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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 0-26542
Redhook Ale Brewery, Incorporated
(Exact name of registrant as specified in its charter)
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Washington |
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91-1141254 |
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(State of incorporation) |
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(I.R.S. Employer Identification Number) |
14300 NE 145th Street, Suite 210
Woodinville, Washington
(Address of principal executive offices) |
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98072-6950
(Zip Code) |
(425) 483-3232
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, Par Value $0.005 Per Share
Rights to Purchase Common Stock
(Title of Class)
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant (based on the closing price of
such stock, as reported by The Nasdaq National Market, on
June 30, 2004) was $10,381,685.(1)
The number of shares of the registrant’s Common Stock
outstanding as of March 11, 2005 was 8,188,859.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to
the registrant’s 2005 Annual Meeting of Stockholders to be
held on May 24, 2005, are incorporated by reference into
Part III of this Report.
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Excludes shares held of record on that date by directors and
executive officers and greater than 10% shareholders of the
registrant. Exclusion of such shares should not be construed to
indicate that any such person directly or indirectly possesses
the power to direct or cause the direction of the management of
the policies of the registrant. |
REDHOOK ALE BREWERY, INCORPORATED
FORM 10-K
TABLE OF CONTENTS
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PART I.
Redhook Ale Brewery, Incorporated (“Redhook” or the
“Company”) is one of the leading brewers of craft
beers in the United States and has been at the forefront of the
domestic craft brewing segment since the Company’s
formation in 1981. Redhook produces its specialty bottled and
draft products in two Company-owned breweries, one in the
Seattle suburb of Woodinville, Washington (the “Washington
Brewery”) and the other in Portsmouth, New Hampshire (the
“New Hampshire Brewery”). By operating its own
small-batch breweries, the Company believes that it is better
able to control the quantities, types and flavors of beer
produced, while optimizing the quality and consistency of its
products. Management believes that the Company’s
significant production capacity is of high quality and that
Redhook is the only domestic craft brewer that owns and operates
substantial production facilities in both a western region and
eastern region of the United States.
The Company currently produces nine styles of beer, marketed
under distinct brand names. The Company’s flagship brand is
Redhook E.S.B. and its other principal products include
Redhook India Pale Ale, Redhook Blonde Ale, Blackhook Porter,
Chinook Copper Ale, and its seasonal offerings
Winterhook, Redhook Sunrye Ale and Redhook Nut Brown
Ale. The Company also produces and sells Widmer
Hefeweizen in the eastern United States under a 2003
licensing agreement with Widmer Brothers Brewing Company
(“Widmer”). In addition to its principal products, the
Company periodically develops and markets new products to test
and measure consumer response to varying styles and flavors. In
the first half of 2004, the Company distributed its products
through a network of third-party wholesale distributors and a
distribution agreement with Anheuser-Busch, Incorporated
(“A-B”) in 48 states. In the second half of 2004,
the Company began distributing its products in the western
United States through Craft Brands Alliance LLC (“Craft
Brands”), a joint venture between the Company and Widmer.
See “Product Distribution — Relationship with
Craft Brands Alliance LLC” below. In the mideast and
eastern United States, the Company continued to distribute its
products through a distribution agreement with A-B. See
“Product Distribution — Relationship with
Anheuser-Busch, Incorporated” below.
Industry Background
The Company is one of the leading brewers in the relatively
small craft brewing segment of the U.S. brewing industry.
Although 2004 production of craft beer is estimated by industry
sources to have increased by approximately 7% over 2003
production, the share of the domestic beer sales market held by
the craft beer segment has increased very modestly in recent
years. Craft beer shipments in 2004, 2003 and 2002 were
approximately 3.4%, 3.2% and 3.2%, respectively, of total beer
shipped in the United States. Approximately 7.02 million,
6.56 million and 6.43 million barrels were shipped in
the U.S. by the craft beer segment during 2004, 2003 and
2002, while total beer sold in the U.S., including imported
beer, was approximately 205.3 million, 204.0 million
and 203.5 million barrels, respectively. The number of
craft brewers in the U.S. has grown dramatically, from 627
at the end of 1994, peaking at nearly 1,500 in 2000, and down to
approximately 1,420 in 2004.
In the early 1900s, the U.S. brewing industry was comprised
of nearly 2,000 breweries, most of which were small operations
that produced distinctive beers for local markets. Fewer than
1,000 of these breweries reopened following Prohibition. During
the ensuing decades, the beer industry concentrated its
resources primarily on marketing pale lagers and pilsners for
various reasons, including the desire to appeal to the broadest
possible segment of the population; to benefit from economies of
scale through large-scale production techniques; to prolong
shelf life through use of pasteurization processes; and to take
advantage of mass media advertising reaching consumers
nationwide. At the same time the beer industry was narrowing its
product offerings to compete more effectively, there was also
extensive consolidation occurring in the industry. According to
industry sources, the three largest domestic brewers accounted
for approximately 86% of total beer shipped in the United
States, including imports, in 2004.
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Annual per capita domestic beer consumption has declined from
the highs experienced in the early 1980s, a result of an
elevated concern over health and safety issues, changing tastes,
and evolving affluence and consumption attitudes of a maturing
generation of beer drinkers born after World War II. Since
the early 1980’s, a sizable number of consumers have
migrated away from the major domestic products toward a broader
taste and variety in their malt beverages, mirroring similar
trends in other beverage and cuisine categories. Foreign brewers
initially benefited from these evolving consumption patterns.
Some of the principal European, Canadian and Mexican imported
beers offered a fuller-flavored alternative to the national
brands produced in the United States, despite also being
produced by large brewers.
By the latter half of the 1980s, a substantial new domestic
industry segment had developed in response to the increasing
consumer demand for specialty beers. Across the country, a
proliferation of regional specialty brewers (annually selling
more than 15,000 barrels but less than 2.0 million
barrels of craft beer brewed at their own facilities), contract
brewers (selling craft beer brewed by a third party to the
contract brewer’s specifications), microbreweries (selling
less than 15,000 barrels per year), and brewpubs
(combination restaurant-breweries) emerged to form the craft
beer industry. This new segment was able to deliver the fuller
flavored products presented by the imported beers while still
offering a fresher product and one that could appeal to local
taste preferences. Craft beer producers tend to concentrate on
flavor and less on appealing to mass markets. The strength of
consumer demand has enabled certain craft brewers, such as the
Company, to evolve from microbreweries into regional and
national specialty brewers by constructing larger breweries
while still adhering to the traditional European brewing methods
that characterize the craft brewing segment. Other craft brewers
have sought to take advantage of growing consumer demand and
excess industry capacity, when available, by contract brewing at
underutilized facilities.
The growth that occurred in the last half of the 1980’s and
early 1990’s in the craft beer segment has more recently
been slowed by the success of the larger specialty beer category
in which the craft beer segment competes as well as by the
growth of the wine and spirits markets. Specialty beverages
include imported beers which have enjoyed resurgence in demand
since the mid-1990’s, fuller-flavored products produced by
national domestic brewers, and the newest category of flavored
alcohol beverages. Certain national domestic brewers have also
sought to appeal to this growing demand for craft beers by
producing their own fuller-flavored products. In 2001 and 2002,
the specialty segment saw the introduction of flavored alcohol
beverages, the consumers of which, industry sources generally
believe, correlate closely with the consumers of the import and
craft beer products. While sales of flavored alcohol beverages
were initially very strong, these growth rates slowed in 2003
and 2004. The wine and spirits market has experienced a surge in
the past several years, attributable to competitive pricing,
television advertising, increased merchandising, and increased
consumer interest in spirits.
Business Strategy
Redhook Ale Brewery strives to be the preeminent specialty craft
brewing company in the United States, producing the highest
quality ale products in company-owned facilities, marketing and
selling them responsibly through its three-tier distribution
system.
The central elements of the Company’s business strategy
include:
Production of High-Quality Craft Beers. The Company is
committed to the production of a variety of distinctive,
flavorful craft beers. The Company brews its craft beers
according to traditional European brewing styles and methods,
using only high-quality ingredients to brew in company-owned and
operated brewing facilities. The Company does not intend to
compete directly in terms of production style, pricing or
extensive mass-media advertising typical of large national
brands.
Control of Production in Company-Owned Breweries. The
Company builds, owns and operates its own brewing facilities to
optimize the quality and consistency of its products and to
achieve the greatest control over its production costs.
Management believes that its ability to engage in ongoing
product innovation and to control product quality are critical
competitive advantages. The Company’s highly automated
breweries are designed to produce beer in small batches, while
attaining production economies through automation rather than
scale. The Company believes that its investment in technology
enables it to optimize employee
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productivity, to contain operating costs, to produce innovative
beer styles and tastes, and to achieve the production
flexibility afforded by small-batch brewing, with minimal loss
of efficiency and process reliability.
Strategic Distribution Relationship with Industry Leader.
Since October 1994, the Company has benefited from a
distribution relationship with A-B, pursuant to which Redhook
distributes its products in substantially all of its markets
through A-B’s wholesale distribution network. A-B’s
domestic network consists of more than 580 wholesale
distributors, most of whom are geographically contiguous and
independently owned and operated, and 15 branches owned and
operated by A-B. This distribution relationship with A-B has
offered efficiencies in delivery of product, state reporting and
licensing, billing and collections. The Company believes that
the existence of the distribution relationship with A-B and the
Company’s access to A-B distributors through presentations
by Redhook’s management at A-B’s distributor
conventions, A-B communications about Redhook in printed
distributor materials, and A-B-supported opportunities for
Redhook to educate A-B distributors about the Company’s
specialty products benefit the Company as this results in
increased awareness of and demand for Redhook products among
A-B’s distributors. The Company is able to reap the
benefits of this distribution relationship with A-B while, as an
independent company, maintaining complete control over the
production and marketing of its products.
Sales and Marketing Relationship with Craft Brands Alliance
LLC. On July 1, 2004, the Company entered into
agreements with Widmer, headquartered in Portland, Oregon, to
form a joint sales and marketing organization that serves both
companies’ operations in the western United States. The
joint organization, named Craft Brands Alliance LLC, advertises,
markets, sells and distributes both Redhook’s and
Widmer’s products to wholesale outlets through a
distribution agreement between Craft Brands and A-B. Management
believes that, in addition to achieving certain synergies, Craft
Brands capitalizes on both companies’ sales and marketing
skills and complementary product portfolios. The Company
believes that the combination of the two brewers’
complementary brand portfolios, led by one focused sales and
marketing organization, will not only deliver financial
benefits, but will also deliver greater impact at the point of
sale.
Operation of Regional Brewing Facilities. Management
believes that, by locating its production facilities in
proximity to the key regional markets it serves, the Company is
able to enjoy distinct competitive advantages, including
shortened delivery times to maximize product freshness, reduced
shipping costs, established brand awareness of the
Company’s products, and enhanced familiarity with local
consumer tastes leading to the Company’s ability to offer
select products appealing to those regional preferences. By
pursuing this strategy, Redhook believes that it will be able to
preserve its reputation and prestige as a regional craft brewer.
Promotion of Products. The Company promotes its products
through a variety of advertising programs with its wholesalers;
by training and educating wholesalers and retailers about the
Company’s products; through promotions at local festivals,
venues, and pubs; by utilizing its pubs located at the
Company’s two breweries; through price discounting; and,
most recently, through Craft Brands. Craft Brands is responsible
for promotion, advertising, and marketing in the western United
States. In the midwest and eastern United States, the
Company’s principal advertising programs include radio,
billboards, and print advertising (magazines, newspapers,
industry publications). The Company also markets its products to
distributors, retailers and consumers through a variety of
specialized training and promotional methods. The Company
actively trains its distributors and retailers in understanding
the brewing process, the craft beer segment and Redhook
products. Promotional methods directed towards consumers include
introducing Redhook products on draft in pubs and restaurants,
using promotional items including tap handles, glassware and
coasters, and participating in local festivals and sports venues
to increase brand name recognition. In addition, the
Company’s prominently located breweries feature pubs and
retail outlets and offer guided tours to further increase
consumer awareness of Redhook.
The Company will occasionally enter into advertising and
promotion programs where the entire program is funded by the
Company but, in recent years, has favored co-operative programs
where the Company’s spending is matched dollar for dollar
by the local distributor. Co-operative programs align the
interests of the Company with those of the wholesaler whose
knowledge of the local market contributes to more effective
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promotions. Sharing these efforts and cost with a wholesaler
helps the Company to leverage the investment made on programs
where the participating wholesaler has a vested interest in the
program’s success.
Products
The Company produces a wide variety of specialty craft beers
using traditional European brewing methods. The Company brews
its beers using only high-quality hops, malted barley, wheat,
rye and other natural ingredients, and does not use any rice,
corn, sugar, syrups or other adjuncts. The Company’s beers
are marketed on the basis of freshness and distinctive flavor
profiles. To help maintain full flavor, the Company’s
products are not pasteurized. As a result, it is appropriate
that they be kept cool so that oxidation and heat-induced aging
will not adversely affect the original taste, and that they be
distributed and served as soon as possible, generally within
three months after packaging to maximize freshness and flavor.
The Company distributes its products only in glass bottles and
kegs, and its products are freshness dated for the benefit of
consumers.
The Company presently produces eight principal brands, each with
its own distinctive combination of flavor, color and clarity:
Redhook E.S.B. The Company’s flagship brand,
Redhook E.S.B., which accounted for approximately 50% of
the Company’s sales in 2004, is a full, rich, well-rounded,
amber-colored ale with a sweet toasted malt flavor balanced by a
pleasant floral liveliness derived from Tettnang hops.
Redhook India Pale Ale. A premium English, pub-style
bitter ale, Redhook IPA is pale and aggressively hopped,
has a brassy color imparted by caramelized malt, an herbal aroma
characteristic of Northwest Cascade hops, and a crisp finish.
Redhook Blonde Ale. A delicious, thirst-quenching golden
ale, the combination of lightly roasted barley, subtle hops, and
a touch of wheat creates a perfectly balanced and distinctively
drinkable ale.
Blackhook Porter. A London-style porter, Blackhook
has an ebony tone, a pleasant “toasted” character
produced by highly roasted black barley, and a dark malt flavor
suggesting coffee and chocolate, balanced by lively hopping.
Chinook Copper Ale. Brewed in small batches exclusively
for the Northwest, this ale is unfiltered so beer drinkers can
enjoy the full flavor characteristics. Chinook Copper is
appetizingly fruity with light maltiness and a very pleasant
piney hint in the aroma. It has a beautiful opalescence from a
small amount of yeast suspended in the beer.
Winterhook. A rich, seasonal holiday ale formulated
specially each year for cold-weather enjoyment, Winterhook
typically is deep in color and rich in flavor, with complex
flavors and a warm finish. Winterhook is available during
fall and winter months.
Redhook Sunrye Ale. Gently roasted barley, delicate hops
and a touch of rye combine for a very balanced beer. Slightly
unfiltered to exude a pearl glow, Sunrye is styled for
warm weather refreshment. Sunrye is available from April
through September.
Redhook Nut Brown Ale. A malty ale with a hint of
sweetness in the finish. The combination of six barley malts and
two hop varieties results in a surprisingly smooth,
well-balanced dark beer. Nut Brown Ale is available
during the late winter and early spring.
The Company also produces Widmer Hefeweizen in the
eastern United States under license from Widmer. Widmer
Hefeweizen is a golden unfiltered wheat beer that is truly
cloudy and clearly superb. Widmer Hefeweizen is one of
the leading American style Hefeweizen sold in the U.S. and best
served with a lemon wedge.
In January 2003, the Company entered into the licensing
agreement with Widmer to produce and sell the Widmer
Hefeweizen brand in states east of the Mississippi River.
Brewing of this product, which began in February 2003, is
conducted at the New Hampshire Brewery under the supervision and
assistance of Widmer’s brewing staff to insure their
brand’s quality and matching taste profile. The term of
this agreement
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is for five years, with an additional one-year automatic renewal
unless either party elects to terminate the arrangement. The
agreement may be terminated by either party at any time without
cause pursuant to 150 days notice. The agreement may be
terminated for cause by either party under certain conditions.
During the term of this agreement, Redhook will not brew,
advertise, market, or distribute any product that is labeled or
advertised as a “Hefeweizen” or any similar product in
the agreed upon eastern territory. Brewing and selling of
Redhook’s Hefe-weizen was discontinued in conjunction with
this agreement. This agreement, for the eastern United States
only, is expected to increase capacity utilization and has
strengthened the Company’s product portfolio. The Company
shipped 17,800 and 12,000 barrels of Widmer Hefeweizen
during 2004 and 2003, respectively. In conjunction with the
Company’s discontinuation of Redhook Hefe-weizen,
shipments of Redhook Hefe-weizen in 2003 declined
approximately 8,000 barrels. A licensing fee of $266,000
and $166,000 due to Widmer is reflected in the Company’s
statement of operations for the years ended December 31,
2004 and 2003, respectively.
The Company also produces Pacific Ridge in the western
United States. In December 2003, the Company entered into a
purchase and sale agreement with A-B for the purchase of the
Pacific Ridge brand, trademark and related intellectual
property. In consideration, the Company agreed to pay A-B a fee
for 20 years based upon the Company’s sales of the
brand. The Company shipped approximately 5,400 barrels of
Pacific Ridge during the year ended December 31,
2004. A fee of $80,000 due to A-B is reflected in the
Company’s statements of operations for the year ended
December 31, 2004.
In an effort to be responsive to varying consumer style and
flavor preferences, the Company also periodically engages in the
development and testing of new products. The Company believes
that the continued success of craft brewers will be affected by
their ability to be innovative and attentive to consumer desires
for new and distinctive taste experiences while maintaining
consistently high product quality. The Company’s breweries
allow it to produce small-batch experimental ales within three
weeks. Experimental products are periodically developed and
typically produced in draft form only for on-premise test
marketing at the Company’s pubs and selected retail sites.
If the initial consumer reception of an experimental brew is
sufficiently positive, then its taste and formula are refined,
as necessary, and a new Redhook brand may be created. Redhook
India Pale Ale, Redhook Nut Brown Ale, and Redhook Blonde
Ale are examples of products that were developed in this
manner.
Brewing Operations
The Brewing Process. Beer is made primarily from four
natural ingredients: malted grain, hops, yeast and water. The
grain most commonly used in brewing is barley, owing to its
distinctive germination characteristics that make it easy to
ferment. The Company uses the finest barley malt, using strains
of barley having two rows of grain in each ear. A wide variety
of hops may be used to add seasoning to the brew; some varieties
best confer bitterness, while others are chosen for their
ability to impart distinctive aromas to the beer. Nearly all the
yeasts used to induce or augment fermentation of beer are of the
species Saccharomyces cerevisiae, which includes both the
top-fermenting yeasts used in ale production and the
bottom-fermenting yeasts associated with lagers.
The brewing process begins when the malt supplier soaks the
barley grain in water, thereby initiating germination, and then
dries and cures the grain through kilning. This process, known
as “malting,” breaks down complex carbohydrates and
proteins so that they can be easily extracted. The malting
process also imparts color and flavor characteristics to the
grain. The cured grain, referred to as “malt,” is then
sold to the brewery. At the brewery, various malts are cracked
by milling, and mixed with warm water. This mixture, or
“mash,” is heated and stirred in the mash tun,
allowing the simple carbohydrates and proteins to be converted
into fermentable sugars. Naturally occurring enzymes help
facilitate this process. The mash is then strained and rinsed in
the lauter tun to produce a residual liquid, high in fermentable
sugars, called “wort,” which then flows into a brew
kettle to be boiled and concentrated. Hops are added during the
boil to impart bitterness, balance and aroma. The specific
mixture of hops and the brewing time and temperature further
affect the flavor of the beer. After the boil, the wort is
strained and cooled before it is moved to a fermentation cellar,
where specially cultured yeast is added to induce fermentation.
During fermentation, the wort’s sugars are metabolized by
the yeast, producing carbon dioxide and alcohol. Some of the
carbon dioxide is recaptured and
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absorbed back into the beer, providing a natural source of
carbonation. After fermentation, the beer is cooled for several
days while the beer is clarified and full flavor develops.
Filtration, the final step for a filtered beer, removes unwanted
yeast. At this point, the beer is in its peak condition and
ready for bottling or keg racking. The entire brewing process of
ales, from mashing through filtration, is typically completed in
14 to 21 days, depending on the formulation and style of
the product being brewed.
[REDHOOK ALE BREW PROCESS GRAPHIC]
Brewing Equipment. The Company uses highly automated
small-batch brewing equipment. The Washington Brewery employs a
100-barrel mash tun, lauter tun, wort receiver, wort kettle,
whirlpool kettle, five 70,000-pound, one 35,000-pound and two
25,000-pound grain silos, two 100-barrel, fifty-four 200-barrel,
and ten 600-barrel fermenters, and two 300-barrel and four
400-barrel bright tanks. The New Hampshire Brewery employs a
100-barrel mash tun, lauter tun, wort receiver, wort kettle,
whirlpool kettle, three 70,000-pound and two 35,000-pound grain
silos, nine 100-barrel, two 200 barrel and eighteen
400-barrel fermenters, two 200-barrel and four 400-barrel bright
tanks, and an anaerobic waste-water treatment facility which
completes the process cycle. Both breweries use advanced
microfiltration technology, including a diatomaceous earth pad
filter and sterile filtration.
Packaging. The Company packages its craft beers in both
bottles and kegs. Both of the Company’s breweries have
fully automated bottling and keg lines. The bottle filler at
both breweries utilizes a carbon dioxide environment during
bottling that is designed to ensure that minimal oxygen is
dissolved in the beer, thereby extending product shelf life.
Quality Control. The Company monitors production and
quality control at both of its breweries with central
coordination at the Washington Brewery. Both the Washington and
New Hampshire breweries have an on-site laboratory where
microbiologists and lab technicians supervise on-site yeast
propagation, monitor product quality, test products, measure
color and bitterness, and test for oxidation and unwanted
bacteria. The Company also regularly utilizes outside
laboratories for independent product analysis.
Ingredients and Raw Materials. The Company currently
purchases a significant portion of its malted barley from a
single supplier and its premium-quality select hops, grown in
the Pacific Northwest, from competitive sources. The Company
periodically purchases small lots of European hops, which it
uses to achieve a special hop character in certain of its beers.
In order to ensure the supply of the hop varieties used in
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its products, the Company enters into supply contracts for its
hop requirements. Redhook believes that comparable quality
malted barley and hops are available from alternate sources at
competitive prices, although there can be no assurance that
pricing would be consistent with the Company’s current
arrangements. The Company currently cultivates its own
Saccharomyces cerevisiae yeast supply and maintains a
separate, secure supply in-house. The Company has access to
multiple competitive sources for packing materials, such as
bottles, labels, six-pack carriers, crowns and shipping cases.
Product Distribution
The Company’s products are available for sale directly to
consumers in draft and bottles at restaurants, bars and liquor
stores, as well as in bottles at supermarkets, warehouse clubs,
convenience stores and drug stores. Like substantially all craft
brewers, the Company’s products are delivered to these
retail outlets through a network of local distributors whose
principal business is the distribution of beer and, in some
cases, other alcoholic beverages, and who traditionally have
local distribution relationships with one or more national beer
brands. To promote and educate the public on the Company’s
products, Redhook also offers its products directly to consumers
at the Company’s two on-premise retail establishments
located at the Company’s breweries, the Forecasters Public
House in Woodinville, Washington and the Cataqua Public House in
Portsmouth, New Hampshire.
Prior to establishing a distribution relationship with A-B in
1994, the Company distributed its products regionally through
distributors, many of which were part of the A-B distribution
network, in eight western states: Washington, California
(northern), Oregon, Idaho, Montana, Wyoming, Colorado and
Alaska. In October 1994, the Company entered into a distribution
agreement with A-B (“Distribution Alliance” or the
“Alliance”) pursuant to which the Company began
distributing its products, for any new markets entered,
exclusively through this agreement. Existing wholesalers
continued to distribute the Company’s products outside of
the Distribution Alliance.
On July 1, 2004, the Company entered into a new
distribution agreement with A-B (the “A-B Distribution
Agreement”) pursuant to which the Company continues to sell
its product in the midwest and eastern United States through
sales to A-B and distribution through the A-B distribution
network.
On July 1, 2004, the Company also entered into agreements
with Widmer Brothers Brewing Company with respect to the
operation of their joint venture sales and marketing entity,
Craft Brands. Under their agreements with Craft Brands, the
Company manufactures and sells its product to Craft Brands at a
price substantially below wholesale pricing levels; Craft
Brands, in turn, advertises, markets, sells and distributes the
product to wholesale outlets in the western United States
through a distribution agreement between Craft Brands and A-B.
Currently, there are no Company products distributed by a
wholesaler that are not distributed pursuant to the A-B
Distribution Agreement or the distribution agreement between
Craft Brands and A-B.
For additional information regarding the Company’s
relationship with A-B and Craft Brands, see “Relationship
with Anheuser-Busch, Incorporated” and “Relationship
with Craft Brands Alliance LLC” below.
A-B, whose products accounted for approximately 49.6% of total
beer shipped by volume in the U.S., including imports,
distributes its products throughout the United States through a
network of more than 580 wholesale distributors, most of whom
are geographically contiguous and independently owned and
operated and 15 branches owned and operated by A-B. The Company
believes that the typical A-B distributor is financially stable
and has both a long-standing presence and a substantial market
share of beer sales in its territory.
Redhook chose to align itself with A-B through the 1994
Distribution Alliance and again through the 2004 A-B
Distribution Agreement and Craft Brands’ distribution
agreement with A-B to provide access to quality distribution
throughout the United States. The Company was the first and is
the largest independent craft brewer to have a formal
distribution agreement with a major U.S. brewer. Management
believes that the Company’s competitors in the craft beer
segment generally negotiate distribution relationships
separately with
7
distributors in each locality and, as a result, typically
distribute through a variety of wholesalers representing
differing national beer brands with uncoordinated territorial
boundaries. Because A-B’s distributors are assigned
territories that generally are contiguous, the distribution
relationship with A-B enables the Company to reduce the gaps and
overlaps in distribution coverage often experienced by the
Company’s competitors.
During the last six months of 2004, the Company sold
approximately 38,000 barrels to A-B through the A-B
Distribution Agreement, accounting for approximately 36% of the
Company’s sales volume for the same period. Also during
this same period, the Company shipped approximately
64,000 barrels, or 61% of the Company’s sales volume,
to Craft Brands.
For the six months ended June 30, 2004, the Company shipped
its products to 495 Alliance distribution points, accounting for
84,000 barrels, or 74% of the Company’s total sales
volume for the same period. In addition, sales through
wholesalers that were part of the A-B distribution network but
that were not part of the Alliance accounted for an additional
22%, or 24,000 barrels, of the Company’s sales volume.
In 2003, the Company shipped its products to 527 Alliance
distribution points, accounting for 166,000 barrels, or 72%
of the Company’s sales volume. In addition, sales through
wholesalers that were part of the A-B distribution network but
that were not part of the Alliance accounted for an additional
25% of the Company’s sales volume in 2003.
The Company’s most significant wholesaler, K&L
Distributors, Inc. (“K&L”), is responsible for
distribution of the Company’s products in most of King
County, Washington, including Seattle, Washington. K&L
accounted for approximately 13% of total sales volume in the
2004, 2003, and 2002. Shipments of the Company’s product to
K&L during the last six months were made through Craft
Brands.
Relationship with Anheuser-Busch, Incorporated
On July 1, 2004, the Company completed the restructuring of
its ongoing relationship with A-B. Pursuant to an exchange and
recapitalization agreement between the Company and A-B (the
“Exchange and Recapitalization Agreement”), the
Company issued 1,808,243 shares of its common stock
(“Common Stock”) to A-B in exchange for
1,289,872 shares of Series B Preferred Stock held by
A-B. The Series B Preferred Stock, reflected in the
Company’s July 1, 2004 balance sheet at approximately
$16.3 million, was subsequently cancelled. In connection
with the exchange, the Company also paid $2.0 million to
A-B in November 2004. As of December 31, 2004, A-B owned
approximately 33.7% of the Company’s Common Stock. A-B was
also granted certain contractual registration rights with
respect to its shares of the Company’s Common Stock.
Additionally, pursuant to the Exchange and Recapitalization
Agreement, A-B is entitled to designate two members of the board
of directors of the Company. A-B also generally has the
contractual right to have one of its designees sit on each
committee of the board of directors of the Company. The Exchange
and Recapitalization Agreement contains limitations on, among
other matters, the Company’s ability to issue equity
securities or acquire or sell assets or stock, amend its
Articles of Incorporation or bylaws, grant board representation
rights, enter into certain transactions with affiliates,
distribute its products in the United States other than through
A-B, Craft Brands or as provided in the A-B Distribution
Agreement, voluntarily delist or terminate its listing on the
Nasdaq Stock Market, or dispose any of its interest in Craft
Brands, without the prior consent of A-B. Further, if the new
A-B Distribution Agreement described below or the distribution
agreement between Craft Brands and A-B is terminated, or the
distribution of Redhook products is terminated by Craft Brands
under the distribution agreement between Craft Brands and A-B,
A-B has the right to solicit and negotiate offers from third
parties to purchase all or substantially all of the assets or
securities of the Company or to enter into a merger or
consolidation transaction with the Company and the right to
cause the board of directors of the Company to consider any such
offer.
On July 1, 2004, the Company also entered into a new A-B
Distribution Agreement. The A-B Distribution Agreement provides
for the distribution of the Company’s products in the
midwest and eastern United States (the “Eastern
Territory”), which represents those states not covered by
the supply, distribution and licensing agreement between the
Company and Craft Brands. The structure of the new A-B
Distribution
8
Agreement is substantially similar to the Company’s prior
arrangement with A-B. Under the A-B Distribution Agreement, the
Company has granted A-B the first right to distribute Redhook
products, including future new products, in the Eastern
Territory. The Company is responsible for marketing its products
to A-B’s distributors in the Eastern Territory, as well as
to retailers and consumers. The A-B distributors then place
orders with the Company, through A-B, for Redhook products. The
Company separately packages and ships the orders in refrigerated
trucks to the A-B distribution center nearest to the distributor
or, under certain circumstances, directly to the distributor.
The new A-B Distribution Agreement has a term that expires on
December 31, 2014, subject to automatic renewal for an
additional ten-year period unless A-B provides written notice of
non-renewal to the Company on or prior to June 30, 2014.
The A-B Distribution Agreement is also subject to early
termination, by either party, upon the occurrence of certain
events. The A-B Distribution Agreement may be terminated
immediately, by either party, upon the occurrence of any one or
more of the following events:
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1) |
a material default by the other party in the performance of any
of the provisions of the A-B Distribution Agreement or any
other agreement between the parties, which default is either: |
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i) |
curable within 30 days, but is not cured within
30 days following written notice of default; or |
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ii) |
not curable within 30 days and either: |
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(1) |
the defaulting party fails to take reasonable steps to cure as
soon as reasonably possible following written notice of such
default; or |
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(2) |
such default is not cured within 90 days following written
notice of such default; |
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2) |
default by the other party in the performance of any of the
provisions of the A-B Distribution Agreement or any other
agreement between the parties, which default is not described in
(a) above and which is not cured within 180 days
following written notice of such default; |
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3) |
the making by the other party of an assignment for the benefit
of creditors; or the commencement by the other party of a
voluntary case or proceeding or the other party’s consent
to or acquiescence in the entry of an order for relief against
such other party in an involuntary case or proceeding under any
bankruptcy, reorganization, insolvency or similar law; |
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4) |
the appointment of a trustee or receiver or similar officer of
any court for the other party or for a substantial part of the
property of the other party, whether with or without the consent
of the other party, which is not terminated within 60 days
from the date of appointment thereof; |
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5) |
the institution of bankruptcy, reorganization, insolvency or
liquidation proceedings by or against the other party without
such proceedings being dismissed within 90 days from the
date of the institution thereof; |
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6) |
any representation or warranty made by the other party under or
in the course of performance of the A-B Distribution
Agreement that is false in material respects; or |
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7) |
the distribution agreement between Craft Brands and A-B is
terminated or the distribution thereunder of the products of
Redhook is terminated pursuant to its terms. |
Additionally, the A-B Distribution Agreement may be
terminated by A-B, upon six months’ prior written notice to
the Company, in the event:
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1) |
the Company engages in certain Incompatible Conduct which is not
curable or is not cured to A-B’s satisfaction (in
A-B’s sole opinion) within 30 days. Incompatible
Conduct is defined as any act or omission of the Company that,
in A-B’s determination, damages the reputation or image of
A-B or the brewing industry. |
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2) |
any A-B competitor or affiliate thereof acquires 10% or more of
the outstanding equity securities of the Company, and one or
more designees of such person becomes a member of the board of
directors of the Company; |
9
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3) |
the current chief executive officer of the Company ceases to
function as chief executive officer and within six months of
such cessation a successor satisfactory in the sole, good faith
discretion of A-B is not appointed; |
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4) |
the Company is merged or consolidated into or with any other
person or any other person merges or consolidates into or with
the Company; or |
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5) |
A-B or its corporate affiliates incur any liability or expense
as a result of any claim asserted against them by or in the name
of the Company or any shareholder of the Company as a result of
the equity ownership of A-B or its affiliates in the Company, or
any equity transaction or exchange between A-B or its affiliates
and the Company, and the Company does not reimburse and
indemnify A-B and its corporate affiliates on demand for the
entire amount of such liability and expense. |
Generally, the Company pays the following fees to A-B in
connection with the sale of the Company’s products:
Margin. The Margin was paid on all sales through the 1994
Distribution Alliance and is currently payable on all sales
through the 2004 A-B Distribution Agreement.
Through June 30, 2004, the Margin was paid on all sales
through the Distribution Alliance. The Margin did not apply to
sales to wholesalers and others that were part of the A-B
distribution network but that were not part of the Distribution
Alliance, including most sales to Washington State wholesalers,
sales to non-A-B wholesalers, sales by the Company’s retail
operations, and dock sales. For the six months ended
June 30, 2004, the Margin was paid to A-B on shipments
totaling 84,000 barrels to 495 Alliance distribution
points. For the year ended December 31, 2003, the Margin
was paid to A-B on shipments totaling 166,000 barrels to
527 Alliance distribution points.
The July 1, 2004 A-B Distribution Agreement modified the
Margin fee structure such that the Margin per barrel shipped
increased and is paid on all sales through the new A-B
Distribution Agreement. The Margin does not apply to sales to
the Company’s retail operations or to dock sales. The
Margin also does not apply to the Company’s sales to Craft
Brands because Craft Brands pays a comparable fee to A-B on its
resale of the product. For the six month period ended
December 31, 2004, the Margin was paid to A-B on shipments
totaling 38,000 barrels to 371 distribution points.
In addition, the Exchange and Recapitalization Agreement
provided that the Margin be retroactively increased to the rate
provided in the Distribution Agreement for all shipments
(excluding sales by the Company’s retail operations and
dock sales) in June 2004. The incremental Margin per barrel was
paid on approximately 20,000 barrels.
The Margin is reflected as a reduction of sales in the
Company’s statement of operations.
Invoicing Cost. The Invoicing Cost was paid on all sales
through the 1994 Distribution Alliance and is currently payable
on all sales through the 2004 A-B Distribution Agreement.
Through June 30, 2004, this cost was paid on sales through
the Distribution Alliance where the wholesaler placed the order
through the A-B order management system and payment to the
Company was processed through A-B. This cost did not apply to
sales to wholesalers that were part of the A-B distribution
network but that were not part of the Distribution Alliance. The
basis of the cost was number of pallet lifts.
After June 30, 2004, this cost is payable on sales through
the new A-B Distribution Agreement. The fee does not apply to
sales by the Company’s retail operations or to dock sales.
The cost also does not apply to the Company’s sales to
Craft Brands because Craft Brands pays a comparable fee to A-B.
The fee per pallet lift remained unchanged during 2004.
Staging Cost and Cooperage Handling Cost. The Staging
Cost was paid on all sales through the Distribution Alliance and
is payable on all sales through the A-B Distribution Agreement
that are delivered to
10
an A-B brewery or A-B distribution facility. The fee does not
apply to product shipped directly to a wholesaler. Cooperage
Handling Charge was paid on all draft beer sales through the
Distribution Alliance and is payable on all draft sales through
the A-B Distribution Agreement that are delivered to a
wholesaler support center or directly to a wholesaler. The basis
for these fees is number of pallet lifts. These fees per pallet
lift remained unchanged during 2004.
Inventory Manager Fee. The Inventory Manager Fee is paid
to reimburse A-B for a portion of the salary of a corporate
inventory management employee, a substantial portion of whose
responsibilities are to coordinate and administer logistics of
the Company’s product distribution to wholesalers. This fee
decreased in the second half of 2004 because Craft Brands
assumed a portion of the fee.
The Invoicing Cost, Staging Cost, Cooperage Handling Charge and
Inventory Manager Fee are reflected in cost of sales in the
Company’s statement of operations. These fees totaled
approximately $406,000 and $300,000 for the years ended
December 31, 2004 and 2003, respectively.
Management believes that the benefits of the distribution
arrangement with A-B, particularly the potential for increased
sales volume and efficiencies in delivery, state reporting and
licensing, billing and collections, are significant to the
Company’s business. The Company believes that the existence
of the A-B Distribution Agreement, presentations by
Redhook’s management at A-B’s distributor conventions,
A-B communications about Redhook in printed distributor
materials, and A-B-supported opportunities for Redhook to
educate A-B distributors about its specialty products has
resulted in increased awareness of and demand for Redhook
products among A-B’s distributors.
If the A-B Distribution Agreement were terminated early, as
described above, it would be extremely difficult for the Company
to rebuild its distribution network without a severe negative
impact on the Company’s sales and results of operations. It
is likely that the Company would need to raise additional funds
to develop a new distribution network. There cannot be any
guarantee that the Company would be able to successfully rebuild
all, or part, of its distribution network or that any additional
financing would be available when needed, or that any such
financing would be on commercially reasonable terms.
The termination of the A-B Distribution Agreement for any reason
would also constitute an event of default under the
Company’s bank credit agreement. Upon default, the bank may
declare the entire outstanding term loan balance immediately due
and payable. The Company could seek to refinance its term loan
with one or more banks or obtain additional equity capital;
however, there can be no assurance the Company would be able to
access additional capital to meet its needs or that such
additional capital would be on commercially reasonable terms.
Relationship with Craft Brands Alliance LLC
On July 1, 2004, the Company entered into agreements with
Widmer with respect to the operation of Craft Brands. Craft
Brands is a joint venture between the Company and Widmer that
purchases products from the Company and Widmer and markets,
advertises, sells and distributes these products in the Western
Territory pursuant to a distribution agreement with A-B (the
“Craft Brands Distribution Agreement”). The Western
Territory includes the following western states: Alaska,
Arizona, California, Colorado, Hawaii, Idaho, Montana, New
Mexico, Nevada, Oregon, Washington and Wyoming. The Company and
Widmer are each a 50% member of Craft Brands and each has the
right to designate two directors to its six member board. A-B is
entitled to designate the remaining two directors.
The Company and Widmer have entered into a restated operating
agreement with Craft Brands (the “Operating
Agreement”) that governs the operations of Craft Brands and
the obligations of its members. The Operating Agreement requires
the Company to make certain capital contributions and loans to
Craft Brands to assist Craft Brands in conducting its operations
and meeting its obligations. In July 2004, the Company made a
2004 sales and marketing capital contribution to Craft Brands in
an amount equal to $250,000 and a member loan of $150,000. The
sales and marketing contribution is to be used by Craft Brands
for expenses related to the marketing, advertising, and
promotion of Redhook products (“Special Marketing
Expense”). The Operating Agreement also requires an
additional sales and marketing contribution in 2008 if the volume
11
of sales of Redhook products in 2007 in the Western Territory is
less than 92% of the volume of sales of Redhook products in 2003
in the Western Territory (other than sales made by the Company
at its on-premise retail establishments and from dock sales).
The 2008 contribution, if one is required, cannot exceed
$750,000 and will be required to be paid by the Company in no
more than three equal installments made on or before
February 1, 2008, April 1, 2008, and July 1,
2008. Widmer has an identical obligation under the Operating
Agreement with respect to sales of its product. Other additional
capital contributions will be made only upon the request and
consent of the Craft Brands’ board.
Additionally, to the extent cash flow from operations and
borrowings from financial institutions are not sufficient for
Craft Brands to meet its obligations, the Company and Widmer are
obligated to lend to Craft Brands the funds that the president
of Craft Brands deems necessary to meet such obligations.
After giving effect to the allocation of the Special Marketing
Expense, which is allocated 100% to Redhook, and giving effect
to income attributable to the shipments of the Kona brand, which
is shared differently between the Company and Widmer through
2006, the Operating Agreement dictates that remaining profits
and losses of Craft Brands are allocated between the Company and
Widmer based on the cash flow percentages of 42% and 58%,
respectively (the “Cash Flow Percentages”). Net cash
flow, if any, will generally be distributed monthly to the
Company and Widmer based upon the Cash Flow Percentages. No
distribution will be made to the Company or Widmer unless, after
the distribution is made, the assets of Craft Brands will be in
excess of its liabilities, with the exception of liabilities to
members, and Craft Brands will be able to pay its debts as they
become due in the ordinary course of business.
The Company has also entered into a supply, distribution and
licensing agreement with Craft Brands (the “Supply and
Distribution Agreement”). Under the Supply and Distribution
Agreement, the Company manufactures and sells its product
directly to Craft Brands (except in states where laws require
sales to be made directly from Redhook to wholesalers) and Craft
Brands advertises, markets and distributes the products to
retail outlets in the Western Territory through the Craft Brands
Distribution Agreement. The Company has granted Craft Brands a
license to use Redhook intellectual property in connection with
these efforts to advertise, market, sell and distribute the
Company’s products in the Western Territory. The Supply and
Distribution Agreement also gives the Company the right to
manufacture certain products of Widmer for sale to Craft Brands
if Widmer is unable to manufacture the quantity ordered by Craft
Brands. In addition, if sales of the Company’s products
decrease as compared to previous year sales, the Company will
have an option to manufacture Widmer products in an amount equal
to the lower of (i) the Company’s product decrease or
(ii) the Widmer product increase.
The Supply and Distribution Agreement also provides that Craft
Brands may elect to discontinue distributing a Redhook product
if sales volume of such product declines to less than 20% of the
total volume of all Redhook products and the volume of
Redhook’s product in the prior year decreased by more than
10% as compared to the year prior. The territory covered by the
Supply and Distribution Agreement may be expanded to cover one
or more of the following states, at Craft Brands’ request:
Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri,
Nebraska, North Dakota, Oklahoma, South Dakota and Texas.
Widmer has also entered into a supply, distribution and
licensing agreement with Craft Brands upon substantially similar
terms.
The Supply and Distribution Agreement has an indefinite term,
subject to early termination upon the occurrence of certain
events. The Supply and Distribution Agreement may be terminated
immediately, by either party, upon the occurrence of any one or
more of the following events:
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1) |
the other party fails to timely make any payment required under
the Supply and Distribution Agreement for a period of
60 days following written notice thereof; |
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2) |
the other party fails to perform any other material obligation
under the Supply and Distribution Agreement and such failure
remains uncured for a period of 60 days following written
notice thereof; |
12
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3) |
the other party becomes the subject of insolvency or bankruptcy
proceedings, ceases doing business, makes an assignment of
assets for the benefit of creditors, dissolves, or has a trustee
appointed for all or a substantial portion of such party’s
assets; |
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4) |
any government authority makes a final decision invalidating a
substantial portion of the Supply and Distribution Agreement; |
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5) |
either party finds that complying with any law or regulation
relating to fulfilling its obligations under the Supply and
Distribution Agreement would be commercially unreasonable and
failure to comply with the law or regulation would subject such
party or any of its personnel to a monetary or criminal
penalty; or |
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6) |
the Craft Brands Distribution Agreement with A-B terminates for
any reason; or |
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7) |
the Operating Agreement terminates for any reason. |
Additionally, Craft Brands may, upon notice to Redhook,
terminate the Supply and Distribution Agreement if Redhook
causes Craft Brands to be in default in its obligations under
the Craft Brands Distribution Agreement and Redhook either
(a) fails to take all actions necessary to cause Craft
Brands to cure such default or (b) fails to pay on demand
certain direct or indirect costs arising out of or related to
such default. Craft Brands may also terminate the Supply and
Distribution Agreement and cease advertising, marketing, or
distributing one or more of the Company’s products if an
event of default occurs under the Craft Brands Distribution
Agreement that gives A-B the right to terminate that agreement
and Redhook caused such event of default.
If the Supply and Distribution Agreement were terminated early,
as described above, it would be extremely difficult for the
Company to rebuild its distribution network in the Western
Territory without a severe negative impact on the Company’s
sales and results of operations. It is likely that the Company
would need to raise additional funds to develop of a new
distribution network. There cannot be any guarantee that the
Company would be able to successfully rebuild all, or part, of
its distribution network or that any additional financing would
be available when needed, or that any such financing would be on
commercially reasonable terms. Additionally, termination of the
Supply and Distribution Agreement could cause a default under
the Craft Brands Distribution Agreement, which could in turn
cause the Company to be in default under the A-B Distribution
Agreement.
The Company has assessed its investment in Craft Brands pursuant
to the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 46 Revised,
Consolidation of Variable Interest Entities — an
Interpretation of ARB No. 51
(“FIN 46R”), and has concluded that its
investment in Craft Brands meets the definition of a variable
interest entity but that the Company is not the primary
beneficiary. In accordance with FIN 46R, the Company has
not consolidated the financial statements of Craft Brands with
the financial statements of the Company, but instead accounted
for its investment in Craft Brands under the equity method, as
outlined by Accounting Principle Board Opinion (“APB”)
Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. In 2004, the Company recognized
$1,123,000 of undistributed earnings related to its investment
in Craft Brands and received cash distributions of $903,000,
representing its share of the net cash flow of Craft Brands. The
Company’s share of the earnings of Craft Brands contributed
a significant portion of income to the Company’s results of
operations. Separate financial statements for Craft Brands are
filed with the Company’s Form 10-K for the year ended
December 31, 2004, Part IV., in Item 15.
Exhibits and Financial Statement Schedules, in accordance
with Rule 3-09 of Regulation S-X.
Sales and Marketing
The Company promotes its products through a variety of
advertising programs with its wholesalers; by training and
educating wholesalers and retailers about the Company’s
products; through promotions at local festivals, venues, and
pubs; by utilizing the pubs located at the Company’s two
breweries; through price discounting; and, most recently,
through Craft Brands.
13
The Company has participated in advertising programs to varying
degrees over the past five years. Prior to 1999, the Company
engaged in very limited advertising to market its products. In
order to increase brand awareness and capture a larger share of
the fragmented craft beer market, the Company determined that a
significant increase in spending on advertising and promotion
was necessary. During 1999 and 2000, the Company primarily
utilized radio, billboard and print advertising in key markets,
while also participating to a small degree in a co-operative
program with its distributors. In 2001, the Company allocated a
larger share of its advertising spending to this co-operative
program whereby the Company’s spending is matched dollar
for dollar by the distributor. In 2002, 2003 and 2004, the
Company continued its co-operative advertising and promotion
program while reducing even further those advertising
expenditures where the Company funded the entire program. The
Company believes that the financial commitment as well as the
distributor’s knowledge of the local market result in an
advertising and promotion program that is targeted in a manner
that will best promote Redhook and align the Company’s
interests with those of its wholesalers. Expenditures for the
co-op program and media advertising program totaled $700,000,
$1.6 million and $1.9 million in 2004, 2003 and 2002,
respectively. Upon the formation of Craft Brands, programs in
the western United States markets were suspended. The Company
continued to participate in the co-op advertising and promotion
program and limited media advertising in select eastern United
States markets through the remainder of 2004.
The Company’s sales and marketing staff offers education,
training and other support to wholesale distributors of the
Company’s products. Because the Company’s wholesalers
generally also distribute much higher volume national beer
brands and commonly distribute other specialty brands, a
critical function of the sales and marketing staff is to elevate
each distributor’s awareness of the Company’s products
and to retain the distributor’s interest in promoting
increased sales of these products. This is accomplished
primarily through personal contact with each distributor,
including on-site sales training, educational tours of the
Company’s breweries, and promotional activities and
expenditures shared with the distributors. The Company’s
sales representatives also provide other forms of support to
wholesale distributors, such as direct contact with restaurant
and grocery chain buyers, direct involvement in the design of
grocery store displays, stacking and merchandising of beer
inventory and supply of point-of-sale materials.
The Company’s sales representatives devote considerable
effort to the promotion of on-premise consumption at
participating pubs and restaurants. The Company believes that
educating retailers about the freshness and quality of the
Company’s products will in turn allow retailers to assist
in educating consumers. The Company considers on-premise product
sampling and education to be among its most effective tools for
building brand awareness with consumers and establishing
word-of-mouth reputation. On-premise marketing is also
accomplished through a variety of other point-of-sale tools,
such as neon signs, tap handles, coasters, table tents, banners,
posters, glassware and menu guidance. The Company seeks to
identify its products with local markets by participating in or
sponsoring cultural and community events, local music and other
entertainment venues, local craft beer festivals and cuisine
events, and local sporting events.
The Company’s breweries also play a significant role in
increasing consumer awareness of the Company’s products and
enhancing Redhook’s image as a craft brewer. Many visitors
take tours at the Company’s breweries. Both of the
Company’s breweries have a retail pub on-site where the
Company’s products are served. In addition, the breweries
have meeting rooms that the public can rent for business
meetings, parties and holiday events, and that the Company uses
to entertain and educate distributors, retailers and the media
about the Company’s products. See Item 2.
“Properties.” The Company also sells various items of
apparel and memorabilia bearing the Company’s trademarks at
its pubs, which creates further awareness of the Company’s
beers and reinforces the Company’s quality image.
To further promote retail bottled product sales and in response
to local competitive conditions, the Company regularly offers
“post-offs,” or price discounts, to distributors in
most of its markets. Distributors and retailers usually
participate in the cost of these price discounts.
The Craft Brands joint sales and marketing organization serves
the operations of Redhook and Widmer in the Western Territory by
advertising, marketing, selling and distributing both
companies’ products to wholesale outlets through a
distribution agreement between Craft Brands and A-B. Similar to
the Company, Craft Brands promotes its products through a
variety of advertising programs with its wholesalers; through
14
training and education of wholesalers and retailers; through
promotions at local festivals, venues, and pubs; by utilizing
the pubs located at the Company’s two breweries; and
through price discounting. Management believes that, in addition
to achieving certain synergies by combining sales and marketing
forces, Craft Brands is able to capitalize on both
companies’ sales and marketing skills and complementary
product portfolios. The Company believes that the combination of
the two brewers’ complementary brand portfolios, led by one
focused sales and marketing organization, will not only deliver
financial benefits, but will also deliver greater impact at the
point of sale.
Seasonality
Sales of the Company’s products are somewhat seasonal, with
the first and fourth quarters historically being the slowest and
the rest of the year generating stronger sales. The volume of
sales may also be affected by weather conditions. Because of the
seasonality of the Company’s business, results for any one
quarter are not necessarily indicative of the results that may
be achieved for the full fiscal year.
Competition
The Company competes in the highly competitive craft brewing
market as well as in the much larger specialty beer market,
which encompasses producers of import beers, major national
brewers that have introduced fuller-flavored products, and large
spirit companies and national brewers that produce flavored
alcohol beverages. Beyond the beer market, craft brewers have
also faced competition from producers of wines and spirits. See
“Industry Background.”
Competition within the domestic craft beer segment and the
specialty beer market is based on product quality, taste,
consistency and freshness; ability to differentiate products;
promotional methods and product support; transportation costs;
distribution coverage; local appeal; and price.
The craft beer segment is highly competitive due to the
proliferation of small craft brewers, including contract
brewers, and the large number of products offered by such
brewers. Craft brewers have also encountered more competition as
their peers expand distribution. Just as Redhook expanded
distribution of its products to markets outside of its home in
the Pacific Northwest, so have other craft brewers expanded
distribution of their products to other regions of the country,
leading to an increase in the number of craft brewers in any
given market. Redhook has encountered strong competition from
microbreweries, from other regional specialty brewers such as
Sierra Nevada Brewing Company and New Belgium Brewing Company,
as well as from contract brewers such as Boston Beer Company.
Because the number of participants and number of different
products offered in this segment have increased significantly in
the past ten years, the competition for bottled product
placements and especially for draft beer placements has
intensified. Although certain of these competitors distribute
their products nationally and may have greater financial and
other resources than the Company, management believes that the
Company possesses certain competitive advantages, including its
Company-owned production facilities and its relationship with
A-B and Craft Brands.
The Company also competes against producers of imported beers,
such as Bass, Becks, Heineken, and Modelo (Corona). Most of
these foreign brewers have significantly greater financial
resources than the Company. Although imported beers currently
account for a much greater share of the U.S. beer market
than craft beers, the Company believes that craft brewers
possess certain competitive advantages over some importers,
including lower transportation and no importation costs,
proximity to and familiarity with local consumers, a higher
degree of product freshness, eligibility for lower federal
excise taxes and absence of currency fluctuations.
In response to the growth of the craft beer segment, most of the
major domestic brewers have introduced fuller-flavored beers.
While these product offerings are intended to compete with craft
beers, many of them are brewed according to methods used by the
major national brewers. Although increased participation of the
major national brewers increases competition for market share
and can heighten price sensitivity within the craft beer
segment, the Company believes that their participation will tend
to increase advertising, distribution and consumer education and
awareness of craft beers, and thus may contribute to further
growth of this industry segment.
15
In the past few years, several major distilled spirits producers
and national brewers have introduced flavored alcohol beverages.
These products, such as Smirnoff Ice, SKYY Blue, Bacardi Silver
and Mike’s Hard Lemonade, initially demonstrated strong
sales and appeared to draw a portion of overlapping consumers
away from imports and craft beers. While industry specialists
estimate that 2004 sales growth rates of some of these products
have leveled off or declined, flavored alcohol beverages, in
general, continue to be supported by significant advertising
spending. The producers of many of these products have
significantly greater financial resources than the Company. The
success of the flavored alcohol beverages will likely subject
the Company to increased competition.
Competition for consumers of craft beers has also come from wine
and spirits. Some of the growth in the past five years in the
wine and spirits market, industry sources believe, has been
drawn away from the beer market. This growth appears to be
attributable to competitive pricing, television advertising,
increased merchandising, and increased consumer interest in
spirits.
A significant portion of the Company’s sales continue to be
in the Pacific Northwest region, which the Company believes is
one of the most competitive craft beer markets in the United
States, both in terms of number of market participants and
consumer awareness. The Company faces extreme competitive
pressure in Washington State, which is not only the
Company’s largest market but is also its oldest market.
Since 1997, the Company has experienced a decline in sales
volume in Washington State of approximately 17%, significantly
impacted by a 12% decline in 2004 volume over 2003 volume. The
Company believes that the Pacific Northwest, and Washington
State in particular, offers significant competition to its
products, not only from other craft brewers but also from the
growing wine market and from flavored alcohol beverages. This
intense competition is magnified because the Company’s
brand is viewed as being relatively mature. Recent focus studies
have indicated that, while the Company’s brand does possess
brand awareness among target consumers, it also appears to not
attract key consumers who seem to be more interested in
experimenting with new products. These recent focus studies have
resulted in Craft Brands focusing its 2005 marketing efforts on
the Pacific Northwest market in an effort to stimulate demand.
In addition, shipments in Washington State in late 2003 and all
of 2004 appear to have been significantly impacted by the
formation of Craft Brands. Management believes that the beer
industry is influenced, both positively and negatively, by
individual relationships. In Washington State, where some of
those relationships have existed for many years, the formation
of Craft Brands appears to have had some short-term negative
impact on those relationships. Some of the Company’s
relationships with wholesalers and retailers suffered as a
result of the transition to Craft Brands. The transition took
longer than anticipated and nearly all Company sales staff
responsible for the Washington State market left the Company.
While the Company believes that the Craft Brands sales staff is
reestablishing those relationships and that sales of the
Company’s products will stabilize, the process is expected
to take some time. The impact that Craft Brands will have on
future sales in Washington state and the rest of its Western
Territory is yet to be determined and may not be quantifiable
for some time.
Regulation
The Company’s business is highly regulated at federal,
state and local levels. Various permits, licenses and approvals
necessary to the Company’s brewery and pub operations and
the sale of alcoholic beverages are required from various
agencies, including the U.S. Treasury Department, Alcohol
and Tobacco Tax and Trade Bureau (the “TTB”), formerly
the Bureau of Alcohol, Tobacco and Firearms; the United States
Department of Agriculture; the United States Food and Drug
Administration; state alcohol regulatory agencies in the states
in which the Company sells its products; 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, although the Company benefits from
favorable treatment granted to brewers producing less than
2 million barrels per year.
Management believes that the Company currently has all licenses,
permits and approvals necessary for its current operations.
However, existing permits or licenses could be revoked if the
Company failed to comply with the terms of such permits or
licenses. Additional permits or licenses could be required in
the future for the Company’s existing or expanded
operations. If licenses, permits or approvals necessary for the
Company’s
16
brewery or pub operations were unavailable or unduly delayed, or
if any such permits or licenses were revoked, the Company’s
ability to conduct its business could be substantially and
adversely affected.
|
|
|
Alcoholic Beverage Regulation and Taxation |
Both of the Company’s breweries and pubs are subject to
licensing and regulation by a number of governmental
authorities. The Company operates its breweries under federal
licensing requirements imposed by the TTB. The TTB requires the
filing of a “Brewer’s Notice” upon the
establishment of a commercial brewery. In addition, commercial
brewers are required to file an amended Brewer’s Notice
every time there is a material change in the brewing process or
brewing equipment, change in the brewery’s location, change
in the brewery’s management or a material change in the
brewery’s ownership. The Company’s operations are
subject to audit and inspection by the TTB at any time.
In addition to the regulations imposed by the TTB, the
Company’s breweries are subject to various regulations
concerning retail sales, pub operations, deliveries and selling
practices in states in which the Company sells its products.
Failure of the Company to comply with applicable federal or
state regulations could result in limitations on the
Company’s ability to conduct its business. The TTB’s
permits can be revoked for failure to pay taxes, to keep proper
accounts, to pay fees, to bond premises, to abide by federal
alcoholic beverage production and distribution regulations, or
if holders of 10% or more of the Company’s equity
securities are found to be of questionable character. Permits
from state regulatory agencies can be revoked for many of the
same reasons.
The U.S. federal government currently imposes an excise tax
of $18 per barrel on beer sold for consumption in the
United States. However, any brewer with annual production under
2 million barrels instead pays federal excise tax in the
amount of $7 per barrel on sales of the first
60,000 barrels. While the Company is not aware of any plans
by the federal government to reduce or eliminate this benefit to
small brewers, any such reduction in a material amount could
have an adverse effect on the Company. In addition, the Company
would lose the benefit of this rate structure if it exceeded the
2 million barrel production threshold. Individual states
also impose excise taxes on alcoholic beverages in varying
amounts, which have also been subject to change. It is possible
that excise taxes will be increased in the future by both the
federal government and several states. In addition, increased
excise taxes on alcoholic beverages have in the past been
considered in connection with various governmental
budget-balancing or funding proposals. Any such increases in
excise taxes, if enacted, could adversely affect the Company.
|
|
|
State and Federal Environmental Regulation |
The Company’s brewery operations are subject to
environmental regulations and local permitting requirements and
agreements regarding, among other things, air emissions, water
discharges and the handling and disposal of wastes. While the
Company has no reason to believe the operations of its
facilities violate any such regulation or requirement, if such a
violation were to occur, or if environmental regulations were to
become more stringent in the future, the Company could be
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. The Company’s pubs have
addressed this concern by establishing early closing hours and
regularly scheduled employee training. Large uninsured damage
awards against the Company could adversely affect the
Company’s financial condition.
Trademarks
The Company has obtained U.S. trademark registrations for
the marks for Ballard Bitter, Blackhook, India Pale
Ale — Ballard Bitter, Pacific Ridge, Redhook, Redhook
ESB, Sunrye and Winterhook. In addition, the Company
has obtained U.S. trademark registrations for the
corresponding logo designs for Blackhook, Redhook and
Winterhook, and a U.S. trademark registration in
printed form for Redhook Doubleblack Stout.
17
The Company has also obtained U.S. trademark registrations
for Forecasters and Trolleyman. The Redhook
mark and certain other Company marks are also registered in
various foreign countries. The Company regards its Redhook
and other trademarks as having substantial value and as
being an important factor in the marketing of its products. The
Company is not aware of any infringing uses that could
materially affect its current business or any prior claim to the
trademarks that would prevent the Company from using such
trademarks in its business. The Company’s policy is to
pursue registration of its marks in its markets whenever
possible and to oppose vigorously any infringement of its marks.
Employees
At December 31, 2004, the Company had 176 employees,
including 78 in production, 58 in the pubs, 24 in sales and
marketing, and 16 in administration. Of these, 40 in the pubs, 3
in administration and 12 in production were part-time employees.
In conjunction with the formation of Craft Brands, the sales
force in the western United States and two officers left the
Company in March 2004. The Company believes its relations with
its employees to be good.
18
The Company currently operates two highly automated small-batch
breweries, one in the Seattle suburb of Woodinville, Washington
and the other in Portsmouth, New Hampshire. See Notes 4 and
11 of the Notes to Financial Statements included elsewhere
herein.
The Washington Brewery. The Washington Brewery, located
on approximately 22 acres (17 of which are developable) in
Woodinville, Washington, a suburb of Seattle, is across the
street from the Chateau Ste. Michelle Winery, next to the
Columbia Winery and visible from a popular bicycle path. The
Washington Brewery is comprised of an approximately
88,000 square-foot building, a 40,000 square-foot
building and an outdoor tank farm. The two buildings house a
100-barrel brewhouse, fermentation cellars, filter rooms, grain
storage silos, a bottling line, a keg filling line, dry storage,
two coolers and loading docks. The brewery includes a retail
merchandise outlet and the Forecasters Public House, a
4,000 square-foot family-oriented pub that seats 200 and
features an outdoor beer garden that seats an additional 200.
Additional entertainment facilities include a
4,000 square-foot special events room accommodating up to
250 people. The brewery also houses office space, a portion of
which is occupied by the Company’s corporate office and the
remainder of which is leased through September 2006. The
brewery’s current production capacity is approximately
250,000 barrels per year under ideal brewing conditions.
The Company purchased the land in 1993 and believes that its
value has appreciated.
The New Hampshire Brewery. The New Hampshire Brewery is
located on approximately 23 acres in Portsmouth, New
Hampshire. The land is subleased, the term of which expires in
2047, and contains two seven-year extension options. The New
Hampshire Brewery is modeled after the Washington Brewery and is
similarly equipped, but is larger in design, covering
125,000 square feet to accommodate all phases of the
Company’s brewing operations under one roof. Also included
is a retail merchandise outlet, the Cataqua Public House, a
4,000 square-foot family-oriented pub with an outdoor beer
garden, and a special events room accommodating up to 250
people. Production began in late October 1996, with an initial
brewing capacity of approximately 100,000 barrels per year.
In order to accommodate anticipated sales growth, additional
brewing capacity was installed in 2002 and 2003, bringing the
current production capacity to approximately
125,000 barrels per year. The Company plans to phase in
additional brewing capacity as needed, up to the maximum
designed production capacity of approximately
250,000 barrels per year under ideal brewing conditions.
|
|
| Item 3. |
Legal Proceedings |
The Company is involved from time to time in claims, proceedings
and litigation arising in the normal course of business. The
Company believes that, to the extent that it exists, any pending
or threatened litigation involving the Company or its properties
will not likely have a material adverse effect on the
Company’s financial condition or results of operations.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
19
|
|
| Item 4A. |
Executive Officers of the Company |
Paul S. Shipman (52) — President, Chief Executive
Officer and Chairman of the Board
Mr. Shipman is one of the Company’s founders and has
served as its President since September 1981, Chairman of the
Board since November 1992, and Chief Executive Officer since
June 1993. Prior to founding the Company, Mr. Shipman was a
marketing analyst for the Chateau Ste. Michelle Winery from 1978
to 1981. Mr. Shipman received his Bachelor’s degree in
English from Bucknell University in 1975 and his Master’s
degree in Business Administration from the Darden Business
School, University of Virginia, in 1978. Since July 1,
2004, Mr. Shipman has served as a director of Craft Brands
Alliance LLC.
David J. Mickelson (45) — Executive Vice President,
Chief Financial Officer and Chief Operating Officer
Mr. Mickelson was named Chief Financial Officer in August
2000 in addition to his position of Executive Vice President and
Chief Operating Officer, which he has held since March 1995.
From April 1994 to March 1995, he was the Company’s Vice
President and General Manager. From July 1992 to December 1994,
he served as its Chief Financial Officer, and was also named
General Manager in January 1994. He served as the Company’s
Controller from 1987 to July 1992, and additionally was elected
Treasurer in 1989. From 1985 to 1987, he was the Controller for
Certified Foods, Inc. and from 1981 to 1985 served as a loan
officer with Barclays Bank PLC. Mr. Mickelson received his
Bachelor’s degree in Business Administration from the
University of Washington in 1981.
Gerard C. Prial (50) — Vice President, East Coast
Operations
Mr. Prial has served as Vice President, East Operations
since November 2001. From 1996 to November 2001, Mr. Prial
served as the General Manager of the Company’s New
Hampshire Brewery. He served as the Company’s Southern
California Field Sales Manager from August 1994 to March 1996.
From April 1993 to April 1994, Mr. Prial served as Vice
President of Sales for Brewski Brewing Company of Culver City,
California. From 1979 to 1993, he served in various positions
for Wisdom Import Sales Company in Irvine, California. From 1977
to 1979, Mr. Prial worked for the Miller Brewing Company as
an Area Manager in the Pacific Northwest. He received his
Bachelor’s degree in Management & Economics from
Marietta College in Marietta, Ohio in 1977.
Allen L. Triplett (46) — Vice President, Brewing
Mr. Triplett has served as Vice President, Brewing since
March 1995. From 1987 to March 1995, he was the Company’s
Production Manager. He has worked in virtually every facet of
production since joining the Company in 1985. Mr. Triplett
has taken coursework at the Siebel Institute of Brewing and the
University of California at Davis. He is a member of the Master
Brewers Association of America, currently serving as its
Secretary and Treasurer and formerly as its Technical Director
in the Northwest district. He is also a member of the American
Society of Brewing Chemists and a current and founding board
member of National Ambassadors at the University of Wyoming. He
received his Bachelor’s degree in Petroleum Engineering
from the University of Wyoming in 1985.
There is no family relationship between any directors or
executive officers of the Company.
20
PART II.
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The Company’s Common Stock trades on the Nasdaq National
Market under the trading symbol HOOK. The table below sets
forth, for the fiscal quarters indicated, the reported high and
low sale prices of the Company’s Common Stock, as reported
on the Nasdaq National Market.
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
3.000 |
|
|
$ |
2.260 |
|
| |
Second quarter
|
|
$ |
2.740 |
|
|
$ |
2.010 |
|
| |
Third quarter
|
|
$ |
4.300 |
|
|
$ |
2.200 |
|
| |
Fourth quarter
|
|
$ |
3.750 |
|
|
$ |
3.010 |
|
|
2003
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
2.400 |
|
|
$ |
2.020 |
|
| |
Second quarter
|
|
$ |
2.860 |
|
|
$ |
1.900 |
|
| |
Third quarter
|
|
$ |
2.600 |
|
|
$ |
1.900 |
|
| |
Fourth quarter
|
|
$ |
3.410 |
|
|
$ |
2.300 |
|
As of March 11, 2005, there were 775 Common Stockholders of
record, although the Company believes that the number of
beneficial owners of its Common Stock is substantially greater.
The Company has not paid any dividends since 1994. The Company
anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of its
business and that it will not pay cash dividends. The payment of
dividends, if any, in the future will be at the discretion of
the Board of Directors and will depend upon, among other things,
future earnings, capital requirements, restrictions in future
financing agreements, the general financial condition of the
Company and general business conditions.
21
|
|
| Item 6. |
Selected Financial Data |
The following selected financial data should be read in
conjunction with the Company’s Financial Statements and the
Notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
included elsewhere in this Form 10-K. The selected
statement of operations and balance sheet data for, and as of
the end of, each of the five years in the period ended
December 31, 2004, are derived from the financial
statements of the Company. The operating data are derived from
unaudited information maintained by the Company.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share and operating data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
36,640 |
|
|
$ |
42,213 |
|
|
$ |
40,913 |
|
|
$ |
40,117 |
|
|
$ |
37,837 |
|
|
Less Excise Taxes
|
|
|
3,268 |
|
|
|
3,498 |
|
|
|
3,465 |
|
|
|
3,412 |
|
|
|
3,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
33,372 |
|
|
|
38,715 |
|
|
|
37,448 |
|
|
|
36,705 |
|
|
|
34,412 |
|
|
Cost of Sales
|
|
|
27,171 |
|
|
|
28,702 |
|
|
|
27,597 |
|
|
|
26,740 |
|
|
|
24,581 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,201 |
|
|
|
10,013 |
|
|
|
9,851 |
|
|
|
9,965 |
|
|
|
9,831 |
|
|
Selling, General and Administrative Expenses
|
|
|
7,639 |
|
|
|
11,689 |
|
|
|
10,910 |
|
|
|
11,817 |
|
|
|
11,747 |
|
|
Income from Equity Investment in Craft Brands
|
|
|
1,123 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Craft Brands Shared Formation Expenses
|
|
|
535 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(850 |
) |
|
|
(1,676 |
) |
|
|
(1,059 |
) |
|
|
(1,852 |
) |
|
|
(1,916 |
) |
|
Interest Expense
|
|
|
189 |
|
|
|
192 |
|
|
|
230 |
|
|
|
394 |
|
|
|
593 |
|
|
Other Income (Expense) — Net(1)
|
|
|
116 |
|
|
|
59 |
|
|
|
30 |
|
|
|
249 |
|
|
|
1,453 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(923 |
) |
|
|
(1,809 |
) |
|
|
(1,259 |
) |
|
|
(1,997 |
) |
|
|
(1,056 |
) |
|
Income Tax Provision (Benefit)
|
|
|
30 |
|
|
|
30 |
|
|
|
(126 |
) |
|
|
(679 |
) |
|
|
(328 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(953 |
) |
|
$ |
(1,839 |
) |
|
$ |
(1,133 |
) |
|
$ |
(1,318 |
) |
|
$ |
(728 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.10 |
) |
|
Diluted Earnings (Loss) per Share
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.10 |
) |
| |
|
Operating Data (in barrels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beer Shipped
|
|
|
216,400 |
|
|
|
228,800 |
|
|
|
225,900 |
|
|
|
223,100 |
|
|
|
212,600 |
|
|
Production Capacity, End of Period(2)
|
|
|
375,000 |
|
|
|
375,000 |
|
|
|
360,000 |
|
|
|
350,000 |
|
|
|
350,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance Sheet Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$ |
5,590 |
|
|
$ |
6,123 |
|
|
$ |
7,007 |
|
|
$ |
6,364 |
|
|
$ |
7,487 |
|
|
Working Capital
|
|
|
3,661 |
|
|
|
4,511 |
|
|
|
4,346 |
|
|
|
4,640 |
|
|
|
4,817 |
|
|
Total Assets
|
|
|
74,128 |
|
|
|
77,131 |
|
|
|
79,982 |
|
|
|
82,155 |
|
|
|
85,621 |
|
|
Long-term Debt, Net of Current Portion
|
|
|
5,175 |
|
|
|
5,625 |
|
|
|
6,075 |
|
|
|
6,525 |
|
|
|
6,975 |
|
|
Convertible Redeemable Preferred Stock
|
|
|
— |
|
|
|
16,233 |
|
|
|
16,188 |
|
|
|
16,144 |
|
|
|
16,099 |
|
|
Common Stockholders’ Equity
|
|
|
61,462 |
|
|
|
47,916 |
|
|
|
50,027 |
|
|
|
52,474 |
|
|
|
54,502 |
|
|
|
| (1) |
Includes a gain of approximately $1.0 million for the year
ended December 31, 2000, resulting from the July 2000 sale
of a warehousing facility and land owned by the Company which
was used as the keg filling, storage and shipping facility prior
to the 1998 curtailment of brewery operations in the Fremont
neighborhood of Seattle. |
| |
| (2) |
Based on the Company’s estimate of current production
capacity of equipment, assuming ideal brewing conditions,
installed as of the end of such period. Amounts do not reflect
maximum designed production capacity. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” |
22
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with the Company’s Financial Statements and
Notes thereto included herein. The discussion and analysis
includes period-to-period comparisons of the Company’s
financial results. Although period-to-period comparisons may be
helpful in understanding the Company’s financial results,
the Company believes that they should not be relied upon as an
accurate indicator of future performance.
Overview
Since its formation, the Company has focused its business
activities on the brewing, marketing and selling of craft beers
in the United States. The Company produces its specialty bottled
and draft products in two Company-owned breweries, one in the
Seattle suburb of Woodinville, Washington and the other in
Portsmouth, New Hampshire. Prior to July 1, 2004, the
Company’s sales consisted predominantly of sales of beer to
third-party distributors and A-B through the Company’s
Distribution Alliance with A-B. Since July 1, 2004, the
Company’s sales have consisted of sales of product to Craft
Brands and A-B. The Company manufactures and sells its product
to Craft Brands at a price substantially below wholesale pricing
levels; Craft Brands, in turn, advertises, markets, sells and
distributes the product to wholesale outlets in the western
United States through a distribution agreement between Craft
Brands and A-B. Profits and losses of Craft Brands are generally
shared between the Company and Widmer based on the cash flow
percentages of 42% and 58%, respectively. The Company continues
to sell its product in the midwest and eastern United States
through sales to A-B pursuant to the July 1, 2004 A-B
Distribution Agreement. For additional information regarding
Craft Brands and the A-B Distribution Agreement, see
Item 1, Product Distribution — Relationship with
Anheuser-Busch, Incorporated and — Relationship with
Craft Brands Alliance LLC. See also “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Results of Operations —
Craft Brands Alliance LLC ” below. In addition
to sales of beer, the Company derives other revenues from
sources including the sale of beer, food, apparel and other
retail items in its two brewery pubs.
For the year ended December 31, 2004, the Company had gross
sales of $36,640,000, a decrease of 13.2% over gross sales of
$42,213,000 for the year ended December 31, 2003. However,
comparability of the Company’s 2004 operating results
relative to the results for 2003 is significantly impacted by
the July 1, 2004 formation of Craft Brands and the
July 1, 2004 A-B Distribution Agreement, as sales for the
second half of 2004 in the western United States were made to
Craft Brands at discounted rates.
The Company’s sales volume (shipments) decreased 5.4%
to 216,400 barrels in 2004 as compared to
228,800 barrels in 2003. Sales in the craft beer industry
generally reflect a degree of seasonality, with the first and
fourth quarters historically being the slowest and the rest of
the year typically demonstrating stronger sales. The Company has
historically operated with little or no backlog, and its ability
to predict sales for future periods is limited.
The Company’s sales are affected by several factors,
including consumer demand, price discounting and competitive
considerations. The Company competes in the highly competitive
craft brewing market as well as in the much larger specialty
beer market, which encompasses producers of import beers, major
national brewers that have introduced fuller-flavored products,
and large spirit companies and national brewers that produce
flavored alcohol beverages. Beyond the beer market, craft
brewers also face competition from producers of wines and
spirits. The craft beer segment is highly competitive due to the
proliferation of small craft brewers, including contract
brewers, and the large number of products offered by such
brewers. Imported products from foreign brewers have enjoyed
resurgence in demand since the mid-1990’s. Certain national
domestic brewers have also sought to appeal to this growing
demand for craft beers by producing their own fuller-flavored
products. In last few years, the specialty segment has seen the
introduction of flavored alcohol beverages, the consumers of
which, industry sources generally believe, correlate closely
with the consumers of the import and craft beer products. While
sales of flavored alcohol beverages were initially very strong,
these growth rates slowed in 2003 and 2004. The wine and spirits
market has experienced a surge in the past several years,
attributable to competitive pricing, increased merchandising,
and increased consumer interest in spirits. Because the number
of participants and number of different products offered in this
segment have increased
23
significantly in the past ten years, the competition for bottled
product placements and especially for draft beer placements has
intensified.
In January 2003, the Company entered into a licensing agreement
with Widmer Brothers Brewing Company to produce and sell the
Widmer Hefeweizen brand in states east of the Mississippi
River. Brewing of this product, which began in February 2003, is
conducted at the New Hampshire Brewery under the supervision and
assistance of Widmer’s brewing staff to insure their
brand’s quality and matching taste profile. The term of
this agreement is for five years, with an additional one-year
automatic renewal unless either party elects to terminate the
arrangement. The agreement may be terminated by either party at
any time without cause pursuant to 150 days notice. The
agreement may be terminated for cause by either party under
certain conditions. During the term of this agreement, Redhook
will not brew, advertise, market, or distribute any product that
is labeled or advertised as a “Hefeweizen” or any
similar product in the agreed upon eastern territory. Brewing
and selling of Redhook’s Hefe-weizen was discontinued in
conjunction with this agreement. This agreement, for the eastern
United States only, is expected to increase capacity utilization
and has strengthened the Company’s product portfolio. The
Company shipped 17,800 and 12,000 barrels of Widmer
Hefeweizen during 2004 and 2003, respectively. In
conjunction with the Company’s discontinuation of
Redhook Hefe-weizen, shipments of Redhook Hefe-weizen
in 2003 declined approximately 8,000 barrels. A
licensing fee of $266,000 and $166,000 due to Widmer is
reflected in the Company’s statement of operations for the
years ended December 31, 2004 and 2003, respectively.
The Company is required to pay federal excise taxes on sales of
its beer. The excise tax burden on beer sales increases from $7
to $18 per barrel on annual sales over 60,000 barrels
and thus, if sales volume increases, federal excise taxes would
increase as a percentage of sales. Most states also collect an
excise tax on the sale of beer.
Under normal circumstances, the Company operates its brewing
facilities up to six days per week with multiple shifts per day.
Under ideal brewing conditions (which would include, among other
factors, production of a single brand in a single package), the
current production capacity is approximately
250,000 barrels per year at the Washington Brewery and
125,000 barrels per year at the New Hampshire Brewery.
Because of various factors, including the following two, the
Company does not believe that it is likely that actual
production volume will approximate current production capacity:
(1) the Company’s brewing process, which management
believes is similar to its competitors’ brewing processes,
inherently results in some level of beer loss attributable to
filtering, bottling, and keg filling; and (2) the Company
routinely brews and packages various brands and package sizes
during the year.
During the peak sales volume periods of 2002, production
capacity at the New Hampshire Brewery was nearly fully utilized.
In order to accommodate volume growth in the markets served by
the New Hampshire Brewery, including anticipated growth
resulting from sales of Widmer Hefeweizen, the Company
expanded fermentation capacity during the first half of 2003.
This expansion brought the production capacity from
approximately 110,000 barrels per year at the end of
December 2002 to the current capacity of approximately
125,000 barrels per year. Production capacity at the New
Hampshire Brewery can be added in phases until the facility
reaches its maximum designed production capacity of
approximately 250,000 barrels per year, under ideal brewing
conditions. Such an increase would require additional capital
expenditures, primarily for fermentation equipment, and
production personnel. The decision to add capacity is affected
by the availability of capital, construction constraints and
anticipated sales in new and existing markets.
The Company’s capacity utilization has a significant impact
on gross profit. Generally, when facilities are operating at
their maximum designed production capacities, profitability is
favorably affected because fixed and semivariable operating
costs, such as depreciation and production salaries, are spread
over a larger sales base. Because current period production
levels have been substantially below the Company’s current
production capacity, gross margins have been negatively
impacted. This negative impact could be reduced if actual
production increases.
In addition to capacity utilization, other factors that could
affect cost of sales and gross margin include sales to Craft
Brands at a fixed transfer price substantially below wholesale
pricing levels, changes in freight charges, the availability and
prices of raw materials and packaging materials, the mix between
draft and
24
bottled product sales, the sales mix of various bottled product
packages, and fees related to the Distribution Agreement with
A-B.
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Certain
Considerations: Issues and Uncertainties.”
Results of Operations
The following table sets forth, for the periods indicated,
certain items from the Company’s Statements of Operations
expressed as a percentage of net sales.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Sales
|
|
|
109.8 |
% |
|
|
109.0 |
% |
|
|
109.3 |
% |
|
Less Excise Taxes
|
|
|
9.8 |
|
|
|
9.0 |
|
|
|
9.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost of Sales
|
|
|
81.4 |
|
|
|
74.1 |
|
|
|
73.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
18.6 |
|
|
|
25.9 |
|
|
|
26.3 |
|
|
Selling, General and Administrative Expenses
|
|
|
22.9 |
|
|
|
30.2 |
|
|
|
29.1 |
|
|
Income from Equity Investment in Craft Brands
|
|
|
3.4 |
|
|
|
— |
|
|
|
— |
|
|
Craft Brands Alliance Shared Formation Expenses
|
|
|
1.6 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(2.5 |
) |
|
|
(4.3 |
) |
|
|
(2.8 |
) |
|
Interest Expense
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
Other Income (Expense) — Net
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(2.8 |
) |
|
|
(4.6 |
) |
|
|
(3.3 |
) |
|
Income Tax Provision (Benefit)
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
(0.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(2.9 |
)% |
|
|
(4.7 |
)% |
|
|
(3.0 |
)% |
| |
|
|
|
|
|
|
|
|
|
25
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
The following table sets, for the periods indicated, a
comparison of certain items from the Company’s Statements
of Operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
December 31, | |
|
|
|
|
| |
|
| |
|
Increase/ | |
|
% | |
| |
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
Change | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except barrels) | |
|
|
|
Sales
|
|
$ |
36,640 |
|
|
$ |
42,213 |
|
|
$ |
(5,573 |
) |
|
|
(13.2 |
)% |
|
Less Excise Taxes
|
|
|
3,268 |
|
|
|
3,498 |
|
|
|
(230 |
) |
|
|
(6.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
33,372 |
|
|
|
38,715 |
|
|
|
(5,343 |
) |
|
|
(13.8 |
) |
|
Cost of Sales
|
|
|
27,171 |
|
|
|
28,702 |
|
|
|
(1,531 |
) |
|
|
(5.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,201 |
|
|
|
10,013 |
|
|
|
(3,812 |
) |
|
|
(38.1 |
) |
|
Selling, General and Administrative Expenses
|
|
|
7,639 |
|
|
|
11,689 |
|
|
|
(4,050 |
) |
|
|
(34.6 |
) |
|
Income from Equity Investment in Craft Brands
|
|
|
1,123 |
|
|
|
— |
|
|
|
1,123 |
|
|
|
100.0 |
|
|
Craft Brands Alliance Shared Formation Expenses
|
|
|
535 |
|
|
|
— |
|
|
|
535 |
|
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(850 |
) |
|
|
(1,676 |
) |
|
|
826 |
|
|
|
49.3 |
|
|
Interest Expense
|
|
|
189 |
|
|
|
192 |
|
|
|
(3 |
) |
|
|
(1.6 |
) |
|
Other Income (Expense) — Net
|
|
|
116 |
|
|
|
59 |
|
|
|
57 |
|
|
|
96.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(923 |
) |
|
|
(1,809 |
) |
|
|
886 |
|
|
|
49.0 |
|
|
Income Tax Provision (Benefit)
|
|
|
30 |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(953 |
) |
|
$ |
(1,839 |
) |
|
$ |
886 |
|
|
|
48.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beer Shipped (in barrels)
|
|
|
216,400 |
|
|
|
228,800 |
|
|
|
(12,400 |
) |
|
|
(5.4 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Sales. The following factors played a role in the
$5,573,000 decline in total sales in 2004 as compared to 2003:
|
|
| |
Sales to Craft Brands Alliance. Significantly impacting
the comparability of 2004 to 2003 are those sales of Redhook
product to Craft Brands in the second half of 2004.
Approximately 29.5% of the 2004 total shipments were sold to
Craft Brands at a price substantially below wholesale pricing
levels. Redhook manufactures and sells its product to Craft
Brands at a fixed transfer price; Craft Brands, in turn,
advertises, markets, sells and distributes the product to
wholesale outlets in the western United States through a
distribution agreement between Craft Brands and A-B. |
| |
| |
Shipments. Total Company shipments declined 5.4%. Total
sales volume for 2004 decreased to 216,400 barrels from
228,800 barrels for the same period in 2003, the result of
an 8.5% decrease in shipments of its packaged products and a
0.2% increase in shipments of the Company’s draft products.
Since the mid 1990s, package beer sales have steadily increased
as a percentage of total beer sales; this migration reversed
slightly in 2004, with 62.8% of total shipments in 2004 being
package shipments versus 64.9% in 2003. At December 31,
2004 and 2003, the Company’s products were distributed in
48 states. |
| |
| |
Although shipments in the midwest and eastern United States
decreased slightly, a 7.8% decline in West Coast volume,
including a 12.0% decrease in shipments in Washington State,
contributed to the majority of the overall sales volume
decrease. A significant portion of the Company’s sales
continue to be in the Pacific Northwest region, which the
Company believes is one of the most competitive craft beer
markets in the United States, both in terms of number of market
participants and consumer awareness. The Company faces extreme
competitive pressure in Washington State, which is not only the
Company’s largest market but is also its oldest market.
Since 1997, the Company has experienced a decline in sales
volume in Washington State of approximately 17%. Management
believes that the decline can be partially attributable to the
relative maturity of the brand in this region and, more
recently, the formation of Craft Brands. The Company believes
that the beer industry is influenced by individual relationships. |
26
|
|
| |
The transition to Craft Brands impacted its established
wholesaler and retailer relationships which, prior to Craft
Brands, had existed for many years. Because the transition to
Craft Brands took longer than anticipated, and because nearly
all the Company’s sales staff responsible for Washington
State left the Company, the Company and Craft Brands have had to
re-establish many of these relationships with wholesalers and
retailers. Sales have also been impacted by a reduction in the
pricing promotions historically offered in this region. |
| |
| |
Pricing and Fees. Total Company average revenue per
barrel for 2004 was significantly impacted by sales of Redhook
product to Craft Brands during the six months ended
December 31, 2004. The Company sells its product to Craft
Brands at a price substantially below historical wholesale
pricing levels; Craft Brands, in turn, advertises, markets,
sells and distributes the product to wholesale outlets in the
western United States through a distribution agreement between
Craft Brands and A-B. For the year ended December 31, 2004,
sales to Craft Brands represented 29.5% of total shipments, or
64,000 barrels. |
| |
| |
Redhook continues to sell its product at wholesale pricing
levels in the midwest and eastern United States through sales to
A-B. Average wholesale revenue per barrel on sales in the
midwest and eastern United States showed modest improvement
while fees that the Company paid to A-B on sales in these same
regions increased pursuant to the July 1, 2004 Distribution
Agreement with A-B. Improvement in average wholesale revenue per
barrel was driven by strength in pricing in many of the
Company’s markets, although the 2004 average revenue per
barrel did experience some downward pressure as a result of the
contract brewing arrangement, sold at a significantly lower
revenue per barrel during the second quarter of 2004, with
Widmer. Average wholesale revenue per barrel for draft products,
excluding contract sales and net of discounts, increased
approximately 1.3% in 2004 as compared to 2003. This increase in
pricing accounted for approximately $130,000 of the change in
total sales. Average wholesale revenue per barrel for bottle
products, net of discounts, increased approximately 1.9% in 2004
as compared to 2003. This increase in pricing accounted for
approximately $580,000 of the change in total sales. Seldom, if
ever, are pricing changes driven by an inflationary period.
Instead, pricing changes implemented by the Company generally
follow pricing changes initiated by large domestic or import
brewing companies. While the Company has implemented modest
pricing increases during the past few years, some of the benefit
has been offset by competitive promotions and discounting.
Additionally, the Company may experience a decline in sales in
certain regions following a price increase. |
| |
| |
In connection with all sales through the Distribution Alliance
prior to July 1, 2004, the Company paid a Margin fee to
A-B. The July 1, 2004 A-B Distribution Agreement modified
the Margin fee structure such that the Margin per barrel shipped
increased and is paid on all sales through the new A-B
Distribution Agreement. The Margin does not apply to sales to
the Company’s retail operations or to dock sales. The
Margin also does not apply to the Company’s sales to Craft
Brands because Craft Brands pays a comparable fee to A-B on its
resale of the product. The A-B Distribution Agreement also
provides that the Company shall pay an additional fee on
shipments that exceed shipments for the same territory during
fiscal 2003. In addition, the Exchange and Recapitalization
Agreement provided that the Margin be retroactively increased to
the rate provided in the A-B Distribution Agreement for all
shipments in June 2004. For the six month period ended
December 31, 2004, the Margin was paid to A-B on shipments
totaling 38,000 barrels to 371 distribution points. The
incremental margin on June 2004 shipments was paid on
approximately 20,000 barrels. For the six months ended
June 30, 2004, the Margin was paid to A-B on shipments
totaling 84,000 barrels to 495 Alliance distribution
points. For the year ended December 31, 2003, the Margin
was paid to A-B on shipments totaling 166,000 barrels to
527 Alliance distribution points. The Margin paid is reflected
as a reduction of sales in the Company’s statement of
operations. |
| |
| |
Retail Operations and Other. Sales other than wholesale
beer sales, primarily retail pub revenues, totaled $4,851,000 in
2004 compared to $4,581,000 in 2003. This increase was primarily
a result of an improvement in overall pub activity, driven by
favorable weather, increased attendance at events held at the
breweries to promote the Company’s products, and modest
pricing increases in some pub fare. |
27
Excise Taxes. Excise taxes decreased $230,000 to
$3,268,000 in 2004 compared to $3,498,000 in 2003. The Company
continues to be responsible for federal and state excise taxes
for all shipments, including those to Craft Brands. The
comparability of excise taxes as a percentage of net sales is
impacted most significantly by the sale of Redhook product to
Craft Brands at a price substantially below wholesale pricing
levels, but also by average revenue per barrel, the proportion
of pub sales to total sales, and the estimated annual average
federal and state excise tax rates.
Cost of Sales. Comparing 2004 to 2003, cost of sales
decreased 5.3%, or $1,531,000, but remained flat on a per barrel
basis. Freight costs declined by approximately 30% as the cost
of shipping Redhook product in the western United States is now
borne by Craft Brands, and the Company’s effort at
streamlining its shipping relationships in the midwest and
eastern United States has yielded additional savings.
Improvement in the Company’s malted barley cost in 2004 was
offset by increases in other indirect costs, including
depreciation and production wages. Depreciation and production
wages increased following the 2003 expansion of brewing capacity
in the Company’s New Hampshire Brewery. Based upon the
breweries’ combined current production capacity of
375,000 barrels in 2004 and 371,250 barrels for the
same 2003 period, the utilization rates were 57.7% and 61.6%,
respectively.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased $4,050,000 to
$7,639,000 from expenses of $11,689,000 for the year ended 2003,
significantly impacted by the formation of Craft Brands as well
as Company efforts to re-focus its sales and marketing spending
in its primary markets. All advertising, marketing and selling
costs in the western United States became the responsibility of
Craft Brands on July 1, 2004. While the Company and Widmer
sought the regulatory approval required for Craft Brands to
become fully operational, they agreed to share certain
sales-related costs, primarily salaries and overhead. The
Company’s share of those costs totaled $554,000 for 2004
and is reflected in the Company’s statement of operations
as selling, general and administrative expenses.
Income from Equity Investment in Craft Brands Alliance.
In accordance with the Craft Brands Operating Agreement, the
Company made a $250,000 sales and marketing capital contribution
to Craft Brands, which was to be used by Craft Brands for
expenses related to the marketing, advertising, and promotion of
Redhook products (“Special Marketing Expense”). After
giving effect to the allocation of the Special Marketing
Expense, which is allocated 100% to Redhook, and giving effect
to income attributable to the Kona brand, which is shared
differently between the Company and Widmer through 2006, the
Operating Agreement dictates that remaining profits and losses
of Craft Brands are allocated between the Company and Widmer
based on the Cash Flow Percentages of 42% and 58%, respectively.
For the year ended December 31, 2004, the Company’s
share of Craft Brands’ net income totaled $1,123,000. This
share of Craft Brands’ profit was net of $115,000 of the
Special Marketing Expense that had been incurred by Craft Brands
during the same period and was fully allocated to the Company.
Net cash flow of Craft Brands, if any, is generally distributed
monthly to the Company based on the Company’s cash flow
percentage of 42%. The Company received cash distributions of
$903,000 in 2004, representing its share of the net cash flow of
Craft Brands.
Craft Brands Alliance Shared Formation Expenses. In
conjunction with the formation of Craft Brands, both the Company
and Widmer incurred certain start-up expenses, including
severance expenses and legal fees. The Company’s operating
income (loss) reflects $535,000 attributable to the
Company’s share of these expenses for the year ended
December 31, 2004.
Interest Expense. Interest expense was $189,000 for the
year ended December 31, 2004, down from $192,000 for the
same period in 2003. A declining term loan balance offset by
slightly higher average interest rates in the last half of 2004
resulted in a decline in interest expense.
Other Income (Expense) — Net. Other
income (expense) — net increased to income of $116,000
in 2004 compared to income of $59,000 in 2003, due primarily to
receipt of a filing commission from a state taxing authority and
rental fees.
Income Taxes. The Company’s effective income tax
rate was a 3.1% current state tax provision for the year ended
December 31, 2004 and 1.6% for the comparable 2003 period.
In 2004 and 2003, the Company increased the valuation allowance
to fully cover net tax operating loss carryforwards and other
net deferred tax
28
assets that were generated during the period. The valuation
allowance covers a portion of the Company’s deferred tax
assets, specifically certain federal and state NOLs that may
expire before the Company is able to utilize the tax benefit.
Realization of the benefit is dependent on the Company’s
ability to generate future U.S. taxable income. To the
extent that the Company continues to be unable to generate
adequate taxable income in future periods, the Company will not
be able to recognize additional tax benefits and may be required
to record a greater valuation allowance covering potentially
expiring NOLs.
|
|
|
Craft Brands Alliance LLC |
The Company has accounted for its investment in Craft Brands
under the equity method, as outlined by APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock. Pursuant to APB No. 18, the Company has recorded
its share of Craft Brands’ net income in the Company’s
statement of operations as income from equity investment in
Craft Brands. Separate financial statements for Craft Brands are
filed with the Company’s Form 10-K for the year ended
December 31, 2004, in Item 15. Exhibits and
Financial Statement Schedules in accordance with
Rule 3-09 of Regulation S-X. The following summarizes
certain items included in Craft Brands’ statement of
operations for the year ended December 31, 2004.
Sales. Craft Brands’ sales totaled $27,777,000 for
the year ended December 31, 2004. In addition to selling
64,000 barrels of the Company’s product sold to
wholesalers in the Western Territory, Craft Brands’ also
sold products brewed by Widmer and Kona Brewery LLC. For the
year ended December 31, 2004, average wholesale revenue per
barrel for all products sold by Craft Brands was approximately
2% higher than average wholesale revenue per barrel on sales to
wholesalers by the Company during the same period. Craft
Brands’ sales efforts during 2004 included a reduction in
discounting on the Company’s products. Craft Brands also
pays a fee to A-B in connection with sales to A-B that are
comparable to fees paid by the Company.
Cost of Sales. Cost of sales of Craft Brands totaled
$20,104,000 for the year ended December 31, 2004. Craft
Brands purchases product from the Company and Widmer at prices
substantially below wholesale pricing levels pursuant to a
Supply, Distribution, and Licensing Agreement between Craft
Brands and each of the Company and Widmer. Craft Brands has
realized improvement in its average freight cost per barrel over
the Company’s historical costs, largely a result of
synergies created by negotiating its shipping relationships as a
single larger entity.
Selling, General and Administrative Expenses. Craft
Brands’ selling, general and administrative expenses
totaled $4,704,000 for the year, reflecting all advertising,
marketing and promotion efforts for the Company’s,
Widmer’s and Kona brands. During the six months ended
December 31, 2004, Craft Brands suspended many of the
Company’s major advertising and promotion efforts while it
completed an assessment of brand. Although the Company
anticipates that advertising and promotion efforts will increase
in 2005, predicting future expenditures is difficult. In
accordance with the Craft Brands Operating Agreement, the
Company made a $250,000 sales and marketing capital contribution
on July 1, 2004, which was to be used by Craft Brands for
expenses related to the marketing, advertising, and promotion of
Redhook products (“Special Marketing Expense”).
Selling, general and administrative expenses of Craft Brands for
the year ended December 31, 2004 includes approximately
$115,000 designated as Special Marketing Expense.
Net Income. Craft Brands’ net income totaled
$2,869,000 for the year ended December 31, 2004. The
Company’s share of Craft Brands’ net income totaled
$1,123,000. After giving effect to the allocation of the Special
Marketing Expense, which is allocated 100% to Redhook, and
giving effect to income attributable to the Kona brand, which is
shared differently between the Company and Widmer through 2006,
the Operating Agreement dictates that remaining profits and
losses of Craft Brands are allocated between the Company and
Widmer based on the cash flow percentages of 42% and 58%,
respectively.
29
Year Ended December 31,
2003 Compared to Year Ended December 31, 2002
The following table sets, for the periods indicated, a
comparison of certain items from the Company’s Statements
of Operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
December 31, | |
|
|
|
|
| |
|
| |
|
Increase/ | |
|
% | |
| |
|
2003 | |
|
2002 | |
|
(Decrease) | |
|
Change | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except barrels) | |
|
|
|
Sales
|
|
$ |
42,213 |
|
|
$ |
40,913 |
|
|
$ |
1,300 |
|
|
|
3.2 |
% |
|
Less Excise Taxes
|
|
|
3,498 |
|
|
|
3,465 |
|
|
|
33 |
|
|
|
1.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
38,715 |
|
|
|
37,448 |
|
|
|
1,267 |
|
|
|
3.4 |
|
|
Cost of Sales
|
|
|
28,702 |
|
|
|
27,597 |
|
|
|
1,104 |
|
|
|
4.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
10,013 |
|
|
|
9,851 |
|
|
|
163 |
|
|
|
1.7 |
|
|
Selling, General and Administrative Expenses
|
|
|
11,689 |
|
|
|
10,910 |
|
|
|
780 |
|
|
|
7.1 |
|
|
Income from Equity Investment in Craft Brands
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Craft Brands Alliance Shared Formation Expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(1,676 |
) |
|
|
(1,059 |
) |
|
|
(617 |
) |
|
|
(58.3 |
) |
|
Interest Expense
|
|
|
192 |
|
|
|
230 |
|
|
|
(38 |
) |
|
|
(16.8 |
) |
|
Other Income (Expense) — Net
|
|
|
59 |
|
|
|
30 |
|
|
|
29 |
|
|
|
95.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(1,809 |
) |
|
|
(1,259 |
) |
|
|
(550 |
) |
|
|
(43.7 |
) |
|
Income Tax Provision (Benefit)
|
|
|
(30 |
) |
|
|
(126 |
) |
|
|
155 |
|
|
|
123.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(1,839 |
) |
|
$ |
(1,133 |
) |
|
$ |
(705 |
) |
|
|
(62.2 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beer Shipped (in barrels)
|
|
|
228,800 |
|
|
|
225,900 |
|
|
|
2,900 |
|
|
|
1.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Sales. The following factors played a role in the
$1,300,000 increase in total sales for the year ended
December 31, 2003 as compared to the year ended
December 31, 2002:
|
|
| |
Shipments. Approximately $625,000 of the $1,300,000
increase in gross sales is attributable to an increase in
wholesale shipments. Total Company shipments increased 1.3% in
2003 as compared to 2002. Total sales volume for the year ended
December 31, 2003 increased to 228,800 barrels from
225,900 barrels for the same period in 2002, the result of a
2.3% increase in shipments of its packaged products, offset by a
0.5% decrease in shipments of the Company’s draft products.
The mix of package sales to draft sales generally affects
overall revenue per barrel, with package product generating a
higher revenue per barrel but also an increased cost of sales
per barrel. The sales mix continued to migrate towards an
increasing proportion of package sales in 2003, with 64.9% of
2003 total volume being package shipments versus 64.3% in 2002.
Contrary to the trend during the past several years, sales
volume for the 12-pack package, which is more costly to produce,
decreased to 33.6% of package sales from 34.1% in 2002. West
Coast sales decreased 5.0% in 2003 as compared to 2002, largely
due to a significant decline in sales in California and, to a
smaller degree, to a 2.4% decline in shipments in Washington
State, the Company’s largest market. At December 31,
2003 and 2002, the Company’s products were distributed in
48 states. |
| |
| |
Pricing and Fees. Average wholesale revenue per barrel
showed modest improvement. Average wholesale revenue per barrel
for draft products, net of discounts, increased approximately
2.0% in 2003 as compared to 2002. This increase in pricing
accounted for approximately $200,000 of the $1,300,000 increase
in total sales. Average wholesale revenue per barrel for bottle
products, net of discounts, increased approximately 1.2% in 2003
as compared to 2002. This increase in pricing accounted for
approximately $330,000 of the $1,300,000 increase in gross
sales. Seldom, if ever, are pricing changes driven by an
inflationary period. Instead, pricing changes implemented by the
Company generally follow pricing changes initiated by large
domestic or import brewing companies. While the Company has
implemented modest pricing increases during the past few years,
some of the benefit has been offset by |
30
|
|
| |
competitive promotions and discounting. Additionally, the
Company may experience a decline in sales in certain regions
following a price increase. |
| |
| |
For the year ended December 31, 2003, the Margin was paid
to A-B on shipments totaling 166,000 barrels to
527 Alliance distribution points. For the year ended
December 31, 2002, the Margin was paid to A-B on shipments
totaling 161,000 barrels to 532 Alliance distribution
points. The Margin paid is reflected as a reduction of sales in
the Company’s statement of operations. |
| |
| |
Retail Operations. Sales other than wholesale beer sales,
primarily retail pub revenues, totaled $4,581,000 in 2003
compared to $4,455,000 in 2002. This increase was due to
increasing sales in the Company’s pubs located in its two
breweries, partially offset by the September 2002 closure of the
Company’s Trolleyman Pub, located in the Company’s
former Fremont Brewery. |
Excise Taxes. Excise taxes increased to $3,498,000 in
2003 from $3,465,000 in 2002, but decreased as a percentage of
net sales to 9.0% from 9.3% in 2002. The comparability of excise
taxes as a percentage of net sales is impacted by many factors,
including average revenue per barrel, the proportion of pub
sales to total sales, and the estimated annual average federal
and state excise tax rates.
Cost of Sales. Cost of sales increased 4.0%, or
$1,104,000, in 2003 and also increased as a percentage of net
sales and on a per barrel basis. The per barrel increase of
$3.27 was attributable to an increase in the cost of raw
materials (malted barley in particular following a poor 2002
worldwide harvest), packaging and brewing supplies, as well as
higher freight costs driven by fuel surcharges. Some of the
Company’s indirect costs also increased in 2003 following
the expansion of its New Hampshire Brewery. The utilization
rate, based upon the breweries’ combined current production
capacity, was 61.6% and 63.4% for the years ended
December 31, 2003 and 2002, respectively.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased $780,000 in 2003
in addition to increasing as a percentage of net sales and on a
per barrel basis. Significant components of the sales and
marketing effort were expenditures for the Company’s
promotion programs as well as salaries and related expenses for
the national sales force. Increases in both promotional expenses
and sales salaries in 2003 were a reaction to perceived
shortfalls in promoting the Redhook brand in certain markets.
These increases in expenses included an increase in sales
headcount and materials related to sales.
Interest Expense. Interest expense decreased in 2003,
compared to 2002, reflecting the effect of lower outstanding
debt and lower average interest rates.
Other Income (Expense) — Net. Other income
(expense) — net increased to income of $59,000 in 2003
from income of $30,000 in 2002. Interest income declined $68,000
in 2003 as a result of a lower average balance of
interest-bearing deposits and lower average interest rates. The
2002 period included a $97,000 loss on the disposal of assets,
most of which were disposed of in conjunction with the September
2002 consolidation of the Company’s corporate offices into
the Washington Brewery.
Income Taxes. The Company’s effective income tax
rate was a 1.6% expense in 2003 compared to a 10.0% benefit in
2002. Both years’ income taxes reflect a deferred income
tax benefit offset to some degree by the recording of a
valuation allowance. In 2003, the Company increased the
valuation allowance to fully cover net tax operating loss
carryforwards (“NOLs”) that were generated by the
year’s deferred income tax benefit. In 2002, the NOLs
generated by the year’s deferred income tax benefit were
partially reduced by the creation of a valuation allowance.
Liquidity and Capital Resources
The Company has required capital principally for the
construction and development of its production facilities.
Historically, the Company has financed its capital requirements
through cash flow from operations, bank borrowings and the sale
of common and preferred stock. The Company expects to meet its
future financing needs and working capital and capital
expenditure requirements through cash on hand, operating cash
flow and bank borrowings, and to the extent required and
available, offerings of debt or equity securities.
31
The Company had $5,590,000 and $6,123,000 of cash and cash
equivalents at December 31, 2004 and 2003, respectively. At
December 31, 2004, the Company had working capital of
$3,661,000. The Company’s long-term debt as a percentage of
total capitalization (long-term debt, preferred stock and Common
Stockholders’ equity) was 8.4% and 8.7% as of
December 31, 2004 and 2003, respectively. Cash provided by
operating activities totaled $2,156,000 and $786,000 for 2004
and 2003, respectively. Cash provided by operations increased in
2004 compared to 2003 as a result of the profit distribution
from Craft Brands and normal fluctuations in operating assets
and liabilities. Additionally, the Company received $267,000
from the issuance of Common Stock resulting from the exercise of
employee stock options. Pursuant to the Exchange and
Recapitalization Agreement, the Company paid $2.0 million
to A-B in November 2004 and the Company had capital expenditures
totaling $252,000 in 2004. Capital expenditures for 2005 are
expected to total approximately $368,000, primarily for brewing
equipment.
The Company has a credit agreement with a bank under which a
term loan (the “Term Loan”) is provided. The Term
Loan, which originated in June 1997 upon the conversion of a
$9 million secured credit facility, matures on June 5,
2007 and has a 20-year amortization schedule. The credit
agreement also provided for a $2 million revolving credit
facility; however, the Company did not renew the revolving
facility upon the July 1, 2004 expiration of the commitment
period. There were no borrowings outstanding under the revolving
facility at the time of its expiration.
The Term Loan is secured by substantially all of the
Company’s assets. Through June 4, 2002, interest on
the Term Loan accrued at a variable rate based on the London
Inter Bank Offered Rate (“LIBOR”) plus 1.25%. Since
June 5, 2002, interest on the Term Loan has accrued at
LIBOR plus 1.75%. The Company has the option to fix the
applicable interest rate for up to twelve months by selecting
LIBOR for one- to twelve- month periods as a base. As of
December 31, 2004, there was $5.625 million
outstanding on the Term Loan, and the Company’s one-month
LIBOR-based borrowing rate was 4.2%. The termination of the A-B
Distribution Agreement for any reason would constitute an event
of default under the credit agreement and the bank may declare
the entire outstanding loan balance immediately due and payable.
See “— Certain Considerations: Issues and
Uncertainties” below. If this were to occur, the Company
could seek to refinance its Term Loan with one or more banks or
obtain additional equity capital; however, there can be no
assurance the Company would be able to access additional capital
to meet its needs or that such additional capital would be at
commercially reasonable terms.
The terms of the credit agreement require the Company to meet
certain financial covenants. These financial covenants, as
defined in the credit agreement, are as follows: tangible net
worth (shareholders’ equity less intangible assets) must be
greater than $60,000,000; the capital ratio (total liabilities
to tangible net worth) must be less than 1.25:1; working capital
must be greater than $1,900,000; and the fixed charge coverage
ratio (cash flow to debt service) must be greater than 1.15:1.
The Company was in compliance with all covenants for the quarter
ended December 31, 2004 and expects that it will remain in
compliance with its debt covenants for the next twelve months.
In December 2001, March 2003, February 2004 and October 2004,
the credit agreement was amended to modify several financial
covenants. These revisions have reduced the likelihood that a
violation of the covenants by the Company will occur in the
future; however, if the Company were to report a significant net
loss for one or more quarters within a time period covered by
the financial covenants, one or more of the covenants would be
negatively impacted and could cause a violation. Failure to meet
the covenants required by the credit agreement is an event of
default and, at its option, the bank could deny a request for a
waiver and declare the entire outstanding loan balance
immediately due and payable. In such a case, the Company would
seek to refinance the loan with one or more banks, potentially
at less desirable terms. However, there can be no guarantee that
additional financing would be available at commercially
reasonable terms, if at all.
32
The following table summarizes the financial covenants required
by the Term Loan and the Company’s current level of
compliance with these covenants:
| |
|
|
|
|
|
|
| |
|
|
|
Quarter Ended | |
| |
|
Required by Term Loan |
|
December 31, 2004 | |
| |
|
|
|
| |
|
Tangible Net Worth
|
|
Greater than $60,000,000 |
|
$ |
61,440,616 |
|
|
Capital Ratio
|
|
Less than: 1.25:1 |
|
|
0.21:1 |
|
|
Working Capital
|
|
Greater than $1,900,000 |
|
$ |
3,660,512 |
|
|
Fixed Charge Coverage Ratio
|
|
Greater than 1.15:1 |
|
|
3.014:1 |
|
From May 2000 through May 2003, the Company repurchased its
Common Stock in conjunction with a repurchase plan authorized by
the board of directors. The plan allowed for the repurchase of
1.5 million outstanding shares of Common Stock for a total
maximum repurchase of $2,750,000. In May 2003, at which time a
total of 1,463,100 shares of Common Stock had been
purchased in the open market for an aggregate expenditure of
$2,750,000, the Company ended the repurchase plan. During 2003,
101,400 shares of Common Stock were purchased for $231,000.
There were no stock repurchases in 2004.
Contractual Commitments. The Company has certain
commitments, contingencies and uncertainties relating to its
normal operations. As of December 31, 2004, contractual
commitments associated with the Company’s long-term debt,
operating leases and hop purchase commitments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
(In thousands) | |
|
|
|
|
|
|
|
Long-term Debt(1)
|
|
$ |
450 |
|
|
$ |
450 |
|
|
$ |
4,725 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,625 |
|
|
Operating Leases(2)
|
|
|
271 |
|
|
|
269 |
|
|
|
267 |
|
|
|
267 |
|
|
|
267 |
|
|
|
12,102 |
|
|
|
13,442 |
|
|
Hop Purchase Commitments(3)
|
|
|
388 |
|
|
|
269 |
|
|
|
171 |
|
|
|
118 |
|
|
|
— |
|
|
|
— |
|
|
|
946 |
|
|
Other Operating Purchase Obligations(4)
|
|
|
109 |
|
|
|
83 |
|
|
|
70 |
|
|
|
70 |
|
|
|
6 |
|
|
|
— |
|
|
|
338 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,218 |
|
|
$ |
1,071 |
|
|
$ |
5,233 |
|
|
$ |
455 |
|
|
$ |
273 |
|
|
$ |
12,102 |
|
|
$ |
20,351 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Represents annual principal payments required on the
Company’s Term Loan. Interest on the Term Loan accrues at
LIBOR plus 1.75%. Payment of accrued interest due monthly is not
reflected above. The termination of the A-B Distribution
Agreement for any reason would constitute an event of default
under the credit agreement and the bank may declare the entire
outstanding loan balance immediately due and payable. |
| |
| (2) |
Represents minimum aggregate future lease payments under
noncancelable operating leases. |
| |
| (3) |
Represents purchase commitments to ensure that the Company has
the necessary supply of specialty hops to meet future production
requirements. Contracts generally provide for payment upon
delivery of the product with the balance due on any unshipped
product during the year following the harvest year. The Company
believes that, based upon its relationships with its hop
suppliers, the risk of non-delivery is low and that if
non-delivery of its required supply of hops were to occur, the
Company would be able to purchase hops to support its operations
from other competitive sources. Hop commitments in excess of
future requirements, if any, will not materially affect the
Company’s financial condition or results of operations. |
| |
| (4) |
Represents legally-binding production and operating purchase
commitments. |
Certain Considerations: Issues and Uncertainties
The Company does not provide forecasts of future financial
performance or sales volumes, although this Annual Report
contains certain other types of forward-looking statements that
involve risks and uncertainties. The Company may, in discussions
of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and
Exchange Commission (or documents incorporated by reference
33
therein) and in written and oral presentations made by the
Company, include forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended,
or Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements are based on
assumptions that the Company believes are reasonable, but are by
their nature inherently uncertain. In all cases, there can be no
assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ
materially from those projected depending on a variety of
factors, including, but not limited to, the successful execution
of market development and other plans, and the availability of
financing and the issues discussed below. While Company
management is optimistic about the Company’s long-term
prospects, the following issues and uncertainties, among others,
should be considered in evaluating its business prospects and
any forward-looking statements.
Relationship with Anheuser-Busch, Incorporated and Craft
Brands Alliance LLC. All of the Company’s future sales
are expected to be made through the A-B Distribution Agreement
and through sales to Craft Brands. Craft Brands will distribute
the Company’s products through a separate distribution
arrangement with A-B. See “Part 1,
Item 1 — Business — Product
Distribution, Relationship with Anheuser-Busch, Incorporated,
and Relationship with Craft Brands Alliance LLC” for a
further description of the Company’s restructured
relationship with A-B and with Craft Brands. If the relationship
between A-B and the Company, between the Company and Craft
Brands or between A-B and Craft Brands were to deteriorate,
distribution of the Company’s products would suffer
significant disruption and such event would have a long-term
severe negative impact on the Company’s sales and results
of operations, as it would be extremely difficult for the
Company to rebuild its own distribution network. While the
Company believes that the benefits of the Distribution Agreement
and its relationship with A-B and Craft Brands, in particular
distribution and material cost efficiencies, offset the costs
associated with the relationship, there can be no assurance that
these costs will not have a negative impact on the
Company’s profit margins in the future.
Craft Brands Alliance LLC. As discussed above, Craft
Brands advertises, markets, sells and distributes the
Company’s and Widmer’s products in the western United
States. The Company believes that the combined sales and
marketing organization will create synergies and capitalize on
both companies’ sales and marketing experience and
complementary product portfolios. The Company anticipates that
the joint organization will positively impact revenues and
decrease the Company’s selling, general and administrative
expenses. The Company has already begun to see a significant
decrease in its selling, general and administrative expenses,
and has recognized income totaling $1.1 million from its
investment in Craft Brands. However, Craft Brands has been
operational for less than a year, and predicting future benefits
from Crafts Brands is difficult. There can be no assurance that
the Company will see any further or anticipated benefits from
the joint venture.
In conjunction with the formation of Craft Brands, both the
Company and Widmer have incurred certain start-up expenses,
including severance expenses and legal fees. The Company’s
operating loss for the year ended December 31, 2004
reflects $535,000 attributable to the Company’s share of
these expenses. Additionally, during the period March 15,
2004 through June 30, 2004, while the companies sought the
regulatory approval required for Craft Brands to become fully
operational, the Company and Widmer agreed to share certain
sales-related costs, primarily salaries and overhead. The
Company’s share of those costs totaled $554,000 for the
year ended December 31, 2004, and are reflected in the
Company’s statement of operations as selling, general and
administrative expenses.
Dependence on Distributors. While all of the
Company’s future sales are expected to be made through the
A-B Distribution Agreement and through sales to Craft Brands,
the Company relies heavily on distributors, most of which are
independent wholesalers, for the sale of its products to
retailers. The Company’s most significant wholesaler,
K&L Distributors, Inc., accounted for approximately 13% of
the Company’s shipments in 2004. A disruption of the
Company’s, Craft Brands’, the wholesalers’ or
A-B’s ability to distribute products efficiently due to any
significant operational problems, such as wide-spread labor
union strikes, the loss of K&L Distributors as a customer,
or the termination of the A-B Distribution Agreement or the
Supply and Distribution Agreement with Craft Brands could have a
material adverse impact on the Company’s sales and results
of operations.
34
Effect of Competition on Future Sales. The Company
competes in the highly competitive craft brewing market as well
as in the much larger specialty beer market, which encompasses
producers of import beers, major national brewers that have
introduced fuller-flavored products, and large spirit companies
and national brewers that produce flavored alcohol beverages.
Beyond the beer market, craft brewers have also faced
competition from producers of wines and spirits. Primarily as a
result of increased competition, the Company experienced
declining sales volumes ranging from 2.3% to 5.7% for the years
1997 through 1999. Company sales volumes for the years 1999 to
2003 increased when compared to the corresponding prior
year’s volumes. However, 2004 sales volumes compared to
2003 declined and competition within the segment has, at times,
negatively impacted pricing of the Company’s products.
Increasing competition could cause the Company’s future
sales and results of operations to be adversely affected. The
Company has historically operated with little or no backlog and,
therefore, its ability to predict sales for future periods is
limited.
Sales Prices. Future prices the Company charges for its
products may decrease from historical levels, depending on
competitive factors in the Company’s various markets. The
Company has participated in price promotions with its
wholesalers and their retail customers in most of its markets.
The number of markets in which the Company participates in price
promotions and the frequency of such promotions may increase in
the future.
Dependence on Sales in Washington State. A significant
portion of the Company’s sales continue to be in the
Pacific Northwest region, which the Company believes is one of
the most competitive craft beer markets in the United States,
both in terms of number of market participants and consumer
awareness. The Company faces extreme competitive pressure in
Washington state, which is not only the Company’s largest
market but is also its oldest market. Since 1997, the Company
has experienced a decline in sales volume in Washington State of
approximately 17%, significantly impacted by a 12% decline in
2004 volume over 2003 volume. The Company believes that the
Pacific Northwest, and Washington State in particular, offers
significant competition to its products, not only from other
craft brewers but also from the growing wine market and from
flavored alcohol beverages. This intense competition is
magnified because the Company’s brand is viewed as being
relatively mature. Recent focus studies have indicated that,
while the Company’s brand does possess brand awareness
among target consumers, it also appears to not attract key
consumers who seem to be more interested in experimenting with
new products. These recent focus studies have resulted in Craft
Brands focusing its 2005 marketing efforts on the Pacific
Northwest market in an effort to stimulate demand. In addition,
shipments in Washington state in late 2003 and all of 2004
appear to have been significantly impacted by the formation of
Craft Brands. Management believes that the beer industry is
influenced, both positively and negatively, by individual
relationships. In Washington state, where some of those
relationships have existed for many years, the formation of
Craft Brands appears to have had some short-term negative impact
on those relationships. Some of the Company’s relationships
with wholesalers and retailers suffered as a result of the
transition to Craft Brands. The transition took longer than
anticipated and nearly all Company sales staff responsible for
the Washington state market left the Company. While the Company
believes that the Craft Brands sales staff is reestablishing
those relationships and that sales of the Company’s
products will stabilize, the process is expected to take some
time. However, there can be no assurance that the Company will
see any anticipated benefits from these efforts.
Variability of Gross Margin and Cost of Sales. The
Company anticipates that its future gross margins will fluctuate
and may decline as a result of many factors, including shipments
to Craft Brands at a fixed transfer price substantially below
wholesale pricing levels, disproportionate depreciation and
other fixed and semivariable operating costs, depending on the
level of production at the Company’s breweries in relation
to current production capacity. The Company’s high level of
fixed and semivariable operating costs causes gross margin to be
very sensitive to relatively small increases or decreases in
sales volume. In addition, other factors that could affect cost
of sales include changes in freight charges, the availability
and prices of raw materials and packaging materials, the mix
between draft and bottled product sales, the sales mix of
various bottled product packages, and federal or state excise
taxes. Also, if sales volume through the A-B Distribution
Agreement increases, the related fees would increase.
Advertising and Promotional Costs. The Company directly
manages its co-op advertising and promotion program and
limited media advertising in the midwest and eastern United
States, and the Craft Brands
35
joint sales and marketing organization serves the operations of
Redhook and Widmer in the Western Territory by advertising,
marketing, selling and distributing both companies’
products to wholesale outlets. Similar to the Company, Craft
Brands promotes its products through a variety of advertising
programs with its wholesalers; through training and education of
wholesalers and retailers; through promotions at local
festivals, venues, and pubs; by utilizing the pubs located at
the Company’s two breweries; and through price discounting.
Management believes that, in addition to achieving certain
synergies, Craft Brands capitalizes on both companies’
sales and marketing skills and complementary product portfolios.
The Company believes that the combination of the two
brewers’ complementary brand portfolios, led by one focused
sales and marketing organization, will not only deliver
financial benefits, but will also deliver greater impact at the
point of sale. However, Craft Brands has been operational for
less than a year, and predicting future benefits from Crafts
Brands is difficult. There can be no assurance that the Company
will see any further or anticipated benefits from the joint
venture. In the Midwest and eastern United States, the Company
expects to continue to participate in co-op advertising and
promotion programs and limited media, but market and competitive
considerations could require an increase in spending in these
programs.
Customer Acceptance, Consumer Trends and Public
Attitudes. If consumers were unwilling to accept the
Company’s products or if general consumer trends caused a
decrease in the demand for beer, including craft beer, it could
adversely impact the Company’s sales and results of
operations. If the flavored alcohol beverage market, the wine
market, or the spirits market continue to grow, they could draw
consumers away from the Company’s products and have an
adverse effect of the Company’s sales and results of
operations. Further, 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. If beer consumption in general were to come into
disfavor among domestic consumers, or if the domestic beer
industry were subjected to significant additional governmental
regulation, the Company’s sales and results of operations
could be adversely affected.
Effect of Sales Trends on Brewery Efficiency and
Operations. The Company’s breweries have been operating
at production levels substantially below their current and
maximum designed capacities. Operating breweries at low capacity
utilization rates negatively impacts gross margins and operating
cash flows generated by the production facilities. In 1998,
after performing an analysis of the Company’s current and
future production capacity requirements, production at the
Fremont Brewery was permanently curtailed and the assets were
written down to an estimate of their net realizable value. The
Company will continue to evaluate whether it expects to recover
the costs of its two remaining production facilities over the
course of their useful lives. If facts and circumstances
indicate that the carrying value of these long-lived assets may
be impaired, an evaluation of recoverability will be performed
in accordance with FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, by
comparing the carrying value of the assets to projected future
undiscounted cash flows in addition to other quantitative and
qualitative analyses. If management believes that the carrying
value of such assets may not be recoverable, the Company will
recognize an impairment loss by a charge against current
operations.
Income Tax Benefits. As of December 31, 2004, the
Company had approximately $11.9 million of deferred tax
assets, comprised principally of federal net operating loss
carryforwards that expire from 2012 through 2024 and state NOLs
that expire through 2019. Federal NOLs, generally permitted to
be carried forward no more than 20 years, and state NOLs,
generally permitted to be carried forward five to 15 years,
can be used to offset regular tax liabilities in future years.
The recognition of these assets is dependent upon estimates of
future taxable income resulting from future reversals of
existing taxable temporary differences, which have been recorded
as deferred tax liabilities and exceed the deferred tax assets.
As of December 31, 2004, the Company also had a valuation
allowance of $1,154,000, reflected as a reduction of the
Company’s deferred tax assets on its balance sheet. The
Company established the valuation allowance in 2002 and
increased the balance in 2003 and 2004. The Company increased
the valuation allowance by $416,000 in 2004. The valuation
allowance covers a portion of the Company’s deferred tax
assets, specifically certain federal and state NOL carryforwards
that may expire before the Company is able to utilize the tax
benefit. Realization of the benefit is dependent on the
Company’s ability to generate future U.S. taxable
income. To the extent that the Company is unable to generate
adequate taxable income in the future, the Company may not be
able to
36
recognize additional tax benefits and may be required to record
a greater valuation allowance covering expiring NOLs.
Critical Accounting Policies and Estimates
The Company’s financial statements are based upon the
selection and application of significant accounting policies
that require management to make significant estimates and
assumptions. Management believes that the following are some of
the more critical judgment areas in the application of the
Company’s accounting policies that currently affect its
financial condition and results of operations. Judgments and
uncertainties affecting the application of these policies may
result in materially different amounts being reported under
different conditions or using different assumptions.
Income Taxes. The Company records federal and state
income taxes in accordance with FASB Statement of Financial
Accounting Standard (“SFAS”) No. 109,
Accounting for Income Taxes. Deferred income taxes or tax
benefits reflect the tax effect of temporary differences between
the amounts of assets and liabilities for financial reporting
purposes and amounts as measured for tax purposes. The Company
will establish a valuation allowance if it is more likely than
not that these items will either expire before the Company is
able to realize their benefits, or that future deductibility is
uncertain. The valuation allowance is reviewed and adjusted on a
quarterly basis based on management’s assessment of the
realizability of the deferred tax assets. As of
December 31, 2004, the Company had approximately
$11.9 million of deferred tax assets, comprised principally
of federal net operating loss carryforwards (“NOLs”)
that expire from 2012 through 2024 and state NOLs that expire
through 2019. The recognition of these assets is dependent upon
estimates of future taxable income resulting from future
reversals of existing taxable temporary differences, which have
been recorded as deferred tax liabilities and exceed the
deferred tax assets. As of December 31, 2004, the Company
also had a valuation allowance of $1,154,000, reflected as a
reduction of the Company’s deferred tax assets on its
balance sheet. The Company established the valuation allowance
in 2002 and increased the balance in 2003 and 2004. The
valuation allowance covers a portion of the Company’s
deferred tax assets, specifically certain federal and state NOLs
that may expire before the Company is able to utilize the tax
benefit. Realization of the benefit is dependent on the
Company’s ability to generate future U.S. taxable
income. To the extent that the Company continues to be unable to
generate adequate taxable income in future periods, the Company
will not be able to recognize additional tax benefits and may be
required to record a greater valuation allowance covering
potentially expiring NOLs.
Long-Lived Assets. The Company evaluates potential
impairment of long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144
establishes procedures for review of recoverability and
measurement of impairment, if necessary, of long-lived assets,
goodwill and certain identifiable intangibles. When facts and
circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is
performed by comparing the carrying value of the assets to
projected future undiscounted cash flows in addition to other
quantitative and qualitative analyses. Upon indication that the
carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against
current operations. Fixed assets are grouped at the lowest level
for which there are identifiable cash flows when assessing
impairment. During 2004, the Company performed an analysis of
its brewery assets to determine if an impairment might exist.
The Company’s estimate of future undiscounted cash flows
indicated that such carrying values were expected to be
recovered. Nonetheless, it is possible that the estimate of
future undiscounted cash flows may change in the future,
resulting in the need to write down those assets to their fair
value.
Investment in Craft Brands Alliance LLC. The Company has
assessed its investment in Craft Brands pursuant to the
provisions of FIN 46R, Consolidation of Variable
Interest Entities — an Interpretation of ARB
No. 51. FIN 46R clarifies the application of
consolidation accounting for certain entities that do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties or in which equity investors do not have the
characteristics of a controlling financial interest; these
entities are referred to as variable interest entities. Variable
interest entities within the scope of FIN 46R are required
to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entity’s expected
losses, receives a majority
37
of its expected returns, or both. FIN 46R also requires
disclosure of significant variable interests in variable
interest entities for which a company is not the primary
beneficiary. The Company has concluded that its investment in
Craft Brands meets the definition of a variable interest entity
but that the Company is not the primary beneficiary. In
accordance with FIN 46R, the Company has not consolidated
the financial statements of Craft Brands with the financial
statements of the Company, but instead accounted for its
investment in Craft Brands under the equity method, as outlined
by APB No. 18, The Equity Method of Accounting for
Investments in Common Stock. The equity method requires that
the Company recognize its share of the net earnings of Craft
Brands by increasing its investment in Craft Brands in the
Company’s balance sheet and recognizing income from equity
investment in the Company’s statement of operations. A cash
distribution or the Company’s share of a net loss reported
by Craft Brands is reflected as a decrease in investment in
Craft Brands in the Company’s balance sheet. The Company
does not control the amount or timing of cash distributions by
Craft Brands. In 2004, the Company recognized $1,123,000 of
undistributed earnings related to its investment in Craft Brands
and received cash distributions of $903,000, representing its
share of the net cash flow of Craft Brands. The Company’s
share of the earnings of Craft Brands contributed a significant
portion of income to the Company’s results of operations.
Separate financial statements for Craft Brands are filed with
the Company’s Form 10-K for the year ended
December 31, 2004, Part IV., in Item 15.
Exhibits and Financial Statement Schedules, in accordance
with Rule 3-09 of Regulation S-X. The Company will
periodically review its investment in Craft Brands to insure
that it complies with the guidelines prescribed by FIN 46R.
Revenue Recognition. The Company recognizes revenue from
product sales, net of excise taxes, discounts and certain fees
the Company must pay in connection with sales to A-B, when the
products are shipped to customers. Although title and risk of
loss do not transfer until delivery of the Company’s
products to A-B or the A-B distributor, the Company recognizes
revenue upon shipment rather than when title passes because the
time lag between shipment and delivery is short and product
damage claims and returns are immaterial. The Company recognizes
revenue on retail sales at the time of sale. The Company
recognizes revenue from events at the time of the event.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs — an Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 requires idle
facility expenses, abnormal freight, handling costs, and wasted
material (spoilage) to be recognized as current-period
charges. In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. The adoption of this Statement will not have
a material effect on the Company’s financial condition or
results of operation.
In December 2004, the FASB issued SFAS No. 123R,
Shared-Based Payment, which revises
SFAS No. 123 and supercedes APB No. 25. SFAS
No. 123R requires all share-based payments to employees to
be recognized as expenses in the statement of operations based
on their fair values and vesting periods.
SFAS No. 123R is effective as of the first interim or
annual reporting period that begins after June 15, 2005.
The cumulative effect of initially applying
SFAS No. 123R is recognized as of the required
effective date. The Company is currently in the process of
determining the impact this statement will have on its financial
condition and results of operations.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
The Company has assessed its vulnerability to certain market
risks, including interest rate risk associated with financial
instruments included in cash and cash equivalents and long-term
debt. Due to the nature of these investments and the
Company’s investment policies, the Company believes that
the risk associated with interest rate fluctuations related to
these financial instruments does not pose a material risk.
The Company did not have any derivative financial instruments as
of December 31, 2004.
38
|
|
| Item 8. |
Financial Statements and Supplementary Data |
REDHOOK ALE BREWERY, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Audited Financial Statements:
|
|
|
|
|
| |
|
|
|
|
40 |
|
| |
|
|
|
|
41 |
|
| |
|
|
|
|
42 |
|
| |
|
|
|
|
43 |
|
| |
|
|
|
|
44 |
|
| |
|
|
|
|
45 |
|
| |
|
|
|
|
46 |
|
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Redhook Ale Brewery, Incorporated
Woodinville, Washington
We have audited the accompanying balance sheet of Redhook Ale
Brewery, Incorporated as of December 31, 2004, and the
related statements of operations, common stockholders’
equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. 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 audit provides 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 Redhook Ale Brewery, Incorporated at December 31, 2004,
and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Seattle, Washington
February 11, 2005
40
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors
Redhook Ale Brewery, Incorporated
We have audited the accompanying balance sheet of Redhook Ale
Brewery, Incorporated as of December 31, 2003, and the
related statements of operations, common stockholders’
equity, and cash flows for each of the two years in the period
ended December 31, 2003. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. 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.
Since the date of completion of our audit of the accompanying
financial statements as of December 31, 2003 and for each
of the two years in the period then ended, and initial issuance
of our report thereon dated January 23, 2004, which report
contained an explanatory paragraph regarding the Company’s
ability to continue as a going concern, the Company, as
discussed in Note 1, has restructured its relationship with
Anheuser-Busch, Incorporated pursuant to an exchange and
recapitalization agreement and entered into a related new
distribution agreement. Therefore, the conditions that raised
substantial doubt about whether the Company will continue as a
going concern no longer exist.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Redhook Ale Brewery, Incorporated as of December 31,
2003, and the results of its operations and its cash flows for
each of the two years in the period ended December 31,
2003, in conformity with accounting principles generally
accepted in the United States.
Seattle, Washington
January 23, 2004,
except for the fourth paragraph of note 1,
as to which the date is July 1, 2004
41
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
| |
|
Current Assets:
|
|
|
|
|
|
|
|
|
| |
Cash and Cash Equivalents
|
|
$ |
5,589,621 |
|
|
$ |
6,123,349 |
|
| |
Accounts Receivable
|
|
|
1,123,475 |
|
|
|
1,686,735 |
|
| |
Trade Receivable from Craft Brands Alliance LLC
|
|
|
398,707 |
|
|
|
— |
|
| |
Inventories
|
|
|
3,000,309 |
|
|
|
3,342,006 |
|
| |
Other
|
|
|
506,328 |
|
|
|
247,038 |
|
| |
|
|
|
|
|
|
| |
|
Total Current Assets
|
|
|
10,618,440 |
|
|
|
11,399,128 |
|
|
Fixed Assets, Net
|
|
|
63,018,806 |
|
|
|
65,699,658 |
|
|
Receivable from Craft Brands Alliance LLC
|
|
|
277,144 |
|
|
|
— |
|
|
Investment in Craft Brands Alliance LLC
|
|
|
192,857 |
|
|
|
— |
|
|
Other Assets
|
|
|
20,977 |
|
|
|
32,256 |
|
| |
|
|
|
|
|
|
| |
|
|
Total Assets
|
|
$ |
74,128,224 |
|
|
$ |
77,131,042 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS’
EQUITY |
| |
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts Payable
|
|
$ |
1,815,380 |
|
|
$ |
1,983,377 |
|
| |
Trade Payable to Craft Brands Alliance LLC
|
|
|
431,089 |
|
|
|
— |
|
| |
Accrued Salaries, Wages and Payroll Taxes
|
|
|
1,220,248 |
|
|
|
1,561,526 |
|
| |
Refundable Deposits
|
|
|
2,526,088 |
|
|
|
2,272,328 |
|
| |
Other Accrued Expenses
|
|
|
515,123 |
|
|
|
621,185 |
|
| |
Current Portion of Long-Term Debt
|
|
|
450,000 |
|
|
|
450,000 |
|
| |
|
|
|
|
|
|
| |
|
Total Current Liabilities
|
|
|
6,957,928 |
|
|
|
6,888,416 |
|
| |
|
|
|
|
|
|
|
Long-Term Debt, Net of Current Portion
|
|
|
5,175,000 |
|
|
|
5,625,000 |
|
| |
|
|
|
|
|
|
|
Deferred Income Taxes, Net
|
|
|
468,798 |
|
|
|
468,798 |
|
| |
|
|
|
|
|
|
|
Other Liabilities
|
|
|
64,903 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
Convertible Redeemable Preferred Stock
|
|
|
— |
|
|
|
16,232,655 |
|
| |
|
|
|
|
|
|
|
Common Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
| |
Common Stock, Par Value $0.005 per Share, Authorized,
50,000,000 Shares; Issued and Outstanding,
8,188,199 Shares in 2004 and 6,226,306 Shares in 2003
|
|
|
40,941 |
|
|
|
31,132 |
|
| |
Additional Paid-In Capital
|
|
|
68,761,766 |
|
|
|
54,250,059 |
|
| |
Retained Earnings (Deficit)
|
|
|
(7,341,112 |
) |
|
|
(6,365,018 |
) |
| |
|
|
|
|
|
|
| |
|
Total Common Stockholders’ Equity
|
|
|
61,461,595 |
|
|
|
47,916,173 |
|
| |
|
|
|
|
|
|
| |
|
|
Total Liabilities, Preferred Stock and Common Stockholders’
Equity
|
|
$ |
74,128,224 |
|
|
$ |
77,131,042 |
|
| |
|
|
|
|
|
|
See Accompanying Notes to Financial Statements
42
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Sales
|
|
$ |
36,639,552 |
|
|
$ |
42,212,771 |
|
|
$ |
40,912,532 |
|
|
Less Excise Taxes
|
|
|
3,267,513 |
|
|
|
3,497,714 |
|
|
|
3,464,762 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
33,372,039 |
|
|
|
38,715,057 |
|
|
|
37,447,770 |
|
|
Cost of Sales
|
|
|
27,171,255 |
|
|
|
28,701,946 |
|
|
|
27,597,345 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,200,784 |
|
|
|
10,013,111 |
|
|
|
9,850,425 |
|
|
Selling, General and Administrative Expenses
|
|
|
7,639,290 |
|
|
|
11,689,410 |
|
|
|
10,909,476 |
|
|
Income from Equity Investment in Craft Brands
|
|
|
1,123,283 |
|
|
|
— |
|
|
|
— |
|
|
Craft Brands Alliance Shared Formation Expenses
|
|
|
534,628 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(849,851 |
) |
|
|
(1,676,299 |
) |
|
|
(1,059,051 |
) |
|
Interest Expense
|
|
|
189,662 |
|
|
|
191,404 |
|
|
|
229,916 |
|
|
Other Income (Expense) — Net
|
|
|
115,619 |
|
|
|
58,891 |
|
|
|
30,074 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(923,894 |
) |
|
|
(1,808,812 |
) |
|
|
(1,258,893 |
) |
|
Income Tax Provision (Benefit)
|
|
|
30,000 |
|
|
|
29,801 |
|
|
|
(125,610 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(953,894 |
) |
|
$ |
(1,838,613 |
) |
|
$ |
(1,133,283 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
| |
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Financial Statements
43
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
Total | |
| |
|
| |
|
Additional | |
|
Retained | |
|
Common | |
| |
|
|
|
Par | |
|
Paid-In | |
|
Earnings | |
|
Stockholders’ | |
| |
|
Shares | |
|
Value | |
|
Capital | |
|
(Deficit) | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, January 1, 2002
|
|
|
6,920,046 |
|
|
$ |
34,600 |
|
|
$ |
55,743,429 |
|
|
$ |
(3,304,322 |
) |
|
$ |
52,473,707 |
|
| |
Repurchase of Common Stock
|
|
|
(593,900 |
) |
|
|
(2,969 |
) |
|
|
(1,266,248 |
) |
|
|
— |
|
|
|
(1,269,217 |
) |
| |
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44,400 |
) |
|
|
(44,400 |
) |
| |
Net Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,133,283 |
) |
|
|
(1,133,283 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
6,326,146 |
|
|
|
31,631 |
|
|
|
54,477,181 |
|
|
|
(4,482,005 |
) |
|
|
50,026,807 |
|
| |
Repurchase of Common Stock
|
|
|
(101,440 |
) |
|
|
(507 |
) |
|
|
(230,160 |
) |
|
|
— |
|
|
|
(230,667 |
) |
| |
Other, Net
|
|
|
1,600 |
|
|
|
8 |
|
|
|
3,038 |
|
|
|
(44,400 |
) |
|
|
(41,354 |
) |
| |
Net Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,838,613 |
) |
|
|
(1,838,613 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
6,226,306 |
|
|
|
31,132 |
|
|
|
54,250,059 |
|
|
|
(6,365,018 |
) |
|
|
47,916,173 |
|
| |
Issuance of Common Stock to A-B in Exchange for Series B
Preferred Stock
|
|
|
1,808,243 |
|
|
|
9,041 |
|
|
|
14,245,814 |
|
|
|
— |
|
|
|
14,254,855 |
|
| |
Issuance of Common Stock
|
|
|
153,650 |
|
|
|
768 |
|
|
|
265,893 |
|
|
|
— |
|
|
|
266,661 |
|
| |
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,200 |
) |
|
|
(22,200 |
) |
| |
Net Loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(953,894 |
) |
|
|
(953,894 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
8,188,199 |
|
|
$ |
40,941 |
|
|
$ |
68,761,766 |
|
|
$ |
(7,341,112 |
) |
|
$ |
61,461,595 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Financial Statements
44
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(953,894 |
) |
|
$ |
(1,838,613 |
) |
|
$ |
(1,133,283 |
) |
|
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Depreciation and Amortization
|
|
|
2,944,412 |
|
|
|
3,024,536 |
|
|
|
3,092,441 |
|
| |
Deferred Income Taxes
|
|
|
— |
|
|
|
— |
|
|
|
(106,542 |
) |
| |
Loss on Disposal of Fixed Assets
|
|
|
— |
|
|
|
— |
|
|
|
97,122 |
|
| |
Income from Equity Investment in Craft Brands In Excess of Cash
Distributions
|
|
|
(219,901 |
) |
|
|
— |
|
|
|
— |
|
| |
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts Receivable
|
|
|
563,260 |
|
|
|
(196,218 |
) |
|
|
(84,188 |
) |
| |
|
Trade Receivable from Craft Brands Alliance LLC
|
|
|
(398,707 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Inventories
|
|
|
341,697 |
|
|
|
(509,579 |
) |
|
|
306,863 |
|
| |
|
Other Current Assets
|
|
|
(259,290 |
) |
|
|
(8,770 |
) |
|
|
(69,919 |
) |
| |
|
Other Assets
|
|
|
4,400 |
|
|
|
(4,400 |
) |
|
|
53,765 |
|
| |
|
Accounts Payable and Other Accrued Expenses
|
|
|
(274,059 |
) |
|
|
63,477 |
|
|
|
417,658 |
|
| |
|
Trade Payable to Craft Brands Alliance LLC
|
|
|
431,089 |
|
|
|
— |
|
|
|
— |
|
| |
|
Accrued Salaries, Wages and Payroll Taxes
|
|
|
(341,278 |
) |
|
|
(73,937 |
) |
|
|
(22,155 |
) |
| |
|
Refundable Deposits
|
|
|
253,760 |
|
|
|
329,525 |
|
|
|
546,348 |
|
| |
|
Other Liabilities
|
|
|
64,903 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
2,156,392 |
|
|
|
786,021 |
|
|
|
3,098,110 |
|
| |
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for Fixed Assets
|
|
|
(252,098 |
) |
|
|
(991,985 |
) |
|
|
(705,416 |
) |
|
Investment in Craft Brands Alliance LLC
|
|
|
(250,100 |
) |
|
|
— |
|
|
|
— |
|
|
Other, Net
|
|
|
(4,583 |
) |
|
|
(417 |
) |
|
|
(29,912 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(506,781 |
) |
|
|
(992,402 |
) |
|
|
(735,328 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment to A-B pursuant to Exchange and Recapitalization
Agreement
|
|
|
(2,000,000 |
) |
|
|
— |
|
|
|
— |
|
|
Principal Payments on Debt
|
|
|
(450,000 |
) |
|
|
(450,000 |
) |
|
|
(450,000 |
) |
|
Repurchase of Common Stock
|
|
|
— |
|
|
|
(230,667 |
) |
|
|
(1,269,217 |
) |
|
Issuance of Common Stock
|
|
|
266,661 |
|
|
|
3,046 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(2,183,339 |
) |
|
|
(677,621 |
) |
|
|
(1,719,217 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(533,728 |
) |
|
|
(884,002 |
) |
|
|
643,565 |
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Beginning of Year
|
|
|
6,123,349 |
|
|
|
7,007,351 |
|
|
|
6,363,786 |
|
| |
|
|
|
|
|
|
|
|
|
| |
End of Year
|
|
$ |
5,589,621 |
|
|
$ |
6,123,349 |
|
|
$ |
7,007,351 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Disposal of Fixed Assets in Exchange for Related Deposit
Liability
|
|
$ |
— |
|
|
$ |
603,825 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Issuance of 1,808,243 Shares of Common Stock to A-B and
Payment of $2,000,000 to A-B in Exchange for
1,289,872 Shares of Series B Preferred Stock Held by
A-B
|
|
$ |
14,232,655 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Financial Statements
45
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Redhook Ale Brewery, Incorporated (the “Company”) was
formed in 1981 to brew and sell craft beer. The Company produces
its specialty bottled and draft products in its two
Company-owned breweries. The Washington Brewery, located in the
Seattle suburb of Woodinville, Washington, began limited
operations in late 1994 after completion of the initial phase of
construction. Additional phases of construction on the
Washington Brewery were completed in 1996 and 1997. The
Company’s New Hampshire Brewery, located in Portsmouth,
New Hampshire, began brewing operations in late 1996. The
fermentation capacity at the New Hampshire Brewery was
expanded during the first half of 2003. Each brewery also
operates a pub on the premises, promoting the Company’s
products, offering dining and entertainment facilities, and
selling retail merchandise. Prior to 1999, the Company also
operated a third brewery, located in the Fremont neighborhood of
Seattle, Washington. In 1998, brewing operations at the Fremont
brewery location were curtailed, but the Company continued to
operate its Trolleyman Pub at the Fremont location as well as
house the Company’s corporate offices. In
September 2002, the Company closed the Trolleyman Pub and
moved its corporate offices to the Washington Brewery location.
Since 1997, the Company’s products have been distributed in
the United States in 48 states. Prior to establishing a
distribution relationship with Anheuser-Busch, Incorporated
(“A-B”) in 1994, the Company distributed its products
regionally through distributors, many of which were part of the
A-B distribution network, in eight western states:
Washington, California (northern), Oregon, Idaho, Montana,
Wyoming, Colorado and Alaska. In October 1994, the Company
entered into a distribution alliance (“Distribution
Alliance” or the “Alliance”) with A-B, consisting
of a national distribution agreement and an investment by A-B in
the Company (the “A-B Investment Agreement”). The
Alliance gave the Company access to A-B’s national
distribution network to distribute its products while existing
wholesalers continued to distribute the Company’s products
outside of the Distribution Alliance. Pursuant to the
A-B Investment Agreement, A-B invested approximately
$30 million to purchase 1,289,872 shares of the
Company’s convertible redeemable Series B Preferred
Stock (the “Series B Preferred Stock”) and
953,470 shares of the Company’s Common Stock
(“Common Stock”), including 716,714 shares issued
concurrent with the Company’s initial public offering.
In August 1995, the Company completed the sale of
2,193,492 shares of Common Stock through an initial public
offering in addition to the 716,714 common shares purchased by
A-B. The net proceeds of the offerings totaled approximately
$46 million.
On July 1, 2004, the Company completed the restructuring of
its ongoing relationship with A-B. The terms of an exchange and
recapitalization agreement provided that the Company issue
1,808,243 shares of Common Stock to A-B in exchange for
1,289,872 shares of Series B Preferred Stock held by
A-B. The Series B Preferred Stock, reflected on the
Company’s balance sheet at approximately
$16.3 million, was cancelled. In connection with the
exchange, the Company also paid $2.0 million to A-B in
November 2004. Also on July 1, 2004, the Company entered
into a new distribution agreement with A-B (the
“A-B Distribution Agreement”) pursuant to which
the Company continues to sell its product in the midwest and
eastern United States through sales to A-B. The new
A-B Distribution Agreement has a term that expires on
December 31, 2014, subject to automatic renewal for an
additional ten-year period unless A-B provides written notice of
non-renewal to the Company on or prior to June 30, 2014.
The A-B Distribution Agreement is also subject to early
termination, by either party, upon the occurrence of certain
events.
On July 1, 2004, the Company also entered into definitive
agreements with Widmer Brothers Brewing Company
(“Widmer”) with respect to the operation of a joint
venture, Craft Brands Alliance LLC (“Craft Brands”).
Pursuant to these agreements, the Company manufactures and sells
its product to Craft Brands at a price substantially below
wholesale pricing levels; Craft Brands, in turn, advertises,
markets, sells and distributes the product to wholesale outlets
in the western United States through a distribution agreement
between Craft Brands and A-B.
46
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
| 2. |
Significant Accounting Policies |
|
|
|
Cash and Cash Equivalents |
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. The carrying amount of cash equivalents
approximates fair value because of the short-term maturity of
these instruments.
Accounts receivable is comprised of trade receivables due from
wholesalers and A-B for beer sales and promotional product.
Because of state liquor laws and each wholesaler’s
agreement with A-B, the Company does not have collectibility
issues related to the sales of its beer products. Accordingly,
the Company does not regularly provide an allowance for doubtful
accounts for beer sales. The Company has provided an allowance
for promotional merchandise that has been invoiced to the
wholesaler. Accounts receivable on the Company’s balances
sheets included an allowance for doubtful accounts of $37,000
and $10,000 as of December 31, 2004 and 2003, respectively.
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company
regularly reviews its inventories for the presence of obsolete
product attributed to age, seasonality, and quality. Inventories
that are considered obsolete are written off or adjusted to
carrying value. Inventories on the Company’s balance sheets
as of December 31, 2004 and 2003 do not include obsolete
inventories requiring reserves.
Fixed assets are carried at cost less accumulated depreciation
and accumulated amortization. The costs of repairs and
maintenance are expensed when incurred, while expenditures for
improvements that extend the useful life of an asset are
capitalized. When assets are retired or sold, the asset cost and
related accumulated depreciation or accumulated amortization are
eliminated with any remaining gain or loss reflected in the
statement of operations. Depreciation and amortization of fixed
assets is provided on the straight-line method over the
following estimated useful lives:
| |
|
|
|
|
|
Buildings
|
|
|
31 - 40 years |
|
|
Brewery equipment
|
|
|
10 - 25 years |
|
|
Furniture, fixtures and other equipment
|
|
|
2 - 10 years |
|
|
Vehicles
|
|
|
5 years |
|
|
|
|
Investment in Craft Brands Alliance LLC |
The Company has assessed its investment in Craft Brands pursuant
to the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 46 Revised,
Consolidation of Variable Interest Entities — an
Interpretation of ARB No. 51
(“FIN 46R”). FIN 46R clarifies the
application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest;
these entities are referred to as variable interest entities.
Variable interest entities within the scope of FIN 46R are
required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity’s
expected losses, receives a majority of its expected returns, or
both. FIN 46R also requires disclosure of significant
variable interests in variable interest entities for which a
company is not the
47
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
primary beneficiary. The Company has concluded that its
investment in Craft Brands meets the definition of a variable
interest entity but that the Company is not the primary
beneficiary. In accordance with FIN 46R, the Company has
not consolidated the financial statements of Craft Brands with
the financial statements of the Company, but instead accounted
for its investment in Craft Brands under the equity method, as
outlined by Accounting Principle Board Opinion (“APB”)
No. 18, The Equity Method of Accounting for Investments
in Common Stock. The equity method requires that the Company
recognize its share of the net earnings of Craft Brands by
increasing its investment in Craft Brands in the Company’s
balance sheet and recognizing income from equity investment in
the Company’s statement of operations. A cash distribution
or the Company’s share of a net loss reported by Craft
Brands is reflected as a decrease in investment in Craft Brands
in the Company’s balance sheet. The Company does not
control the amount or timing of cash distributions by Craft
Brands. The Company will periodically review its investment in
Craft Brands to insure that it complies with the guidelines
prescribed by FIN 46R.
The Company evaluates potential impairment of long-lived assets
in accordance with FASB Statement of Financial Accounting
Standard (“SFAS”) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 establishes procedures for review of
recoverability and measurement of impairment, if necessary, of
long-lived assets, goodwill and certain identifiable
intangibles. When facts and circumstances indicate that the
carrying values of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the
carrying value of the assets to projected future undiscounted
cash flows in addition to other quantitative and qualitative
analyses. Upon indication that the carrying value of such assets
may not be recoverable, the Company recognizes an impairment
loss by a charge against current operations. Fixed assets are
grouped at the lowest level for which there are identifiable
cash flows when assessing impairment. During 2004, the Company
performed an analysis of its brewery assets to determine if an
impairment might exist. The Company’s estimate of future
undiscounted cash flows indicated that such carrying values were
expected to be recovered.
The Company recognizes revenue from product sales, net of excise
taxes, discounts and certain fees the Company must pay in
connection with sales to A-B, when the products are shipped to
customers. Although title and risk of loss do not transfer until
delivery of the Company’s products to A-B or the A-B
distributor, the Company recognizes revenue upon shipment rather
than when title passes because the time lag between shipment and
delivery is short and product damage claims and returns are
immaterial. The Company recognizes revenue on retail sales at
the time of sale. The Company recognizes revenue from events at
the time of the event.
|
|
|
Shipping and Handling Costs |
Costs incurred for the shipping of finished goods are included
in cost of sales in the Company’s statements of operations.
The Company records federal and state income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes,
whereby deferred taxes are provided for the temporary
differences between the financial reporting basis and the tax
basis of the Company’s assets and liabilities. These
deferred tax assets and liabilities are measured under the
provisions of the currently enacted tax laws. The Company will
establish a valuation allowance if it is more likely than not
that these items will either expire before the Company is able
to realize their benefits, or that future deductibility is
uncertain.
48
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
Advertising costs, comprised of radio, print and outdoor
advertising, sponsorships and printed product information, as
well as costs to produce these media, are expensed as incurred.
For the years ended December 31, 2004, 2003 and 2002,
advertising expenses totaling $728,000, $1,706,000 and
$1,655,000, respectively, are reflected as selling, general and
administrative expenses in the Company’s statements of
operation.
The Company operates in one principal business segment as a
manufacturer of beer and ales across domestic markets. The
Company believes that its pub operations and brewery operations,
whether considered individually or in combination, do not
constitute a separate segment under SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. The Company believes that its two brewery
operations are functionally and financially similar. The Company
operates its two pubs as an extension of its marketing of the
Company’s products and views their primary function to be
promotion of the Company’s products.
The Company accounts for its employee stock-based compensation
plans using the intrinsic value method, as prescribed by APB
No. 25, Accounting for Stock Issued to Employees.
Under APB 25, because the Company’s employee stock
options are granted at an exercise price equal to the fair
market value of the underlying Common Stock on the date of the
grant, no compensation expense is recognized. As permitted, the
Company has elected to adopt the disclosure only provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148.
The following table illustrates the effect on net income (loss)
and earnings (loss) per share for the years ended
December 31, 2004, 2003 and 2002 had compensation cost for
the Company’s stock options been recognized based upon the
estimated fair value on the grant date under the fair value
methodology:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss), as reported
|
|
$ |
(953,894 |
) |
|
$ |
(1,838,613 |
) |
|
$ |
(1,133,283 |
) |
|
Add: Stock-based employee compensation expense as reported under
APB 25
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Less: Stock-based employee compensation expense determined under
fair value based method for all options, net of related tax
effects
|
|
|
(194,718 |
) |
|
|
(260,220 |
) |
|
|
(219,518 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(1,148,612 |
) |
|
$ |
(2,098,833 |
) |
|
$ |
(1,352,801 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
| |
Basic — pro forma
|
|
$ |
(0.16 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.21 |
) |
| |
Diluted — as reported
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
| |
Diluted — pro forma
|
|
$ |
(0.16 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.21 |
) |
49
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
The fair value of options granted (which is amortized to expense
over the option vesting period in determining the pro forma
impact) is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected life of option
|
|
|
5 yrs. |
|
|
|
5 yrs. |
|
|
|
5 yrs. |
|
|
Risk-free interest rate
|
|
|
3.88 |
% |
|
|
2.63 |
% |
|
|
3.25 |
% |
|
Volatility of the Company’s stock
|
|
|
52.0 |
% |
|
|
52.5 |
% |
|
|
63.3 |
% |
|
Dividend yield on the Company’s stock
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The weighted average estimated fair value of options granted
during the years ended December 31, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Total number of options granted
|
|
|
16,000 |
|
|
|
12,000 |
|
|
|
296,800 |
|
|
Estimated fair value of each option granted
|
|
$ |
1.08 |
|
|
$ |
0.97 |
|
|
$ |
1.04 |
|
|
Total estimated fair value of all options granted
|
|
$ |
17,000 |
|
|
$ |
12,000 |
|
|
$ |
309,000 |
|
In accordance with SFAS No. 148, the weighted average
estimated fair value of stock options granted is required to be
based on a theoretical statistical model using the preceding
Black-Scholes assumptions. In actuality, because Company stock
options do not trade on a secondary exchange, employees can
receive no value nor derive any benefit from holding stock
options under these plans without an increase, above the grant
price, in the market price of the Company’s stock. Such an
increase in stock price would benefit all stockholders
commensurately. Refer to the table of options currently
outstanding in Note 8 for the weighted average exercise
price for options granted during 2004, 2003 and 2002.
|
|
|
Earnings (Loss) per Share |
The Company follows SFAS No. 128, Earnings per
Share. Basic earnings (loss) per share is calculated using
the weighted average number of shares of Common Stock
outstanding. The calculation of adjusted weighted average shares
outstanding for purposes of computing diluted earnings (loss)
per share includes the dilutive effect of all outstanding
convertible redeemable preferred stock and outstanding stock
options for the periods when the Company reports net income. The
convertible preferred stock and outstanding stock options have
been excluded from the calculation of diluted loss per share for
the years ended December 31, 2004, 2003 and 2002, because
their effect is antidilutive. The calculation uses the treasury
stock method and the as if converted method in determining the
resulting incremental average equivalent shares outstanding as
applicable.
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those
estimates.
|
|
|
Fair Value of Financial Instruments |
The Company’s balance sheets include the following
financial instruments: cash and cash equivalents, accounts
receivable, inventory, accounts payable, accrued expenses,
long-term debt and convertible redeemable preferred stock. The
Company believes the carrying amounts of current assets and
liabilities and indebtedness in the balance sheets approximate
the fair value. The carrying value of convertible redeemable
preferred stock in the balance sheets as of December 31,
2003 representing the Company’s outstanding Series B
Preferred Stock, was based upon the anticipated redemption
value, which the Company believed
50
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
approximated fair value. On July 1, 2004, the Company
issued 1,808,243 shares of Common Stock to A-B in exchange
for 1,289,872 shares of Series B Preferred Stock held
by A-B. The Series B Preferred Stock was cancelled. In
connection with the exchange, the Company also paid
$2.0 million to A-B in November 2004.
|
|
|
Recently Issued Accounting Standards |
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs — an Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 requires idle
facility expenses, abnormal freight, handling costs, and wasted
material (spoilage) to be recognized as current-period charges.
In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities.
SFAS No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
The adoption of this Statement will not have a material effect
on the Company’s financial condition or results of
operation.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which revises SFAS No. 123
and supersedes APB No. 25. SFAS No. 123R requires
all share-based payments to employees to be recognized as
expenses in the statement of operations based on their fair
values and vesting periods. SFAS No. 123R is effective
as of the first interim or annual reporting period that begins
after June 15, 2005. The cumulative effect of initially
applying SFAS No. 123R is recognized as of the
required effective date. The Company is currently in the process
of determining the impact this statement will have on its
financial condition and results of operations.
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Raw materials
|
|
$ |
1,122,290 |
|
|
$ |
1,184,733 |
|
|
Work in process
|
|
|
833,846 |
|
|
|
900,388 |
|
|
Finished goods
|
|
|
350,543 |
|
|
|
408,561 |
|
|
Promotional merchandise
|
|
|
480,338 |
|
|
|
631,147 |
|
|
Packaging materials
|
|
|
213,292 |
|
|
|
217,177 |
|
| |
|
|
|
|
|
|
| |
|
$ |
3,000,309 |
|
|
$ |
3,342,006 |
|
| |
|
|
|
|
|
|
Work in process is beer held in fermentation prior to the
filtration and packaging process.
51
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
Fixed assets consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Brewery equipment
|
|
$ |
46,191,232 |
|
|
$ |
45,941,954 |
|
|
Buildings
|
|
|
35,753,363 |
|
|
|
35,753,363 |
|
|
Land and improvements
|
|
|
4,601,427 |
|
|
|
4,601,427 |
|
|
Furniture, fixtures and other equipment
|
|
|
2,094,100 |
|
|
|
2,055,809 |
|
|
Vehicles
|
|
|
81,730 |
|
|
|
81,730 |
|
|
Construction in progress
|
|
|
2,096 |
|
|
|
37,567 |
|
| |
|
|
|
|
|
|
| |
|
|
88,723,948 |
|
|
|
88,471,850 |
|
|
Less accumulated depreciation and amortization
|
|
|
25,705,142 |
|
|
|
22,772,192 |
|
| |
|
|
|
|
|
|
| |
|
$ |
63,018,806 |
|
|
$ |
65,699,658 |
|
| |
|
|
|
|
|
|
|
|
| 5. |
Craft Brands Alliance LLC |
On July 1, 2004, the Company entered into agreements with
Widmer with respect to the operation of Craft Brands. The
Company also entered into a supply, distribution and licensing
agreement with Craft Brands pursuant to which Craft Brands
purchases products from the Company and advertises, markets,
sells and distributes these products in the western United
States. The Company and Widmer also entered into a restated
operating agreement with Craft Brands (the “Operating
Agreement”) that governs the operations of Craft Brands and
the obligations of its members.
The Operating Agreement requires the Company to make certain
capital contributions to support the operations of Craft Brands.
Contemporaneous with the execution of the Operating Agreement,
the Company was obligated to make a 2004 sales and marketing
capital contribution in the amount of $250,000. The Operating
Agreement designated this sales and marketing capital
contribution to be used by Craft Brands for expenses related to
the marketing, advertising, and promotion of the Company’s
products (“2004 Special Marketing Expense”). The
Operating Agreement also requires an additional sales and
marketing contribution in 2008 if the volume of sales of Redhook
products in 2007 in the Craft Brands territory is less than 92%
of the volume of sales of Redhook products in 2003 in the Craft
Brands territory. The 2008 contribution, if one is required,
cannot exceed $750,000 and will be required to be paid by the
Company in no more than three equal installments made on or
before February 1, 2008, April 1, 2008, and
July 1, 2008. Widmer has an identical obligation under the
Operating Agreement with respect to the 2008 sales and marketing
capital contribution and sales of its product. The Operating
Agreement also obligates the Company and Widmer to make other
additional capital contributions only upon the request and
consent of the Craft Brands’ board.
To the extent cash flow from operations and borrowings from
financial institutions is not sufficient for Craft Brands to
meet its obligations, the Company and Widmer are obligated to
lend to Craft Brands the funds the president of Craft Brands
deems necessary to meet such obligations.
The Operating Agreement additionally addresses the allocation of
profits and losses of Craft Brands. After giving effect to the
allocation of the 2004 Special Marketing Expense, which is
allocated 100% to the Company up to the $250,000 sales and
marketing capital contribution, the remaining profits and losses
of Craft Brands are allocated between the Company and Widmer
based on the cash flow percentages of 42% and 58%, respectively.
Net cash flow, if any, will generally be distributed monthly to
the Company and Widmer based upon the cash flow percentages. No
distribution will be made to the Company or Widmer unless, after
the distribution is made, the assets of Craft Brands will be in
excess of its liabilities, with the exception of
52
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
liabilities to members, and Craft Brands will be able to pay its
debts as they become due in the ordinary course of business.
On July 1, 2004, the Company made the required 2004 sales
and marketing capital contribution to Craft Brands in an amount
equal to $250,000. For the six months ended December 31,
2004, the Company’s share of Craft Brands’ net income
totaled $1,123,000. This share of Craft Brands’ profit was
net of $115,000 of the 2004 Special Marketing Expense that had
been incurred by Craft Brands during the same period and was
fully allocated to the Company. During 2004, the Company
received cash distributions of $903,000, representing its share
of the net cash flow of Craft Brands. In January 2005, the
Company received an additional $277,000 in cash distributions,
reflected on the Company’s balance sheet as of
December 31, 2004 as a receivable from Craft Brands. In
July 2004, the Company also made a member loan of $150,000
to Craft Brands. Craft Brands repaid the entire loan and accrued
interest in December 2004. In conjunction with the sale of
Redhook product to Craft Brands, the Company’s balance
sheet as of December 31, 2004 reflects a trade payable due
to Craft Brands of approximately $431,000 and a trade receivable
due from Craft Brands of approximately $399,000. Separate
financial statements for Craft Brands are filed with the
Company’s Form 10-K for the year ended
December 31, 2004, Part IV., in Item 15.
Exhibits and Financial Statement Schedules, in accordance
with Rule 3-09 of Regulation S-X.
During the formation of Craft Brands, both the Company and
Widmer incurred certain start-up expenses. During the period
March 15, 2004 through June 30, 2004, while the
companies sought the regulatory approval required for Craft
Brands to become fully operational, the Company and Widmer
agreed to share certain sales-related costs, primarily salaries
and overhead. The Company’s share of those costs totaled
$535,000 for the year ended December 31, 2004, and are
reflected in the Company’s statement of operations as
selling, general and administrative expenses.
Long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Term Loan, payable to bank monthly at $37,500 plus accrued
interest; interest at 4.2% at December 31, 2004 due
June 5, 2007
|
|
$ |
5,625,000 |
|
|
$ |
6,075,000 |
|
|
Current portion
|
|
|
(450,000 |
) |
|
|
(450,000 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
5,175,000 |
|
|
$ |
5,625,000 |
|
| |
|
|
|
|
|
|
Annual principal payments required on debt:
| |
|
|
|
|
|
2005
|
|
|
450,000 |
|
|
2006
|
|
|
450,000 |
|
|
2007
|
|
|
4,725,000 |
|
| |
|
|
|
| |
|
$ |
5,625,000 |
|
| |
|
|
|
The Company has a credit agreement with a bank under which a
term loan (the “Term Loan”) is provided. The Term
Loan, which originated in June 1997 upon the conversion of a
$9 million secured credit facility and was amended in June
2001, matures on June 5, 2007 and has a 20 year
amortization schedule. The credit agreement also provided for a
$2 million revolving credit facility; however, the Company
did not renew the revolving facility upon the July 1, 2004
expiration of the commitment period. There were no borrowings
outstanding under the revolving facility at the time of its
expiration.
53
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Term Loan is secured by substantially all of the
Company’s assets. Through June 4, 2002, interest on
the Term Loan accrued at a variable rate based on the London
Inter Bank Offered Rate (“LIBOR”) plus 1.25%.
Since June 5, 2002, interest on the Term Loan has accrued
at LIBOR plus 1.75%. The Company has the option to fix the
applicable interest rate for up to twelve months by selecting
LIBOR for one- to twelve- month periods as a base. The
termination of the A-B Distribution Agreement for any reason
would constitute an event of default under the credit agreement
and the bank may declare the entire outstanding loan balance
immediately due and payable.
The terms of the credit agreement require the Company to meet
certain financial covenants: Tangible net worth must be greater
than $60,000,000; Capital ratio must be less than 1.25:1;
Working capital must be greater than $1,900,000; fixed charge
coverage ratio must be greater than 1.15:1 The Company was
in compliance with all financial covenants for the quarter ended
December 31, 2004 and expects that it will remain in
compliance with its debt covenants for the next twelve months.
In December 2001, March 2003, February 2004 and
October 2004, the credit agreement was amended to modify
several financial covenants. These revisions have reduced the
likelihood that a violation of the covenants by the Company will
occur. However, if the Company were to report a significant net
loss for one or more quarters within a time period covered by
the financial covenants, one or more of the covenants would be
negatively impacted and could cause a violation. Failure to meet
the covenants required by the credit agreement is an event of
default and, at its option, the bank could deny a request for a
waiver and declare the entire outstanding loan balance
immediately due and payable. In such a case, the Company would
seek to refinance the loan with one or more banks, potentially
at less desirable terms. However, there can be no guarantee that
additional financing would be available at commercially
reasonable terms, if at all.
The Company made interest payments on the Term Loan totaling
$185,000, $194,000 and $233,000, for the years ended
December 31, 2004, 2003 and 2002, respectively.
|
|
| 7. |
Convertible Redeemable Preferred Stock |
Convertible redeemable preferred stock outstanding is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 |
|
2003 | |
| |
|
|
|
| |
|
Series B, par value $0.005 per share, issued and
outstanding, no shares in 2004 and 1,289,872 shares in
2003; net of unamortized offering costs
|
|
$ |
— |
|
|
$ |
16,232,655 |
|
| |
|
|
|
|
|
|
Of the 10,000,000 shares of preferred stock authorized by
the Company’s articles of incorporation,
7,467,271 shares remain authorized but unissued as of
December 31, 2004. Two series of preferred stock have been
issued in the Company’s history. In 1993,
1,242,857 shares of preferred stock were designated as
Series A Preferred Stock and sold to existing common
shareholders, institutional investors and other qualified or
accredited investors. In August 1995, upon the closing of the
Company’s initial public offering, all Series A shares
were automatically converted to an equal number of common
shares. In 1994, 1,289,872 preferred shares were designated as
Series B Preferred Stock and sold to A-B for approximately
$16.3 million, or $12.61 per share. The difference
between the issuance price, net of offering costs, of the
convertible redeemable preferred stock and the redemption value
was accreted periodically through June 30, 2004. The
Company accreted $22,000 and $44,000 as a charge to retained
earnings for the years ended December 31, 2004 and 2003,
respectively.
On July 1, 2004, the Company completed the restructuring of
its ongoing relationship with A-B and issued
1,808,243 shares of Common Stock to A-B in exchange for the
1,289,872 shares of Series B Preferred Stock held by
A-B. The Series B Preferred Stock was then cancelled. In
connection with this exchange, the
54
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
Company paid $2.0 million to A-B in November 2004. As of
December 31, 2004, there was no preferred stock of the
Company outstanding.
|
|
| 8. |
Common Stockholders’ Equity |
In August 1995, the Company completed the sale of
2,193,492 shares of Common Stock through an initial public
offering and 716,714 common shares in a concurrent private
placement to A-B (collectively, the “Offerings”) at a
price of $17.00 per share. The net proceeds of the
Offerings totaled approximately $46 million. All of the
1,242,857 shares of Series A convertible preferred
stock automatically converted to an equal number of common
shares upon closing of the Offerings.
On July 1, 2004, the Company issued 1,808,243 shares
of Common Stock to A-B in exchange for 1,289,872 shares of
Series B Preferred Stock held by A-B. The Series B
Preferred Stock was cancelled. A-B was also granted certain
contractual registration rights with respect to the shares of
Common Stock held by A-B. In connection with the exchange, the
Company paid $2,000,000 to A-B in November 2004. The impact of
this exchange and recapitalization on the balance sheet as of
December 31, 2004 was to reduce convertible preferred stock
by $16,300,000, increase common stock by $9,000, increase
additional paid-in capital by $14,200,000 and reduce cash by
$2,000,000. As of December 31, 2004, A-B held 33.7% of the
Company’s outstanding shares of Common Stock.
In conjunction with the exercise of stock options granted under
the Company’s stock option plans, the Company issued
153,650 shares of the Company’s Common Stock totaling
$267,000 during the year ended December 31, 2004 and
1,600 shares of Common Stock totaling $3,000 during the
year ended December 31, 2003.
|
|
|
Repurchase of Common Stock |
From May 2000 through May 2003, the Company repurchased its
Common Stock in conjunction with a repurchase plan authorized by
the Board of Directors. The plan allowed for the repurchase of
1.5 million outstanding shares of Common Stock for a total
maximum repurchase of $2,750,000. In May 2003, at which time a
total of 1,463,100 shares of Common Stock had been
purchased in the open market for an aggregate expenditure of
$2,750,000, the Company ended the repurchase plan. During 2003,
101,400 shares of Common Stock were purchased for $231,000.
There were no stock repurchases in 2004.
In 2002, the Company’s shareholders approved the 2002 Stock
Option Plan (the “2002 Plan”). The maximum number of
shares of Common Stock for which options may be granted during
the term of the 2002 Plan is 346,000. The compensation committee
of the board of directors administers the 2002 Plan, determining
to whom options are to be granted, the number of shares of
Common Stock for which the options are exercisable, the purchase
prices of such shares, and all other terms and conditions.
Options granted to employees of the Company in 2002 under the
2002 Plan vest over a five-year period, and options granted to
the Company’s directors in 2002, 2003 and 2004 under the
2002 Plan became exercisable six months after the grant date.
Options are granted at an exercise price equal to fair market
value of the underlying Common Stock on the grant date and
terminate on the tenth anniversary of the grant date.
In 1993, the Company’s shareholders approved the 1992 Stock
Incentive Plan (the “1992 Plan”) and the Directors
Stock Option Plan (the “Directors Plan”). The plans,
amended in May 1996, provided for 1,270,000 and
170,000 shares of Common Stock for option grants,
respectively. Employee options generally vest over a five-year
period while director options became exercisable six months
after the grant date. Vested options are generally exercisable
for ten years from the date of grant. Although the expiration of
the 1992 Plan and the
55
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
Directors Plan in October 2002 prevents any further option
grants under these plans, the provisions of these plans remain
in effect until all options terminate or are exercised. As of
December 31, 2002, there were no options available for
future grant under the 1992 Plan or Directors Plan.
Presented below is a summary of stock option plans’
activity for the years shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares of | |
|
|
|
|
|
|
| |
|
Common | |
|
Weighted | |
|
Options | |
|
Weighted | |
| |
|
Stock | |
|
Average | |
|
Exercisable | |
|
Average | |
| |
|
Under the | |
|
Exercise | |
|
at End of | |
|
Exercise | |
| |
|
Plans | |
|
Price | |
|
Year | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at January 1, 2002
|
|
|
1,208,092 |
|
|
$ |
4.27 |
|
|
|
439,622 |
|
|
$ |
7.57 |
|
| |
Granted
|
|
|
296,800 |
|
|
|
2.03 |
|
|
|
|
|
|
|
|
|
| |
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Canceled
|
|
|
(97,290 |
) |
|
|
5.16 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
1,407,602 |
|
|
|
3.73 |
|
|
|
555,631 |
|
|
|
6.17 |
|
| |
Granted
|
|
|
12,000 |
|
|
|
2.18 |
|
|
|
|
|
|
|
|
|
| |
Exercised
|
|
|
(1,600 |
) |
|
|
1.90 |
|
|
|
|
|
|
|
|
|
| |
Canceled
|
|
|
(45,680 |
) |
|
|
7.03 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
1,372,322 |
|
|
|
3.61 |
|
|
|
766,562 |
|
|
|
4.85 |
|
| |
Granted
|
|
|
16,000 |
|
|
|
2.45 |
|
|
|
|
|
|
|
|
|
| |
Exercised
|
|
|
(153,650 |
) |
|
|
1.74 |
|
|
|
|
|
|
|
|
|
| |
Canceled
|
|
|
(180,142 |
) |
|
|
6.19 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,054,530 |
|
|
$ |
3.43 |
|
|
|
703,760 |
|
|
$ |
4.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information for options currently
outstanding and exercisable at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
|
| |
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
| |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Exercise | |
| Range of Exercise Prices |
|
Outstanding | |
|
Life (Yrs) | |
|
Price | |
|
Exercisable | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$1.49 to $ 1.82
|
|
|
36,000 |
|
|
|
5.72 |
|
|
$ |
1.60 |
|
|
|
27,250 |
|
|
$ |
1.61 |
|
|
1.87 to 1.87
|
|
|
446,630 |
|
|
|
6.59 |
|
|
|
1.87 |
|
|
|
242,610 |
|
|
|
1.87 |
|
|
2.02 to 2.02
|
|
|
219,901 |
|
|
|
7.64 |
|
|
|
2.02 |
|
|
|
81,901 |
|
|
|
2.02 |
|
|
2.18 to 2.45
|
|
|
37,999 |
|
|
|
8.54 |
|
|
|
2.36 |
|
|
|
37,999 |
|
|
|
2.36 |
|
|
3.97 to 3.97
|
|
|
176,400 |
|
|
|
4.31 |
|
|
|
3.97 |
|
|
|
176,400 |
|
|
|
3.97 |
|
|
5.73 to 25.50
|
|
|
137,600 |
|
|
|
2.13 |
|
|
|
10.83 |
|
|
|
137,600 |
|
|
|
10.83 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.49 to $25.50
|
|
|
1,054,530 |
|
|
|
5.89 |
|
|
$ |
3.43 |
|
|
|
703,760 |
|
|
$ |
4.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of the Company’s incentive stock option
plans, employees and directors may be granted options to
purchase the Company’s Common Stock at the market price on
the date the option is granted. At December 31, 2004, 2003
and 2002, a total of 87,109, 62,269 and 64,399 options,
respectively, were available for future grants under the 2002
plan.
The Company has reserved approximately 1.1 million shares
of Common Stock for future issuance related to potential stock
option exercises.
56
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
|
Shareholder Rights Agreement |
In September 1995, the Company’s board of directors adopted
a shareholder rights agreement (the “Rights
Agreement”). The Rights Agreement was subsequently amended
in May 1999 and May 2004. Pursuant to the Rights Agreement,
holders of Common Stock have certain rights to purchase Common
Stock that are exercisable only in certain circumstances (the
“Rights”). The Rights trade together with the Common
Stock until the Distribution Date. The “Distribution
Date” shall occur on the earlier of: (i) ten days
following the date that the Company learns that a person or
group of affiliated or associated persons (an “Acquiring
Person”) has acquired beneficial ownership of 20% or more
of the outstanding Common Stock and (ii) such date as may
be designated by the Company’s board following the
commencement of, or announcement of an intention to make, a
tender or exchange offer, the consummation of which would result
in the beneficial ownership by a person or group of 20% or more
of such outstanding Common Stock. Each Right will not be
exercisable until the Distribution Date. If any person becomes
an Acquiring Person, the Rights will entitle each holder of a
Right (other than those held by an Acquiring Person (or any
affiliate or associate of any Acquiring Person)) to purchase,
for $120 per Right (the “Purchase Price”), that
number of shares of Common Stock which at the time of the
transaction would have a market value of twice the Purchase
Price. The Rights Agreement provides certain exceptions for
beneficial ownership by A-B of up to 35% of the Company’s
Common Stock. The Rights, which are not currently exercisable,
expire on September 22, 2005, but may be extended by the
Company or redeemed at any time by the Company for
$0.001 per Right.
|
|
| 9. |
Earnings (Loss) Per Share |
The following table sets forth the computation of basic and
diluted earnings (loss) per common share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss)
|
|
$ |
(953,894 |
) |
|
$ |
(1,838,613 |
) |
|
$ |
(1,133,283 |
) |
|
Preferred stock accretion
|
|
|
(22,200 |
) |
|
|
(44,400 |
) |
|
|
(44,400 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) available to common stockholders
|
|
$ |
(976,094 |
) |
|
$ |
(1,883,013 |
) |
|
$ |
(1,177,683 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
7,228,674 |
|
|
|
6,243,208 |
|
|
|
6,689,189 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic and diluted earnings (loss) per share
|
|
$ |
(0.14 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
| |
|
|
|
|
|
|
|
|
|
The convertible redeemable preferred stock and outstanding stock
options have been excluded from the calculation of diluted loss
per share for the years ended December 31, 2004, 2003 and
2002 because their effect is antidilutive.
The components of income tax expense (benefit) are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current
|
|
$ |
30,000 |
|
|
$ |
29,801 |
|
|
$ |
30,344 |
|
|
Deferred
|
|
|
— |
|
|
|
— |
|
|
|
(155,954 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
30,000 |
|
|
$ |
29,801 |
|
|
$ |
(125,610 |
) |
| |
|
|
|
|
|
|
|
|
|
57
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
The current tax expense is attributable to state taxes.
A reconciliation between the U.S. federal statutory tax
rate and the Company’s effective tax rate is presented
below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes, net of federal benefit
|
|
|
2.7 |
|
|
|
2.7 |
|
|
|
2.6 |
|
|
Permanent differences, primarily meals and entertainment
|
|
|
(6.9 |
) |
|
|
(3.8 |
) |
|
|
(4.8 |
) |
|
Other items, net
|
|
|
22.8 |
|
|
|
0.2 |
|
|
|
(0.3 |
) |
|
Valuation allowance
|
|
|
(55.9 |
) |
|
|
(34.7 |
) |
|
|
(21.5 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(3.3 |
)% |
|
|
(1.6 |
)% |
|
|
10.0 |
% |
| |
|
|
|
|
|
|
|
|
|
Significant components of the Company’s deferred tax
liabilities and assets are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Tax-over-book depreciation
|
|
$ |
11,074,306 |
|
|
$ |
11,373,318 |
|
| |
Other
|
|
|
150,716 |
|
|
|
119,213 |
|
| |
|
|
|
|
|
|
| |
|
|
11,225,022 |
|
|
|
11,492,531 |
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
NOL and AMT credit carryforwards
|
|
|
11,468,505 |
|
|
|
11,542,567 |
|
| |
Other
|
|
|
441,503 |
|
|
|
218,849 |
|
| |
Valuation allowance
|
|
|
(1,153,784 |
) |
|
|
(737,683 |
) |
| |
|
|
|
|
|
|
| |
|
|
10,756,224 |
|
|
|
11,023,733 |
|
| |
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
468,798 |
|
|
$ |
468,798 |
|
| |
|
|
|
|
|
|
As of December 31, 2004, the primary components of the
Company’s deferred tax asset presented above were: federal
net operating tax loss (“NOL”) carryforwards of
$30.7 million, or $10.5 million tax-effected; federal
alternative minimum tax credit carryforwards of $135,000; and
state NOL carryforwards of $818,000 tax-effected. The federal
NOL carryforwards expire from 2012 through 2024; alternative
minimum tax credit carryforwards can be utilized to offset
regular tax liabilities in future years and have no expiration
date; and state NOL carryforwards expire through 2019. In 2002,
the Company received a $49,000 refund resulting from the
carryback of a federal alternative minimum tax credit to reduce
a prior year’s tax liability.
In accordance with SFAS No. 109, the Company
established a valuation allowance in 2002 and increased it
further in 2003 and 2004. The net change in the valuation
allowance during the years ended December 31, 2004 and
December 31, 2003 was an increase of $416,000 and an
increase of $467,000, respectively. The valuation allowance
covers a portion of the Company’s deferred tax assets,
specifically certain federal and state NOLs that may expire
before the Company is able to utilize the tax benefit. The
Company evaluates the potential recoverability of its deferred
tax assets on a quarterly basis and, to the extent necessary,
records a valuation allowance when circumstances indicate that
the deferred tax asset may expire before the Company is able to
utilize the tax benefit. Realization of the benefit is dependent
on the Company’s ability to generate future
U.S. taxable income. To the extent that the Company
continues to be unable to generate adequate
58
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
taxable income in future periods, the Company will not be able
to recognize additional tax benefits and may be required to
record a greater valuation allowance covering potentially
expiring NOLs.
Rent expense for the years ended December 31, 2004, 2003
and 2002 totaled $315,000, $247,000 and $527,000, respectively.
Minimum aggregate future lease payments under noncancelable
operating leases as of December 31, 2004 are as follows:
| |
|
|
|
|
|
2005
|
|
$ |
271,584 |
|
|
2006
|
|
|
268,784 |
|
|
2007
|
|
|
266,701 |
|
|
2008
|
|
|
266,701 |
|
|
2009
|
|
|
266,701 |
|
|
Thereafter
|
|
|
12,101,633 |
|
| |
|
|
|
| |
|
$ |
13,442,104 |
|
| |
|
|
|
In November 2002, the Company’s lease of its Fremont
Brewery facility expired. The corporate office, located in the
facility, was relocated to vacant office space at the Washington
Brewery in Woodinville, and the Trolleyman Pub, also located in
the Fremont Brewery facility, was closed. In conjunction with
the closure and subsequent relocation, the Company recorded a
$73,000 loss on disposal of assets.
In May 1995, the Company entered into an agreement to lease the
land on which the New Hampshire Brewery was subsequently
constructed. The initial lease period runs through April 2047
and may be extended at the Company’s option for two
additional seven-year terms. The lease also provides the Company
with the first right of refusal to purchase the premises should
the lessor receive an offer to sell the property to a third
party. The monthly rent commenced upon the completion of the
facility, and will escalate by 5% at the end of every five-year
period beginning in 2005. Escalating rent expense is recorded on
a straight-line basis over the term of the lease.
The Company periodically enters into commitments to purchase
natural gas and certain raw materials in the normal course of
business. Furthermore, the Company has entered into purchase
commitments to ensure it has the necessary supply of hops to
meet future production requirements. Hop commitments are for
crop years through 2008. The Company believes that hop
commitments in excess of future requirements, if any, will not
materially affect its financial condition or results of
operations.
The Company leases corporate office space to an unrelated party.
The lease agreement expires in 2006. The Company recognized
rental income for the years ended December 31, 2004, 2003
and 2002 of $162,000, $169,000 and $171,000, respectively.
Future minimum lease rentals under the agreement total $284,000.
|
|
| 12. |
Employee Benefit Plan |
The Company maintains a 401(k) savings plan for employees
age 21 years or older with at least six months of
service. Employee contributions may not exceed a specific dollar
amount determined by law and rules of the Internal Revenue
Service. The Company matches 100% of each dollar contributed by
a participant employed by the Company on the last day of the
calendar year who has worked 1,000 or more hours with a maximum
matching contribution of 4% of a participant’s
compensation. The Company’s contributions to the plan vest
incrementally over five years of service by the employee. The
Company’s contributions to the plan totaled $205,000,
$231,000 and $214,000 in 2004, 2003 and 2002, respectively.
59
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
| 13. |
Financial Instruments, Major Customers, and Related-Party
Transactions |
Financial instruments that potentially subject the Company to
credit risk consist principally of trade receivables and
interest-bearing deposits. The Company’s interest-bearing
deposits are placed with major financial institutions. While
wholesale distributors, A-B and Craft Brands account for
substantially all accounts receivable, this concentration risk
is limited due to the number of distributors, their geographic
dispersion, and state laws regulating the financial affairs of
distributors of alcoholic beverages.
The Company’s most significant wholesaler, K&L
Distributors, Inc. (“K&L”), is responsible for
distribution of the Company’s products in most of King
County, Washington, including Seattle. K&L accounted for
approximately 13% of total sales volume in the 2004, 2003, and
2002. Shipments of the Company’s product to K&L during
the last six months of 2004 were made through Craft Brands.
For the six months ended June 30, 2004, sales to A-B
through the Distribution Alliance represented 67% of total sales
during the same period, or $14,041,000. For the six months ended
December 31, 2004, sales to A-B through the A-B
Distribution Agreement represented 40% of total sales during the
same period, or $6,275,000. Sales to A-B through the
Distribution Alliance represented 65% and 63% of total sales, or
$27,312,000 and $25,914,000, in 2003 and 2002, respectively.
For the six months ended December 31, 2004, sales to Craft
Brands represented 61% of total shipments during the same
period, or 64,000 barrels.
In connection with all sales through the Distribution Alliance
prior to July 1, 2004, the Company paid a Margin fee to
A-B. The July 1, 2004 A-B Distribution Agreement modified
the Margin fee structure such that the Margin per barrel shipped
increased and is paid on all sales through the new A-B
Distribution Agreement. The Margin does not apply to sales to
the Company’s retail operations or to dock sales. The
Margin also does not apply to the Company’s sales to Craft
Brands because Craft Brands pays a comparable fee on its resale
of the product. The A-B Distribution Agreement also provides
that the Company shall pay an additional fee on shipments that
exceed shipments for the same territory during fiscal 2003. In
addition, the Exchange and Recapitalization Agreement provided
that the Margin be retroactively increased to the rate provided
in the A-B Distribution Agreement for all shipments in June 2004.
For the six month period ended December 31, 2004, the
Margin was paid to A-B on shipments totaling 38,000 barrels
to 371 distribution points. The incremental margin on June 2004
shipments was paid on approximately 20,000 barrels. For the
six months ended June 30, 2004, the Margin was paid to A-B
on shipments totaling 84,000 barrels to 495 Alliance
distribution points. For the year ended December 31, 2003,
the Margin was paid to A-B on shipments totaling
166,000 barrels to 527 Alliance distribution points. The
Margin paid is reflected as a reduction of sales in the
Company’s statement of operations.
The Company also incurred additional fees related to A-B
administrative and handling charges. Invoicing costs, staging
costs, cooperage handling charges and inventory manager fees are
reflected in cost of sales in the Company’s statement of
operations. These fees collectively totaled approximately
$406,000, $300,000 and $268,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
The Company purchased certain materials through A-B totaling
$5,584,000, $6,750,000 and $4,115,000 in 2004, 2003 and 2002,
respectively. The net amount due to A-B was $196,000 as of
December 31, 2004 and the net amount due from A-B was
$150,000 as December 31, 2003.
In December 2003, the Company entered into a purchase and sale
agreement with A-B for the purchase of the Pacific Ridge brand,
trademark and related intellectual property. In consideration,
the Company agreed to pay A-B a fee for 20 years based upon
the Company’s sales of the brand. A fee of $80,000 due to
A-B is reflected in the Company’s statements of operations
for the year ended December 31, 2004.
60
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS — (Continued)
In conjunction with the shipment of its products to wholesalers,
the Company collects refundable deposits on its pallets. In
certain circumstances when the pallets are returned to the
Company, A-B may return the deposit to the wholesaler. The
refundable deposit liability reflected in the Company’s
balance sheets as of December 31, 2004 includes
approximately $426,000 that is due to A-B.
In January 2003, the Company entered into a licensing agreement
with Widmer to produce and sell the Widmer Hefeweizen
brand in states east of the Mississippi River. Brewing of
this product, which began in February 2003, is conducted at the
New Hampshire Brewery under the supervision and assistance of
Widmer’s brewing staff to insure their brand’s quality
and matching taste profile. The term of this agreement is for
five years, with an additional one-year automatic renewal unless
either party elects to terminate the arrangement. The agreement
may be terminated by either party at any time without cause
pursuant to 150 days notice. The agreement may be
terminated for cause by either party under certain conditions.
During the term of this agreement, Redhook will not brew,
advertise, market, or distribute any product that is labeled or
advertised as a “Hefeweizen” or any similar product in
the agreed upon eastern territory. Brewing and selling of
Redhook’s Hefe-weizen was discontinued in conjunction with
this agreement. A licensing fee of $266,000 and $166,000 due to
Widmer is reflected in the Company’s statements of
operations for the years ended December 31, 2004 and 2003,
respectively.
|
|
| 14. |
Quarterly Financial Data (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Quarter Ended | |
|
2003 Quarter Ended | |
| |
|
| |
|
| |
| |
|
Dec. 31 | |
|
Sept. 30 | |
|
June 30 | |
|
Mar. 31 | |
|
Dec. 31 | |
|
Sept. 30 | |
|
June 30 | |
|
Mar. 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share amounts) | |
|
Sales
|
|
$ |
7,016 |
|
|
$ |
8,790 |
|
|
$ |
11,443 |
|
|
$ |
9,391 |
|
|
$ |
10,099 |
|
|
$ |
11,110 |
|
|
$ |
12,332 |
|
|
$ |
8,671 |
|
|
Less Excise Taxes
|
|
|
666 |
|
|
|
878 |
|
|
|
952 |
|
|
|
771 |
|
|
|
828 |
|
|
|
868 |
|
|
|
1,068 |
|
|
|
733 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
6,350 |
|
|
|
7,912 |
|
|
|
10,491 |
|
|
|
8,620 |
|
|
|
9,271 |
|
|
|
10,242 |
|
|
|
11,264 |
|
|
|
7,938 |
|
|
Cost of Sales
|
|
|
6,167 |
|
|
|
6,951 |
|
|
|
7,479 |
|
|
|
6,575 |
|
|
|
7,412 |
|
|
|
7,178 |
|
|
|
7,844 |
|
|
|
6,267 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
183 |
|
|
|
961 |
|
|
|
3,012 |
|
|
|
2,045 |
|
|
|
1,859 |
|
|
|
3,064 |
|
|
|
3,420 |
|
|
|
1,671 |
|
|
Selling, General and Administrative Expenses
|
|
|
1,255 |
|
|
|
1,310 |
|
|
|
2,546 |
|
|
|
2,528 |
|
|
|
2,683 |
|
|
|
3,236 |
|
|
|
2,937 |
|
|
|
2,833 |
|
|
Income from Equity Investment in Craft Brands
|
|
|
466 |
|
|
|
658 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Craft Brands Alliance Shared Formation Expenses
|
|
|
— |
|
|
|
(2 |
) |
|
|
131 |
|
|
|
407 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(606 |
) |
|
|
311 |
|
|
|
335 |
|
|
|
(890 |
) |
|
|
(824 |
) |
|
|
(172 |
) |
|
|
483 |
|
|
|
(1,162 |
) |
|
Interest Expense
|
|
|
55 |
|
|
|
48 |
|
|
|
43 |
|
|
|
44 |
|
|
|
45 |
|
|
|
46 |
|
|
|
50 |
|
|
|
51 |
|
|
Other Income (Expense) — Net
|
|
|
33 |
|
|
|
59 |
|
|
|
11 |
|
|
|
13 |
|
|
|
18 |
|
|
|
7 |
|
|
|
15 |
|
|
|
19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(628 |
) |
|
|
322 |
|
|
|
303 |
|
|
|
(921 |
) |
|
|
(851 |
) |
|
|
(211 |
) |
|
|
448 |
|
|
|
(1,194 |
) |
|
Income Tax Provision (Benefit)
|
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(638 |
) |
|
$ |
312 |
|
|
$ |
293 |
|
|
$ |
(921 |
) |
|
$ |
(881 |
) |
|
$ |
(211 |
) |
|
$ |
448 |
|
|
$ |
(1,194 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share
|
|
$ |
(0.08 |
) |
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
|
$ |
(0.19 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share
|
|
$ |
(0.08 |
) |
|
$ |
0.04 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.19 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barrels Shipped
|
|
|
47.2 |
|
|
|
57.1 |
|
|
|
62.0 |
|
|
|
50.2 |
|
|
|
54.6 |
|
|
|
58.7 |
|
|
|
67.9 |
|
|
|
47.7 |
|
61
|
|
| Item 9. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure |
On August 16, 2004, Ernst & Young LLP
(“Ernst & Young”) resigned as the independent
registered public accounting firm for the Company. The
resignation followed notification by Ernst & Young on
July 23, 2004 that the firm would resign as the
Company’s independent registered public accounting firm
following completion of services related to the review of the
interim financial statements of the Company for the quarter
ended June 30, 2004.
The reports of Ernst & Young on the Company’s
financial statements for the years ended December 31, 2003
and 2002 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except that the report
for the year ended December 31, 2003 expressed substantial
doubt regarding the Company’s ability to continue as a
going concern if the Company’s distribution agreement with
Anheuser-Busch, which was subject to early termination in 2004,
was terminated. The termination of the distribution agreement
would have caused an event of default under the Company’s
bank credit agreement and would have required the Company to
redeem the Series B Preferred Stock on December 31,
2004. As reported in the Company’s current report on
Form 8-K filed on July 2, 2004, the Company and
Anheuser-Busch entered into a new distribution agreement which
will expire on December 31, 2024, subject to the one-time
right of Anheuser-Busch to terminate the distribution agreement
on December 31, 2014.
In connection with the audits of the Company’s financial
statements for each of the two fiscal years ended
December 31, 2003 and 2002, and in the subsequent interim
period from December 31, 2003 through August 16, 2004,
there were no disagreements with Ernst & Young on any
matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which, if
not resolved to the satisfaction of Ernst & Young would
have caused Ernst & Young to make reference to the
subject matter of the disagreement in their report. There were
no “reportable events” as that term is described in
Item 304(a)(1)(v) of Regulation S-K. The Company
requested and Ernst & Young furnished a letter
addressed to the Commission stating whether it agreed with the
above statements. A copy of that letter, dated August 20,
2004, is filed as Exhibit 16.2 to the Company’s
Form 10-K for the year ended December 31, 2004.
On September 9, 2004, the Company engaged Moss Adams LLP
(“Moss Adams”) as the Company’s independent
registered public accounting firm for its fiscal year ending
December 31, 2004. During the last two fiscal years and the
subsequent interim period through September 9, 2004, the
Company had not consulted with Moss Adams with respect to:
(i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company’s financial
statements; or (ii) any matter that was either the subject
of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event (as described in
Item 304(a)(1)(v) of Regulation S-K). The decision to
engage Moss Adams was approved by the Company’s audit
committee.
|
|
| Item 9A. |
Controls and Procedures |
The Company has carried out an evaluation of the effectiveness
of the design and operation of the Company’s disclosure
controls and procedures (as defined in Exchange Act
Rule 13a-15(e) or 15d-15(e)) as of the end of the period
covered by this annual report on Form 10-K. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls
and procedures are effective.
No changes in the Company’s internal control over financial
reporting were identified in connection with the evaluation that
has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
|
|
| Item 9B. |
Other Information |
None.
62
PART III.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The response to this Item is contained in part in the
Company’s definitive proxy statement for its 2005 Annual
Meeting of Stockholders (the “2005 Proxy Statement”)
under the captions “Board of Directors” and
“Section 16(a) Beneficial Ownership Reporting
Compliance,” and the information contained therein is
incorporated herein by reference.
Information regarding executive officers is set forth herein in
Part I, Item 4A, under the caption “Executive
Officers of the Company.”
The Company has adopted a Code of Conduct applicable to all
employees, including the principal executive officer, principal
financial officer, principal accounting officer and directors. A
copy of the Code of Conduct is available on the Company’s
website at www.Redhook.com under “Governance.” Any
waivers of the code for the Company’s directors or
executive officers will be approved by the board of directors.
The Company will disclose any such waivers on a Form 8-K
within five business days after the waiver is approved.
|
|
| Item 11. |
Executive Compensation |
The response to this Item is contained in the 2005 Proxy
Statement under the caption “Executive Compensation,”
and the information contained therein is incorporated herein by
reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Securities Authorized for Issuance Under Equity Compensation
Plans
The following is a summary as of December 31, 2004 of all
equity compensation plans of the Company that provide for the
issuance of equity securities as compensation. See Note 8
of the Notes to Financial Statements — Common
Stockholders’ — Equity for additional discussion.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
| |
|
|
|
|
|
Remaining Available | |
| |
|
Number of Securities | |
|
|
|
for Future Issuance | |
| |
|
to be Issued Upon | |
|
Weighted Average | |
|
under Equity | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
Compensation Plans | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
(excluding securities | |
| |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
reflected in column (a)) | |
| Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
1,054,530 |
|
|
$ |
3.43 |
|
|
|
87,109 |
|
|
Equity compensation plans not approved by security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,054,530 |
|
|
$ |
3.43 |
|
|
|
87,109 |
|
| |
|
|
|
|
|
|
|
|
|
The remaining response to this Item is contained in part in the
2005 Proxy Statement under the caption “Security Ownership
of Certain Beneficial Owners and Management the information
contained therein is incorporated herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The response to this Item is contained in the 2005 Proxy
Statement under the caption “Certain Transactions,”
and the information contained therein is incorporated herein by
reference.
63
|
|
| Item 14. |
Principal Accounting Fees and Services |
The response to this Item is contained in the 2005 Proxy
Statement under the caption “Proposal 2 —
Appointment of Independent Auditors,” and the information
contained therein is incorporated herein by reference.
PART IV.
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this
report:
1. Audited Financial
Statements
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Moss-Adams LLP, Independent Registered Public
Accountants
|
|
|
40 |
|
|
Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm
|
|
|
41 |
|
|
Balance Sheets as of December 31, 2004 and 2003
|
|
|
42 |
|
|
Statements of Operations for the Years Ended December 31,
2004, 2003 and 2002
|
|
|
43 |
|
|
Statements of Common Stockholders’ Equity for the Years
Ended December 31, 2004, 2003 and 2002
|
|
|
44 |
|
|
Statements of Cash Flows for the Years Ended December 31,
2004, 2003 and 2002
|
|
|
45 |
|
|
Notes to Financial Statements
|
|
|
46 |
|
2. Financial Statement
Schedules
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Moss-Adams LLP, Independent Registered Public
Accountants
|
|
|
70 |
|
|
Craft Brands Alliance LLC Balance Sheet as of December 31,
2004
|
|
|
71 |
|
|
Craft Brands Alliance LLC Statement of Income from Inception
(July 1, 2004) through December 31, 2004
|
|
|
72 |
|
|
Craft Brands Alliance Statement of Members’ Equity from
Inception (July 1, 2004) through December 31, 2004
|
|
|
73 |
|
|
Craft Brands Alliance Statement of Cash Flows from Inception
(July 1, 2004) through December 31, 2004
|
|
|
74 |
|
|
Notes to Financial Statements
|
|
|
75 |
|
|
|
| |
All other Financial Statement Schedules are omitted because they
are not applicable or the required information is shown in the
Financial Statements and Notes. |
3. Exhibits
|
|
| |
The following exhibits are filed with or incorporated by
reference into this report pursuant to Item 601 of
Regulation S-K: |
| |
| |
EXHIBIT NO. 3 Articles of Incorporation and Bylaws |
| |
|
|
|
|
| |
3.1 |
|
|
Restated Articles of Incorporation of Registrant, dated
July 7, 2004 (Incorporated by reference from
Exhibit 3.1 to the Company’s Form 10-Q for the
quarter ended June 30, 2004) |
| |
3.2 |
|
|
Amended and Restated Bylaws of Registrant, dated April 7,
2004 (Incorporated by reference from Exhibit 3.1 to the
Company’s Form 10-Q for the quarter ended
March 31, 2004) |
64
|
|
| |
EXHIBIT NO. 4 Instruments Defining the Rights of Security
Holders, Including Indentures |
| |
|
|
|
4.1
|
|
Amended and Restated Rights Agreement, dated as of May 12,
1999 between Redhook Ale Brewery, Incorporated and ChaseMellon
Shareholder Services, L.L.C. (Incorporated by reference from
Exhibit 10.39 to the Company’s Form 10-Q for the
quarter ended March 31, 1999) |
|
4.2
|
|
Amendment No. 1, dated as of May 18, 2004, to Amended
and Restated Rights Agreement dated May 12, 1999 between
Redhook Ale Brewery, Incorporated and Mellon Investor Services
LLC (formerly known as ChaseMellon Shareholder Services,
L.L.C.), as Rights Agent (Incorporated by reference from
Exhibit 1 to the Company’s Form 8-A/A filed on
June 28, 2004) |
|
|
| |
EXHIBIT NO. 10 Material Contracts |
| |
| |
Executive Compensation Plans and Agreements |
| |
|
|
|
10.1
|
|
Registrant’s Incentive Stock Option Plan, dated
September 12, 1990 (Incorporated by reference from
Exhibit 10.15 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
10.2
|
|
Amended and Restated Registrant’s Directors Stock Option
Plan (Incorporated by reference from Exhibit 10.14 to the
Company’s Registration Statement on Form S-1,
No. 33-94166) |
|
10.3
|
|
Amendment dated as of February 27, 1996, to Amended and
Restated Registrant’s Directors Stock Option Plan
(Incorporated by reference from Exhibit 10.32 to the
Company’s Form 10-Q for the quarter ended
June 30, 1996, No. 0-26542) |
|
10.4
|
|
Form of Stock Option Agreement for Registrant’s Directors
Stock Option Plan |
|
10.5
|
|
Registrant’s 1992 Stock Incentive Plan, approved
October 20, 1992, as amended, October 11, 1994 and
May 25, 1995 (Incorporated by reference from
Exhibit 10.16 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
10.6
|
|
Amendment dated as of July 25, 1996, to Registrant’s
1992 Stock Incentive Plan, as amended (Incorporated by reference
from Exhibit 10.33 to the Company’s Form 10-Q for
the quarter ended June 30, 1996, No. 0-26542) |
|
10.7
|
|
Amendment dated as of February 27, 1996, to
Registrant’s 1992 Stock Incentive Plan, as amended
(Incorporated by reference from Exhibit 10.31 to the
Company’s Form 10-Q for the quarter ended
June 30, 1996, No. 0-26542) |
|
10.8
|
|
Form of Stock Option Agreement for Registrant’s 1992 Stock
Incentive Plan, as amended |
|
10.9
|
|
Registrant’s 2002 Stock Option Plan (Incorporated by
reference from the Addendum to the Company’s Proxy
Statement for 2002 Annual Meeting of Shareholders) |
|
10.10
|
|
Form of Stock Option Agreement (Directors Grants) for
Registrant’s 2002 Stock Option Plan |
|
10.11
|
|
Form of Stock Option Agreement (Executive Officer Grants) for
Registrant’s 2002 Stock Option Plan |
|
10.12
|
|
Employment Agreement between Registrant and Paul Shipman, dated
November 1, 2000 (Incorporated by reference from
Exhibit 10.43 to the Company’s Form 10-K for the
year ended December 31, 2000) |
|
10.13
|
|
Employment Agreement between Registrant and David J. Mickelson,
dated August 1, 2000 (Incorporated by reference from
Exhibit 10.27 to the Company’s Form 10-Q for the
quarter ended September 30, 2000) |
|
10.14
|
|
Employment Agreement between Registrant and Allen L. Triplett,
dated August 1, 2000 (Incorporated by reference from
Exhibit 10.28 to the Company’s Form 10-Q for the
quarter ended September 30, 2000) |
|
10.15
|
|
Employment Agreement between Registrant and Pamela J. Hinckley,
dated August 1, 2000 (Incorporated by reference from
Exhibit 10.29 to the Company’s Form 10-Q for the
quarter ended September 30, 2000) |
65
| |
|
|
|
10.16
|
|
Employment Agreement between Registrant and Greg Marquina, dated
August 1, 2000 (Incorporated by reference from
Exhibit 10.41 to the Company’s Form 10-Q for the
quarter ended September 30, 2000) |
|
10.17
|
|
Employment Agreement between Registrant and Gerard C. Prial,
dated August 1, 2000 (Incorporated by reference from
Exhibit 10.46 to the Company’s Form 10-K for the
year ended December 31, 2001) |
|
10.18
|
|
Summary Sheet of Director Compensation and Executive Cash
Compensation |
| |
|
|
|
10.19
|
|
Investment Agreement dated as of October 18, 1994, between
the Registrant and Anheuser-Busch, Incorporated (Incorporated by
reference from Exhibit 10.4 to the Company’s
Registration Statement on Form S-1, No. 33-94166) |
|
10.20
|
|
Registration Rights Agreement dated as of October 18, 1994,
between Registrant and Anheuser-Busch, Incorporated
(Incorporated by reference from Exhibit 10.7 to the
Company’s Registration Statement on Form S-1,
No. 33-94166) |
|
10.21
|
|
Master Distributor Agreement between Registrant and
Anheuser-Busch, Incorporated, dated October 18, 1994
(Incorporated by reference from Exhibit 10.21 to the
Company’s Registration Statement on Form S-1,
No. 33-94166)* |
|
10.22
|
|
Amendment No. 1 dated as of June 26, 1996, to Master
Distribution Agreement between Registrant and Anheuser-Busch,
Incorporated, dated October 18, 1994 (Incorporated by
reference from Exhibit 10.30 to the Company’s
Form 10-Q for the quarter ended June 30, 1996,
No. 0-26542) |
|
10.23
|
|
Letter Agreement dated as of July 31, 1995, between
Registrant and Anheuser-Busch, Incorporated (Incorporated by
reference from Exhibit 10.25 to the Company’s
Registration Statement on Form S-1, No. 33-94166) |
|
10.24
|
|
Consent, Waiver and Amendment, dated September 19, 1997, to
Master Distributor Agreement between Registrant and
Anheuser-Busch, Incorporated, dated October 18, 1994
(Incorporated by reference from Exhibit 10.36 to the
Company’s Form 10-Q for the quarter ended
September 30, 1997, No. 0-26542) |
|
10.25
|
|
Purchasing Agreement dated as of March 27, 1998, between
Registrant and Anheuser-Busch, Incorporated (Incorporated by
reference from Exhibit 10.37 to the Company’s
Form 10-Q for the quarter ended March 31, 1998) |
|
10.26
|
|
Purchasing Agreement dated as of November 21, 2002, between
Registrant and Anheuser-Busch, Incorporated (Incorporated by
reference from Exhibit 10.21 to the Company’s
Form 10-K for the year ended December 31, 2002) |
|
10.27
|
|
Multi-Tenant Lease between the Quadrant Corporation and
Registrant, dated June 1, 1987, as amended,
November 5, 1987, February 1, 1988, March 29,
1988, June 27, 1988, October 27, 1988, June 18,
1991, October 1, 1991, December 22, 1992 and
March 31,1993 (Incorporated by reference from
Exhibit 10.9 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
10.28
|
|
Sublease between Pease Development Authority as Sublessor and
Registrant as Sublessee, dated May 30, 1995 (Incorporated
by reference from Exhibit 10.11 to the Company’s
Registration Statement on Form S-1, No. 33-94166) |
|
10.29
|
|
Assignment of Sublease and Assumption Agreement dated as of
July 1, 1995, between Registrant and Redhook of New
Hampshire, Inc. (Incorporated by reference from
Exhibit 10.24 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
10.30
|
|
Amended and Restated Credit Agreement between U.S. Bank of
Washington, National Association and Registrant, dated
June 5, 1995 (Incorporated by reference from
Exhibit 10.18 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
10.31
|
|
First Amendment dated as of July 25, 1996, to Amended and
Restated Credit Agreement between U.S. Bank of Washington,
National Association and Registrant, dated June 5, 1995
(Incorporated by reference from Exhibit 10.34 to the
Company’s Form 10-Q for the quarter ended
September 30, 1996, No. 0-26542) |
66
| |
|
|
|
10.32
|
|
Second Amendment to Amended and Restated Credit Agreement
between U.S. Bank of Washington, National Association and
Registrant, dated September 15, 1997 (Incorporated by
reference from Exhibit 10.35 to the Company’s
Form 10-Q for the quarter ended September 30, 1997,
No. 0-26542) |
|
10.33
|
|
Third Amendment to Amended and Restated Credit Agreement between
U.S. Bank of Washington, National Association and
Registrant, dated February 22, 1999 (Incorporated by
reference from Exhibit 10.38 to the Company’s
Form 10-Q for the quarter ended March 31, 1999) |
|
10.34
|
|
Fourth Amendment to Amended and Restated Credit Agreement
between U.S. Bank National Association and Registrant,
dated August 10, 2000 (Incorporated by reference from
Exhibit 10.42 to the Company’s Form 10-Q for the
quarter ended September 30, 2000) |
|
10.35
|
|
Fifth Amendment to Amended and Restated Credit Agreement between
U.S. Bank National Association and Registrant, dated
June 19, 2001 (Incorporated by reference from
Exhibit 10.44 to the Company’s Form 10-Q for the
quarter ended June 30, 2001) |
|
10.36
|
|
Sixth Amendment to Amended and Restated Credit Agreement between
U.S. Bank National Association and Registrant, dated
December 31, 2001 (Incorporated by reference from
Exhibit 10.45 to the Company’s Form 10-K for the
year ended December 31, 2001) |
|
10.37
|
|
Seventh Amendment to Amended and Restated Credit Agreement
between U.S. Bank National Association and Registrant,
dated June 21, 2002 (Incorporated by reference from
Exhibit 10.47 to the Company’s Form 10-Q for the
quarter ended June 30, 2002) |
|
10.38
|
|
Eighth Amendment to Amended and Restated Credit Agreement
between U.S. Bank National Association and Registrant,
dated March 18, 2003 (Incorporated by reference from
Exhibit 10.1 to the Company’s Form 10-Q for the
quarter ended March 31, 2003) |
|
10.39
|
|
Ninth Amendment to Amended and Restated Credit Agreement between
U.S. Bank National Association and Registrant, dated as of
October 31, 2003 (Incorporated by reference from
Exhibit 10.34 to the Company’s Form 10-K for the
year ended December 31, 2003) |
|
10.40
|
|
Tenth Amendment to Amended and Restated Credit Agreement between
U.S. Bank National Association and Registrant, dated as of
February 9, 2004 (Incorporated by reference from
Exhibit 10.35 to the Company’s Form 10-K for the
year ended December 31, 2003) |
|
10.41
|
|
Eleventh Amendment to Amended and Restated Credit Agreement
between U.S. Bank National Association and Registration,
dated as of September 28, 2004 (Incorporated by reference
from Exhibit 10.1 to the Company’s Form 8-K filed
on October 26, 2004) |
|
10.42
|
|
Exchange and Recapitalization Agreement dated as of
June 30, 2004 between the Registrant and Anheuser-Busch,
Incorporated (Incorporated by reference from Exhibit 10.1
to the Company’s Form 8-K filed on July 2, 2004) |
|
10.43
|
|
Master Distributor Agreement dated as of July 1, 2004
between the Registrant and Anheuser-Busch, Incorporated
(Incorporated by reference from Exhibit 10.2 to the
Company’s Form 8-K filed on July 2, 2004)* |
|
10.44
|
|
Registration Rights Agreement dated as of July 1, 2004
between the Registrant and Anheuser-Busch, Incorporated
(Incorporated by reference from Exhibit 10.3 to the
Company’s Form 8-K filed on July 2, 2004) |
|
10.45
|
|
Supply, Distribution and Licensing Agreement dated as of
July 1, 2004 between the Registrant and Craft Brands
Alliance LLC (Incorporated by reference from Exhibit 10.4
to the Company’s Form 8-K filed on July 2, 2004)* |
|
10.46
|
|
Master Distributor Agreement dated as of July 1, 2004
between Craft Brands Alliance LLC and Anheuser-Busch,
Incorporated (Incorporated by reference from Exhibit 10.5
to the Company’s Form 8-K filed on July 2, 2004)* |
|
10.47
|
|
Amendment No. 1, dated as of May 18, 2004, to Amended
and Restated Rights Agreement dated May 12, 1999 between
Redhook Ale Brewery, Incorporated and Mellon Investor Services
LLC (formerly known as ChaseMellon Shareholder Services,
L.L.C.), as Rights Agent (Incorporated by reference from
Exhibit 1 to the Company’s Form 8-A/A filed on
June 28, 2004) |
67
|
|
| |
EXHIBIT NO. 16 Letter regarding Change in Certifying Accountant |
| |
|
|
|
|
| |
16.1 |
|
|
Letter dated July 29, 2004 from the Company’s former
principal independent accountants (Incorporated by reference
from Exhibit 16.1 to the Company’s Form 8-K filed
on July 30, 2004) |
| |
16.2 |
|
|
Letter dated August 20, 2004 from the Company’s former
principal independent accountants (Incorporated by reference
from Exhibit 16.1 to the Company’s Form 8-K/A
filed on August 20, 2004) |
|
|
| |
EXHIBIT NO. 21 Subsidiaries of the Registrant |
| |
|
|
|
|
| |
21.1 |
|
|
Subsidiaries of the Registrant (Incorporated by reference from
Exhibit 21.1 to the Company’s Registration Statement
on Form S-1, No. 33-94166) |
|
|
| |
EXHIBIT NO. 23 Consents of Experts and Counsel |
| |
|
|
|
|
| |
23.1 |
|
|
Consent of Moss Adams LLP, Independent Registered Public
Accountants |
| |
23.2 |
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm |
| |
23.3 |
|
|
Consent of Moss Adams LLP, Independent Registered Public
Accountants |
|
|
| |
EXHIBIT NO. 31 and 32 Certifications |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
31.2 |
|
|
Certification of Chief Financial Officer of Redhook Ale Brewery,
Incorporated pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
32.1 |
|
|
Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| |
32.2 |
|
|
Certification of Chief Financial Officer of Redhook Ale
Brewery,, Incorporated pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
| |
(*) |
Confidential treatment has been granted for portions of this
document. |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Woodinville, State of
Washington, on March 30, 2005.
|
|
| |
REDHOOK ALE BREWERY, INCORPORATED |
|
|
|
| |
By |
/s/ David J. Mickelson
|
|
|
| |
|
| |
David J. Mickelson |
| |
Executive Vice President, |
| |
Chief Financial Officer and |
| |
Chief Operating Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
/s/ Paul S. Shipman
Paul
S. Shipman |
|
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer) |
|
March 30, 2005 |
| |
/s/ David J. Mickelson
David
J. Mickelson |
|
Executive Vice President, Chief Financial Officer and Chief
Operating Officer
(Principal Financial Officer) |
|
March 30, 2005 |
| |
/s/ Lorri L. Jones
Lorri
L. Jones |
|
Controller and Treasurer
(Principal Accounting Officer) |
|
March 30, 2005 |
| |
/s/ Frank H. Clement
Frank
H. Clement |
|
Director |
|
March 30, 2005 |
| |
/s/ Jerry D. Jones
Jerry
D. Jones |
|
Director |
|
March 30, 2005 |
| |
/s/ David R. Lord
David
R. Lord |
|
Director |
|
March 30, 2005 |
| |
/s/ Patrick J. McGauley
Patrick
J. McGauley |
|
Director |
|
March 30, 2005 |
| |
/s/ John D. Rogers, Jr.
John
D. Rogers, Jr. |
|
Director |
|
March 30, 2005 |
| |
/s/ Anthony J. Short
Anthony
J. Short |
|
Director |
|
March 30, 2005 |
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Craft Brands Alliance LLC
We have audited the accompanying balance sheet of Craft Brands
Alliance LLC as of December 31, 2004, and the related
statements of income, members’ equity and cash flows from
inception (July 1, 2004) through December 31, 2004.
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 audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. 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 audit provides 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 Craft Brands Alliance LLC at December 31, 2004, and the
results of its operations and its cash flows from inception
(July 1, 2004) through December 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America.
Seattle, Washington
February 11, 2005
70
CRAFT BRANDS ALLIANCE LLC
BALANCE SHEET
December 31, 2004
| |
|
|
|
|
|
|
ASSETS |
| |
|
Current Assets
|
|
|
|
|
| |
Cash and Cash Equivalents
|
|
$ |
146,423 |
|
| |
Accounts Receivable, net
|
|
|
1,916,879 |
|
| |
Inventory
|
|
|
754,778 |
|
| |
Prepaid Expenses
|
|
|
111,678 |
|
| |
|
|
|
| |
|
$ |
2,929,758 |
|
| |
|
|
|
| |
|
LIABILITIES AND MEMBERS’ EQUITY |
| |
|
Current Liabilities
|
|
|
|
|
| |
Accounts Payable
|
|
$ |
1,982,340 |
|
| |
Other Accrued Expenses
|
|
|
673,352 |
|
| |
|
|
|
| |
|
|
2,655,692 |
|
|
Members’ Equity
|
|
|
274,066 |
|
| |
|
|
|
| |
|
$ |
2,929,758 |
|
| |
|
|
|
See accompanying notes.
71
CRAFT BRANDS ALLIANCE LLC
STATEMENT OF INCOME
From Inception (July 1, 2004) through December 31,
2004
| |
|
|
|
|
|
|
Sales
|
|
$ |
27,777,282 |
|
|
Cost of Sales
|
|
|
20,103,807 |
|
| |
|
|
|
|
Gross Profit
|
|
|
7,673,475 |
|
|
Operating Expenses
|
|
|
4,704,232 |
|
| |
|
|
|
|
Income from Operations
|
|
|
2,969,243 |
|
| |
|
|
|
|
Other Income (Expense)
|
|
|
|
|
| |
Interest Expense
|
|
|
(3,347 |
) |
| |
Miscellaneous Income
|
|
|
108 |
|
| |
Royalty Expense
|
|
|
(97,294 |
) |
| |
|
|
|
| |
|
|
(100,533 |
) |
| |
|
|
|
|
Net Income
|
|
$ |
2,868,710 |
|
| |
|
|
|
See accompanying notes.
72
CRAFT BRANDS ALLIANCE LLC
STATEMENT OF MEMBERS’ EQUITY
From Inception (July 1, 2004) through December 31,
2004
| |
|
|
|
|
|
|
Balance, July 1, 2004 (date of inception)
|
|
$ |
— |
|
| |
Issuance of Units
|
|
|
200 |
|
| |
Sales and Marketing Capital Contribution by Redhook Ale Brewery,
Incorporated
|
|
|
250,000 |
|
| |
Net Income
|
|
|
2,868,710 |
|
| |
Profit Distributions to Members
|
|
|
(2,844,844 |
) |
| |
|
|
|
|
Balance, December 31, 2004
|
|
$ |
274,066 |
|
| |
|
|
|
See accompanying notes.
73
CRAFT BRANDS ALLIANCE LLC
STATEMENTS OF CASH FLOWS
From Inception (July 1, 2004) through December 31,
2004
| |
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net Income
|
|
$ |
2,868,710 |
|
|
Changes in Assets and Liabilities
|
|
|
|
|
| |
|
Accounts Receivable
|
|
|
(1,916,879 |
) |
| |
|
Inventory
|
|
|
(754,778 |
) |
| |
|
Prepaid Expenses
|
|
|
(111,678 |
) |
| |
|
Accounts Payable and Other Accrued Expenses
|
|
|
2,655,692 |
|
| |
|
|
|
|
Net Cash from Operating Activities
|
|
|
2,741,067 |
|
| |
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Issuance of Units
|
|
|
200 |
|
|
Capital Contributions
|
|
|
250,000 |
|
|
Issuance of Member Notes Payable
|
|
|
300,000 |
|
|
Payoff of Member Notes Payable
|
|
|
(300,000 |
) |
|
Profit Distribution
|
|
|
(2,844,844 |
) |
| |
|
|
|
|
Net Cash from Financing Activities
|
|
|
(2,594,644 |
) |
| |
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
146,423 |
|
| |
Beginning of Period
|
|
|
— |
|
| |
|
|
|
| |
End of Period
|
|
$ |
146,423 |
|
| |
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
| |
Cash paid during the period for interest
|
|
$ |
3,347 |
|
| |
|
|
|
See accompanying notes.
74
CRAFT BRANDS ALLIANCE LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
Note 1 — Description of Operations and Summary
of Significant Accounting Policies
Description of Operations — Craft Brands
Alliance LLC was formed on July 1, 2004 in Oregon by Widmer
Brothers Brewing Company and Redhook Ale Brewery, Incorporated.
The Company represents three malt beverage brands —
Widmer, Redhook and Kona in 12 western states, including Alaska,
Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada,
New Mexico, Oregon, Washington and Wyoming, acting as a sales
representative, marketing firm and wholesaler for the breweries
in this area, except in the state of Washington. Approximately
54% of the sales volume for the Company is from the California
and Oregon markets.
Cash Equivalents — All highly liquid investment
instruments with a remaining maturity of three months or less
when purchased are considered to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest, which
approximates market value.
Accounts Receivable — Sales are made to
approved customers on an open account basis, subject to
established credit limits, and generally no collateral is
required. Accounts receivable are stated at an amount management
expects to collect. The Company has recorded an allowance for
doubtful accounts of $10,000 at December 31, 2004. This
allowance is based on management’s evaluation of
outstanding accounts receivable at the end of the period.
Inventory — Inventory includes only point of
sale and promotional merchandise items. The inventory items are
based on the average cost method. These inventory items are
classified as finished goods when received.
| |
|
|
|
|
|
Merchandise
|
|
$ |
286,989 |
|
|
Point of Sale
|
|
|
467,789 |
|
| |
|
|
|
| |
|
$ |
754,778 |
|
| |
|
|
|
Income Taxes — Craft Brands Alliance LLC is
limited liability company that was established as a partnership
and is not required to pay any income taxes, due to the entity
type. The members owning the company will be required to report
all income and associated taxes on their financial reports and
tax filings.
Use of Estimates — The preparation of the
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates on
historical experience and on various assumptions that are
believed to be reasonable under the circumstances at the time.
Actual results may differ from those estimates under different
assumptions or conditions.
Concentration of Credit Risk — Financial
instruments that potentially subject the Company to
concentrations of credit risk consist of cash and accounts
receivable. At times, cash balances exceed federal insured
limits. However, cash is held on deposit in a major financial
institution and is considered minimum credit risk.
As of December 31, 2004, the Company has one customer that
accounted for approximately 64% of the accounts receivable. This
customer accounted for 69% of the total revenue.
Fair Value of Financial Instruments — The
recorded value of the Company’s financial instruments is
considered to approximate the fair value of the instruments, in
all material respects, because the Company’s receivables
and payables are recorded at amounts expected to be realized and
paid.
Product Purchase Price — The products from the
participating breweries are purchased at what is referred to as
the transfer price. The transfer price updates annually based on
the last 12-months actual net
75
CRAFT BRANDS ALLIANCE LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
sales per barrel results. The average net sales price per barrel
for Widmer, Redhook and Kona split between draught and package
are multiplied by 59%. Then, the average excise tax rate is then
added to the total to create the new transfer price. The price
is updated annually based on the last 12-month results as of
September 30 for the next calendar year.
Advertising — The Company expenses advertising
costs when incurred. Advertising expense during 2004 totaled
$316,543.
Recent Accounting Pronouncements — Due to FASB
Interpretation Number 46 (FIN 46) — Consolidation
of Variable Interest Entities, Craft Brands Alliance LLC
financial statements will be consolidated with Widmer Brothers
Brewing Company for reporting purposes. The decision to
consolidate at the Widmer company level is due to their control
of the Company based on the greater than 50% profit share for
Widmer since the number of board seats and ownership percentage
is equal between the Company members.
Note 2 — Company Operating Agreement
The Operating Agreement was made and entered into effective
July 1, 2004, by and between Widmer Brothers Brewing
Company, an Oregon corporation (“Widmer”), Redhook Ale
Brewery, Incorporated, a Washington corporation
(“Redhook”), and Craft Brands Alliance LLC (the
“Company”). Widmer and Redhook referred to hereinafter
as the “Members.”
Widmer and Redhook are both manufacturers of craft malt
beverages. Widmer and Redhook each have a distribution agreement
with Anheuser-Busch, Inc. (“A-B”) pursuant to which
A-B distributes the malt beverage products of Widmer and Redhook.
Widmer and Redhook Products are currently distributed in the
following common states: Alaska, Arizona, California, Colorado,
Hawaii, Idaho, Montana, New Mexico, Nevada, Oregon, Washington,
and Wyoming (the “Initial Territory”). The Members
have determined that it would create certain efficiencies and
synergies for Widmer and Redhook to consolidate certain
marketing, advertising, sales, distribution, and related
operations and to jointly market, advertise, sell, and
distribute their respective Products in the Initial Territory.
The Members intend for Company to market, advertise, sell, and
distribute the Products in the Initial Territory on an exclusive
basis; provided that in the state of Washington,
(1) Company will receive orders for Products from A-B
Wholesalers, (2) Company will assign the orders to Widmer
or Redhook, and (3) the Products will be sold and
distributed directly by Redhook and Widmer to A-B wholesalers
located in Washington. The Products will continue to be
distributed through A-B.
The Operating Agreement may be terminated by either member if
A-B no longer distributes the products of Craft Brands Alliance
LLC.
A-B currently has an equity interest in both Widmer and Redhook.
The Company has the following additional agreements with Widmer
Brothers Brewing Company and Redhook Ale Brewery, Incorporated:
A Supply, Distribution, and Licensing Agreement by and between
Widmer and Company, pursuant to which Company purchases
Widmer’s Products from Widmer and has the exclusive right
to advertise and market the Widmer Products in the Initial
Territory and to distribute the Widmer Products in the Initial
Territory except for Washington.
A Supply, Distribution, and Licensing Agreement by and between
Redhook and Company, pursuant to which Company purchases the
Redhook Products from Redhook and has the exclusive right to
advertise and market the Redhook Products in the Initial
Territory and to distribute the Redhook Products in the Initial
Territory except for Washington.
76
CRAFT BRANDS ALLIANCE LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
A Master Distributor Agreement by and between A-B and Company,
pursuant to which A-B distributes the Redhook Products and the
Widmer Products in the Initial Territory (other than Washington).
A Master Distributor Agreement between A-B and Widmer, pursuant
to which A-B wholesalers continue to distribute Widmer Products
in Washington.
A Master Distributor Agreement between A-B and Redhook, pursuant
to which A-B continues to distribute Redhook Products outside
the Initial Territory.
A Management Services Agreement by and between Company and
Widmer, pursuant to which Widmer provides Company certain
management services, and licenses to Company certain office
space.
A License and Services Agreement by and between Company and
Redhook pursuant to which Redhook licenses certain space and
provides certain services to Company.
A Consulting Services Agreement by and between Company and
Widmer pursuant to which Company provides certain consulting
services to Widmer.
A Consulting Services Agreement by and between Company and
Redhook pursuant to which Company provides certain consulting
services to Redhook.
A Cross-Indemnity Agreement pursuant to which each Member agrees
to indemnify and defend the other Member and Company from claims
brought by the shareholders of the indemnifying Member against
either the indemnified Member or Company.
Limited Liability Company Profit Distribution —
The profit is distributed between its members at a
58% & 42% split to Widmer and Redhook, respectively.
This calculation is completed after the Kona profit is
determined, which is based on Kona’s volume percentage of
the total Company sales volume. The Kona percentage is then
multiplied by the income total and is distributed by 70%/30%
split in 2004 between Widmer and Redhook, respectively. The Kona
profitability split changes each year, 65%/35% in 2005 to
60%/40% in 2006 and until 2007 when the split is the 58%/42%
income distribution for Widmer and Redhook, respectively, as it
is for all products according to the Agreement. The remaining
income is then shared between Widmer and Redhook at the
above-mentioned split. The profit distribution is paid to the
members monthly once the financial statements are finalized. The
profit distribution may be lower than the monthly income
generated if additional working capital is required to satisfy
the Company’s needs.
Master Distributor Agreement with Anheuser-Busch —
The Company entered into a Master Distributor Agreement with
A-B on July 1, 2004. Under the terms of the Agreement, the
Company granted A-B the exclusive right to serve as the Master
Distributor for the Company’s products, except in the state
of Washington. The Company sells its products to A-B who in turn
then sells the products to its wholesalers. In addition, the
Company pays A-B specified fees for certain transaction
processing and product handling.
The Agreement remains in effect until December 31, 2014 and
renews automatically for an additional ten-year period unless
terminated by either party upon at least six months prior
written notice. In addition, either party may terminate the
Agreement at any time upon 30 days to six months prior
written notice in the event of default of either party’s
performance if the default issue is not cured within the
specified time frame. Also, A-B can terminate the Agreement
immediately if changes in ownership, control or incompatible
conduct on the part of the Company which is not remedied within
the required time.
A-B is also due the Incremental Margin Fee which is derived from
the quarterly volume in the given year compared to the 2003 base
volume. Any volume gain over the 2003 base volume is remitted to
A-B within 45 days of the end of the quarter. This fee
updates annually based on the GDP Deflator. No Incremental Fees
were due in 2004.
77
CRAFT BRANDS ALLIANCE LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
Note 3 — Related Party Transactions
The Company has transactions and account balances with
affiliates, including the Company’s two members, plus Kona
Brewery LLC which are suppliers to the Company and through the
distribution relationship with Anheuser-Busch Inc. that sells
the Company’s products directly to the wholesalers, except
in the state of Washington.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Widmer | |
|
Redhook | |
|
Kona | |
|
ABI | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Payables
|
|
$ |
814,593 |
|
|
$ |
398,707 |
|
|
$ |
142,897 |
|
|
$ |
52,294 |
|
|
$ |
1,408,491 |
|
|
Receivables
|
|
|
233,749 |
|
|
|
431,089 |
|
|
|
(1,152 |
) |
|
|
1,232,016 |
|
|
|
1,895,702 |
|
Note 4 — Notes Payable
The Company issued member notes payable that were paid off in
their entirety prior to year-end. The original notes payable
were related to initial startup loans by Widmer and Redhook as a
part of the Operating Agreement to fund the initial working
capital requirements. The Operating Agreement states that within
ten days following the operative date of this Agreement each
Member shall make a Required Member Loan to Company in the
amount requested by Company, up to $150,000 each. Craft Brands
Alliance repaid each brewery the principal amount, plus interest
based on the federal funds rate.
Note 5 — Member’s Equity
As a part of the Operating Agreement, each member will own
500 units of the company. The units have no par value. No
stock certificates were issued to represent the units. The
initial capital contribution was $100 for each brewery. Only
1,000 shares were initially authorized for Craft Brands
Alliance LLC.
| |
|
|
|
|
|
|
|
|
| Member |
|
# of Units | |
|
Initial Investment | |
| |
|
| |
|
| |
|
Redhook Ale Brewery
|
|
|
500 |
|
|
$ |
100 |
|
|
Widmer Bros. Brewing Co.
|
|
|
500 |
|
|
$ |
100 |
|
Redhook was required to make an additional capital contribution
due to lower than expected volume results for 2003 which totaled
$250,000. These dollars must be used to market, advertise,
promote and invest directly into the Redhook brand within the
established territory. $114,772 of Redhook marketing expenses
was used to promote the brand during the year, leaving a
$135,228 balance as of December 31, 2004.
Note 6 — Retirement Plan
The Company established a deferred compensation retirement plan,
which covers employees that are at least 18 years of age
and with greater than three months of service. Under the terms
of the plan, participating employees may defer a portion of
their gross wages. The Company has a discretionary match that is
stated as 50% of the employee’s contributions up to 6% of
their gross wages. The Company funded $43,651 in employer
contributions for 2004.
Note 7 — Commitments
The Company has made commitments with two advertising agencies
to perform creative development and advertising for the Widmer,
Redhook and Kona brands. The agencies, Sedgwick Rd and
Wongdoody, are guaranteed $85,716 and $75,000 in 2005,
respectively, for their services. Also, the Company has an
advertising agreement with Trail Blazers Inc., which includes
$38,827 in sponsorship costs in 2005.
78
CRAFT BRANDS ALLIANCE LLC
NOTES TO FINANCIAL STATEMENTS — (Continued)
Note 8 — Subsequent Events
The Company has initiated changes to the Redhook brand which
include the new design and production of a proprietary bottle in
2005 along with updated packaging. It is estimated that the
design, package and bottle will cost the Company approximately
$250,000. The new bottle and packaging is expected to be
released in May 2005.
79
