<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-26542
---------------------------
REDHOOK ALE BREWERY, INCORPORATED
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1141254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3400 PHINNEY AVENUE NORTH 98103-8624
SEATTLE, WASHINGTON
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 548-8000
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 X No__
Common stock, par value $.005 per share:
7,687,486 shares outstanding as of September 30, 1998.
Page 1 of 15 sequentially numbered pages
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<PAGE> 2
REDHOOK ALE BREWERY, INCORPORATED
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets
September 30, 1998 and December 31, 1997 ..................... 3
Statements of Operations
Three Months Ended September 30, 1998 and 1997
and Nine Months Ended September 30, 1998 and 1997 ............ 4
Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 ................ 5
Notes to Financial Statements..................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..................................... 14
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents .................................................. $ 2,910,742 $ 892,165
Accounts Receivable ........................................................ 1,699,277 1,588,368
Inventories ................................................................ 2,677,775 2,815,782
Income Taxes Receivable .................................................... 471,392 1,124,813
Other ...................................................................... 342,057 519,515
----------- -----------
Total Current Assets ..................................................... 8,101,243 6,940,643
Fixed Assets, Net ............................................................ 80,871,681 88,761,436
Assets Held for Sale ......................................................... 1,168,000 --
Other Assets ................................................................. 750,445 1,067,264
----------- -----------
Total Assets ........................................................... $90,891,369 $96,769,343
=========== ===========
LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ........................................................... $ 3,181,785 $ 2,290,012
Accrued Salaries, Wages and Payroll Taxes .................................. 1,424,620 1,322,966
Refundable Deposits ........................................................ 1,296,642 1,166,070
Other Accrued Expenses ..................................................... 557,248 231,816
Current Portion of Long-Term Debt .......................................... 450,000 591,759
----------- -----------
Total Current Liabilities ................................................ 6,910,295 5,602,623
----------- -----------
Long-Term Debt, Net of Current Portion ....................................... 7,987,500 9,873,973
----------- -----------
Deferred Income Taxes ........................................................ 2,496,166 3,987,519
----------- -----------
Other Liabilities ............................................................ -- 40,546
----------- -----------
Convertible Redeemable Preferred Stock ....................................... 15,999,555 15,966,255
----------- -----------
Common Stockholders' Equity:
Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 7,687,486 Shares in 1998 and 1997 ........ 38,438 38,438
Additional Paid-In Capital ................................................. 56,888,633 56,805,633
Retained Earnings .......................................................... 570,782 4,454,356
----------- ----------
Total Common Stockholders' Equity ...................................... 57,497,853 61,298,427
----------- ----------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity ........................................ $90,891,369 $96,769,343
=========== ===========
</TABLE>
See Accompanying Notes
3
<PAGE> 4
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales ........................................... $ 9,152,137 $ 9,718,785 $ 27,575,174 $ 28,563,068
Less Excise Taxes ............................... 838,154 879,858 2,580,938 2,728,798
----------- ----------- ------------ ------------
Net Sales ....................................... 8,313,983 8,838,927 24,994,236 25,834,270
Cost of Sales ................................... 5,800,275 6,546,247 18,165,215 19,272,627
----------- ----------- ------------ ------------
Gross Profit .................................... 2,513,708 2,292,680 6,829,021 6,561,643
Special Valuation Provision ..................... -- -- 5,172,650 --
Selling, General and Administrative Expenses .... 2,210,543 2,450,924 7,044,171 7,390,086
----------- ----------- ------------ ------------
Operating Income (Loss) ......................... 303,165 (158,244) (5,387,800) (828,443)
Interest Expense ................................ 173,632 187,058 535,642 192,840
Other Income -- Net ............................. 49,085 35,142 90,962 72,687
----------- ----------- ------------ ------------
Income (Loss) before Income Taxes ............... 178,618 (310,160) (5,832,480) (948,596)
Income Taxes Expense (Benefit) .................. 29,449 (44,392) (1,982,206) (265,806)
----------- ----------- ------------ ------------
Net Income (Loss) ............................... $ 149,169 $ (265,768) $ (3,850,274) $ (682,790)
=========== =========== ============ ============
Basic Earnings (Loss) per Share.................. $ 0.02 $ (0.03) $ (0.50) $ (0.09)
=========== =========== ============ ============
Diluted Earnings (Loss) per Share................ $ 0.02 $ (0.03) $ (0.50) $ (0.09)
=========== =========== ============ ============
</TABLE>
See Accompanying Notes
4
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REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ......................................................... $ (3,850,274) $ (682,790)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Depreciation and Amortization ................................ 2,529,090 2,502,187
Special Valuation Provision .................................. 5,172,650 --
Deferred Income Tax Provision ................................ (1,491,353) 271,039
Net Change in Operating Assets and Liabilities ............... 2,465,360 204,046
------------ -----------
Net Cash Provided by Operating Activities ........................ 4,825,473 2,294,482
------------ -----------
INVESTING ACTIVITIES
Expenditures for Fixed Assets .................................... (877,664) (5,906,439)
Other ............................................................ 16,000 (41,800)
------------ -----------
Net Cash Used in Investing Activities ............................ (861,664) (5,948,239)
------------ -----------
FINANCING ACTIVITIES
Proceeds from Debt ............................................... -- 5,350,000
Repayments on Debt ............................................... (2,028,108) (1,061,030)
Officer Note Repayment and Other, Net ............................ 82,876 (40,722)
------------ -----------
Net Cash (Used in) Provided by Financing Activities .............. (1,945,232) 4,248,248
------------ -----------
Increase in Cash and Cash Equivalents ............................ 2,018,577 594,491
Cash and Cash Equivalents:
Beginning of Year .............................................. 892,165 1,162,352
------------ -----------
End of Period .................................................. $ 2,910,742 $ 1,756,843
============ ===========
</TABLE>
See Accompanying Notes
5
<PAGE> 6
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The accompanying financial statements
include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements are unaudited and condensed, and
do not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company, for the
periods presented, have been made. All such adjustments were of a normal,
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year.
2. EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128").
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented and, where necessary,
restated to conform to the Statement 128 requirements and SEC Staff Accounting
Bulletin No. 98.
The calculation of adjusted weighted-average shares outstanding for
purposes of computing diluted earnings per share includes the dilutive effect of
all outstanding convertible redeemable preferred stock and outstanding stock
options for the three months ended September 30, 1998. The convertible preferred
stock and outstanding stock options have been excluded from the calculation of
diluted loss per share for the three months ended June 30, 1997, and for the
nine months ended September 30, 1998 and 1997, because their effect is
antidilutive. The calculation uses the treasury stock method in determining the
resulting incremental average equivalent shares outstanding when they are
dilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share computation:
Numerator:
Net income (loss) .................. $ 149,169 $ (265,768) $ (3,850,274) $ (682,790)
---------- ----------- ------------ ----------
Denominator:
Weighted-average common shares ..... 7,687,486 7,686,686 7,687,486 7,686,244
---------- ----------- ------------ ----------
Basic earnings (loss) per share... $0.02 $(0.03) $(0.50) $(0.09)
========== =========== ============ ==========
Diluted earnings (loss) per share computation:
Numerator:
Net income (loss) .................. $ 149,169 $ (265,768) $ (3,850,274) $ (682,790)
---------- ----------- ------------ ----------
Denominator:
Weighted-average common shares ..... 8,998,164 7,686,686 7,687,486 7,686,244
---------- ----------- ------------ ----------
Diluted earnings (loss) per share. $0.02 $(0.03) $(0.50) $(0.09)
========== =========== ============ ==========
</TABLE>
6
<PAGE> 7
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Finished goods .......................... $ 1,328,144 $ 1,387,933
Raw materials ........................... 888,086 879,836
Promotional merchandise ................. 245,881 328,064
Packaging materials ..................... 215,664 219,949
------------ ------------
$ 2,677,775 $ 2,815,782
============ ============
</TABLE>
Finished goods include beer held in fermentation prior to the filtration
and packaging process.
4. SPECIAL VALUATION PROVISION
In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served primarily as a backup facility to the Woodinville
Brewery. In conjunction with this reduction, during the quarter ended June 30,
1998, the Company analyzed its current and future production capacity
requirements and its plans for the Fremont Brewery production assets. Based upon
that analysis, the Company decided to permanently curtail the Fremont Brewery
operations and sell those production assets. In compliance with FASB Statement
No. 121, the Fremont production assets were written down to an estimate of their
net realizable value in the quarter ended June 30, 1998. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million. The
special valuation provision, net of the related income tax benefit, totaled $3.4
million.
The write-down was recorded in the statement of operations on a separate
line as a Special Valuation Provision. The assets are presented as Assets Held
for Sale on the balance sheet as of September 30, 1998, at their estimated fair
market value.
The special valuation provision and the related assets held for sale were
recorded as follows:
<TABLE>
<S> <C>
Brewery equipment ............................................... $ 8,577,598
Building ........................................................ 1,068,824
-----------
9,646,422
Less accumulated depreciation and amortization .................. (3,389,772)
-----------
Net book value .................................................. 6,256,650
Estimated net realizable value of Assets Held for Sale........... (1,184,000)
-----------
Estimated impairment ............................................ 5,072,650
Reserve for disposal related costs............................... 100,000
-----------
Special Valuation Provision ..................................... 5,172,650
Income tax benefit .............................................. (1,810,428)
-----------
Special Valuation Provision, net of income tax benefit .......... $ 3,362,222
===========
</TABLE>
7
<PAGE> 8
ITEM 2. 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.
OVERVIEW
Since its formation, the Company has focused its business activities on the
brewing, marketing and selling of craft beers. For the nine months ended
September 30, 1998, the Company had gross sales of $27,575,000, a decrease of
3.5% from the nine months ended September 30, 1997. The Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an accurate indicator of future performance. The Company's sales consist
predominantly of sales of beer to third-party distributors and Anheuser-Busch,
Inc. ("A-B") through the Distribution Alliance. In addition, the Company derives
other revenues from the sale of beer, food, apparel and other retail items in
its brewery pubs. The Company is required to pay Federal and certain state
excise taxes on sales of its beer. The Federal excise tax burden on beer sales
increases from $7 to $18 per barrel on annual production over 60,000 barrels and
thus, if sales volume increases, federal excise taxes would increase as a
percentage of sales.
The Company's sales volume declined 4.0% for the nine months ended
September 30, 1998, compared to the same period in 1997. In addition to the
level of consumer demand in existing markets, the Company's sales are also
affected by other factors such as competitive considerations, including the
increased number of craft brewers and promotional pricing, the opening of new
distribution territories and new product introductions. Sales in the craft beer
industry generally reflect a degree of seasonality, with the first quarter
historically being the slowest and the rest of the year typically demonstrating
relatively stronger sales in connection with summer activities and fall and
early winter holidays. The Company has historically operated with little or no
backlog, and its ability to predict sales for future periods is limited.
Under normal circumstances, the Company generally operates its brewing
facilities up to five days per week, two shifts per day. The Company has
increased its company-wide annual production capacity from approximately 3,000
barrels at its first brewery in the Ballard neighborhood of Seattle in 1982 to
approximately 425,000 barrels, prior to the 75,000 barrel decrease related to
the Fremont Brewery (see discussion below). Production capacity of each facility
is added in phases until the facility reaches its maximum designed production
capacity. The timing of each phase is affected by the availability of capital,
construction constraints and sales growth in new and existing markets. The
Portsmouth, New Hampshire brewery began commercial production during October
1996. The Portsmouth Brewery's current production capacity is approximately
100,000 barrels per year, and its maximum designed production capacity is
approximately 250,000 barrels per year. Additional capital expenditures and
production personnel will be required to bring the Portsmouth Brewery to its
maximum designed capacity.
Upon the opening of the Portsmouth Brewery, the Company's maximum designed
production capacity increased from 325,000 barrels per year to 575,000 barrels
per year, prior to the 75,000 barrel decrease related to the Fremont Brewery
(see discussion below), resulting in a significant decline in the company-wide
capacity utilization rate. The Company's capacity utilization has a significant
impact on gross profit. When facilities are operating at their maximum designed
production capacities, profitability is favorably affected by spreading fixed
and semivariable operating costs, such as depreciation and production salaries,
over a larger sales base. Most capital costs associated with building a new
brewery, and fixed and semivariable costs related to operating a new brewery,
are incurred prior to, or upon commencement of, production at a facility.
Because the actual production level may be substantially below the facility's
maximum designed production capacity, gross margins are negatively impacted.
This impact is reduced when actual production levels increase.
In January 1998, production at the Fremont Brewery was significantly
reduced, and the brewery served primarily as a backup facility to the
Woodinville Brewery. In conjunction with this reduction, during the quarter
ended June 30, 1998, the Company analyzed its current and future production
capacity requirements and its plans for the Fremont Brewery production assets.
Based upon that analysis, the Company decided to permanently curtail the Fremont
Brewery operations and sell those production assets. In compliance with
8
<PAGE> 9
FASB Statement No. 121, the Fremont production assets were written down to an
estimate of their net realizable value in the quarter ended June 30, 1998. The
write-down was recorded through a non-cash valuation provision totaling $5.2
million. The special valuation provision, net of the related income tax benefit,
totaled $3.4 million.
In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the development
of newer distribution territories, such as increased shipping, marketing and
sales personnel costs; fees related to the distribution agreement with A-B;
changes in packaging and other material costs; and changes in product sales mix.
The incremental cost of shipping beer from the Company's breweries will increase
if the volume of beer supplied to more distant markets increases.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales........................................... 110.1 % 110.0 % 110.3 % 110.6%
Less Excise Taxes............................... 10.1 10.0 10.3 10.6
----- ----- ----- -----
Net Sales....................................... 100.0 100.0 100.0 100.0
Cost of Sales................................... 69.8 74.1 72.7 74.6
----- ----- ----- -----
Gross Profit.................................... 30.2 25.9 27.3 25.4
Special Valuation Provision..................... 0.0 0.0 20.7 0.0
Selling, General and Administrative Expenses.... 26.6 27.7 28.2 28.6
----- ----- ----- -----
Operating Income (Loss)......................... 3.6 (1.8) (21.6) (3.2)
Interest Income (Expense) -- Net ............... (1.5) (1.7) (1.7) (0.4)
----- ----- ----- -----
Income (Loss) Before Income Taxes............... 2.1 (3.5) (23.3) (3.6)
Provision (Benefit) for Income Taxes............ 0.3 (0.5) (7.9) (1.0)
----- ----- ----- -----
Net Income (Loss)............................... 1.8 % (3.0)% (15.4)% (2.6)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Sales. Total sales decreased 5.8% to $9,152,000 for the three months ended
September 30, 1998, compared to $9,719,000 for the comparable 1997 period, as a
6.7% decrease in total sales volume was partially offset by a small increase in
other sales. Total sales volumes for the third quarter of 1998 decreased to
50,400 barrels from 54,000 barrels for the same period in 1997. Sales volume in
Washington State, the Company's largest market, increased 5.1% in the third
quarter of 1998 compared to the third quarter of 1997. The competitive landscape
continues to be affected by the increase in the number of craft beer companies
and the number of different products they offer. The Company's other sales
totaled $1,180,000 for the third quarter of 1998, compared to $1,120,000 for the
third quarter of 1997. At September 30, 1998 and 1997, the Company was selling
beer in 47 states.
Excise Taxes. Excise taxes decreased to $838,000, or 10.1% of net sales,
for the third quarter of 1998, compared to $880,000, or 10.0% of net sales, for
the comparable period of 1997.
Cost of Sales. Cost of sales decreased to $5,800,000 for three months ended
September 30, 1998, from $6,546,000 for the same period in 1997, primarily due
to lower volume and the positive effect of decreased costs at the Fremont
Brewery. Cost of sales, as a percentage of net sales, decreased to 69.8% for the
1998
9
<PAGE> 10
period, compared to 74.1% for the 1997 period. The combined utilization rate of
maximum designed capacity for the operating breweries increased to 40.3% for
three months ended September 30, 1998, compared to 37.6% for the comparable 1997
period. The increase reflects the Fremont Brewery shutdown offset partially by
lower total volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,211,000 for the third quarter of 1998
from $2,451,000 for the same period of 1997 due primarily to reductions in sales
and marketing costs. As a percentage of net sales, these expenses were 26.6% and
27.7% for the quarters ended September 30, 1998 and 1997, respectively.
Interest Expense. Interest expense totaled $174,000 for the third quarter
of 1998, compared to $187,000 for the comparable 1997 period, reflecting lower
outstanding debt and lower interest rates.
Other Income -- Net. Other income -- net, increased to $49,000 in the third
quarter of 1998, compared to $35,000 in the same 1997 quarter due to a higher
average balance of interest-bearing deposits.
Income Taxes. The Company's effective income tax rate increased to a 16.5%
expense for the third quarter of 1998 from a 14.3% benefit for the third quarter
of 1997. The tax rate for the third quarter of 1998 adjusts the tax rate for the
nine months ended September 30, 1998 to 26% from 24%.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Sales. Total sales decreased 3.5% to $27,575,000 for the nine months ended
September 30, 1998, compared to $28,563,000 for the comparable 1997 period, as a
4.0% decrease in total sales volume was partially offset by an increase in other
sales. Total sales volume for the first nine months of 1998 decreased to 155,400
barrels from 161,800 barrels for the same period in 1997. Sales volume in
Washington State, the Company's largest market, increased 1.1% in 1998 compared
to 1997. The Company's other sales totaled $2,823,000 for the nine months ended
September 30, 1998, compared to $2,631,000 for comparable 1997 period.
Excise Taxes. Excise taxes decreased to $2,581,000, or 10.3% of net sales,
for the first nine months of 1998, compared to $2,729,000, or 10.6% of net
sales, for the comparable period of 1997.
Cost of Sales. Cost of sales decreased to $18,165,000 for the nine months
ended September 30, 1998 from $19,273,000 for same period in 1997, primarily due
to the lower sales volume and the positive effect of decreased costs at the
Fremont Brewery, partially offset by an increase in depreciation expense related
to the kegging and cold storage facility in Woodinville. Cost of sales, as a
percentage of net sales, decreased to 72.7% for the 1998 period, compared to
74.6% for the 1997 period. The combined utilization rate of maximum designed
capacity for the operating breweries was 39.5% and 37.5% for the nine months
ended September 30, 1998 and 1997, respectively. The increase reflects the
Fremont Brewery shutdown offset partially by lower total volume.
Special Valuation Provision. In the quarter ended June 30, 1998, the
Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $7,044,000 for the first nine months of
1998 from $7,390,000 for the same period of 1997 due primarily to reductions in
sales and marketing costs. As a percentage of net sales, these expenses were
28.2% and 28.6% for the nine months ended September 30, 1998 and 1997,
respectively
Interest Expense. Interest expense totaled $536,000 for the nine months of
1998, compared to $193,000 for the comparable 1997 period, as the result of
substantially all construction in progress being placed in service on July 1,
1997. Substantially all interest costs incurred in the first six months of 1997
were capitalized to the construction project.
10
<PAGE> 11
Other Income-- Net. Other income-- net, increased slightly to $91,000 in
1998, compared to $73,000 in 1997.
Income Taxes. Excluding the non-cash special valuation provision, the
Company's effective income tax rate decreased to a 26.0% benefit for the nine
months ended September 30, 1998, from a 28.0% benefit for the same period in
1997. The change is primarily the result of lower estimated pre-tax results for
the full year of 1998, relative to other components of the tax provision
calculation, such as the exclusion of a portion of meals and entertainment
expenses from tax return deductions. The tax benefit related to the special
valuation provision was calculated using a 35% rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2,911,000 and $892,000 of cash and cash equivalents at
September 30, 1998 and December 31, 1997, respectively. At September 30, 1998,
the Company had working capital of $1,191,000. In September 1998, the Company
elected to pay off the remaining balance of a note payable to a bank. That
payment totaled approximately $1.6 million. The Company's long-term debt as a
percentage of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was 10.3% and 11.9% as of September 30, 1998 and December
31, 1997, respectively. Cash provided by operating activities totaled $4,825,000
and $2,294,000 for the nine months ended September 30, 1998 and 1997,
respectively. The 1998 amount includes the April collection of an income tax
receivable totaling approximately $1 million.
On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of September 30, 1998, there was $8.4
million outstanding on the Secured Facility, and the Company's one-month
IBOR-based borrowing rate was approximately 6.9%. In addition, the Company has a
$10 million unsecured revolving credit facility (the "Revolving Facility") with
the same bank through June 5, 1999, and as of September 30, 1998, there were no
borrowings outstanding on this facility. The bank has committed to extend the
Revolving Facility through July 1, 2001. The covenants will not change, and the
Company has agreed to secure the line with the same assets that are collateral
for the Secured Facility. Interest accrues at a variable rate based on the Inter
Bank Offered Rate ("IBOR"), plus 1.25% to 2.75% for the Secured Facility, and
plus 1.00% to 2.50% on the Revolving Facility, depending on the Company's
debt-to-tangible net worth ratio. The Company can fix the rate by selecting IBOR
for one- to twelve-month periods as a base. Beginning June 6, 1999, the interest
rate for the Revolving Facility will be the applicable LIBOR plus 1.00% to
2.00%, depending on the Company's debt-to-cash flow ratio.
The Company has required capital principally for the construction and
development of its technologically advanced production facilities. To date, 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, including working capital and capital
expenditure requirements, through cash on hand, operating cash flow and, to the
extent required and available, bank borrowings and offerings of debt or equity
securities.
Capital expenditures for the nine months ended September 30, 1998, totaled
$878,000. Capital expenditures for 1998 are expected to total approximately
$1,000,000.
The Company has certain commitments, contingencies and uncertainties
relating to its normal operations. Management believes that any such
commitments, contingencies or uncertainties, including any environmental
uncertainties, will not have a material adverse effect on the Company's
financial position or results of operations.
11
<PAGE> 12
CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance or
sales volumes, although this Quarterly 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 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
issues discussed below, the successful execution of market development and other
plans and the availability of financing. 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 growth outlook and any
forward-looking statements.
Effect of Competition on Future Sales. The domestic market in which the
Company's craft beers are sold is highly competitive due to the proliferation of
small craft brewers, including contract brewers, the increase in the number of
products offered by such brewers and the introduction of fuller-flavored
products by major national brewers. The Company's revenue growth rate began to
slow in late 1996, and sales have declined in 1997 and in the first nine months
of 1998, due primarily to slower sales in the highly competitive draft beer
market. If negative sales trends were to continue, the Company's future sales
and results of operations would 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 is expected to increase in the future.
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 disproportionate depreciation and other fixed and
semivariable operating costs, during periods when the Company's breweries are
producing below maximum designed 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:
shipping costs, availability and prices of raw materials and packaging
materials, mix between draft and bottled product sales, and Federal or state
excise taxes. Also, as sales volumes through the Distribution Alliance increase,
the alliance fee, and other staging and administrative costs, would increase.
Advertising and Promotional Costs. While the Company has historically done
very limited advertising, market and competitive considerations could make a
significant increase in such spending appropriate. In addition, market and
competitive considerations could require an increase in other promotional costs
associated with developing existing and new markets.
Relationship with Anheuser-Busch, Incorporated. Most of the Company's
future sales are expected to be through the Distribution Alliance with A-B. If
the Distribution Alliance were to be terminated, or if the relationship between
A-B and the Company were to deteriorate, the Company's sales and results of
operations could be materially adversely affected. While the Company believes
that the benefits of the Distribution Alliance, in particular access to
distributors and distribution efficiencies, offset costs associated with the
Alliance, there can be no assurance that these costs will not have a negative
impact on the Company's profit margins in the future.
12
<PAGE> 13
Dependence on Third-Party Distributors. The Company relies heavily on
third-party distributors for the sale of its products to retailers. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
A-B affiliated wholesaler in the Seattle area, accounted for approximately 17%
of the Company's sales during the first nine months of 1998. Substantially all
of the remaining sales volumes are now through the Distribution Alliance to A-B
affiliated distributors, most of whom are independent wholesalers. The loss of
K&L or the termination of the Distribution Alliance could have a material
adverse impact on the Company's sales and results of operations.
Customer Acceptance, Consumer Trends and Public Attitudes. If consumers
were unwilling to accept the Company's products or if the recent trends toward
drinking craft beers were to change further, it could adversely impact the
Company's sales and results of operations. 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.
Impact of Year 2000. Some of the Company's computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company recently completed an assessment on a significant portion of
its information systems and is in the process of upgrading software so that
those computer systems will function properly with respect to dates in the year
2000 and thereafter. Those upgrades are expected to be completed by the end of
1998. In addition, the Company expects to complete the assessment of the
remaining systems in early 1999. The costs associated with all software upgrades
or modifications are currently expected to be less than $50,000.
The Company is working directly with key vendors, service providers and
business partners, such as A-B, in order to avoid any business interruptions in
the year 2000 and thereafter. Steps are being taken to understand key third
parties' ability to continue providing services and products through the change
to 2000. Currently, the Company is in the process of sending detailed
questionnaires to key third parties to verify Year 2000 readiness and is
conducting on-going risk analysis. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of third parties to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by third parties is not
determinable.
In addition, the Company is in the process of completing its contingency
planning for all risk areas. The contingency plans include, among other things,
manual "work-arounds" for potential software and hardware failures.
The project is expected to be completed prior to any potential negative
impact on the Company's operations or information systems. The Company believes
that the new software will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 compliance issue could have a
significant impact on the operations of the Company.
The costs and timing of the project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
13
<PAGE> 14
NEW ACCOUNTING STANDARD
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The new rules require that all items that
are recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997.
The Company has evaluated this statement and has determined that it will
have no impact on the Company's financial statements.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this report.
27 Financial Data Schedule for the nine months ended September 30,
1998.
(b) REPORTS ON FORM 8-K
None were filed during the quarter ended September 30, 1998.
ITEMS 1, 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
<PAGE> 15
SIGNATURE
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 Seattle,
State of Washington, on November 10, 1998.
REDHOOK ALE BREWERY, INCORPORATED
BY: /s/ Bradley A. Berg
------------------------------------
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
BY: /s/ David H. Kirske
------------------------------------
David H. Kirske
Controller and Treasurer,
Principal Accounting Officer
DATE: November 10, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,910,742
<SECURITIES> 0
<RECEIVABLES> 1,709,277
<ALLOWANCES> 10,000
<INVENTORY> 2,677,775
<CURRENT-ASSETS> 8,101,243
<PP&E> 89,297,183
<DEPRECIATION> 8,425,502
<TOTAL-ASSETS> 90,891,369<F1>
<CURRENT-LIABILITIES> 6,910,295
<BONDS> 7,987,500
15,999,555
0
<COMMON> 38,438
<OTHER-SE> 57,459,415
<TOTAL-LIABILITY-AND-EQUITY> 90,891,369
<SALES> 24,994,236<F2>
<TOTAL-REVENUES> 24,994,236<F2>
<CGS> 18,165,215
<TOTAL-COSTS> 30,382,036<F3>
<OTHER-EXPENSES> (90,962)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 535,642
<INCOME-PRETAX> (5,832,480)
<INCOME-TAX> (1,982,206)
<INCOME-CONTINUING> (3,850,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,850,274)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
<FN>
<F1>TOTAL ASSETS INCLUDES ASSETS HELD FOR SALE OF $1,168,000.
<F2>SALES AND TOTAL REVENUES ARE NET OF FEDERAL AND STATE EXCISE TAXES.
<F3>TOTAL COSTS INCLUDES SPECIAL VALUATION PROVISION OF $5,172,650.
</FN>
</TABLE>
