996 and December
31, 1995. . . . . . . . . . . . . . . . . . . 3
Statement of Operations - Three Months and Nine
Months Ended September 30, 1996 and September 30,
1995. . . . . . . . . . . . . . . . . . . . . 4
Statement of Cash Flows - Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . 9
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K . . 13
Signatures . . . . . . . . . . . . . . . . . . 14
AVIATOR ALES, INC.
(A Development Stage Company)
Balance Sheet
September 30,
1996 December 31,
ASSETS (unaudited) 1995
___________ ____________
Current Assets:
Cash and cash
equivalents $ 106,437 $ 226,401
Accounts receivable 185,623 48,870
Inventories 450,418 244,273
Other current assets,
net 115,391 57,912
___________ __________
Total current assets 857,869 577,456
Property and equipment,
net 2,232,347 2,153,851
Other non-current
assets, net 4,760 16,361
___________ ____________
Total assets $3,094,976 $ 2,747,668
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 512,177 $ 202,312
Accrued liabilities 124,809 29,552
Current portion of
capital lease 3,964 -
Payable to parent and
affiliated companies,
net 563,160 28,111
___________ ___________
Total current
liabilities 1,204,110 259,975
Capital Lease 8,722 -
Mortgage note payable 50,000 50,000
Advance from affiliate 275,000 250,000
Deferred rent 73,449 47,951
___________ ___________
1,611,281 607,926
___________ ___________
Commitments
Shareholders' equity:
Common stock, $.001 par
value - 10,000,000 shares
authorized, 5,803,597
and 7,460,226 shares
outstanding 7,461 7,461
Additional paid-in
capital 2,577,649 2,577,649
Deficit accumulated during
the development stage (1,101,415) (445,368)
___________ ____________
1,483,695 2,139,742
Total liabilities and
shareholders' equity $3,094,976 $ 2,747,668
=========== ============
AVIATOR ALES, INC.
(A Development Stage Company)
Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
_______ _______ _________ _______
Gross sales 911,662 16,058 1,657,903 22,830
Less: excise
taxes 29,341 1,694 67,307 1,694
_______ _______ _________ _______
Net sales 882,321 14,364 1,590,596 21,136
Cost of sales 672,916 20,000 1,497,781 22,735
_______ _______ _______ _______
Gross profit
(deficit) 209,405 (5,636) 92,815 (1,599)
Selling, general and
administrative
expenses 183,894 129,318 529,240 315,193
_______ ________ _________ _________
Loss from
operations 25,511 (134,954) (436,425) (316,792)
Other income
(expense)
Other
expense (219,330) - (219,330) -
Interest
income 894 13,315 3,185 76,446
Interest
expense (1,228) (1,125) (3,477) (3,500)
_________ ________ _________ _______
(219,664) 12,190 (219,622) 72,946
_________ ________ _________ _______
Net income (loss)
$(194,153) $(122,764) $(656,047) $(243,846)
========= ========== ========== ==========
Net loss per
common share $ (0.04) $ (0.02) $ (0.11) $ (0.03)
======= ========== ========== ==========
Weighted average
number of
common shares
outstanding 5,330,275 7,454,546 5,803,597 7,454,546
========= ========= ========== ===========
AVIATOR ALES, INC.
(A Development Stage Company)
Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
1996 1995
_____________ _____________
Cash flows from operating
activities:
Net (loss) $ (656,047) $ (243,846)
Reconciliation of net loss
to net cash used (provided)
by operating activities:
Depreciation and
amortization 115,996 11,497
Changes in assets
and liabilities:
Accounts receivable (136,753) (15,000)
Inventories (206,145) (106,746)
Other current assets (57,479) 9,469
Other non-current assets 11,601 (11,000)
Accounts payable 309,865 111,833
Accrued liabilities 95,257 38,638
Payables to parent and
affiliated companies 535,049 (39,884)
________ ________
Net cash (used for) provided
by operating activities 11,344 (245,039)
Cash flows from investing activities:
Purchases of property and
equipment (249,492) (1,772,601)
Sale of asset 55,000 -
________ ________
Net cash used for
investing activities (194,492) (1,772,601)
Cash flows from financing
activities:
Payments on capital lease (314) -
Proceeds from capital lease 13,000 -
Cash advances from
affiliated company 25,000 -
Deferred rent 25,498 -
Deferred stock
offering costs - (10,927)
_________ _________
Net cash used for
financing activities (63,184) (10,927)
_________ _________
Net increase (decrease) in cash
and cash equivalents (119,964) (2,028,567)
Cash and cash equivalents:
Beginning of period 226,401 2,490,777
___________ ___________
End of period $ 106,437 $ 462,210
=========== ===========
AVIATOR ALES, INC.
NOTES TO FINANCIAL STATEMENTS
DEVELOPMENT STAGE COMPANY
Aviator Ales, Inc. (the Company) was formed on February 14,
1994 to produce and sell hand-crafted ales under its own
label "Aviator Ales" in the State of Washington. To achieve
its goal, the Company has built a brewery in an 18,948
square foot leased facility in Woodinville, Washington. The
brewery has an initial production capacity of 11,700 barrels
per year with a maximum designed production capacity of
125,000 barrels per year.
The Company is a development stage company that was
organized under the laws of the State of Delaware. From the
date of inception (February 14, 1994) through September 30,
1996, the Company's efforts have been directed toward: 1)
organizing and completing a public offering of shares of its
Common Stock, 2) building and equipping its brewery, 3)
developing and beginning production of six distinct styles
of hand-crafted ales, and 4) establishing a network of
independent distributors. The Company is a majority owned
subsidiary of Willamette Valley, Inc. Microbreweries across
America ("WVI"), a company organized to establish microbreweries
throughout the United States. At September 30, 1996, WVI
owned approximately 51% of the Company's common stock.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited
and have been prepared by Aviator Ales, Inc. pursuant to the
rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
typically included in financial statements prepared in
accordance with generally accepted accounting standards have
been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial
statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair
presentation of the results for the interim period
presented. The financial statements should be read in
conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1995 filed with the
Securities and Exchange Commission. The results of
operations for an interim period are not necessarily
indicative of the results of operations for a full year.
Inventories
Inventories consist of the following:
September 30, December 31,
1996 1995
_____________ ____________
Raw materials $ 139,967 $ 48,589
Work-in-process 91,885 30,100
Finished goods 106,065 147,992
Retail products 112,501 17,592
_____________ ____________
$ 450,418 $ 244,273
============= ============
AVIATOR ALES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment consists of the following:
September 30, December 31,
1996 1995
_____________ ____________
Land and improvements $ 98,455 $ 98,455
Leasehold improvements 597,031 543,820
Brewery equipment 1,646,606 1,527,269
Office furniture and equipment 13,861 10,162
Vehicles 19,490 19,490
_____________ ____________
2,375,443 2,199,196
Less accumulated depreciation
and amortization (143,096) (45,345)
______________ ______________
$ 2,232,347 $ 2,153,851
============== ==============
Income Taxes
No benefit for income taxes was recognized for the periods
ended September 30, 1995 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. Accumulated
net operating loss carryforwards at September 30, 1996 and
December 31, 1995 were $1.2 million and $580,000, respectively.
Shareholders' Equity
The Company has filed a registration statement with the
Securities and Exchange Commission to sell an additional
820,000 shares of its common stock at a proposed offering
price of $1.85 per share. The amount raised to date is
approximately $547,000 and has been placed into an escrow
account.
In March 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; the Company, in turn, retired these
shares. This transaction reduced WVI's ownership in the
Company from approximately 65% to approximately 51%.
Related Party Transactions
For the three months ended September 30, 1996, the Company
purchased management and administrative services from WVI at
a total cost of $2,976. WVI contracts for certain of these
services under a general services agreement between WVI and
Nor'Wester Brewing Company, Inc. (Nor'Wester), an affiliated
company. In conjunction with the Company's stock offering,
the Company has been charged an aggregate of $15,700 by
WVI, Nor'Wester, and WVV for stock offering services.
In 1996, Nor'Wester purchased from the Company $55,000 of
1/2 barrel kegs to be used for production of Nor'Wester beer
under the Cooperative Brewing Agreement. In addition, the
Company has agreed to cooperatively brew and bottle beer for
Bayhawk Ales, Inc. ("Bayhawk"), another majority-owned
subsidiary of WVI. In accordance with this agreement,
Bayhawk advanced $25,000 to the Company in April 1996 for
the purchase of raw materials. Sales of beer by the Company
to the affiliates through the third quarter of 1996 totaled
$463,609.
AVIATOR ALES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net Loss Per Share
Net loss per common share is calculated based on the
weighted average number of common shares outstanding.
Shares owned by the Company's parent, WVI, are held in
escrow and are included in the weighted average number of
common shares outstanding.
Contingencies
In September 1996, the Company's parent, WVI entered
into a non-binding letter of intent with The UB Group of
Bangalore, India setting forth the proposed terms of the
UB Group's planned investment of $9.0 million in cash and
certain intangible consideration in exchange for an equity
interest in the resulting entity following the proposed
consolidation of the Company, WVI, and the Company's
affiliates, Nor'Wester, Bayhawk, Mile High Brewing Company,
and North Country Brewing Company. Although the parties are
proceeding toward signing a definitive agreement setting forth
the terms and conditions of the proposed investment, there
can be no assurance that an equity investment by The UB Group
will be made or, if made, the ultimate terms of such investment.
AVIATOR ALES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that
involve risks and uncertainties. Actual future results may differ
materially depending on a variety of factors, including, but not
limited to, pricing and availability of raw materials and packaging,
successful execution of internal performance and expansion plans,
impact of competition, distributor changes, availability of financing,
and other risks detailed below and in the Company's Securities and
Exchange Commission filings, including the Company's Registration
Statement filed on Form SB-2 relating to its recently terminated
public offering and its periodic reports.
Results of Operations
Three Months Ended September 30, 1996
Gross Sales.. Sales in dollars and barrels for the three
months ended September 30, 1996 were $911,662 and 4,454,
respectively. This compares to sales in dollars and barrels
for the comparable period in 1995 of $16,058 and 80,
respectively. This represents an increase in revenue
for the quarter ended September, 1996 of 5577% over the same
period in 1995, and an increase of 5581% in barrels sold for
the quarter ended September 1996 over the same period in
1995. This significant increase in sales is attributable
to the fact that AAI only commenced its brewing operation
during the third quarter of 1995; over the last twelve months,
AAI has continued to build its distribution channels, enhanced
awareness of its line of ales, developed a growing contingency
of loyal customers and participated in cooperative brewing
arrangements with affiliated companies. The Company
anticipates a decline in gross sales for the fourth quarter
due to the seasonal nature of the beer industry; the company
also expects a decline in the projected need for cooperative
brewing done for affiliated companies. To mitigate some of
the cyclical nature of its industry, the company has developed
two seasonal ales: Harvest Ale and Winter Flight Ale. The
Harvest Ale release will coincide with the autumn months to
be followed by the introduction of the Winter Flight Ale during
the winter months. Sales of beer under the cooperative brewing
agreements with affiliated breweries were $384,700, or 42% of
total sales, for three months ended September 30, 1996.
Excise Taxes. Excise taxes were $29,341 (3% of net sales)
for the three months ended September 30, 1996 as compared
to $1,694 (12% of net sales) for the same period in 1995.
Excise taxes decreased as a percentage of net sales due to
the cooperative brewing agreements with affiliates
Nor'Wester Brewing Company and Bayhawk Ales, Inc., where the
Company is reimbursed for excise taxes paid that are
applicable to the cooperatively brewed beer.
Cost of Sales. Cost of sales as a percentage of net
revenues for the third quarter ended 1996 was 76%,
reflecting the disproportionate cost of production for goods
sold during a period when the facility was operating at less
than its maximum designed capacity, as well as development-
stage production costs such as recipe testing. With the
introduction of its product to surrounding states, the
Company has also experienced an increase in shipping costs.
Cost of sales as a percentage of net revenues for the
comparable period in the prior year was 139%. In addition,
the gross margin on cooperative brewed beer is substantially less
than the Company's own products thereby increasing the cost
of sales as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months
ended September 30, 1996 totaled $183,894, or 21% of net sales,
as compared to $129,318, or 900% of net sales, for the comparable period
in 1995. This is primarily due to higher management and administrative
support required when the Company commenced operations and
increased selling costs for the quarter ended September 30,
1996. The Company has recently restructured its compensation
program for its sales force; the Company will emphasize a
commission-based structure thus allowing its sales force to
benefit as sales increase.
Other Income and Expenses. In June 1996, the Company commenced
a registered public stock offering sell up to 820,000 shares of
its Common Stock at a proposed offering price of $1.85 per share.
The Company has determined that continuance of the offering was
no longer in the best interest of the Company or investors.
Accordingly, the Company intends to terminate the offering and
return all funds held in escrow, together with interest, to the
prospective investors. With the proposed termination of the
offering, the Company took a one-time charge for legal and other
deferred stock offering costs of $219,330 in the three months
ended September 30, 1996.
Nine Months Ended September 30, 1996
Gross Sales. Sales for the nine months ended September 30,
1996 were $1,657,903, an increase of 7,161% as compared to
gross sales of $22,830 for the same period in 1995. This
reflects an increase in sales volume from 80 barrels in 1995
to 8,727 in 1996. Sales of beer under the cooperative brewing
agreements with affiliated breweries were $463,609, or 28% of
the total, for the nine months ended September 30, 1996.
Excise Taxes. Excise taxes were $67,307 (4% of net sales)
for the nine months ended September 30, 1996 as compared to
$1,694 (8% of net sales), for the same period in 1995.
Excise taxes decreased as a percentage of net sales due to
the cooperative brewing agreements with affiliates
Nor'Wester Brewing Company and Bayhawk Ales, Inc., where the
Company is reimbursed for excise taxes paid that are
applicable to the cooperatively brewed beer.
AVIATOR ALES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 (cont.)
Cost of Sales. Cost of sales as a percentage of net
revenues for the first three quarters of 1996 was 94%,
reflecting the disproportionate cost of production for goods
sold during a period when the facility was operating at less
than its maximum designed capacity, as well as development-
stage production costs such as recipe testing. Cost of
sales as a percentage of net revenues for the comparable
period in the prior year was 108%. In addition, the margin
on cooperative brewed beer is substantially less than the
Company's own products thereby increasing the cost of sales
as a percentage of net revenues. As sales of the Company's
own products continue to expand, the increased capacity
utilization and margin on sale price will reduce the cost
of sales as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling,
general, and administrative expenses for the nine months
ended September 30, 1996 totaled $529,240, or 33% of net sales,
as compared to $315,193, or 1,491% of net sales, for the comparable
period in 1995. This is primarily due to higher management and
administrative support required when the Company commenced operations.
Other Income and Expenses. As discussed above the termination
of the offering the Company took a one-time charge for legal
and other deferred stock offering costs of $219,330 in the
period ended September 30, 1996.
Liquidity and Capital Resources
For the nine months ended September 30, 1996, cash and cash
equivalents decreased $119,964 primarily due to increased
operating expenses associated with the expansion of sales and
production in addition to costs associated with the stock
offering of $219,330. Other uses of funds for the period
include an increase in accounts receivable of $136,753 due
to increased sales, an increase in inventories of $206,145,
purchases of brewing and other equipment of $249,492 and an
increase in other current assets of $57,479. Primary sources
of funds include an increase in accounts payable of $309,865
to support expansion and sales, an increase in accrued
expenses of $95,257, an increase in deferred rent of
$25,498, a decrease in non-current assets of $11,601, an
increase in amounts payable to affiliated companies of
$535,049 for the purchase of cooperative brewing equipment
and supplies and for administrative and financial support,
sale of asset for $55,000, proceeds from a capital
lease of $13,000 and an increase in advance from affiliates
of $25,000 for cooperative brewing.
The Company will be dependent upon proceeds from debt or
equity financing as cash flows from operations are not
expected to be sufficient to satisfy the Company's working
capital needs for the next twelve months.
To address the liquidity and capital resources concerns of
the Company and certain of its affiliated breweries, in
September 1996, the Company's parent, WVI and its affiliate
Nor'Wester entered into a non-bonding letter of intent with The
UB Group of Bangalore, India setting forth the proposed
terms of The UB Group's possible investment of $9.0 million in
cash and certain intangible consideration including the grant
of an exclusive right to manufacture The UB Group's Kingfisher
brand beer for sale in North America and The UB Group's
provision of certain management and technical services of
craft breweries controlled by WVI and its affiliate, Nor'Wester.
Under the terms of the letter of intent, The UB Group's investment
will be made in the resulting entity following a proposed
consolidation of the Company, WVI and WVI's subsidiaries--
Mile High Brewing Company, Inc., located in Denver, Colorado,
Bayhawk Ales, located in Irvine, California, and Nor'Wester and
Nor'Wester's subsidiary, North Country Brewing Company, located in
Saratoga Springs, New York.
The closing of the proposed investment remains subject to
(i) The UB Group's completion of satisfactory due diligence,
(ii) negotiation and execution of a definitive investment
agreement between the parties, (iii) approval by the boards
of directors and shareholders of each of the Company, WVI,
Nor'Wester and their respective subsidiaries, (iv) registration
with the U.S. Securities and Exchange Commission of shares in the
resulting entity following consolidation which will be exchanged
in the merger, and (v) such other customary conditions for
transactions of this type.
Following execution of the letter of intent, The UB Group has
provided the WVI/Nor'Wester alliance of craft breweries with
bridge loans in the amount of $650,000 to sustain and grow their
brewing operations. The UB Group has also indicated that it may,
at its discretion, provide additional bridge loans or guarantees
on bank loans in such amounts and at such times as are necessary to
sustain the breweries' operations until completion of the planned
consolidation and closing of the investment. There can be no
assurances that additional bridge loans will be made by The UB Group,
that an equity investment by The UB Group will ultimately be made or,
if made, the final terms of such investment.
The Company commenced a public stock offering in June 1996 to sell up
to 820,000 shares of its Common Stock at an offering price of
$1.85 per share. It is the Company's intention to terminate
such offering in light of the proposed consolidation and
the investment from The UB Group. If, for any reason, the
proposed consolidation and possible investment does not take place
the Company would be unable to finance its future expansion and
working capital requirements without alternative sources of
financing. Although the Company continues to negotiate with
several lenders there can be no assurance that such financing
will be available or, if the terms and conditions under which
such financing is offered will be acceptable to the Company.
The Company's inability to obtain additional capital would
result in a material adverse effect on the Company's business
and results of operations.
AVIATOR ALES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K.
On September 26, 1996, the Company filed a
Form 8-K in connection with its execution of
a non-binding letter of intent with The UB
Bangalore, India relating to The UB Group's
proposed investment of $9.0 million in cash
along with certain other non-cash intangible
consideration into the entity resulting from
the proposed consolidation of the Company with
its affiliates, Willamette Valley Inc.
Microbreweries Across America, Bayhawk Ales,
Inc., Mile High Brewing Company, Nor'Wester
Brewing Company, Inc. and North Country
Brewing Company. The Form 8-K set forth the
terms and conditions of the proposed investment
as outlined in the letter of intent, and
included as exhibits copies of the letter of
intent dated September 18, 1996, a September
26, 1996 press release relating to the matter,
and a September 26, 1996 letter to the
Company's shareholders describing the matter.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
AVIATOR ALES, INC.
Date: By _________________________
Dusty Wyant
General Manager
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
AVIATOR ALES, INC.
Date:__________________________________By /s/ Dusty Wyant
Dusty Wyant
General Manager
17