<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-26542
REDHOOK ALE BREWERY, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1141254
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
3400 PHINNEY AVENUE NORTH 98103
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(206) 548-8000
(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 [X] No [ ]
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. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing price on February 27, 1998, as reported on
NASDAQ, was $33,906,536.(1)
The number of shares of the registrant's Common Stock outstanding as of
February 27, 1998, was 7,687,486.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's
1998 Annual Meeting of Stockholders to be held on May 19, 1998, are incorporated
by reference into Part III of this Report.
- ---------------
(1) Excludes shares held of record on that date by directors and 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.
================================================================================
<PAGE> 2
REDHOOK ALE BREWERY, INCORPORATED
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 14
ITEM 3. Legal Proceedings........................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders......... 15
ITEM 4A. Executive Officers of the Company........................... 15
PART II.
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
ITEM 6. Selected Financial Data..................................... 17
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
ITEM 8. Financial Statements and Supplementary Data................. 24
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and
Financial Disclosures....................................... 40
PART III.
ITEM 10. Directors and Executive Officers of the Registrant.......... 40
ITEM 11. Executive Compensation...................................... 40
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
ITEM 13. Certain Relationships and Related Transactions.............. 40
PART IV.
ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K...... 40
</TABLE>
i
<PAGE> 3
PART I.
ITEM 1. BUSINESS
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 three
technologically advanced, company-owned breweries, two in the Seattle,
Washington area and a third in Portsmouth, New Hampshire. By operating its own
small-batch breweries, the Company believes 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 has the
largest company-owned production capacity of any domestic craft brewer and 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 (a.k.a. Ballard Bitter),
Redhook Hefe-Weizen, Blackhook, Redhook Rye, Double Black Stout brewed with
Starbucks(R) coffee, and its seasonal offerings Redhook Blonde Ale, Winterhook,
and Redhook Nut Brown Ale. 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. The Company distributed its products
through a network of third-party wholesale distributors and a long-term
distribution alliance with Anheuser-Busch, Incorporated ("A-B") (the
"Distribution Alliance" or the "Alliance") in 48 states as of December 31, 1997.
INDUSTRY BACKGROUND
The Company is a leader in the relatively small but growing craft brewing
segment of the U.S. brewing industry, which includes regional specialty brewers
such as the Company, contract brewers, microbreweries and brewpubs. Craft beers
are distinguishable from other domestically produced beers by their fuller
flavor and adherence to traditional European brewing styles. According to
industry sources, shipments in the craft beer segment increased by 26% to 5.4
million barrels in 1996, yet represented less than 3% of the 200 million barrels
shipped by domestic producers within the United States. Although 1997
information is not yet available, the U.S. craft beer segment volume growth is
expected to be less than 10%. While the segment volume growth has recently
slowed, the number of craft brewers in the U.S. has grown dramatically, from 627
at the end of 1994 to over 1,300 as of December 31, 1997.
At the turn of this century, the U.S. brewing industry comprised 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, competition in the beer industry came
to focus on a narrowing of product offerings to less distinctive beer styles
(principally pale lagers and pilsners) to please the broadest possible segment
of the population; economies of scale; mass production techniques; lower costs
and lighter flavor profiles through the use of less barley and more corn, rice
and other adjuncts; use of pasteurization processes to prolong shelf-life; and
marketing a few major brand names on a national basis, principally through
mass-media advertising. As a result of these competitive factors, extensive
industry consolidation occurred. Currently, according to industry sources, the
five largest domestic brewers account for approximately 90% of domestic beer
shipments.
By the early 1980s, annual domestic consumption of beer produced by U.S.
brewers had plateaued at approximately 180 million barrels. Over the past
decade, per capita annual domestic beer consumption has declined slightly, due
to increasing health and safety consciousness and the changing tastes, affluence
and consumption attitudes of the maturing generation of beer drinkers born after
World War II. A growing number of consumers began to migrate away from less
flavorful mass-marketed beers toward greater taste and broader variety in their
malt beverages, mirroring similar trends in other beverage and cuisine
categories. Initially, foreign brewers were the principal beneficiaries of these
evolving consumption patterns. Even though the principal European, Canadian and
Mexican imported beers are also mass-produced, many represent a fuller-flavored
alternative to the national brands produced in the United States.
1
<PAGE> 4
By the latter half of the 1980s, a substantial new domestic industry
segment had developed in response to the increasing consumer demand for
fuller-flavored beers. Across the country, a proliferation of regional specialty
brewers (annually selling more than 15,000 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. The strength of consumer demand has enabled
certain craft brewers, such as the Company, to evolve from microbreweries into
regional 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 by hiring certain brewers of typical American-style lagers to
perform contract brewing at their otherwise underutilized brewing facilities.
Certain national brewers of mass-produced beers have also sought to appeal to
this growing demand for craft beers by introducing their own fuller-flavored
products.
BUSINESS STRATEGY
The Company's principal business objective is to be the leading brewer of
craft beers in the United States. Redhook seeks to achieve this objective by
expanding penetration in existing markets. 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 designed to
appeal to a growing number of consumers. The Company brews its craft
beers according to traditional European brewing styles and methods, using
only high-quality ingredients and technologically advanced brewing
equipment. The Company does not intend to compete directly in terms of
production style, pricing or mass-media advertising with the mass-
marketed 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
constant product innovation and its control over product quality are
critical competitive advantages. Accordingly, the Company does not hire
third parties to perform contract brewing of any of its products.
- Production Economies Through Technologically Advanced Equipment. The
Company's technologically advanced, 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 technological leadership enables it to optimize
employee 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 speed and process
reliability.
- Strategic Distribution Alliance With Industry Leader. In October 1994,
the Company entered into a long-term distribution agreement with A-B,
pursuant to which Redhook distributes its products in most markets
through A-B's wholesale distribution network. A-B's network consists of
over 700 wholesale distributors, which are for the most part
geographically contiguous and independently owned and operated. The
Alliance with A-B has enabled the Company to expand its distribution to
new markets more quickly and without the delays, costs and potential gaps
or overlaps in coverage associated with developing a network of
distributors on a piecemeal basis. In addition, the Alliance enables the
Company to have access to wholesaler representation in all of the
Company's markets. With the proliferation of craft beer companies, it has
been increasingly difficult for many small brewers to get access to
quality distributors because of limitations on distributors' ability to
effectively manage a greater number of brands. As an independent company,
Redhook maintains complete control over the production and marketing of
its product.
- 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 consumer identification
with the Company's brands, and enhanced familiarity with local consumer
tastes. Redhook may construct additional brewing facilities in the
future, if
2
<PAGE> 5
additional capacity is required, in select locations in the United
States, with the capability to produce Redhook's principal products, as
well as to offer select products to respond to local taste preferences.
By pursuing this strategy, Redhook believes that it will be able to
preserve its reputation and prestige as a regional craft brewer, while
selectively introducing its products into regional markets.
- Promotion of Products Within Local Markets. The Company 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 include
introducing Redhook products on draft in pubs and restaurants, using
promotional items including tap handles, glassware and coasters, and
participating in local festivals 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 believes that its training and
promotional methods are more effective in communicating and educating
consumers than broad-based, less flexible mass-media beer advertising
campaigns, although the Company does limited print advertising. While the
Company has historically done very limited advertising, market and
competitive considerations could make a significant increase in such
spending appropriate.
PRODUCTS
The Company produces a variety of styles of full-flavored 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 approximately 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 nine principal brands, each with its own
distinctive combination of flavor, color and clarity:
Redhook E.S.B. (Extra Special Bitter). The Company's flagship brand,
Redhook E.S.B., which accounted for approximately 69% of the Company's sales in
1997, is a full, rich, well-rounded, copper-colored ale with a sweet toasted
malt flavor balanced by a pleasant floral/herbal liveliness derived from
Tettnang hops.
Redhook India Pale Ale (a.k.a. Ballard Bitter). A premium English pub-style
bitter ale, Redhook India Pale Ale, is pale and aggressively hopped, has a
brassy color imparted by caramelized malt, an herbal aroma characteristic of
Northwest Cascade hops, and a crisp, dry finish.
Redhook Hefe-Weizen. This wheat beer is unfiltered and named hefe-weizen
which means "wheat beer with yeast." Leaving the yeast in, instead of filtering
it out, accentuates the wheat flavor and adds visual appeal.
Redhook Rye. A pleasing, sweet, light and easy-to-drink ale, Redhook Rye
has a flavor that is enhanced by the addition of flaked rye grain, which adds a
spicy character, and by the live yeast content that remains after it is racked
into kegs or bottled.
Blackhook. A London-style Porter, Blackhook has an ebony tone, a pleasant
"burnt" character produced by highly roasted black barley, and a dark malt
flavor suggesting coffee and chocolate, balanced by lively hopping.
Double Black Stout. A rich, imperial stout enhanced by the addition of an
extract of Starbucks(R) coffee. Dark malts and the coffee create a big roasty
flavor that is rounded out with a touch of honey.
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.
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.
3
<PAGE> 6
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 result in a
surprisingly smooth, well-balanced dark beer.
In an effort to be responsive to varying consumer style and flavor
preferences, the Company is also periodically engaged in the development and
testing of new products. The Company believes that the continued success of
craft brewers will increasingly depend on their ability to be innovative and
attentive to consumer desires for new and distinctive taste experiences. The
Company may also consider producing low-alcohol beer or other low-alcohol or
nonalcoholic beverages (such as root beer, fruit beers, craft sodas and ciders).
The Company's technologically advanced breweries allow it to produce small-batch
experimental ales within two to three weeks. These 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 Rye, Redhook India Pale Ale, Redhook Nut Brown Ale, and Double
Black Stout are examples of products that were developed in this manner. Other
such products have included ales such as Barley Wine, Honey Stout, Oatmeal
Stout, Scotch Ale and Wit, and lagers such as Marzen and Pilsner.
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, which make it easy
to ferment. The Company uses the finest barley malt, typically 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,
concentrated and clarified. 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 cells, producing carbon dioxide and alcohol.
Some of the carbon dioxide is recaptured and 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 10 to 14 days, depending on the formulation and style of
the product being brewed.
4
<PAGE> 7
[REDHOOK ALE BREW PROCESS]
Brewing Equipment. The Company uses only technologically advanced and
highly automated small batch brewing equipment. The Woodinville 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 Portsmouth 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; three 100-barrel and
sixteen 400-barrel fermenters; two 200-barrel and two 400-barrel bright tanks;
and an anaerobic waste-water treatment facility which completes the process
cycle. The Fremont Brewery employs a 55-barrel mash tun; lauter tun; two brew
kettles; four 35,000-pound grain silos; and, thirty-eight 110-barrel, one
55-barrel and two 40-barrel fermenters. Each brewery uses advanced
microfiltration technology, including a diatomaceous earth pad filter to
eliminate unwanted yeast and to extend shelf life.
In January 1998, production at the Fremont Brewery was significantly
reduced. The brewery will serve primarily as a backup facility to the
Woodinville Brewery until such time that its production capacity is required on
a regular basis, if market conditions improve sufficiently.
Bottling and Kegging. The Company packages its craft beers in both bottles
and kegs. Each of the Company's breweries has a fully automated, technologically
advanced bottling line. The bottle filler at each brewery utilizes a carbon
dioxide environment during bottling designed to ensure that minimal oxygen is
dissolved in the beer, thereby extending shelf life. Redhook uses the latest keg
technology, which is preferred by many draft beer retailers because the kegs are
designed to be easier to handle and lift, to consume less floor space, to have
more consistent flow and to reduce waste. During 1997, the Company completed a
kegging and cold storage facility at its Woodinville Brewery. Currently, the
Company can fill kegs at the Fremont Brewery, Woodinville Brewery, and the
Portsmouth Brewery.
Quality Control. The Woodinville Brewery was designed to be the center of a
quality control and analysis network. The Company monitors production and
quality control of each of its breweries with central coordination at the
Woodinville Brewery. Both of the Woodinville and Portsmouth breweries have an
on-site laboratory where microbiologists and lab technicians supervise on-site
yeast propagation, monitor product
5
<PAGE> 8
quality, test products, measure color and bitterness, and test for oxidation and
unwanted bacteria. The Company also regularly utilizes independent laboratories
for product analysis.
Ingredients and Raw Materials. The Company currently obtains all of its
malted barley from two suppliers and its premium-quality select hops, grown in
the Pacific Northwest, from three 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. Redhook believes that alternate sources of
malted barley and hops are available at competitive prices. The Company
currently cultivates its own Saccharomyces cerevisiae yeast supply. The Company
has available to it multiple competitive sources for packing materials, such as
bottles, labels, six-pack carriers, crowns and shipping cases.
PRODUCT DISTRIBUTION
Redhook'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 and convenience stores. Like 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. The Company,
together with its distributors, markets its products to retail outlets and
relies on its distributors to provide regular delivery to retailers, to maintain
retail shelf space and to oversee timely rotation of inventory to ensure the
freshness of its products. The Company also offers its products directly to
consumers at the Company's three on-premise retail establishments, the
Trolleyman pub in Fremont, the Forecasters pub in Woodinville, and the Cataqua
pub in Portsmouth, New Hampshire.
In October 1994, the Company entered into the Distribution Alliance with
A-B pursuant to which Redhook distributes its products in new markets
exclusively through A-B's wholesale distribution network. If an A-B distributor
does not agree to carry the Company's products, the Company may select a non-A-B
distributor for that territory. The exclusivity provisions of the A-B
Distribution Agreement do not apply to territories currently subject to
distribution arrangements with non-Alliance distributors until such arrangements
expire. During 1996, Redhook changed the distribution in substantially all of
the significant markets previously served by non-A-B wholesalers to distribution
through the Alliance.
Prior to establishing the Alliance with A-B, the Company distributed its
products regionally through distributors in eight western states: Washington,
California (northern), Oregon, Idaho, Montana, Wyoming, Colorado and Alaska. The
Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an
independent A-B distributor responsible for distribution in most of King County,
Washington, which includes Seattle, accounted for approximately 17%, 18% and 24%
of total sales in 1997, 1996 and 1995, respectively. As of December 31, 1997,
the Company had 37 non-Alliance distributors. The Company expects the percentage
of sales represented by non-Alliance distributors to continue to decline as the
Company expands its sales through the Alliance.
A-B, whose products accounted for approximately 46% of total domestic beer
sales by volume in 1997, distributes its products throughout the United States
through a network of over 700 wholesale distributors, which are for the most
part geographically contiguous and independently owned and operated. 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 Alliance as an integral
part of its growth strategy, and to provide access to quality distribution
throughout the U.S., thereby developing a competitive advantage for Redhook
products. Redhook was the first and is the largest independent craft brewer to
have a formal distribution agreement with a major U.S. brewer. The Company
believes that access to A-B's distribution network has enabled it to enter
targeted new markets more rapidly and with more thorough penetration of the
available customer base in the territory. The Distribution Alliance allowed the
Company to retain control over the selection and timing of new market
introductions. The Company believes that the existence of the Alliance,
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
6
<PAGE> 9
distributors about its specialty products result in increased awareness of and
demand for Redhook products among A-B's distributors.
The Company believes that local beer distribution territories have tended
to become dominated by a smaller number of distributors, generally those
carrying beers marketed by the larger national breweries, and that this
consolidation has had the effect of making it more difficult for relatively
small craft brewers to establish effective distribution networks with reliable
distributors. Management believes that the Company's competitors in the craft
beer segment generally negotiate distribution relationships separately with
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 Alliance enables the Company to
reduce the gaps and overlaps in distribution coverage often experienced by the
Company's competitors. As a result, the Company believes the Alliance provides
the Company with significant advantages over competitors in the craft beer
industry, who generally are unable to achieve the distribution efficiencies
afforded by the Alliance network.
The Distribution Alliance enabled the Company to accelerate the
distribution of its products into new markets. The Company expanded distribution
into 48 states by the end of 1997, although in many of those states the account
penetration is initially very low. As of December 31, 1997, the Company had 653
Alliance distributors, accounting for approximately 77% of the Company's sales
volume in 1997. The Company believes that the opening of the Portsmouth Brewery
has allowed it to increase its market penetration in the eastern half of the
United States.
Under the Alliance, the Company is responsible for marketing its products
to A-B's distributors, as well as to retailers and consumers. The A-B
distributors then place orders with A-B for the Company's products, which the
Company separately packages and ships in refrigerated trucks to the A-B
distribution center nearest to the distributor or, under certain circumstances,
directly to the distributor. The Company sells its products to A-B at the same
list prices paid by non-Alliance distributors, net of the Alliance fee. The
Company pays an Alliance fee to A-B, determined by a formula, that effectively
reduces the total gross profit margin earned on sales to A-B. However,
management believes that the benefits of the Alliance, particularly the
potential for increased sales volume, and efficiencies in delivery, state
reporting and licensing, billing and collections created by the Alliance are
significant to the Company's business.
Under the Alliance, the Company has granted A-B the first right to
distribute Redhook products in the United States and Mexico, except in those
territories already subject to distribution agreements with non-Alliance
distributors, in which case such right does not commence until the existing
arrangements expire. A-B additionally has a first right to distribute new
Redhook products in non-Alliance territories. In exchange, prior to October
1997, A-B could not acquire an interest between 10% and 50% of the common stock
of, or distribute the products of, any other U.S.-based small brewer (producing
or distributing less than 1,000,000 barrels annually) that distributes beer in
those areas where the Company distributes its products, without the Company's
approval. After October 1997, if A-B were to agree to distribute the products of
any U.S.-based small brewer in areas where the Company's products are
distributed, without the Company's approval, the Alliance fee would be
substantially reduced on sales of Redhook products in such areas.
SALES AND MARKETING
The Company has historically engaged in very limited media advertising to
market its products, choosing instead to stimulate consumer demand by educating
consumers and wholesalers as to the distinctive qualities of its products, and
by sponsoring localized promotions designed to enhance Redhook's word-of-mouth
reputation. The Company maintains a sales and marketing staff whose efforts are
focused principally on local promotions, programs for on-premise consumer and
retailer education, and distributor training and assistance. 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 professional sporting events,
as well as the limited use of print and billboard advertising.
The Company's sales and marketing staff also offers education, training and
other support to wholesale distributors of the Company's products. Because the
Company's wholesalers generally also distribute much
7
<PAGE> 10
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 and educational tours of the Company's breweries. 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 identity 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
periodic distribution of the Company's experimental products in limited
quantities to selected pubs and restaurants is another example of on-premise
marketing designed to increase consumer awareness.
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 regional
brewer. More than 50,000 visitors participated in brewery tours at the Company's
facilities in 1997. Each of the Company's breweries has a retail pub on-site
where the Company's products are served. In addition, the Woodinville and
Portsmouth breweries each 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 breweries, which
the Company believes create further awareness of the Company's beers and
reinforce the Company's quality image.
To further promote retail bottled product sales, the Company periodically
offers "post-offs," or price discounts to distributors in certain markets,
primarily in Washington state. Distributors and retailers participate in these
price discounts. In addition, the Company anticipates that it will offer such
promotions in most markets in response to local competitive conditions.
COMPETITION
The highly fragmented craft beer category is the fastest growing segment of
the domestic beer industry, although its growth has slowed in 1996 and 1997. The
Company competes primarily with other participants in the craft beer segment,
producers of imported beers and mass-market national brewers. See "Industry
Background." The number of participants and number of different products offered
in this segment have increased significantly, thereby intensifying competition
for the bottled product placements and especially for draft beer placements.
Competition within the domestic craft beer segment 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. A significant portion of the Company's past sales growth has
been achieved through increasing sales in the Pacific Northwest region, which
the Company believes is one of the most competitive craft beer markets in the
United States in terms of number of market participants and consumer awareness.
Craft beers represented approximately 10% of total beer sales in Washington and
Oregon during 1997. Because of the strong demand for the Company's products in
this region, the Company has not historically encountered significant pricing
pressures relative to those found in other regions. In 1997, the sales for the
Company, and many of its competitors, declined in Washington State compared to
1996. The Company's Washington State 1997 sales volumes decreased 2% compared to
1996.
As the Company expanded its distribution network outside the Pacific
Northwest region, and as other craft brewers expand their distribution to the
Pacific Northwest, Redhook expects to encounter increasing competition from
other regional specialty brewers such as Sierra Nevada Brewing Company and
Anchor Brewing Company, as well as from contract brewers such as Pete's Brewing
Company and Boston Beer
8
<PAGE> 11
Company. 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 technologically advanced, company-owned production facilities and
the availability of distribution through the Alliance.
The Company also competes against producers of imported beers, such as
Heineken, Molson, Modelo (Corona), Becks and Labatts. Although imported beers
currently account for a much greater share of the U.S. beer market than craft
beers, the Company believes that regional craft brewers possess significant
competitive advantages over certain 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, and others may be
expected to do so in the future. Although these product offerings are intended
to compete with craft beers, many of them are brewed according to methods used
by the major national brewers. The Company believes that certain of the major
national brewers, with their superior financial resources, access to raw
materials and established distribution networks, may seek further participation
in the continuing growth of the craft beer segment through the acquisition of
equity positions in, or the formation of distribution alliances with, smaller
craft brewers. Although the increasing participation of the major national
brewers will likely increase competition for market share and 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 contribute to further growth of
this industry segment.
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, Bureau of Alcohol,
Tobacco and Firearms (the "BATF"); 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 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 were to fail to comply with the terms
of such permits or licenses, and additional permits or licenses could in the
future be required for the Company's existing or expanded operations. If
licenses, permits or approvals necessary for the Company's 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
Each of the Company's breweries and pubs is subject to licensing and
regulation by a number of governmental authorities. The Company operates its
breweries under federal licensing requirements imposed by the BATF. The BATF
requires the filing of a "Brewer's Notice" upon the establishment of a new
commercial brewery, such as at the Portsmouth 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 BATF at any time.
In addition to the regulations imposed by the BATF, 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 by the Company to comply with applicable federal or state
regulations could result in limitations on the Company's ability to conduct its
business. The BATF's permits can be
9
<PAGE> 12
revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond
premises, and 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 produced for consumption in the United States. However, any
brewer with production under 2 million barrels per year instead pays federal
excise tax in the amount of $7 per barrel on the first 60,000 barrels it
produces annually. 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 will lose the benefit of this rate structure if it exceeds
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, the
Company's business may be adversely affected. In addition, if environmental
regulations were to become more stringent in the future, the Company could be
adversely affected.
Dram Shop Laws
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 employee training
and designated-driver programs. Large uninsured damage awards against the
Company could adversely affect the Company's financial condition.
RELATIONSHIP WITH ANHEUSER-BUSCH, INCORPORATED
In October 1994, the Company entered into the Alliance with A-B. The
Alliance consists of a long term national distribution agreement (the "A-B
Distribution Agreement") and an investment by A-B in the Company (the "A-B
Investment Agreement"). The Alliance gives the Company access to A-B's domestic
network of over 700 wholesale distributors, while the Company maintains control
over the production and marketing of its products. Pursuant to the A-B
Investment Agreement, A-B invested approximately $30 million to purchase common
stock of the Company ("Common Stock"), including newly-issued shares concurrent
with the Company's initial public offering, and the Company's Series B Preferred
Stock (the "Series B Preferred Stock").
A-B Distribution Agreement
The A-B Distribution Agreement has a stated term of 20 years, but is
subject to earlier termination (i) by either party after 10 years, (ii) by
either party upon an uncured material breach by the other party of certain
provisions of the Series B Preferred Stock, the A-B Investment Agreement, the
A-B Distribution Agreement and certain related A-B investment documents, or upon
the insolvency of the other party, (iii) by A-B upon (a) acquisition by another
large alcoholic beverage competitor of 10% or greater equity ownership of the
Company and a seat on the Company's Board of Directors or (b) a deterioration of
the Company's financial condition that results from a change in ownership of the
Company and materially adversely affects its ability to perform under the A-B
Distribution Agreement, or (iv) by A-B following (a) any action by the Company
that
10
<PAGE> 13
in A-B's sole determination damages the reputation or image of A-B or the
brewing industry (for example, production of a high-alcohol beer, defamation of
A-B or its products or contamination of the Company's products, but not poor
operating results, an unsuccessful product introduction or competition with
A-B's products), (b) any acquisition of, agreement to acquire, or institution of
a tender or exchange offer to acquire a percentage of the Company's equity
securities equal to or greater than that held by A-B, (c) certain agreements
pursuant to which the Company would merge into or consolidate with another
corporation or sell substantially all of its assets or certain of its
trademarks, or (d) the failure to appoint a successor acceptable to A-B in the
event Paul S. Shipman ceases to function as the Company's Chief Executive
Officer. The term "Extraordinary Termination" refers to the termination by A-B
of the A-B Distribution Agreement for any of the reasons described under clause
(iv) above.
A-B Investment Agreement
Pursuant to the A-B Investment Agreement, A-B purchased 236,756 shares of
Common Stock for $7.00 per share in October 1994 and 1,289,872 shares of Series
B Preferred Stock for $12.61 per share in November 1994.
A-B Preemptive Rights. Pursuant to the A-B Investment Agreement, A-B
exercised its right in connection with the Company's public offering in August
1995 to purchase 716,714 shares of Common Stock at $17.00 per share in order to
maintain its 25% ownership percentage of the Common Stock on a Fully Diluted
Basis (as defined below). A-B has no further preemptive rights.
A-B Standstill and Transfer Restrictions. Pursuant to the A-B Investment
Agreement, A-B has agreed that neither it nor its affiliates will acquire any
Common Stock, or any option, right or warrant to acquire, or security
convertible or exchangeable into Common Stock, if such purchase or acquisition
would result in A-B and its affiliates holding in the aggregate in excess of 25%
(prior to November 16, 1999) or 30% (prior to November 16, 2001) of the
outstanding shares of Common Stock, calculated on a Fully Diluted Basis (the
"A-B Standstill"). Certain increases in A-B's beneficial ownership resulting
from involuntary acquisitions or decreases in the number of outstanding shares
are excluded from the A-B Standstill.
The A-B Standstill terminates prior to November 16, 2001 if (i) any person
unaffiliated with A-B directly or indirectly: (a) becomes a beneficial owner of,
or enters into an agreement to acquire, commences a tender offer or exchange
offer to acquire, or announces the intention to acquire and, in A-B's reasonable
judgment, has a reasonable likelihood of acquiring as a result thereof, 25% or
more (prior to November 16, 1999) or 30% or more of the outstanding shares of
Common Stock, calculated on a Fully Diluted Basis; (b) enters into an agreement
to consolidate with the Company, to have the Company merged into or with it or
to enter into a share exchange with the Company (other than any merger,
consolidation or share exchange in which the holders of the Company's
outstanding voting securities immediately preceding such transaction will,
immediately after such transaction, own capital stock possessing more than 50%
of the aggregate voting power and economic rights of the outstanding capital
stock of the entities surviving such transaction); or (c) enters into an
agreement to acquire all or substantially all of the Company's assets or certain
trademarks or trade names; (ii) the Company announces its intention to enter
into any agreement described above; or (iii) at any time continuing directors
(defined as directors as of the date of the Company's initial public offering,
directors subsequently elected whose nomination was approved by a majority of
the continuing directors, and directors designated by A-B) cease to constitute
at least a majority of the Company's Board of Directors. If the A-B Standstill
is terminated but the underlying transaction giving rise to termination of the
A-B Standstill does not in fact transpire, the A-B Standstill will be reinstated
as if such event had not occurred if A-B has not increased its ownership above
the standstill limitation in the interim.
The A-B Investment Agreement further provides that, to the extent A-B's
ownership exceeds the limits permitted under the A-B Standstill as the result of
a rights offering while such obligations are still in effect, A-B will, in
certain circumstances, take steps to divest itself of such shares no later than
the later of (i) one year from the date of such purchase or acquisition and (ii)
the earliest period in which such shares may be sold pursuant to Rule 144 under
the Securities Act of 1933, as amended.
11
<PAGE> 14
The A-B Investment Agreement imposes further restrictions on A-B's ability
to transfer Series B Preferred Stock and Common Stock, including, subject to
certain exceptions (including sales of less than 3% of the outstanding Common
Stock, or sales pursuant to the exercise of registration rights), a limited
right of first refusal in favor of the Company on proposed sales of Common Stock
by A-B, an outright prohibition of sales by A-B of more than 12.5% of the Common
Stock on a Fully Diluted Basis to any single person or group, or of any Common
Stock to brewers of malt beverages, and a prohibition on any sale of Series B
Preferred Stock prior to an Extraordinary Termination of the A-B Distribution
Agreement.
A-B Board Representation. Under the A-B Investment Agreement, A-B has the
right, until November 16, 1999, to designate two nominees for election to the
Company's Board of Directors (or, if the Board of Directors has other than nine
members, that number of nominees based on A-B's percentage ownership of the
Common Stock as calculated on a Fully Diluted Basis, but not less than two).
After November 16, 1999, A-B is entitled to designate that number of nominees
based on its percentage ownership, but not less than two, so long as A-B holds
at least 20% of the Common Stock on a Fully Diluted Basis. A-B's percentage
ownership on a "Fully Diluted Basis," as defined in the A-B Investment Agreement
is calculated based on the assumption that all outstanding shares of Series B
Preferred Stock and other convertible securities are converted into Common
Stock, that all outstanding warrants and stock options (other than stock options
granted to officers, directors and employees under the Company's option plans)
have been exercised in full, and that all holdings of A-B and its affiliated
companies are aggregated. Currently, there are no outstanding options or
warrants that would be included in the calculation of outstanding shares on a
Fully Diluted Basis.
Pursuant to an agreement between A-B and the Company dated July 31, 1995,
if GE Capital Redhook Investment Corp. no longer has the right to designate any
nominees for election to the Company's Board of Directors, A-B is entitled to
designate for nomination to the Company's Board of Directors the number of Board
members which, as a percentage of the total Board, is no less than A-B's
percentage ownership of the Common Stock, calculated on a Fully-Diluted Basis
(which number will be rounded up to the next highest whole number if not a whole
number). The Company is obligated to use reasonable efforts to cause the
election of the nominees designated by A-B. If the designees are not elected,
the Company is obligated to take certain remedial measures, and A-B is entitled
to elect the same number of directors by class voting under the terms of the
Series B Preferred Stock. A-B also has a contractual right to have one of its
Board designees sit on each committee of the Company's Board of Directors.
Covenants Binding the Company. The Company has agreed, pursuant to the A-B
Investment Agreement, that it will not, without A-B's consent, (i) enter into
any acquisition or investment transaction involving an aggregate purchase price
exceeding 50% of the book value of the Company's assets prior to such
transaction; (ii) enter into any transaction involving the transfer of specified
trademarks or trade names or of assets representing more than 50% of the book
value of the Company's assets prior to such transaction; (iii) issue or sell to
any person (including A-B), or amend its capital structure to authorize the
issuance of, equity securities except within certain permitted categories,
including pursuant to (a) the conversion of the Series B Preferred Stock, (b) a
stock split or the exercise of any outstanding option, (c) the issuance of
Common Stock in an initial public offering not exceeding 25% of the Common Stock
outstanding (assuming conversion of all Preferred Stock) as of the closing date
for the sale of the Series B Preferred Stock to A-B, (d) other issuances not
exceeding in the aggregate 20% of the shares of Common Stock and Series B
Preferred Stock (as if converted) outstanding at the beginning of each two-year
period commencing on January 1, 1995 and on January 1 of every second year
thereafter, and (e) issuances under certain antitakeover plans; (iv) authorize
or issue any shares of capital stock ranking equal or prior to the Series B
Preferred Stock as to dividend or liquidation rights, or entitled to more than
one vote per share or to class voting on any matter (except as required by
Washington corporation law) or to ordinary voting power in the election of
directors (other than Common Stock), or authorize or issue any new class or
series of common shares; (v) issue or sell any equity securities to persons
having revenues of $100 million or more from the production or distribution of
alcoholic beverages in North and South America; (vi) afford to any other person
or group the right to designate a number of the Company's directors equal to or
greater than the largest number A-B is contractually entitled to designate;
(vii) enter into any transaction with any affiliate of the Company except under
certain circumstances; (viii) engage in any material respect in any business
other than
12
<PAGE> 15
producing and distributing beverages; (ix) enter into a merger, consolidation or
share exchange with another corporation, except for transactions meeting
multiple criteria (including, among others, survival of the Company and no
change in control); or (x) amend its Articles or Bylaws in certain respects. The
number of shares of Common Stock sold by the Company in the August 1995 initial
public offering of the Company's Common Stock and concurrent placement of shares
of Common Stock with A-B was approximately 29% of the Common Stock outstanding
(assuming conversion of the Series A Preferred Stock and Series B Preferred
Stock) as of the closing date for the sale of Series B Preferred Stock. As a
result, without A-B's consent, the number of shares the Company would otherwise
be entitled to issue in reliance upon the exception described in clause (iii)(d)
above during the two-year period ending January 1, 1999 will be reduced by
254,753 shares.
These covenants, as well as A-B's contractual Board and committee
representation rights, terminate upon the earliest of (i) a reduction in the
ownership of A-B and its affiliates to less than the greater of (a) 610,000
shares of Common Stock (assuming conversion and exercise of all convertible
securities, options and warrants and ignoring any stock split or other
recapitalization) and (b) 7.5% of the Common Stock calculated on a Fully Diluted
Basis, (ii) an increase in the ownership of A-B and its affiliates to more than
30% of the Common Stock calculated on a Fully Diluted Basis, (iii) an
Extraordinary Termination of the A-B Distribution Agreement, (iv) termination of
the A-B Distribution Agreement by Redhook on the basis of an uncured breach by,
or insolvency of, A-B, and (v) termination of the A-B Distribution Agreement by
either party at the end of 2004 or the expiration thereof at the end of 2014.
TRADEMARKS
The Company has obtained U.S. trademark registrations for the marks and
corresponding logo designs for: Ballard Bitter, Blackhook, Redhook, Redhook ESB,
Wheathook, Winterhook, Double Black Stout and Blueline. The Company has also
obtained U.S. trademark registrations for Forecasters, Trolleyman, and Cataqua.
The Redhook mark and certain other Company marks are also registered or pending
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 March 1, 1998, the Company had 210 employees, including 69 in
production, 82 in the pubs, 44 in sales and marketing, and 15 in administration.
Of these, 4 in production, 44 in the pubs, 6 in sales and marketing, and 3 in
administration are part-time employees. The Company believes its relations with
its employees to be very good.
13
<PAGE> 16
ITEM 2. PROPERTIES
The Company currently operates three technologically advanced, highly
automated small-batch breweries, two in the Seattle, Washington area and a third
in Portsmouth, New Hampshire. See Note 10 of the Notes to Financial Statements
included elsewhere herein.
The Fremont Brewery. In June 1987, the Company leased the historic Fremont
brewery building and hired German brewery engineers to design and install a
brewery to meet its special requirements. Production began in 1989 with an
annual capacity of approximately 30,000 barrels. As the result of further
expansion that included construction of a kegging and warehousing facility,
capacity increased in stages to approximately 75,000 barrels per year by 1993.
The Company leases the brewery building, which covers approximately 26,000
square feet, 1,500 square feet of which are occupied by the Trolleyman pub,
under a lease that expires in October 2002, with one five-year extension option.
The Company owns the adjacent kegging and warehousing facilities, which cover
approximately 23,000 square feet. In January 1998, production at the Fremont
Brewery was significantly reduced. The brewery will serve primarily as a backup
facility to the Woodinville Brewery until such time that its production capacity
is required on a regular basis, if market conditions improve sufficiently. The
Company also leases approximately 7,600 square feet of adjacent office space
under a lease that originally expired in 2001. The Company has exercised its
option to terminate the office lease as of January 1999 and expects to move its
corporate offices into the Fremont Brewery building during 1998.
The Woodinville Brewery. In 1993, the Company acquired approximately 22
acres (17 of which are developable) in Woodinville, Washington, a suburb of
Seattle, to build a second brewery and bottling facility. The site is across the
street from the Chateau Ste. Michelle Winery, next to the Columbia Winery, and
visible from a popular bicycle path. The Woodinville Brewery is housed in an
approximately 88,000-square-foot building that currently includes a 100-barrel
brewhouse, fermentation cellars, a filter room, grain storage silos, a bottling
line, dry storage, a cooler, loading docks, a retail outlet and Forecasters, a
4,000-square-foot family-oriented pub that seats 175 and features an outdoor
beer garden that seats an additional 200. The Woodinville Brewery began limited
operations in September 1994 with an annual capacity of approximately 60,000
barrels. Completion of an outdoor tank farm during 1996 brought the Woodinville
Brewery to its maximum designed production capacity of approximately 250,000
barrels per year. The Company completed construction of a 19,000 square-foot
kegging and storage cooler facility adjacent to the brewery building during
1997.
The Portsmouth Brewery. In May 1995, the Company subleased approximately 23
acres in Portsmouth, New Hampshire to build a third brewery and a bottling and
kegging facility to supply eastern U.S. markets. The sublease expires in 2047,
but contains two seven-year extension options. The Portsmouth Brewery is modeled
after the Woodinville Brewery, but the building is designed to be larger,
covering 125,000 square feet, to accommodate a keg racking line and a larger
cooler. Production began in late October 1996, with an initial capacity of
approximately 100,000 barrels per year. The Company plans to phase in additional
capacity as needed, with maximum designed production capacity of approximately
250,000 barrels per year.
ITEM 3. LEGAL PROCEEDINGS
The Company believes that neither it nor its properties are currently
involved in, or subject to, any pending legal proceedings which, if determined
adversely to the Company, would have a material adverse effect on the Company's
financial condition or results of operations.
14
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Paul S. Shipman (45) -- 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.
Bradley A. Berg (40) -- Executive Vice President and Chief Financial Officer
Mr. Berg has served as the Company's Chief Financial Officer since December
1994. He was the Vice President and Chief Financial Officer of Holly Residential
Properties, Inc., a NYSE-listed company engaged in the ownership and operation
of multi-family residential properties, from February 1994 to December 1994. Mr.
Berg served as Vice President and Controller of Burlington Resources Inc., a
NYSE-listed natural resources holding company, from November 1989 to February
1994. Prior to joining Burlington Resources Inc., he was a General Practice
Partner with the certified public accounting firm of Coopers & Lybrand. Mr. Berg
received his Bachelor's degree in Accounting from the University of Northern
Iowa in 1979.
David J. Mickelson (38) -- Executive Vice President and Chief Operating Officer
Mr. Mickelson has served in his current position since March 1995, and 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.
Pamela J. Hinckley (44) -- Vice President, Sales and Marketing
Ms. Hinckley has served in her current position since June 1996, and from
March 1995 to May 1996 she served as the Company's Vice President, Marketing.
She served as the Company's Marketing Director from August 1992 to March 1995
and its Retail Tourism Manager from August 1988 to August 1992. From 1984 to
1988, she was the wine buyer for a Seattle-area specialty food and wine retailer
and from 1982 to 1984 she was the retail and tourism manager for Stevenot
Winery. Ms. Hinckley received her Bachelor's degree in Psychology from Suffolk
University in 1974.
Allen L. Triplett (39) -- Vice President, Brewing
Mr. Triplett has served in his current position since March 1995, and from
1987 to March 1995 he was the Company's Production Manager. He has worked in
every facet of production since joining the Company in 1985. Mr. Triplett has
taken extensive coursework at the Siebel Institute of Brewing and the University
of California at Davis. He received his Bachelor's degree in Petroleum
Engineering from the University of Wyoming in 1985.
15
<PAGE> 18
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company effected its initial public offering of Common Stock on August
16, 1995, at a price to the public of $17.00 per share. Since that date the
Company's Common Stock has traded on the NASDAQ National Market. 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.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First quarter............................................. $27.375 $21.000
Second quarter............................................ $25.500 $20.500
Third quarter............................................. $23.750 $17.750
Fourth quarter............................................ $22.250 $ 9.125
1997
First quarter............................................. $12.250 $ 9.375
Second quarter............................................ $ 9.750 $ 6.375
Third quarter............................................. $ 9.125 $ 6.250
Fourth quarter............................................ $ 9.000 $ 4.875
</TABLE>
As of March 9, 1998, there were 784 recordholders of Common Stock, although
the Company believes that the number of beneficial owners of its Common Stock is
substantially greater.
The Company has not paid any dividends other than a one-time extraordinary
dividend in 1994 from the proceeds of the sale of Series B Preferred Stock to
A-B. That dividend totaled $9,071,354 ($2.00 per share) and was paid on all
Series A Preferred Stock and common shares outstanding (except those owned by
A-B). 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. Payment of dividends is also restricted by terms of the
Series B Preferred Stock.
16
<PAGE> 19
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, 1997, are derived from the financial statements of the
Company, which were audited by Ernst & Young LLP, independent auditors. The
operating data are derived from unaudited information maintained by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.................................... $37,894 $39,410 $28,426 $16,209 $12,331
Less Excise Taxes........................ 3,608 3,732 2,532 1,280 847
------- ------- ------- ------- -------
Net Sales................................ 34,286 35,678 25,894 14,929 11,484
Cost of Sales............................ 25,963 23,581 16,970 8,686 6,162
------- ------- ------- ------- -------
Gross Profit............................. 8,323 12,097 8,924 6,243 5,322
Selling, General and Administrative
Expenses............................... 9,981 7,853 4,606 2,801 2,001
------- ------- ------- ------- -------
Operating Income (Loss).................. (1,658) 4,244 4,318 3,442 3,321
Interest Expense......................... 378 -- 24 130 158
Other Income, Net........................ 93 615 678 9 40
------- ------- ------- ------- -------
Income (Loss) Before Income Taxes........ (1,943) 4,859 4,972 3,321 3,203
Provision (Benefit) for Income Taxes..... (544) 1,773 1,790 1,196 1,099
------- ------- ------- ------- -------
Income (Loss) Before Accounting Change... (1,399) 3,086 3,182 2,125 2,104
Change in Accounting for Income Taxes.... -- -- -- -- 99
------- ------- ------- ------- -------
Net Income (Loss)........................ $(1,399) $ 3,086 $ 3,182 $ 2,125 $ 2,005
======= ======= ======= ======= =======
Basic Earnings (Loss) per Share(1)....... $ (0.18) $ 0.40 $ 0.63 $ (0.11) $ 0.65
Diluted Earnings (Loss) per Share(1)..... $ (0.18) $ 0.34 $ 0.44 $ 0.43 $ 0.53
Dividends per Share(2)................... -- -- -- $ 2.00 --
OPERATING DATA (IN BARRELS):
Beer Shipped............................. 214,600 224,700 158,700 93,700 73,900
Production Capacity, End of Period(3).... 425,000 425,000 245,000 135,000 75,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)................ $ 1,338 $ 850 $21,385 $ (842) $ 1,735
Total Assets............................. 96,769 95,124 86,638 34,689 20,044
Long-term Debt, Net of Current Portion... 9,874 6,191 1,825 3,793 2,066
Series A Preferred Stock................. -- -- -- 8,956 8,335
Series B Preferred Stock................. 15,966 15,922 15,877 15,834 --
Common Stockholders' Equity.............. 61,298 62,630 59,579 1,269 6,683
</TABLE>
- ---------------
(1) Prior year amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, Earnings per Share, and SEC Staff Accounting
Bulletin No. 98. The $2.5 million dividend paid to Series A Preferred
Stockholders in 1994 is deducted from Net Income to calculate the 1994 Basic
Earnings (Loss) per Share.
(2) Consists entirely of a one-time extraordinary dividend paid to common and
preferred shareholders, other than A-B, from the proceeds of the sale of
Series B Preferred Stock to A-B.
(3) Based on the Company's estimate of normal production capacity of equipment
installed as of the end of such period. Amounts do not reflect maximum
designed production capacity. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
<PAGE> 20
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.
OVERVIEW
Since its formation, the Company has focused its business activities on the
brewing, marketing and selling of craft beers. For the year ended December 31,
1997, the Company had gross sales of $37,894,000, a decrease of 3.8% from 1996.
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 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 excise taxes
on sales of its beer. The 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 growth slowed significantly in late 1996 and sales
volume declined 4.5% in 1997, compared to 1996. 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 second half of the year typically demonstrating
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 companywide 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 as of December 31, 1997. 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, resulting in a significant decline in the companywide 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 increases.
In January 1998, production at the Fremont Brewery was significantly
reduced. The brewery will serve primarily as a backup facility to the
Woodinville Brewery until such time that its production capacity is required on
a regular basis, if market conditions improve sufficiently. Due to these
changes, 1998 operating costs, including payroll-related costs, are expected to
be reduced compared to costs incurred during the year ended December 31, 1997.
In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the opening of
new distribution territories, such as increased shipping, marketing and sales
personnel costs; fees related to the distribution agreement with A-B; changes in
packaging
18
<PAGE> 21
and other material costs; and changes in product sales mix. The incremental cost
of shipping beer from the Company's breweries will continue to increase as the
volume of beer supplied to more distant markets increases. The commencement of
production at the Portsmouth Brewery reduced shipping expenses to eastern U.S.
markets.
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>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Sales....................................................... 110.5% 110.5% 109.8%
Less Excise Taxes........................................... 10.5 10.5 9.8
----- ----- -----
Net Sales................................................... 100.0 100.0 100.0
Cost of Sales............................................... 75.7 66.1 65.5
----- ----- -----
Gross Profit................................................ 24.3 33.9 34.5
Selling, General and Administrative Expenses................ 29.1 22.0 17.8
----- ----- -----
Operating Income (Loss)..................................... (4.8) 11.9 16.7
Interest Expense............................................ 1.1 -- 0.1
Other Income -- Net......................................... 0.2 1.7 2.6
----- ----- -----
Income (Loss) before Income Taxes........................... (5.7) 13.6 19.2
Provision (Benefit) for Income Taxes........................ (1.6) 5.0 6.9
----- ----- -----
Net Income (Loss)........................................... (4.1)% 8.6% 12.3%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Total sales decreased 3.8% to $37,894,000 in 1997, compared to
$39,410,000 in 1996, as a 4.5% decrease in total sales volumes and a small
decrease in prices were partially offset by a slight increase in other sales.
Although total sales volumes in 1997 decreased to 214,600 barrels from 224,700
barrels in 1996, West Coast sales decreased 6.3% for the same period, including
a 2.0% decline in Washington State, the Company's largest market. The
competitive landscape has been 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 $3,406,000 in 1997, compared to $3,372,000 in 1996. At
December 31, 1997, the Company was selling beer in 48 states compared to 47
states at December 31, 1996.
Excise Taxes. Excise taxes were substantially unchanged at $3,608,000, or
$10.5% of net sales in 1997, compared to $3,732,000, or 10.5% of net sales in
1996.
Cost of Sales. Cost of sales increased to $25,963,000 in 1997 from
$23,581,000 in 1996, primarily due to the impact of the depreciation and other
operating costs related to the new brewery in Portsmouth, New Hampshire, which
commenced operations in October 1996, and an increase in the percentage of total
volume sold in bottles compared to kegs, partially offset by the effects of
decreases in sales volume, freight expense and per unit packaging costs. Cost of
sales, as a percentage of net sales, increased to 75.7% in 1997 compared to
66.1% in 1996, primarily due to the increase in fixed and semivariable costs
associated with operating the new brewery and the increase in the percentage of
total volume sold in bottles compared to kegs, partially offset by freight
savings on shipments to eastern markets and a decrease in packaging costs. The
companywide utilization rate of maximum designed capacity was 37% and 61% in
1997 and 1996, respectively. The companywide utilization rate decreased in 1997
due to the increase in capacity associated with the commissioning of the
Portsmouth Brewery and lower sales volumes.
19
<PAGE> 22
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9,981,000 in 1997 from $7,853,000 in 1996.
The increase is primarily related to the Company's expansion of distribution.
These expenses increased as a percentage of net sales to 29.1% in 1997 from
22.0% in 1996, primarily attributable to additional sales personnel and related
expenses in new markets, and increased promotional and marketing expenses in the
Company's existing markets that are increasingly competitive.
Interest Expense. Interest expense increased to $378,000 in 1997 as the
result of substantially all construction in progress being placed in service on
July 1, 1997. All interest costs incurred in 1996 and the first six months of
1997 were capitalized to the construction projects.
Other Income -- Net. Other income -- net, decreased to $93,000 in 1997,
compared to $615,000 in 1996. The decrease is due primarily to a decline in
income from short-term investments as available funds were invested in the
Portsmouth and Woodinville breweries.
Income Taxes. The Company's effective income tax rate changed to a 28%
benefit in 1997 from a 36.5% expense in 1996. The change is primarily the result
of lower pre-tax results 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by 38.6% to $39,410,000 in 1996 from $28,426,000 in
1995, primarily due to expansion into new markets and growth in existing
markets. At December 31, 1996, the Company was selling beer in 47 states
compared to 29 states at December 31, 1995. This sales increase reflects a 41.6%
increase in sales volume to 224,700 barrels in 1996 from 158,700 barrels in
1995, and relatively stable sales prices in the Company's various markets. The
Company's other sales totaled $3,372,000 in 1996, compared to $3,347,000 in
1995. The Company's sales growth slowed in late 1996 due in large part to lower
than expected fourth quarter sales on the West Coast. Total fourth quarter sales
volumes increased 17% compared to last year's fourth quarter. West Coast sales
increased over 25% for the full year but decreased approximately 5% in the
fourth quarter compared to the 1995 fourth quarter, including an 11% decline in
Washington State volumes compared to the 1995 fourth quarter. Washington State
is the Company's largest market. The competitive landscape has been affected by
the continued increase in the number of craft beer companies and the number of
different products they offer.
Excise Taxes. Excise taxes increased to $3,732,000, or 10.5% of net sales
in 1996, from $2,532,000, or 9.8% of net sales in 1995, reflecting increased
sales volumes and the increased excise tax rate applicable to annual production
in excess of 60,000 barrels.
Cost of Sales. Cost of sales increased to $23,581,000 in 1996 from
$16,970,000 in 1995, primarily due to the increase in sales volume. Cost of
sales, as a percentage of net sales, increased to 66.1% in 1996, compared to
65.5% in 1995, primarily due to higher freight costs, substantially offset by
increased capacity utilization and the resulting effect of spreading fixed and
semivariable operating costs over a larger production base. The utilization rate
of the breweries' maximum designed capacity was 61% and 49% in 1996 and 1995,
respectively. The utilization rate dropped to 47% in the fourth quarter of 1996
due to the commissioning of the Portsmouth Brewery in late October. Shipping
expense significantly increased in 1996 compared to 1995, reflecting increased
shipments of beer to new, more distant markets. Cost of sales, as a percentage
of sales, was negatively impacted in the quarter ended December 31, 1996 due to
commencing production at the Portsmouth Brewery and the resulting decrease in
the Company's capacity utilization rate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7,853,000 in 1996 from $4,606,000 in 1995.
The increase is primarily related to the Company's expansion into new markets.
These expenses increased as a percentage of net sales to 22.0% in 1996 from
17.8% in 1995, primarily attributable to additional sales personnel in the new
markets and related expenses, including promotional and marketing support.
20
<PAGE> 23
Other Income, Net. Other income, net, decreased to $615,000 in 1996
compared to $678,000 in the 1995 period. The decrease is due primarily to a
decline in income from short-term investments as available funds were invested
in the Portsmouth and Woodinville breweries.
Income Taxes. The Company's effective income tax rate increased to 36.5% in
1996 from 36.0% in 1995. That increase is the result of the Company's expansion
into new states and the corresponding increase in state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $892,000 and $1,162,000 of cash and cash equivalents at
December 31, 1997 and 1996, respectively. At December 31, 1997, the Company had
working capital of $1,338,000. The Company's long-term debt as a percentage of
total capitalization (long-term debt, preferred stock and common stockholders'
equity) was 11.9% and 7.5% as of December 31, 1997 and 1996, respectively. Cash
provided by operating activities totaled $1,919,000 and $5,258,000 in 1997 and
1996, respectively.
On June 5, 1997, the Company elected to convert 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 December 31, 1997, there
was $8.8 million outstanding on the Secured Facility and the Company's one-month
IBOR-based borrowing rate was approximately 6.94%. In addition, the Company has
a $10 million unsecured revolving credit facility with the same bank through
June 5, 1999, and as of December 31, 1997, there were no borrowings outstanding
on this 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 unsecured 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.
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 1997 totaled $6,402,000, including $1.8 million
that was accrued at December 31, 1996. The capital expenditures related
primarily to the kegging and cold storage facility at the Woodinville Brewery
that was placed in service July 1, 1997. Capital expenditures for 1998 are
expected to total approximately $500,000.
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.
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 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 expansion and other plans
and the availability of financing. While
21
<PAGE> 24
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 Growth. 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, due primarily to slower than
expected sales in its highly competitive West Coast markets. 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. See
"Part 1, Item 1 -- Business -- Product Distribution, and Relationship With
Anheuser-Busch, Incorporated" for a further description of the relationship 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.
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 1997. 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, 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
22
<PAGE> 25
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 has completed an assessment and will have to upgrade portions
of its software so that its computer systems will function properly with respect
to dates in the year 2000 and thereafter. The software upgrades are available at
no cost to the Company.
The project is estimated to be completed prior to any negative impact on
its information systems. The Company believes that with modifications to its
existing software or conversions to new software, the Year 2000 Issue 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 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 difference 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.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REDHOOK ALE BREWERY, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors........... 25
Balance Sheets as of December 31, 1997 and 1996............. 26
Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995....................................... 27
Statements of Common Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995.................... 28
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... 29
Notes to Financial Statements............................... 30
</TABLE>
24
<PAGE> 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Redhook Ale Brewery, Incorporated
We have audited the accompanying balance sheets of Redhook Ale Brewery,
Incorporated as of December 31, 1997 and 1996, and the related statements of
operations, common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
January 21, 1998
25
<PAGE> 28
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 892,165 $ 1,162,352
Accounts Receivable....................................... 1,588,368 2,051,591
Inventories............................................... 2,815,782 2,229,376
Income Taxes Receivable................................... 1,124,813 427,075
Other..................................................... 519,515 1,725,942
----------- -----------
Total Current Assets................................... 6,940,643 7,596,336
Fixed Assets, Net........................................... 88,761,436 86,357,559
Other Assets................................................ 1,067,264 1,170,144
----------- -----------
Total Assets...................................... $96,769,343 $95,124,039
=========== ===========
LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 2,290,012 $ 4,075,699
Accrued Salaries, Wages and Payroll Taxes................. 1,322,966 1,220,212
Refundable Deposits....................................... 1,166,070 950,926
Other Accrued Expenses.................................... 231,816 367,025
Current Portion of Long-Term Debt......................... 591,759 132,554
----------- -----------
Total Current Liabilities.............................. 5,602,623 6,746,416
----------- -----------
Long-Term Debt, Net of Current Portion...................... 9,873,973 6,190,764
----------- -----------
Deferred Income Taxes....................................... 3,987,519 3,582,692
----------- -----------
Other Liabilities........................................... 40,546 52,461
----------- -----------
Convertible Redeemable Preferred Stock...................... 15,966,255 15,921,855
----------- -----------
Common Stockholders' Equity:
Common Stock, Par Value $0.005 per Share, Authorized,
50,000,000 Shares; Issued and Outstanding, 7,687,486
Shares in 1997 and 7,685,486 Shares in 1996............ 38,438 38,428
Additional Paid-In Capital................................ 56,805,633 56,652,764
Retained Earnings......................................... 4,454,356 5,938,659
----------- -----------
Total Common Stockholders' Equity................. 61,298,427 62,629,851
----------- -----------
Total Liabilities, Preferred Stock and Common
Stockholders' Equity......................... $96,769,343 $95,124,039
=========== ===========
</TABLE>
See Accompanying Notes
26
<PAGE> 29
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $37,894,468 $39,410,119 $28,425,729
Less Excise Taxes................................... 3,608,166 3,732,034 2,531,378
----------- ----------- -----------
Net Sales........................................... 34,286,302 35,678,085 25,894,351
Cost of Sales....................................... 25,962,672 23,580,745 16,969,859
----------- ----------- -----------
Gross Profit........................................ 8,323,630 12,097,340 8,924,492
Selling, General and Administrative Expenses........ 9,981,469 7,853,360 4,606,375
----------- ----------- -----------
Operating Income (Loss)............................. (1,657,839) 4,243,980 4,318,117
Interest Expense.................................... 378,444 -- 23,814
Other Income -- Net................................. 92,998 615,145 678,280
----------- ----------- -----------
Income (Loss) before Income Taxes................... (1,943,285) 4,859,125 4,972,583
Provision (Benefit) for Income Taxes................ (544,319) 1,773,581 1,790,130
----------- ----------- -----------
Net Income (Loss)................................... $(1,398,966) $ 3,085,544 $ 3,182,453
=========== =========== ===========
Basic Earnings (Loss) per Share..................... $ (0.18) $ 0.40 $ 0.63
=========== =========== ===========
Diluted Earnings (Loss) per Share................... $ (0.18) $ 0.34 $ 0.44
=========== =========== ===========
</TABLE>
See Accompanying Notes
27
<PAGE> 30
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ ADDITIONAL COMMON
PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
--------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995..................... 3,529,576 $17,649 $ 1,112,539 $ 138,782 $ 1,268,970
Sale of Common Stock, net.................. 2,910,206 14,549 46,187,364 -- 46,201,913
Other, net................................. 957 5 12,780 -- 12,785
Conversion of Series A Preferred to Common
Stock................................... 1,242,857 6,214 9,329,980 (423,720) 8,912,474
Net Income................................. -- -- -- 3,182,453 3,182,453
--------- ------- ----------- ---------- -----------
Balance, December 31, 1995................... 7,683,596 38,417 56,642,663 2,897,515 59,578,595
Other, net................................. 1,890 11 10,101 (44,400) (34,288)
Net Income................................. -- -- -- 3,085,544 3,085,544
--------- ------- ----------- ---------- -----------
Balance, December 31, 1996................... 7,685,486 38,428 56,652,764 5,938,659 62,629,851
Other, net................................. 2,000 10 152,869 (85,337) 67,542
Net Loss................................... -- -- -- (1,398,966) (1,398,966)
--------- ------- ----------- ---------- -----------
Balance, December 31, 1997................... 7,687,486 $38,438 $56,805,633 $4,454,356 $61,298,427
========= ======= =========== ========== ===========
</TABLE>
See Accompanying Notes
28
<PAGE> 31
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)................................... $(1,398,966) $ 3,085,544 $ 3,182,453
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Depreciation and Amortization.................. 3,399,217 2,042,780 1,324,239
Deferred Income Tax Provision.................. 404,827 1,193,104 1,027,771
Changes in Operating Assets and Liabilities:
Accounts Receivable.......................... 463,223 (24,137) (881,236)
Inventories.................................. (586,406) (888,932) (762,014)
Income Taxes................................. (697,738) (427,075) 326,361
Other Current Assets......................... 49,099 (295,765) (202,641)
Other Assets................................. 83,670 (586,053) (345,111)
Accounts Payable and Other Accrued
Expenses.................................. (115,822) 655,633 (391,421)
Accrued Salaries, Wages and Payroll Taxes.... 102,754 524,567 240,980
Refundable Deposits.......................... 215,144 (22,031) 457,251
----------- ------------ ------------
Net Cash Provided by Operating Activities........... 1,919,002 5,257,635 3,976,632
----------- ------------ ------------
INVESTING ACTIVITIES
Expenditures for Fixed Assets....................... (6,401,745) (33,094,235) (24,023,006)
Other............................................... (41,800) (70,365) 3,503
----------- ------------ ------------
Net Cash Used in Investing Activities............... (6,443,545) (33,164,600) (24,019,503)
----------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from Debt.................................. 5,350,000 23,600,000 16,789,249
Repayments on Debt.................................. (1,207,586) (19,223,680) (18,751,683)
Proceeds from Sale of Common Stock.................. -- -- 46,201,913
Officer Note Repayment and Other, Net............... 111,942 16,397 7,505
----------- ------------ ------------
Net Cash Provided by Financing Activities........... 4,254,356 4,392,717 44,246,984
----------- ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents.... (270,187) (23,514,248) 24,204,113
Cash and Cash Equivalents:
Beginning of Year................................. 1,162,352 24,676,600 472,487
----------- ------------ ------------
End of Year....................................... $ 892,165 $ 1,162,352 $ 24,676,600
=========== ============ ============
</TABLE>
See Accompanying Notes
29
<PAGE> 32
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Redhook Ale Brewery, Incorporated (the "Company") was incorporated on May
4, 1981 for the purpose of brewing, marketing and selling craft beers. Its
operations consist of a brewery and distribution facility in the Fremont area of
Seattle, Washington; a brewery in the Seattle suburb of Woodinville, Washington;
and, a brewery in Portsmouth, New Hampshire. As of December 31, 1997, the
Company's products were distributed in 48 states.
In 1994, the Company signed an agreement (the "Distribution Alliance" or
the "Alliance") with Anheuser-Busch, Incorporated ("A-B"), pursuant to which the
Company utilizes A-B's national distribution network as the Company expands the
markets in which it sells Redhook products. In addition, A-B purchased 1,289,872
shares of Series B convertible redeemable preferred stock (the "Series B
Preferred Stock") and 236,756 newly issued shares of common stock in connection
with the Distribution Alliance. As of December 31, 1997, A-B owned 25% of the
Company's voting stock, which is the maximum percentage currently allowed under
the agreements with the Company.
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Fixed Assets
Fixed assets are stated at cost. Significant additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Upon disposition
of fixed assets, any gains or losses are reflected in the statement of
operations. The Company provides for depreciation and amortization using the
straight-line method to recognize the costs over the following estimated useful
lives:
<TABLE>
<S> <C>
Buildings.................................... 31 - 40 years
Brewery equipment............................ 20 - 25 years
Leasehold improvements....................... Lesser of lease term or useful life
Furniture, fixtures and other equipment...... 2 - 10 years
Vehicles..................................... 5 years
</TABLE>
Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board 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 (loss) per share includes the effect of
all outstanding convertible redeemable preferred stock and outstanding stock
options for the years ended December 31, 1996 and 1995. The convertible
preferred stock and outstanding stock options have been excluded from the
calculation of diluted loss per share for the year
30
<PAGE> 33
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ended December 31, 1997 because their effect is antidilutive. The calculation
uses the treasury stock method in determining the resulting incremental average
equivalent shares outstanding.
Income Taxes
The Company accounts for income taxes under the liability method, 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.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles 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.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Finished goods...................................... $1,387,933 $1,264,480
Raw materials....................................... 879,836 282,603
Promotional merchandise............................. 328,064 511,089
Packaging materials................................. 219,949 171,204
---------- ----------
$2,815,782 $2,229,376
========== ==========
</TABLE>
Finished goods include beer held in fermentation prior to the filtration
and packaging process.
3. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Prepaid expenses..................................... $226,636 $ 374,478
Insurance receivable, construction claim............. -- 1,157,328
Other................................................ 292,879 194,136
-------- ----------
$519,515 $1,725,942
======== ==========
</TABLE>
31
<PAGE> 34
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and improvements............................. $ 5,163,835 $ 5,163,835
Buildings......................................... 36,198,909 28,994,115
Brewery equipment................................. 52,660,874 47,683,654
Furniture, fixtures and other equipment........... 3,233,712 2,756,420
Leasehold improvements............................ 546,831 480,161
Vehicles.......................................... 136,478 136,478
Construction in progress.......................... 136,749 7,105,985
----------- -----------
98,077,388 92,320,648
Less accumulated depreciation and amortization.... 9,315,952 5,963,089
----------- -----------
$88,761,436 $86,357,559
=========== ===========
</TABLE>
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Note payable to bank, currently payable monthly at
$21,538, including interest at 7.36%, maturing
in 2006......................................... $ 1,690,732 $1,823,318
Secured Facility, payable to bank monthly at
$37,500, plus accrued interest, interest at
6.94% at December 31, 1997, due 2002............ 8,775,000 --
Bank facility, interest at 6.625% at December 31,
1996............................................ -- 4,500,000
----------- ----------
Total long-term debt.............................. 10,465,732 6,323,318
Current portion................................... 591,759 132,554
----------- ----------
$ 9,873,973 $6,190,764
=========== ==========
</TABLE>
Annual principal payments required on long-term debt during the next five
years and thereafter are as follows:
<TABLE>
<S> <C>
1998............................................ $ 591,759
1999............................................ 597,549
2000............................................ 608,645
2001............................................ 621,196
2002............................................ 7,159,417
Thereafter...................................... 887,166
-----------
$10,465,732
===========
</TABLE>
On June 5, 1997, the Company elected to convert 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. In addition, the Company has $10
million available under an unsecured revolving credit facility with the same
bank through June 5, 1999, and as of December 31, 1997, there were no borrowings
outstanding on this 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 unsecured facility, depending on the Company's
debt-to-
32
<PAGE> 35
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
tangible net worth ratio. The Company can fix the rate by selecting IBOR for
one- to twelve-month periods as a base.
The note payable to the bank and the Secured Facility are with the same
bank and are secured by all of the Company's Washington State brewing equipment,
inventories and accounts receivable.
The fair market value of the Company's variable rate debt is assumed to
approximate its carrying value. The fair value of the Company's fixed rate debt
is also assumed to equal its carrying value as the rate is adjusted every three
years and was recently adjusted.
The Company made interest payments totaling $587,000, $290,000 and $444,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Interest
capitalized as a part of construction costs for the years ended December 31,
1997, 1996 and 1995 totaled $270,000, $291,000 and $402,000, respectively.
Included in other assets are capitalized loan fees with a net unamortized
balance of $56,000 and $54,000 at December 31, 1997 and 1996, respectively.
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
Convertible redeemable preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Series B, par value $0.005 per share, issued and
outstanding 1,289,872 shares; net of unamortized
offering costs.................................. $15,966,255 $15,921,855
=========== ===========
</TABLE>
There are 10,000,000 shares of preferred stock authorized. During 1993, the
Board of Directors designated 1,242,857 preferred shares as Series A Preferred
Stock. In August 1993, the Company sold all such designated shares of Series A
Preferred Stock to existing common shareholders, institutional investors and
other qualified or accredited investors for approximately $8.7 million, or $7.00
per share. All shares of Series A Preferred Stock were automatically converted
to an equal number of common shares upon the closing of the Company's initial
public offering in August 1995.
During 1994, the Board of Directors designated 1,289,872 preferred shares
as Series B Preferred Stock. In November 1994, the Company sold all shares of
Series B Preferred Stock to A-B for approximately $16.3 million, or $12.61 per
share. A-B's ownership percentage of the Company is limited to 25% of the
outstanding Common Stock, assuming the conversion of all outstanding Preferred
Stock. That percentage limitation increases to 30% for the period November 1999
through November 2001.
Each share of Series B Preferred Stock is entitled to as many votes as the
number of shares of common stock into which it is convertible. The conversion
rate is one share of common stock for each share of preferred stock, subject to
antidilution adjustment under certain circumstances. The Series B Preferred
Stock is convertible to common stock at any time by its holder and is subject to
automatic conversion under certain circumstances on December 31, 2004 or
December 31, 2014.
Under the terms of the Series B Preferred Stock purchase agreement, the
Company is required to meet various affirmative and negative covenants. These
covenants limit the Company's ability to declare dividends on, or purchase, any
of its capital stock without prior approval. The holders of Series B Preferred
Stock and converted Series A Preferred Stock also are entitled to certain
contractual registration rights.
Holders of Series B Preferred Stock generally are entitled to receive
dividends at a rate equal to any dividends declared on common stock, when and if
dividends are declared by the Company's Board of Directors. In addition, under
certain circumstances relating to the termination of the Distribution Alliance
by A-B, the Series B Preferred Stock would prospectively accumulate preferential
dividends until stock
33
<PAGE> 36
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
redemption at a fixed annual rate based on the ten-year U.S. Treasury rate, plus
2.75%. Holders of Series B Preferred Stock also have mandatory redemption rights
and liquidation preferences equal to $12.61 per share, plus any accumulated and
unpaid dividends. The Company is required to redeem all shares of outstanding
Series B Preferred Stock on December 31, 2004, or on December 31, 2014, under
certain other conditions relating to a termination of the Distribution Alliance
by A-B.
The difference between the issuance price, net of offering costs, of the
convertible redeemable preferred stock and the redemption value is accreted
periodically through the redemption date by a charge to retained earnings.
7. COMMON STOCKHOLDERS' EQUITY
Note Receivable for Stock Purchase
The Company's President had an interest-bearing loan for $183,000 and
$333,000 outstanding at December 31, 1997 and 1996, respectively, related to the
exercise of stock options in 1994. The loan is secured by Company stock held by
the officer and is included as a reduction in common stockholders' equity.
Principal payments received on the loan have been reflected in the Statement of
Cash Flows as a financing activity and as an increase in common stockholders'
equity. The note, including interest accruing at 6% per year, is due no later
than September 30, 2001.
Sale of Common Stock
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.
Stock Option Plans
In 1993, the Company's shareholders approved the 1992 Stock Incentive Plan
(the "Plan") and the Directors Stock Option Plan (the "Directors Plan"). Under
the Plan, as amended in May 1996, the approval provides for 1,270,000 shares of
common stock for options. The approval, as amended in May 1996, also provided
for 170,000 shares of common stock for options under the Directors Plan.
Employee options generally vest over a five-year period and director options
vest over a six-month period. Vested options are generally exercisable for ten
years from the date of grant.
In September 1990, the Company reserved 120,000 shares of common stock for
its 1990 Incentive Stock Option Plan. Options for 120,000 shares were granted at
that time with an exercise price equal to the estimated fair market value. The
exercise price increased from the original price by 5% per year until full
vesting occurred. These options generally vested over five years and are
exercisable for ten years from the date of grant.
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
no less than 100% of the market price on the date the option is granted. At
December 31, 1997, 1996 and 1995, a total of 545,071, 743,181 and 790,421
options, respectively, were available for future grants under the plans.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which
established accounting and reporting standards for stock-based employee
compensation plans. Statement 123 defines a fair value-based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and
34
<PAGE> 37
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recognizes that cost over the service period. As permitted under Statement 123,
the Company has elected to continue accounting for stock-based compensation in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
("Opinion 25"). Accordingly, because the grant price equals the market price on
the date of grant, no compensation expense is recognized for stock options
issued. 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 prescribed by Statement 123, the Company's net income (loss) and
earnings (loss) per share for the years ended December 31, 1997, 1996 and 1995
would have been impacted as indicated in the following table. Pursuant to the
provisions of Statement 123, the pro forma results shown below only reflect the
impact of options granted in 1997, 1996 and 1995. Since option vesting occurs
over five years, the pro forma impact is expected to increase for the next 3 - 5
years and then remain relatively constant thereafter, absent significant changes
to valuation assumptions or option grant patterns.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Reported net income (loss).................... $(1,398,966) $3,085,544 $3,182,453
Pro forma net income (loss)................... (1,966,482) 2,609,350 3,064,581
Reported basic earnings (loss) per share...... $ (0.18) $ 0.40 $ 0.63
Reported diluted earnings (loss) per share.... (0.18) 0.34 0.44
Pro forma basic earnings (loss) per share..... $ (0.26) $ 0.34 $ 0.61
Pro forma diluted earnings (loss) per share... (0.26) 0.29 0.42
</TABLE>
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 Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------------
<S> <C> <C> <C>
Expected life of option........................... 5 yrs. 5 yrs. 5 yrs.
Risk-free interest rate........................... 6.47% 6.42% 5.63 to 6.88%
Expected volatility of the Company's stock........ 50.0% 50.0% 50.0%
Expected dividend yield on the Company's stock.... 0.0% 0.0% 0.0%
</TABLE>
The weighted average estimated fair value of options granted during the
years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C>
Total number of options granted............... 294,500 68,000 227,700
Estimated fair value of each option granted... $ 5.29 $ 10.72 $ 10.26
Total estimated fair value of all options
granted..................................... $1,556,462 $728,960 $2,336,202
</TABLE>
In accordance with Statement 123, 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 below for the average grant price for options
granted during 1997, 1996, and 1995.
35
<PAGE> 38
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Presented below is a summary of stock option plans' activity for the years
shown:
<TABLE>
<CAPTION>
SHARES OF
COMMON WEIGHTED OPTIONS WEIGHTED
STOCK AVERAGE EXERCISABLE AVERAGE
UNDER THE EXERCISE AT EXERCISE
PLAN PRICE END OF YEAR PRICE
---------- -------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............ 320,100 87,799 $ 6.53
Granted............................... 227,700 $20.11
Exercised............................. (957) 12.02
Canceled.............................. (2,721) 11.37
-------
Balance at December 31, 1995............ 544,122 165,422 8.55
Granted............................... 68,000 22.75
Exercised............................. (1,890) 8.48
Canceled.............................. (20,760) 20.13
-------
Balance at December 31, 1996............ 589,472 291,312 11.84
Granted............................... 294,500 9.92
Exercised............................. (2,000) 3.33
Canceled.............................. (96,390) 13.84
-------
Balance at December 31, 1997............ 785,582 346,592 $12.37
=======
</TABLE>
The following table summarizes information for options currently
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.65 to $ 3.33 70,800 4.02 $ 2.92 70,800 $ 2.92
7.00 to 11.50 358,100 8.48 9.59 80,940 8.00
12.61 to 17.00 187,582 6.79 13.16 118,952 13.29
22.75 to 25.50 169,100 8.14 24.62 75,900 24.41
------- -------
$ 1.65 to $25.50 785,582 7.60 $13.08 346,592 $12.37
======= =======
</TABLE>
Shareholder Rights Agreement
In September 1995, the Company's Board of Directors adopted a shareholder
rights agreement (the "Rights Agreement"). 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
36
<PAGE> 39
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 for up to
30% of the Company's common stock. The Rights, which are not currently
exercisable, expire on September 22, 2005, but may be redeemed at any time by
the Company for $0.001 per Right.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings (loss) per share computation:
Numerator:
Net income (loss)........................ $(1,398,966) $3,085,544 $3,182,453
----------- ---------- ----------
Denominator:
Weighted-average common shares........... 7,686,510 7,685,014 5,012,636
----------- ---------- ----------
Basic earnings (loss) per share.......... $ (0.18) $ 0.40 $ 0.63
=========== ========== ==========
Diluted earnings (loss) per share computation:
Numerator:
Net income (loss)........................ $(1,398,966) $3,085,544 $3,182,453
----------- ---------- ----------
Denominator:
Weighted-average common shares........... 7,686,510 7,685,014 5,012,636
----------- ---------- ----------
Effect of dilutive securities:
Series A convertible preferred stock... -- -- 796,791
Series B convertible preferred stock... -- 1,289,872 1,289,872
Stock options, net..................... -- 163,057 186,040
----------- ---------- ----------
Dilutive potential common shares......... -- 1,452,929 2,272,703
----------- ---------- ----------
Denominator for diluted earnings (loss)
per share.............................. 7,686,510 9,137,943 7,285,339
----------- ---------- ----------
Diluted earnings (loss) per share........ $ (0.18) $ 0.34 $ 0.44
=========== ========== ==========
</TABLE>
9. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Current........................................ $(949,146) $ 580,477 $ 762,359
Deferred....................................... 404,827 1,193,104 1,027,771
--------- ---------- ----------
$(544,319) $1,773,581 $1,790,130
========= ========== ==========
</TABLE>
The Company's effective income tax rate was 28.0%, 36.5% and 36.0% for the
years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the
effective rate was lower than the federal statutory rate due primarily to lower
pre-tax results 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. In 1996 and 1995, the effective rate exceeded the 34% federal
statutory rate due primarily to the effect of state income taxes.
37
<PAGE> 40
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax-over-book depreciation........................ $7,111,558 $4,166,502
Other............................................. 561,638 520,957
---------- ----------
7,673,196 4,687,459
Deferred tax assets................................. 3,685,677 1,104,767
---------- ----------
Net deferred tax liability.......................... $3,987,519 $3,582,692
========== ==========
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
of $6.2 million and alternative minimum tax credit carryforwards of $667,000
which can be utilized to offset regular tax liabilities in future years. The
alternative minimum tax credit carryforwards, which have no expiration date, and
the tax benefit of the net operating loss carryforwards, which expire in 2012,
are the primary components of the Company's deferred tax asset presented above.
The Company made income tax payments (net of refunds) of $984,000 and
$392,000 for the years ended December 31, 1996 and 1995, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its Fremont brewery and office premises under operating
leases. Terms of the brewery premises lease include annual rental payment
adjustments to reflect changes in the Consumer Price Index. In 1997, the company
exercised its option to extend the lease through October 2002. The Company has
an option to extend the lease for one additional five-year period. The Company
has elected to terminate the office lease early. The office lease now runs
through January 1999 and the Company will move the corporate offices into the
Fremont brewery building during 1998.
In May 1995, the Company entered into an agreement to lease the land on
which the New Hampshire brewery was 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 sublease also provides the Company with the
first right of refusal to purchase the premises should the sublessor receive an
offer to sell the property to a third party. The monthly rent commenced upon the
completion of the facility, and can escalate up to 5% at the end of every
five-year period.
Rent expense for the years ended December 31, 1997, 1996 and 1995 totaled
$845,000, $532,000, and $451,000, respectively.
38
<PAGE> 41
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Minimum aggregate future lease payments under noncancelable operating
leases as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................. $ 869,712
1999................................................. 655,676
2000................................................. 644,400
2001................................................. 644,400
2002................................................. 600,282
Thereafter........................................... 16,848,838
-----------
$20,263,308
===========
</TABLE>
The Company also periodically enters into commitments to purchase certain
raw materials in the normal course of business, including hops commitments for a
portion of the anticipated production requirements through 2002.
11. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) savings plan for employees age 21 years or
older with at least one year of service. The maximum employee contribution is
15% of the participant's compensation. The Company matches 100% of each dollar
contributed by a participant, with a maximum matching contribution of 4% of a
participant's compensation. The Company's contributions to the plan vest at
varying rates up to five years depending upon the employee's years of service
and totaled $197,000, $142,000 and $87,000 in 1997, 1996 and 1995, respectively.
12. 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. Wholesale distributors account for substantially all accounts
receivable; therefore, 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 non-Alliance wholesaler, K&L Distributors,
Inc., an independent A-B distributor, accounted for approximately 17%, 18% and
24% of total sales in 1997, 1996 and 1995, respectively. The sales to A-B
through the Distribution Alliance represented 73%, 59% and 28% of total sales,
or $27,668,000, $23,417,000 and $7,950,000 (net of an approximate 2% alliance
fee), in 1997, 1996 and 1995, respectively. Additional fees incurred by the
Company for A-B administrative and handling charges totaled $191,000, $146,000
and $92,000 in 1997, 1996 and 1995, respectively. The Company purchased certain
raw materials through A-B totaling $2,420,000 and $1,728,000 in 1997 and 1996,
respectively. Net amounts due from A-B were $232,000 and $502,000 as of December
31, 1997 and 1996, respectively.
39
<PAGE> 42
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. INTERIM FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTER ENDED 1996 QUARTER ENDED
----------------------------------------- -----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
------- --------- -------- -------- ------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............................. $9,331 $9,719 $9,976 $8,868 $10,159 $10,394 $10,302 $8,555
Less Excise Taxes................. 879 880 975 874 943 963 992 834
------ ------ ------ ------ ------- ------- ------- ------
Net Sales......................... 8,452 8,839 9,001 7,994 9,216 9,431 9,310 7,721
Cost of Sales..................... 6,690 6,546 6,354 6,372 6,683 6,045 5,798 5,055
------ ------ ------ ------ ------- ------- ------- ------
Gross Profit...................... 1,762 2,293 2,647 1,622 2,533 3,386 3,512 2,666
Selling, General and
Administrative Expenses......... 2,592 2,451 2,518 2,421 2,342 2,117 1,862 1,532
------ ------ ------ ------ ------- ------- ------- ------
Operating Income (Loss)........... (830) (158) 129 (799) 191 1,269 1,650 1,134
Interest Expense and
Other Income, Net............... (165) (152) 13 18 41 128 189 257
------ ------ ------ ------ ------- ------- ------- ------
Income (Loss) Before Taxes........ (995) (310) 142 (781) 232 1,397 1,839 1,391
Provision (Benefit) for Income
Taxes........................... (279) (44) 71 (293) 85 510 671 507
------ ------ ------ ------ ------- ------- ------- ------
Net Income (Loss)................. $ (716) $ (266) $ 71 $ (488) $ 147 $ 887 $ 1,168 $ 884
====== ====== ====== ====== ======= ======= ======= ======
Basic Earnings (Loss) per Share... $(0.09) $(0.03) $ 0.01 $(0.06) $ 0.02 $ 0.12 $ 0.15 $ 0.11
====== ====== ====== ====== ======= ======= ======= ======
Diluted Earnings (Loss) per
Share........................... $(0.09) $(0.03) $ 0.01 $(0.06) $ 0.02 $ 0.10 $ 0.13 $ 0.10
====== ====== ====== ====== ======= ======= ======= ======
Barrels Shipped................... 52.8 54.0 56.4 51.4 58.1 57.6 59.3 49.7
</TABLE>
The 1996 and first three quarters of 1997 earnings (loss) per share amounts
have been restated to comply with Statement 128.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers is
incorporated by reference from the Company's definitive proxy statement for its
1998 Annual Meeting of Stockholders (the "1998 Proxy Statement") under the
captions "Board of Directors" or "Executive Compensation."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
from the 1998 Proxy Statement caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the 1998 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the 1998 Proxy Statement under the caption
"Certain Transactions."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedules. See Index to
Financial Statements at Item 8 on page 24 of this report. All other
financial statement schedules are omitted because they were not
required or the required information is included in the Financial
Statements or Notes thereto.
2. Exhibit Index is included in the Form 10-K filed with Securities and
Exchange Commission.
40
<PAGE> 43
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
Seattle, State of Washington, on March 25, 1998.
REDHOOK ALE BREWERY, INCORPORATED
By /s/ BRADLEY A. BERG
------------------------------------
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PAUL S. SHIPMAN President, Chief Executive March 25, 1998
- -------------------------------------------------------- Officer and Chairman of the
Paul S. Shipman Board (Principal Executive
Officer)
/s/ BRADLEY A. BERG Executive Vice President March 25, 1998
- -------------------------------------------------------- and Chief Financial Officer
Bradley A. Berg (Principal Financial
Officer)
/s/ DAVID H. KIRSKE Controller and Treasurer March 25, 1998
- -------------------------------------------------------- (Principal Accounting
David H. Kirske Officer)
/s/ GORDON A. BOWKER Director March 25, 1998
- --------------------------------------------------------
Gordon A. Bowker
/s/ JOHN T. CARLETON Director March 25, 1998
- --------------------------------------------------------
John T. Carleton
/s/ FRANK H. CLEMENT Director March 25, 1998
- --------------------------------------------------------
Frank H. Clement
/s/ DAVID R. ENGLISH Director March 25, 1998
- --------------------------------------------------------
David R. English
/s/ JERRY D. JONES Director March 25, 1998
- --------------------------------------------------------
Jerry D. Jones
/s/ BRUCE M. SANDISON Director March 25, 1998
- --------------------------------------------------------
Bruce M. Sandison
/s/ WALTER F. WALKER Director March 25, 1998
- --------------------------------------------------------
Walter F. Walker
/s/ DENNIS P. WESTON Director March 25, 1998
- --------------------------------------------------------
Dennis P. Weston
</TABLE>
41
<PAGE> 44
REDHOOK ALE BREWERY, INCORPORATED
REPORT OF MANAGEMENT
To the Stockholders and Directors of Redhook Ale Brewery, Incorporated:
The accompanying financial statements have been prepared by management in
conformity with generally accepted accounting principles. The fairness and
integrity of these financial statements, including any judgments, estimates and
selection of appropriate generally accepted accounting principles, are the
responsibility of management, as is all other information presented in this
Annual Report.
In the opinion of management, the financial statements are fairly stated,
and, to that end, the Company maintains a system of internal control which:
provides reasonable assurance that transactions are recorded properly for the
preparation of financial statements; safeguards assets against loss or
unauthorized use; maintains accountability for assets; and requires proper
authorization and accounting for all transactions. Management is responsible for
the effectiveness of internal control. This is accomplished through established
accounting and other control systems, policies and procedures, employee
selection and training, appropriate delegation of authority and segregation of
responsibilities.
Our independent auditors provide an objective independent review by their
audit of the Company's financial statements. Their audit is conducted in
accordance with generally accepted auditing standards and includes a review of
internal accounting control to the extent deemed necessary for the purposes of
their audit.
The Audit Committee of the Board of Directors is composed entirely of
Directors who are not employees of the Company. They meet regularly with the
independent auditors and management to review the work of each and to ensure
that each is properly discharging its financial reporting and internal control
responsibilities. To ensure complete independence, the independent auditors have
full and free access to the Audit Committee to discuss the results of their
audits, the adequacy of internal auditing controls and the quality of financial
reporting.
March 25, 1998
/s/ Bradley A. Berg
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
/s/ David H. Kirske
David H. Kirske
Controller and Treasurer
Principal Accounting Officer
42
<PAGE> 45
EXHIBIT INDEX
(1) 3.1 Articles of Amendment to and Second Restatement of Articles
of Incorporation of Registrant dated November 15, 1994;
Articles of Amendment, dated November 15, 1994; and Articles
of Amendment, dated June 15, 1995
(1) 3.2 Amended and Restated Bylaws of Registrant, dated April 2,
1991; Amendment to the Bylaws of Registrant, dated August 9,
1993; Amendments to Bylaws of Registrant, dated October 11,
1994
(1) 10.1 Securities Purchase Agreement dated as of July 21, 1993,
between the Registrant and GE Capital Redhook Investment
Corp.
(1) 10.2 Securities Purchase Agreement dated as of July 21, 1993,
among Registrant and certain investors
(1) 10.3 Amendment No. 2 dated as of October 18, 1994, to
Securities Purchase Agreement dated as of July 21, 1993 (see
Exhibits 10.1 and 10.2)
(1) 10.4 Investment Agreement dated as of October 18, 1994, between
the Registrant and Anheuser-Busch, Incorporated
(1) 10.5 Registration Rights Agreement dated as of August 9,
1993, between the Registrant and Purchasers (as defined
therein)
(1) 10.6 Amendment No. 1 dated as of October 18, 1994, to Registration
Rights Agreement dated as of August 9, 1993
(1) 10.7 Registration Rights Agreement dated as of October 18,
1994, between Registrant and Anheuser-Busch, Incorporated
(1) 10.8 Employment Agreement between Registrant and Paul Shipman,
dated October 18, 1994
(1) 10.9 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
(1) 10.10 Lease Agreement between Lake Union Center Phase One Limited
Partnership and Registrant, dated December 15, 1994
(1) 10.11 Sublease between Pease Development Authority as
Sublessor and Registrant as Sublessee, dated May 30, 1995
(1) 10.12 Agreement between Owner (Registrant) and Construction Manager
(Seattle Construction Services, Inc.) for Phase I of the New
Brewery; Woodinville, Washington, dated May 1, 1993
(1) 10.13 Agreement Between Owner (Registrant) and Construction Manager
(Seattle Construction Services, Inc.) for Redhook's New
Hampshire Brewery Facility, dated September 14, 1994
(1) 10.14 Amended and Restated Registrant's Directors Stock Option Plan
(1) 10.15 Registrant's Incentive Stock Option Plan, dated September 12,
1990
(1) 10.16 1992 Stock Incentive Plan, approved October 20, 1992,
as amended, October 11, 1994 and May 25, 1995
(1) 10.17 New York Life Insurance Policy No. 44 939 338 for Paul
Shipman, dated July 1, 1993
(1) 10.18 Amended and Restated Credit Agreement between U.S. Bank of
Washington, National Association and Registrant, dated June
5, 1995
(1) 10.19 Loan Agreement between the City of Seattle Industrial
Development Corporation and Registrant, dated November 1,
1991
(1) 10.20 Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated November 1, 1991, as
amended, June 5, 1995
(1)(6)10.21 Master Distributor Agreement between Registrant and
Anheuser-Busch, Incorporated, dated
<PAGE> 46
October 18, 1994
(1) 10.22 Amendment No. 3 dated as of July 27, 1995, to
Securities Purchase Agreement dated as of July 21, 1993 (see
Exhibits 10.1 and 10.2)
(1) 10.23 Amendment dated as of July 25, 1995, between the
Registrant and GE Capital Redhook Investment Corp.
(1) 10.24 Assignment of Sublease and Assumption Agreement dated
as of July 1, 1995, between Registrant and Redhook of New
Hampshire, Inc. (see Exhibit 10.11)
(1) 10.25 Letter Agreement dated as of July 31, 1995, between
Registrant and Anheuser-Busch, Incorporated
10.26 Employment Agreement between Registrant and Bradley A. Berg,
dated December 16, 1997
10.27 Employment Agreement between Registrant and David J.
Mickelson, dated December 15, 1997
10.28 Employment Agreement between Registrant and Allen L Triplett,
dated December 16, 1997
10.29 Employment Agreement between Registrant and Pamela J.
Hinckley, dated December 30, 1997
(3) 10.30 Amendment No. 1 dated as of June 26, 1996, to Master
Distribution Agreement between Registrant and Anheuser-Busch,
Incorporated, dated October 18, 1994
(3) 10.31 Amendment dated as of February 27, 1996, to
Registrant's 1992 Stock Incentive Plan, as amended
(3) 10.32 Amendment dated as of February 27, 1996, to Amended and
Restated Registrant's Directors Stock Option Plan
(3) 10.33 Amendment dated as of July 25, 1996, to Registrant's
1992 Stock Incentive Plan, as amended
(4) 10.34 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
(5) 10.35 Second Amendment to Amended and Restated Credit Agreement
between U.S. Bank of Washington, National Association and
Registrant, dated September 15, 1997
(5) 10.36 Consent, Waiver and Amendment, dated September 19,
1997, to Master Distributor Agreement between Registrant and
Anheuser-Busch, Incorporated, dated October 18, 1994
(1) 21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule for the years ended December 31,
1997, and 1995 and for the quarter ended March 31, 1996.
27.2 Financial Data Schedule for the quarters ended September 30,
1997, June 30, 1997 and March 31, 1997.
27.3 Financial Data Schedule for the year ended December 31, 1996
and for the quarters ended September 30, 1996 and June 30,
1996.
(1) Incorporated by reference to same exhibit number as in the Company's
Registration Statement on Form S-1, Registrant No. 33-94166.
(2) Incorporated by reference to same exhibit number as in the Company's Form
10-K for the year ended December 31, 1995.
(3) Incorporated by reference to same exhibit number as in the Company's Form
10-Q for the quarter ended June 30, 1996.
(4) Incorporated by reference to same exhibit number as in the Company's Form
10-Q for the quarter ended September 30, 1996.
(5) Incorporated by reference to same exhibit number as in the Company's Form
10-Q for the quarter ended September 30, 1997.
(6) Confidential treatment has been granted for portions of this document.
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the
16th day of December, 1997, between Employer, Redhook Ale Brewery, Incorporated
("Employer") and Bradley A. Berg ("Employee").
1. Explanatory Statement
a. Employer is engaged in the business of brewing, packaging,
marketing, and distributing alcoholic malt beverages and other beverages.
b. Employee has specialized expertise in the business of brewing,
packaging, marketing, and distributing alcoholic malt beverages, and other
beverages and is the current Executive Vice President and Chief Financial
Officer of Employer.
c. Employee accepts continued employment with Employer and agrees
to render the services for Employer on the terms and conditions set forth in
this Agreement.
2. Term of Employment. The term of this Agreement commences on January
1, 1998 and, subject to the further provisions of this Agreement, ends on
December 31, 1999.
3. Employment. Employer employs Employee as Executive Vice President
and Chief Financial Officer and Employee agrees to render services for and on
behalf of Employer under the direction and supervision of the Chief Executive
Officer. The Chairman of the Board of Directors or the Board of Directors may
assign other executive duties to Employee. Employee shall provide these services
professionally and competently and shall devote substantially all of Employee's
business time to his services hereunder.
4. Compensation. Employer will pay Employee as compensation for
services rendered under this Agreement as follows:
a. a minimum base salary of One Hundred Forty Four Thousand Five
Hundred Dollars ($144,500) per year in accordance with Employer's normal payroll
policies;
b. a performance bonus in an amount to be determined by the
Compensation Committee of the Board of Directors, conditioned on Employer's
<PAGE> 2
reaching or exceeding year-end performance goals as those goals are specified in
Employer's annual business plan, in addition to consideration of other
achievements during the year.
c. The Board of Directors in its sole discretion may review
Employee's compensation for upward adjustment.
5. Vacations and Fringe Benefits.
a. Employer shall provide Employee the same vacation, retirement,
and other fringe benefits provided other executive employees of Employer.
b. Employer may furnish Employee an automobile, which may be used
by Employee for personal and business use and shall pay the ordinary and
reasonable expenses associated with operation of the automobile; however,
Employee shall account to Employer for the personal use of the automobile which
in turn shall be reported by Employer as income to Employee in accordance with
the regulations of the Internal Revenue Service. If at any time the rules
regarding personal use of business automobiles are changed by the Internal
Revenue Service, this Agreement shall be modified to assure compliance in a
manner that is as favorable to Employee as permitted by such rules. If Employer
does not provide an automobile for Employee, Employee will receive a monthly car
allowance in an amount to be determined by the Compensation Committee.
6. Termination of Employment.
a. Employer may at its option terminate the employment of
Employee with no further obligation to compensate Employee through written
notice to Employee for any of the following reasons:
(1) Employee materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach; or
(2) Employee is unable for any reason other than death or
disability to perform the material duties of the position for longer than
one hundred and eighty (180) consecutive days; or
(3) Employee has engaged in conduct which in the event he
were to remain employed by Employer would substantially and adversely
impair the interests of Employer; or
<PAGE> 3
(4) Employee repeatedly refuses to obey lawful directions of
Employer's Chief Executive Officer or Board of Directors.
b. Employer may at its option terminate the employment of
Employee through written notice to Employee for any other reason; however, in
the event of such termination:
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.b.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.b., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.b., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of the Employee's compensation
under this Section 6.b.(4) shall not limit Employer's rights to pursue
other remedies at law or in equity.
c. Employee may at his option terminate his employment with
Employer under this Agreement through written notice to Employer for the
following reasons:
<PAGE> 4
(1) Employer materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach and action required to
cure the breach;
(2) Employer is declared bankrupt or a receiver is appointed
for longer than 180 days;
(3) Employer liquidates or otherwise ceases business
operations;
(4) Employer requires relocation of Employee's place of work
outside of King County, Washington
d. In the event that Employee elects to terminate his employment
under Section 6.c.(1) or Section 6.c.(4):
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.d.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.d., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.d., shall immediately terminate, and the
Employer will have no further obligation to Employee
<PAGE> 5
pursuant to this Agreement, provided that the cessation of Employee's
compensation under this Section 6.d.(4) shall not limit Employer's rights
to pursue other remedies at law or in equity.
e. Employee's termination of employment for any other reason
shall constitute a material breach of this Agreement, and shall terminate
Employer's obligations under this Agreement, without limiting Employer's rights
to pursue other remedies at law or in equity; and
f. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment for any
reason.
7. Confidential Information and Goodwill.
a. Employee will acquire knowledge of Employer's confidential
information. Confidential information is information which is of a unique nature
relating to the Employer's business operations, internal structure, financial
affairs, programs, recipes, formulations, brewing methods, systems, procedures,
manuals, confidential reports, lists of customers and prospective customers,
sales and marketing methods, as well as the amount, nature and type of product,
equipment and methods used and preferred by Employer's customers and the prices
paid by Employer's customers or any other information which is confidential or
proprietary or otherwise not available to the general public. Disclosure of this
confidential information could cause substantial loss to the Employer. Employee
agrees that Employee will not for any purpose disclose any confidential
information obtained by Employee during employment with the Employer to any
person or entity.
b. Employee may have access to records of the Employer. Records
are all contracts, agreements, financial books, instruments and documents,
client lists, memoranda, data, reports, recipes, formulations, brewing records,
tapes, rolodexes, telephone and address books, letters, research, card decks,
listings, programming, and any other instruments, records or documents relating
or pertaining to manufacturing or customer sales by Employer or Employee, the
services rendered by Employee, or the business of the Employer. Records will
remain in Employer's property. When Employee's employment terminates, Employee
will return to Employer all records and will neither make nor retain any copies
of any records after termination of employment.
c. During the term of this Agreement and thereafter, Employee
<PAGE> 6
shall diligently, legally and freely perform his duties as set forth in this
Agreement and shall take no action that would damage the goodwill of the
Employer. During the term of this Agreement and thereafter, Employee agrees that
he will not make any oral or written statement to any third party that is
intended to, or does, call into question the (1) conduct, business practices or
business judgment of the Employer or any of its officers, directors or business
partners; or (2) quality of the Employer's products or services.
8. Restrictive Covenants.
a. Employee will perform services which have a unique value to
Employer which if used in competition with Employer could cause serious and
irreparable harm to Employer. Employee will develop goodwill for Employer
through personal contact with customers and others who have business
relationships with Employer. This goodwill, which is a proprietary asset of
Employer, may follow Employee after the employment with Employer terminates.
Employee agrees that for a period of two (2) years following the termination of
this Agreement, Employee will not, unless given prior written consent by
Employer:
(1) solicit for employment or employ any other person or
entity any person who is employed by Employer during the same time as
Employee. Employee will not persuade or attempt to persuade any customer,
supplier, distributor, retailer, person or entity which is a customer or
supplier to Employer during the time of Employee's employment with
Employer, to discontinue business with Employer and its affiliates or
modify the terms of business between itself and Employer or its
affiliates.
(2) engage or act, either as a consultant, independent
contractor, proprietor, stockholder, partner, employee, officer, or in any
other capacity, in any business which brews, packages, markets or
distributes alcoholic malt beverages in any state of the continental
United States or in any foreign country where Employer brewed, packaged,
marketed or distributed alcoholic malt beverages during the term of this
Agreement.
b. If any provision or portion of this section of the Agreement
is held unreasonable, unlawful, or unenforceable by a court of competent
jurisdiction, the provision will be deemed to be modified to the extent
necessary for the provision to be legally enforceable to the fullest extent
permitted by applicable law. Any court of competent jurisdiction may enforce
<PAGE> 7
any provision of this section or modify any provision in order that the
provision will be enforced by the court to the fullest extent permitted by
applicable law.
c. Violation by Employee of the provisions of Sections 7 or 8 of
this Agreement could cause irreparable injury to Employer and there is no
adequate remedy at law for violation of those provisions. Employer has, in
addition to other legal or equitable remedies, the right to enjoin Employee in a
court of equity from violating those provisions. The cessation of Employee's
compensation under Section 6 shall in no way limit the damages available to the
Employer upon violation by Employee of Sections 7 or 8 of this Agreement.
9. Employee's Death or Disability. In the event that Employee dies or
becomes disabled during the period that Employee is employed by Employer under
this Agreement, Employer shall pay for a period of six (6) months the
compensation, other than the annual performance bonus, then in effect on the
date of Employee's death, or date that notice of Employee's disability is
received, to Employee or to Employee's estate or legal guardian. In the event
that Employee dies within one year after Employee's employment has been
terminated pursuant to Section 6.b., Section 6.c.(1) or Section 6.c.(4),
Employer shall continue to pay Employee's estate the compensation, other than
the annual performance bonus, then in effect on the date of Employee's death
until the first anniversary of the date Employee's employment terminated,
whereupon Employer's obligation to pay compensation under Section 6 shall cease.
In addition, the options/shares granted to the Employee that are scheduled to
vest during the twelve (12) month period under Section 6.b.(3) and Section
6.d.(3) shall vest immediately and be exercisable for a period of six (6) months
from the date of Employee's death. Employee shall continue to be subject to the
restrictions in Sections 7 and 8 of this Agreement following termination of
employment due to disability.
10. Notices. All notices and other communications required or permitted
to be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand delivered and a signed receipt is given
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Secretary of the Board of Directors
Redhook Ale Brewery, Incorporated
3400 Phinney Avenue North
Seattle, Washington 98103
and if to Employee to:
<PAGE> 8
Bradley A. Berg
23306 SE 16th Pl.
Issaquah, Washington 98029
or at any other address as either party notifies the other of in writing.
11. Miscellaneous.
a. This Agreement binds and benefits Employer and its successors
and assigns. This Agreement binds and benefits Employee and Employee's heirs,
personal and legal representatives, and guardians. No portion of this Agreement
or interest in it may be assigned by Employee.
b. The terms and provisions of this Agreement may not be modified
except by written instrument duly executed by Employer and Employee.
c. This Agreement will be governed by and enforced and construed
in accordance with the laws of the State of Washington. Venue for an action to
enforce this Agreement shall be in Superior Court for King County, Washington.
d. In any dispute arising out of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys' fees and costs.
e. In the event of a breach of this Agreement, the non-breaching
party may maintain an action for specific performance against the party who is
alleged to have breached any of the terms of the Agreement. This subsection will
not be construed to limit in any manner any other rights or remedies an
aggrieved party may have by virtue of any breach of this Agreement.
f. Each of the parties has the right to waive compliance with any
obligation of this Agreement, but a waiver by any party of any obligation will
not be deemed a waiver of compliance with any other obligation or of its right
to seek redress for any breach of any obligation on any subsequent occasion, nor
will any waiver be deemed effective unless in writing and signed by the party so
waiving.
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement.
"EMPLOYER"
Redhook Ale Brewery, Incorporated
By /s/ Paul S. Shipman Date: December 16, 1997
Its President and Chief
Executive Officer
"EMPLOYEE"
By /s/ Bradley A. Berg Date: December 16, 1997
<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the
15th day of December, 1997, between Employer, Redhook Ale Brewery, Incorporated
("Employer") and David J. Mickelson ("Employee").
1. Explanatory Statement
a. Employer is engaged in the business of brewing, packaging,
marketing, and distributing alcoholic malt beverages and other beverages.
b. Employee has specialized expertise in the business of brewing,
packaging, marketing, and distributing alcoholic malt beverages, and other
beverages and is the current Executive Vice President and Chief Operating
Officer of Employer.
c. Employee accepts continued employment with Employer and agrees
to render the services for Employer on the terms and conditions set forth in
this Agreement.
2. Term of Employment. The term of this Agreement commences on January
1, 1998 and, subject to the further provisions of this Agreement, ends on
December 31, 1999.
3. Employment. Employer employs Employee as Executive Vice President
and Chief Operating Officer, and Employee agrees to render services for and on
behalf of Employer under the direction and supervision of the Chief Executive
Officer. The Chairman of the Board of Directors or the Board of Directors may
assign other executive duties to Employee. Employee shall provide these services
professionally and competently and shall devote substantially all of Employee's
business time to his services hereunder.
4. Compensation. Employer will pay Employee as compensation for
services rendered under this Agreement as follows:
a. a minimum base salary of One Hundred, Twenty Thousand Dollars
($120,000) per year in accordance with Employer's normal payroll policies;
b. a performance bonus in an amount to be determined by the
Compensation Committee of the Board of Directors, conditioned on Employer's
<PAGE> 2
reaching or exceeding year-end performance goals as those goals are specified in
Employer's annual business plan, in addition to consideration of other
achievements during the year.
c. The Board of Directors in its sole discretion may review
Employee's compensation for upward adjustment.
5. Vacations and Fringe Benefits.
a. Employer shall provide Employee the same vacation, retirement,
and other fringe benefits provided other executive employees of Employer.
b. Employer may furnish Employee an automobile, which may be used
by Employee for personal and business use and shall pay the ordinary and
reasonable expenses associated with operation of the automobile; however,
Employee shall account to Employer for the personal use of the automobile which
in turn shall be reported by Employer as income to Employee in accordance with
the regulations of the Internal Revenue Service. If at any time the rules
regarding personal use of business automobiles are changed by the Internal
Revenue Service, this Agreement shall be modified to assure compliance in a
manner that is as favorable to Employee as permitted by such rules. If Employer
does not provide an automobile for Employee, Employee will receive a monthly car
allowance in an amount to be determined by the Compensation Committee.
6. Termination of Employment.
a. Employer may at its option terminate the employment of
Employee with no further obligation to compensate Employee through written
notice to Employee for any of the following reasons:
(1) Employee materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach; or
(2) Employee is unable for any reason other than death or
disability to perform the material duties of the position for longer than
one hundred and eighty (180) consecutive days; or
(3) Employee has engaged in conduct which in the event he
were to remain employed by Employer would substantially and
<PAGE> 3
adversely impair the interests of Employer; or
(4) Employee repeatedly refuses to obey lawful directions of
Employer's Chief Executive Officer or Board of Directors.
b. Employer may at its option terminate the employment of
Employee through written notice to Employee for any other reason; however, in
the event of such termination:
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.b.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.b., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.b., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of the Employee's compensation
under this Section 6.b.(4) shall not limit Employer's rights to pursue
other remedies at law or in equity.
c. Employee may at his option terminate his employment with
Employer under this Agreement through written notice to Employer for the
following reasons:
<PAGE> 4
(1) Employer materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach and action required to
cure the breach;
(2) Employer is declared bankrupt or a receiver is appointed
for longer than 180 days;
(3) Employer liquidates or otherwise ceases business
operations;
d. In the event that Employee elects to terminate his employment
under Section 6.c.(1):
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.d.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.d., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.d., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of Employee's compensation under
this Section 6.d.(4) shall not limit Employer's rights
<PAGE> 5
to pursue other remedies at law or in equity.
e. Employee's termination of employment for any other reason
shall constitute a material breach of this Agreement, and shall terminate
Employer's obligations under this Agreement, without limiting Employer's rights
to pursue other remedies at law or in equity; and
f. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment for any
reason.
7. Confidential Information and Goodwill.
a. Employee will acquire knowledge of Employer's confidential
information. Confidential information is information which is of a unique nature
relating to the Employer's business operations, internal structure, financial
affairs, programs, recipes, formulations, brewing methods, systems, procedures,
manuals, confidential reports, lists of customers and prospective customers,
sales and marketing methods, as well as the amount, nature and type of product,
equipment and methods used and preferred by Employer's customers and the prices
paid by Employer's customers or any other information which is confidential or
proprietary or otherwise not available to the general public. Disclosure of this
confidential information could cause substantial loss to the Employer. Employee
agrees that Employee will not for any purpose disclose any confidential
information obtained by Employee during employment with the Employer to any
person or entity.
b. Employee may have access to records of the Employer. Records
are all contracts, agreements, financial books, instruments and documents,
client lists, memoranda, data, reports, recipes, formulations, brewing records,
tapes, rolodexes, telephone and address books, letters, research, card decks,
listings, programming, and any other instruments, records or documents relating
or pertaining to manufacturing or customer sales by Employer or Employee, the
services rendered by Employee, or the business of the Employer. Records will
remain in Employer's property. When Employee's employment terminates, Employee
will return to Employer all records and will neither make nor retain any copies
of any records after termination of employment.
c. During the term of this Agreement and thereafter, Employee
shall diligently, legally and freely perform his duties as set forth in this
Agreement and shall take no action that would damage the goodwill of the
<PAGE> 6
Employer. During the term of this Agreement and thereafter, Employee agrees that
he will not make any oral or written statement to any third party that is
intended to, or does, call into question the (1) conduct, business practices or
business judgment of the Employer or any of its officers, directors or business
partners; or (2) quality of the Employer's products or services.
8. Restrictive Covenants.
a. Employee will perform services which have a unique value to
Employer which if used in competition with Employer could cause serious and
irreparable harm to Employer. Employee will develop goodwill for Employer
through personal contact with customers and others who have business
relationships with Employer. This goodwill, which is a proprietary asset of
Employer, may follow Employee after the employment with Employer terminates.
Employee agrees that for a period of two (2) years following the termination of
this Agreement, Employee will not, unless given prior written consent by
Employer:
(1) solicit for employment or employ any other person or
entity any person who is employed by Employer during the same time as
Employee. Employee will not persuade or attempt to persuade any customer,
supplier, distributor, retailer, person or entity which is a customer or
supplier to Employer during the time of Employee's employment with
Employer, to discontinue business with Employer and its affiliates or
modify the terms of business between itself and Employer or its
affiliates.
(2) engage or act, either as a consultant, independent
contractor, proprietor, stockholder, partner, employee, officer, or in any
other capacity, in any business which brews, packages, markets or
distributes alcoholic malt beverages in any state of the continental
United States or in any foreign country where Employer brewed, packaged,
marketed or distributed alcoholic malt beverages during the term of this
Agreement.
b. If any provision or portion of this section of the Agreement
is held unreasonable, unlawful, or unenforceable by a court of competent
jurisdiction, the provision will be deemed to be modified to the extent
necessary for the provision to be legally enforceable to the fullest extent
permitted by applicable law. Any court of competent jurisdiction may enforce any
provision of this section or modify any provision in order that the provision
will be enforced by the court to the fullest extent permitted by applicable law.
<PAGE> 7
c. Violation by Employee of the provisions of Sections 7 or 8 of
this Agreement could cause irreparable injury to Employer and there is no
adequate remedy at law for violation of those provisions. Employer has, in
addition to other legal or equitable remedies, the right to enjoin Employee in a
court of equity from violating those provisions. The cessation of Employee's
compensation under Section 6 shall in no way limit the damages available to the
Employer upon violation by Employee of Sections 7 or 8 of this Agreement.
9. Employee's Death or Disability. In the event that Employee dies or
becomes disabled during the period that Employee is employed by Employer under
this Agreement, Employer shall pay for a period of six (6) months the
compensation, other than the annual performance bonus, then in effect on the
date of Employee's death, or date that notice of Employee's disability is
received, to Employee or to Employee's estate or legal guardian. In the event
that Employee dies within one year after Employee's employment has been
terminated pursuant to Section 6.b. or Section 6.c.(1), Employer shall continue
to pay Employee's estate the compensation, other than the annual performance
bonus, then in effect on the date of Employee's death until the first
anniversary of the date Employee's employment terminated, whereupon Employer's
obligation to pay compensation under Section 6 shall cease. In addition, the
options/shares granted to the Employee that are scheduled to vest during the
twelve (12) month period under Section 6.b.(3) and Section 6.d.(3) shall vest
immediately and be exercisable for a period of six (6) months from the date of
Employee's death. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment due to
disability.
10. Notices. All notices and other communications required or permitted
to be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand delivered and a signed receipt is given
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Secretary of the Board of Directors
Redhook Ale Brewery, Incorporated
3400 Phinney Avenue North
Seattle, Washington 98103
and if to Employee to:
David J. Mickelson
<PAGE> 8
23912-24th Dr. SE
Bothell, Washington 98021
or at any other address as either party notifies the other of in writing.
11. Miscellaneous.
a. This Agreement binds and benefits Employer and its successors
and assigns. This Agreement binds and benefits Employee and Employee's heirs,
personal and legal representatives, and guardians. No portion of this Agreement
or interest in it may be assigned by Employee.
b. The terms and provisions of this Agreement may not be modified
except by written instrument duly executed by Employer and Employee.
c. This Agreement will be governed by and enforced and construed
in accordance with the laws of the State of Washington. Venue for an action to
enforce this Agreement shall be in Superior Court for King County, Washington.
d. In any dispute arising out of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys' fees and costs.
e. In the event of a breach of this Agreement, the non-breaching
party may maintain an action for specific performance against the party who is
alleged to have breached any of the terms of the Agreement. This subsection will
not be construed to limit in any manner any other rights or remedies an
aggrieved party may have by virtue of any breach of this Agreement.
f. Each of the parties has the right to waive compliance with any
obligation of this Agreement, but a waiver by any party of any obligation will
not be deemed a waiver of compliance with any other obligation or of its right
to seek redress for any breach of any obligation on any subsequent occasion, nor
will any waiver be deemed effective unless in writing and signed by the party so
waiving.
IN WITNESS WHEREOF, the parties have executed and delivered this
<PAGE> 9
Agreement.
"EMPLOYER"
Redhook Ale Brewery, Incorporated
By /s/ Paul S. Shipman Date: December 15, 1997
Its President and Chief
Executive Officer
"EMPLOYEE"
By /s/ David J. Mickelson Date: December 15, 1997
<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the
16th day of December, 1997, between Employer, Redhook Ale Brewery, Incorporated
("Employer") and Allen L. Triplett ("Employee").
1. Explanatory Statement
a. Employer is engaged in the business of brewing, packaging,
marketing, and distributing alcoholic malt beverages and other beverages.
b. Employee has specialized expertise in the business of brewing,
packaging, marketing, and distributing alcoholic malt beverages, and other
beverages and is the current Vice President, Brewing, of Employer.
c. Employee accepts continued employment with Employer and agrees
to render the services for Employer on the terms and conditions set forth in
this Agreement.
2. Term of Employment. The term of this Agreement commences on January
1, 1998 and, subject to the further provisions of this Agreement, ends on
December 31, 1999.
3. Employment. Employer employs Employee as Vice President, Brewing,
and Employee agrees to render services for and on behalf of Employer under the
direction and supervision of the Chief Executive Officer. The Chairman of the
Board of Directors or the Board of Directors may assign other executive duties
to Employee. Employee shall provide these services professionally and
competently and shall devote substantially all of Employee's business time to
his services hereunder.
4. Compensation. Employer will pay Employee as compensation for
services rendered under this Agreement as follows:
a. a minimum base salary of One Hundred Seven Thousand Five
Hundred Dollars ($107,500) per year in accordance with Employer's normal payroll
policies;
b. a performance bonus in an amount to be determined by the
Compensation Committee of the Board of Directors, conditioned on Employer's
reaching or exceeding year-end performance goals as those goals are specified
<PAGE> 2
in Employer's annual business plan, in addition to consideration of other
achievements during the year.
c. The Board of Directors in its sole discretion may review
Employee's compensation for upward adjustment.
5. Vacations and Fringe Benefits.
a. Employer shall provide Employee the same vacation, retirement,
and other fringe benefits provided other executive employees of Employer.
b. Employer may furnish Employee an automobile, which may be used
by Employee for personal and business use and shall pay the ordinary and
reasonable expenses associated with operation of the automobile; however,
Employee shall account to Employer for the personal use of the automobile which
in turn shall be reported by Employer as income to Employee in accordance with
the regulations of the Internal Revenue Service. If at any time the rules
regarding personal use of business automobiles are changed by the Internal
Revenue Service, this Agreement shall be modified to assure compliance in a
manner that is as favorable to Employee as permitted by such rules. If Employer
does not provide an automobile for Employee, Employee will receive a monthly car
allowance in an amount to be determined by the Compensation Committee.
6. Termination of Employment.
a. Employer may at its option terminate the employment of
Employee with no further obligation to compensate Employee through written
notice to Employee for any of the following reasons:
(1) Employee materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach; or
(2) Employee is unable for any reason other than death or
disability to perform the material duties of the position for longer than
one hundred and eighty (180) consecutive days; or
(3) Employee has engaged in conduct which in the event he
were to remain employed by Employer would substantially and adversely
impair the interests of Employer; or
<PAGE> 3
(4) Employee repeatedly refuses to obey lawful directions of
Employer's Chief Executive Officer or Board of Directors.
b. Employer may at its option terminate the employment of
Employee through written notice to Employee for any other reason; however, in
the event of such termination:
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.b.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.b., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.b., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of the Employee's compensation
under this Section 6.b.(4) shall not limit Employer's rights to pursue
other remedies at law or in equity.
c. Employee may at his option terminate his employment with
Employer under this Agreement through written notice to Employer for the
following reasons:
(1) Employer materially breaches any of the provisions of
<PAGE> 4
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach and action required to
cure the breach;
(2) Employer is declared bankrupt or a receiver is appointed
for longer than 180 days;
(3) Employer liquidates or otherwise ceases business
operations;
d. In the event that Employee elects to terminate his employment
under Section 6.c.(1):
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.d.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.d., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.d., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of Employee's compensation under
this Section 6.d.(4) shall not limit Employer's rights to pursue other
remedies at law or in equity.
<PAGE> 5
e. Employee's termination of employment for any other reason
shall constitute a material breach of this Agreement, and shall terminate
Employer's obligations under this Agreement, without limiting Employer's rights
to pursue other remedies at law or in equity; and
f. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment for any
reason.
7. Confidential Information and Goodwill.
a. Employee will acquire knowledge of Employer's confidential
information. Confidential information is information which is of a unique nature
relating to the Employer's business operations, internal structure, financial
affairs, programs, recipes, formulations, brewing methods, systems, procedures,
manuals, confidential reports, lists of customers and prospective customers,
sales and marketing methods, as well as the amount, nature and type of product,
equipment and methods used and preferred by Employer's customers and the prices
paid by Employer's customers or any other information which is confidential or
proprietary or otherwise not available to the general public. Disclosure of this
confidential information could cause substantial loss to the Employer. Employee
agrees that Employee will not for any purpose disclose any confidential
information obtained by Employee during employment with the Employer to any
person or entity.
b. Employee may have access to records of the Employer. Records
are all contracts, agreements, financial books, instruments and documents,
client lists, memoranda, data, reports, recipes, formulations, brewing records,
tapes, rolodexes, telephone and address books, letters, research, card decks,
listings, programming, and any other instruments, records or documents relating
or pertaining to manufacturing or customer sales by Employer or Employee, the
services rendered by Employee, or the business of the Employer. Records will
remain in Employer's property. When Employee's employment terminates, Employee
will return to Employer all records and will neither make nor retain any copies
of any records after termination of employment.
c. During the term of this Agreement and thereafter, Employee
shall diligently, legally and freely perform his duties as set forth in this
Agreement and shall take no action that would damage the goodwill of the
Employer. During the term of this Agreement and thereafter, Employee agrees
<PAGE> 6
that he will not make any oral or written statement to any third party that is
intended to, or does, call into question the (1) conduct, business practices or
business judgment of the Employer or any of its officers, directors or business
partners; or (2) quality of the Employer's products or services.
8. Restrictive Covenants.
a. Employee will perform services which have a unique value to
Employer which if used in competition with Employer could cause serious and
irreparable harm to Employer. Employee will develop goodwill for Employer
through personal contact with customers and others who have business
relationships with Employer. This goodwill, which is a proprietary asset of
Employer, may follow Employee after the employment with Employer terminates.
Employee agrees that for a period of two (2) years following the termination of
this Agreement, Employee will not, unless given prior written consent by
Employer:
(1) solicit for employment or employ any other person or
entity any person who is employed by Employer during the same time as
Employee. Employee will not persuade or attempt to persuade any customer,
supplier, distributor, retailer, person or entity which is a customer or
supplier to Employer during the time of Employee's employment with
Employer, to discontinue business with Employer and its affiliates or
modify the terms of business between itself and Employer or its
affiliates.
(2) engage or act, either as a consultant, independent
contractor, proprietor, stockholder, partner, employee, officer, or in any
other capacity, in any business which brews, packages, markets or
distributes alcoholic malt beverages in any state of the continental
United States or in any foreign country where Employer brewed, packaged,
marketed or distributed alcoholic malt beverages during the term of this
Agreement.
b. If any provision or portion of this section of the Agreement
is held unreasonable, unlawful, or unenforceable by a court of competent
jurisdiction, the provision will be deemed to be modified to the extent
necessary for the provision to be legally enforceable to the fullest extent
permitted by applicable law. Any court of competent jurisdiction may enforce any
provision of this section or modify any provision in order that the provision
will be enforced by the court to the fullest extent permitted by applicable law.
<PAGE> 7
c. Violation by Employee of the provisions of Sections 7 or 8 of
this Agreement could cause irreparable injury to Employer and there is no
adequate remedy at law for violation of those provisions. Employer has, in
addition to other legal or equitable remedies, the right to enjoin Employee in a
court of equity from violating those provisions. The cessation of Employee's
compensation under Section 6 shall in no way limit the damages available to the
Employer upon violation by Employee of Sections 7 or 8 of this Agreement.
9. Employee's Death or Disability. In the event that Employee dies or
becomes disabled during the period that Employee is employed by Employer under
this Agreement, Employer shall pay for a period of six (6) months the
compensation, other than the annual performance bonus, then in effect on the
date of Employee's death, or date that notice of Employee's disability is
received, to Employee or to Employee's estate or legal guardian. In the event
that Employee dies within one year after Employee's employment has been
terminated pursuant to Section 6.b. or Section 6.c.(1), Employer shall continue
to pay Employee's estate the compensation, other than the annual performance
bonus, then in effect on the date of Employee's death until the first
anniversary of the date Employee's employment terminated, whereupon Employer's
obligation to pay compensation under Section 6 shall cease. In addition, the
options/shares granted to the Employee that are scheduled to vest during the
twelve (12) month period under Section 6.b.(3) and Section 6.d.(3) shall vest
immediately and be exercisable for a period of six (6) months from the date of
Employee's death. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment due to
disability.
10. Notices. All notices and other communications required or permitted
to be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand delivered and a signed receipt is given
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Secretary of the Board of Directors
Redhook Ale Brewery, Incorporated
3400 Phinney Avenue North
Seattle, Washington 98103
and if to Employee to:
Allen L. Triplett
902 W. Fulton
<PAGE> 8
Seattle, Washington 98119
or at any other address as either party notifies the other of in writing.
11. Miscellaneous.
a. This Agreement binds and benefits Employer and its successors
and assigns. This Agreement binds and benefits Employee and Employee's heirs,
personal and legal representatives, and guardians. No portion of this Agreement
or interest in it may be assigned by Employee.
b. The terms and provisions of this Agreement may not be modified
except by written instrument duly executed by Employer and Employee.
c. This Agreement will be governed by and enforced and construed
in accordance with the laws of the State of Washington. Venue for an action to
enforce this Agreement shall be in Superior Court for King County, Washington.
d. In any dispute arising out of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys' fees and costs.
e. In the event of a breach of this Agreement, the non-breaching
party may maintain an action for specific performance against the party who is
alleged to have breached any of the terms of the Agreement. This subsection will
not be construed to limit in any manner any other rights or remedies an
aggrieved party may have by virtue of any breach of this Agreement.
f. Each of the parties has the right to waive compliance with any
obligation of this Agreement, but a waiver by any party of any obligation will
not be deemed a waiver of compliance with any other obligation or of its right
to seek redress for any breach of any obligation on any subsequent occasion, nor
will any waiver be deemed effective unless in writing and signed by the party so
waiving.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement.
<PAGE> 9
"EMPLOYER"
Redhook Ale Brewery, Incorporated
By /s/ Paul S. Shipman Date: December 16, 1997
Its President and Chief
Executive Officer
"EMPLOYEE"
By /s/ Allen L. Triplett Date: December 16, 1997
<PAGE> 1
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the
30th day of December, 1997, between Employer, Redhook Ale Brewery, Incorporated
("Employer") and Pamela J. Hinckley ("Employee").
1. Explanatory Statement
a. Employer is engaged in the business of brewing, packaging,
marketing, and distributing alcoholic malt beverages and other beverages.
b. Employee has specialized expertise in the business of brewing,
packaging, marketing, and distributing alcoholic malt beverages, and other
beverages and is the current Vice President, Marketing, of Employer.
c. Employee accepts continued employment with Employer and agrees
to render the services for Employer on the terms and conditions set forth in
this Agreement.
2. Term of Employment. The term of this Agreement commences on January
1, 1998 and, subject to the further provisions of this Agreement, ends on
December 31, 1999.
3. Employment. Employer employs Employee as Vice President, Marketing,
and Employee agrees to render services for and on behalf of Employer under the
direction and supervision of the Chief Executive Officer. The Chairman of the
Board of Directors or the Board of Directors may assign other executive duties
to Employee. Employee shall provide these services professionally and
competently and shall devote substantially all of Employee's business time to
her services hereunder.
4. Compensation. Employer will pay Employee as compensation for
services rendered under this Agreement as follows:
a. a minimum base salary of One Hundred Seven Thousand Five
Hundred Dollars ($107,500) per year in accordance with Employer's normal payroll
policies;
b. a performance bonus in an amount to be determined by the
Compensation Committee of the Board of Directors, conditioned on Employer's
reaching or exceeding year-end performance goals as those goals are specified
<PAGE> 2
in Employer's annual business plan, in addition to consideration of other
achievements during the year.
c. The Board of Directors in its sole discretion may review
Employee's compensation for upward adjustment.
5. Vacations and Fringe Benefits.
a. Employer shall provide Employee the same vacation, retirement,
and other fringe benefits provided other executive employees of Employer.
b. Employer may furnish Employee an automobile, which may be used
by Employee for personal and business use and shall pay the ordinary and
reasonable expenses associated with operation of the automobile; however,
Employee shall account to Employer for the personal use of the automobile which
in turn shall be reported by Employer as income to Employee in accordance with
the regulations of the Internal Revenue Service. If at any time the rules
regarding personal use of business automobiles are changed by the Internal
Revenue Service, this Agreement shall be modified to assure compliance in a
manner that is as favorable to Employee as permitted by such rules. If Employer
does not provide an automobile for Employee, Employee will receive a monthly car
allowance in an amount to be determined by the Compensation Committee.
6. Termination of Employment.
a. Employer may at its option terminate the employment of
Employee with no further obligation to compensate Employee through written
notice to Employee for any of the following reasons:
(1) Employee materially breaches any of the provisions of
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach; or
(2) Employee is unable for any reason other than death or
disability to perform the material duties of the position for longer than
one hundred and eighty (180) consecutive days; or
(3) Employee has engaged in conduct which in the event he
were to remain employed by Employer would substantially and adversely
impair the interests of Employer; or
<PAGE> 3
(4) Employee repeatedly refuses to obey lawful directions of
Employer's Chief Executive Officer or Board of Directors.
b. Employer may at its option terminate the employment of
Employee through written notice to Employee for any other reason; however, in
the event of such termination:
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.b.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.b., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.b., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of the Employee's compensation
under this Section 6.b.(4) shall not limit Employer's rights to pursue
other remedies at law or in equity.
c. Employee may at her option terminate her employment with
Employer under this Agreement through written notice to Employer for the
following reasons:
(1) Employer materially breaches any of the provisions of
<PAGE> 4
this Agreement and fails to cure the breach within thirty (30) days after
receiving specific written notice of the breach and action required to
cure the breach;
(2) Employer is declared bankrupt or a receiver is appointed
for longer than 180 days;
(3) Employer liquidates or otherwise ceases business
operations;
d. In the event that Employee elects to terminate her employment
under Section 6.c.(1):
(1) Employer shall continue to pay Employee for a minimum of
one (1) additional year the compensation, other than the annual
performance bonus, then in effect on the date that notice of termination
is received;
(2) Employee shall be entitled to receive the compensation
referred to in Section 6.d.(1) for a period not to exceed two (2) years
from the date that notice of termination is received, to the extent that
Employee has not commenced employment (1) in a similarly compensated
position; or (2) with a business that brews, packages, markets or
distributes alcoholic malt beverages in any state of the United States or
in any foreign country where Employer brewed, packaged, marketed or
distributed alcoholic malt beverages during the term of this Agreement;
(3) All outstanding unvested options/shares granted to the
Employee that are scheduled to vest within one (1) year from the date that
notice of termination is received under this Section 6.d., will continue
to vest according to that schedule and all other unvested options/shares
will be canceled;
(4) If Employee violates Sections 7 or 8 of this Agreement,
Employer's obligation to continue to pay Employee's compensation, as
described in this Section 6.d., shall immediately terminate, and the
Employer will have no further obligation to Employee pursuant to this
Agreement, provided that the cessation of Employee's compensation under
this Section 6.d.(4) shall not limit Employer's rights to pursue other
remedies at law or in equity.
<PAGE> 5
e. Employee's termination of employment for any other reason
shall constitute a material breach of this Agreement, and shall terminate
Employer's obligations under this Agreement, without limiting Employer's rights
to pursue other remedies at law or in equity; and
f. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment for any
reason.
7. Confidential Information and Goodwill.
a. Employee will acquire knowledge of Employer's confidential
information. Confidential information is information which is of a unique nature
relating to the Employer's business operations, internal structure, financial
affairs, programs, recipes, formulations, brewing methods, systems, procedures,
manuals, confidential reports, lists of customers and prospective customers,
sales and marketing methods, as well as the amount, nature and type of product,
equipment and methods used and preferred by Employer's customers and the prices
paid by Employer's customers or any other information which is confidential or
proprietary or otherwise not available to the general public. Disclosure of this
confidential information could cause substantial loss to the Employer. Employee
agrees that Employee will not for any purpose disclose any confidential
information obtained by Employee during employment with the Employer to any
person or entity.
b. Employee may have access to records of the Employer. Records
are all contracts, agreements, financial books, instruments and documents,
client lists, memoranda, data, reports, recipes, formulations, brewing records,
tapes, rolodexes, telephone and address books, letters, research, card decks,
listings, programming, and any other instruments, records or documents relating
or pertaining to manufacturing or customer sales by Employer or Employee, the
services rendered by Employee, or the business of the Employer. Records will
remain in Employer's property. When Employee's employment terminates, Employee
will return to Employer all records and will neither make nor retain any copies
of any records after termination of employment.
c. During the term of this Agreement and thereafter, Employee
shall diligently, legally and freely perform her duties as set forth in this
Agreement and shall take no action that would damage the goodwill of the
Employer. During the term of this Agreement and thereafter, Employee agrees
<PAGE> 6
that she will not make any oral or written statement to any third party that is
intended to, or does, call into question the (1) conduct, business practices or
business judgment of the Employer or any of its officers, directors or business
partners; or (2) quality of the Employer's products or services.
8. Restrictive Covenants.
a. Employee will perform services which have a unique value to
Employer which if used in competition with Employer could cause serious and
irreparable harm to Employer. Employee will develop goodwill for Employer
through personal contact with customers and others who have business
relationships with Employer. This goodwill, which is a proprietary asset of
Employer, may follow Employee after the employment with Employer terminates.
Employee agrees that for a period of two (2) years following the termination of
this Agreement, Employee will not, unless given prior written consent by
Employer:
(1) solicit for employment or employ any other person or
entity any person who is employed by Employer during the same time as
Employee. Employee will not persuade or attempt to persuade any customer,
supplier, distributor, retailer, person or entity which is a customer or
supplier to Employer during the time of Employee's employment with
Employer, to discontinue business with Employer and its affiliates or
modify the terms of business between itself and Employer or its
affiliates.
(2) engage or act, either as a consultant, independent
contractor, proprietor, stockholder, partner, employee, officer, or in any
other capacity, in any business which brews, packages, markets or
distributes alcoholic malt beverages in any state of the continental
United States or in any foreign country where Employer brewed, packaged,
marketed or distributed alcoholic malt beverages during the term of this
Agreement.
b. If any provision or portion of this section of the Agreement
is held unreasonable, unlawful, or unenforceable by a court of competent
jurisdiction, the provision will be deemed to be modified to the extent
necessary for the provision to be legally enforceable to the fullest extent
permitted by applicable law. Any court of competent jurisdiction may enforce any
provision of this section or modify any provision in order that the provision
will be enforced by the court to the fullest extent permitted by applicable law.
<PAGE> 7
c. Violation by Employee of the provisions of Sections 7 or 8 of
this Agreement could cause irreparable injury to Employer and there is no
adequate remedy at law for violation of those provisions. Employer has, in
addition to other legal or equitable remedies, the right to enjoin Employee in a
court of equity from violating those provisions. The cessation of Employee's
compensation under Section 6 shall in no way limit the damages available to the
Employer upon violation by Employee of Sections 7 or 8 of this Agreement.
9. Employee's Death or Disability. In the event that Employee dies or
becomes disabled during the period that Employee is employed by Employer under
this Agreement, Employer shall pay for a period of six (6) months the
compensation, other than the annual performance bonus, then in effect on the
date of Employee's death, or date that notice of Employee's disability is
received, to Employee or to Employee's estate or legal guardian. In the event
that Employee dies within one year after Employee's employment has been
terminated pursuant to Section 6.b. or Section 6.c.(1), Employer shall continue
to pay Employee's estate the compensation, other than the annual performance
bonus, then in effect on the date of Employee's death until the first
anniversary of the date Employee's employment terminated, whereupon Employer's
obligation to pay compensation under Section 6 shall cease. In addition, the
options/shares granted to the Employee that are scheduled to vest during the
twelve (12) month period under Section 6.b.(3) and Section 6.d.(3) shall vest
immediately and be exercisable for a period of six (6) months from the date of
Employee's death. Employee shall continue to be subject to the restrictions in
Sections 7 and 8 of this Agreement following termination of employment due to
disability.
10. Notices. All notices and other communications required or permitted
to be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand delivered and a signed receipt is given
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Secretary of the Board of Directors
Redhook Ale Brewery, Incorporated
3400 Phinney Avenue North
Seattle, Washington 98103
and if to Employee to:
Pamela J. Hinckley
6722-16th Avenue NW
<PAGE> 8
Seattle, Washington 98117
or at any other address as either party notifies the other of in writing.
11. Miscellaneous.
a. This Agreement binds and benefits Employer and its successors
and assigns. This Agreement binds and benefits Employee and Employee's heirs,
personal and legal representatives, and guardians. No portion of this Agreement
or interest in it may be assigned by Employee.
b. The terms and provisions of this Agreement may not be modified
except by written instrument duly executed by Employer and Employee.
c. This Agreement will be governed by and enforced and construed
in accordance with the laws of the State of Washington. Venue for an action to
enforce this Agreement shall be in Superior Court for King County, Washington.
d. In any dispute arising out of this Agreement, the prevailing
party shall be entitled to recover its reasonable attorneys' fees and costs.
e. In the event of a breach of this Agreement, the non-breaching
party may maintain an action for specific performance against the party who is
alleged to have breached any of the terms of the Agreement. This subsection will
not be construed to limit in any manner any other rights or remedies an
aggrieved party may have by virtue of any breach of this Agreement.
f. Each of the parties has the right to waive compliance with any
obligation of this Agreement, but a waiver by any party of any obligation will
not be deemed a waiver of compliance with any other obligation or of its right
to seek redress for any breach of any obligation on any subsequent occasion, nor
will any waiver be deemed effective unless in writing and signed by the party so
waiving.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement.
<PAGE> 9
"EMPLOYER"
Redhook Ale Brewery, Incorporated
By /s/ Paul S. Shipman Date: December 30, 1997
Its President and
Chief Executive Officer
"EMPLOYEE"
By /s/ Pamela J. Hinckley Date: December 30, 1997
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to the 1992 Stock Incentive Plan, as amended, and the
Amended and Restated Directors Stock Option Plan of Redhook Ale Brewery,
Incorporated of our report dated January 21,1998 with respect to the financial
statements of Redhook Ale Brewery, Incorporated included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Seattle, Washington
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1995 MAR-31-1996
<CASH> 892,165 24,676,600 15,350,909
<SECURITIES> 0 0 0
<RECEIVABLES> 1,598,368 2,037,454 2,742,498
<ALLOWANCES> 10,000 10,000 10,000
<INVENTORY> 2,815,782 1,340,444 1,270,078
<CURRENT-ASSETS> 6,940,643 28,317,347 19,626,006
<PP&E> 98,077,388 61,744,785 71,787,792
<DEPRECIATION> 9,315,952 3,945,091 4,355,846
<TOTAL-ASSETS> 96,769,343 86,638,436 87,766,882
<CURRENT-LIABILITIES> 5,602,623 6,932,111 6,955,294
<BONDS> 9,873,973 1,825,339 1,790,572
15,966,255 15,877,455 15,888,555
0 0 0
<COMMON> 38,438 38,417 38,424
<OTHER-SE> 61,259,989 59,540,178 60,413,129
<TOTAL-LIABILITY-AND-EQUITY> 96,769,343 86,638,436 87,766,882
<SALES> 34,286,302 25,894,351 7,721,106
<TOTAL-REVENUES> 34,286,302 25,894,351 7,721,106
<CGS> 25,962,672 16,969,859 5,055,061
<TOTAL-COSTS> 35,944,141 21,576,234 6,587,227
<OTHER-EXPENSES> (92,998) (678,280) (257,506)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 378,444 23,814 0
<INCOME-PRETAX> (1,943,285) 4,972,583 1,391,385
<INCOME-TAX> (544,319) 1,790,130 507,855
<INCOME-CONTINUING> (1,398,966) 3,182,453 883,530
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,398,966) 3,182,453 883,530
<EPS-PRIMARY> (0.18) 0.63 0.11
<EPS-DILUTED> (0.18) 0.44 0.10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 1,756,843 2,048,230 35,006
<SECURITIES> 0 0 0
<RECEIVABLES> 1,300,084 2,004,349 2,322,372
<ALLOWANCES> 10,000 10,000 10,000
<INVENTORY> 2,774,428 2,579,868 2,447,600
<CURRENT-ASSETS> 7,096,466 7,725,483 5,810,746
<PP&E> 97,649,904 96,708,221 94,881,225
<DEPRECIATION> 8,429,182 7,553,340 6,752,381
<TOTAL-ASSETS> 97,468,590 97,982,898 95,038,547
<CURRENT-LIABILITIES> 5,720,923 5,992,159 5,797,094
<BONDS> 10,022,868 10,170,874 7,655,839
15,955,155 15,944,055 15,932,955
0 0 0
<COMMON> 38,434 38,434 38,430
<OTHER-SE> 61,834,605 62,152,410 62,093,616
<TOTAL-LIABILITY-AND-EQUITY> 97,468,590 97,982,898 95,038,547
<SALES> 25,834,270 16,995,343 7,993,854
<TOTAL-REVENUES> 25,834,270 16,995,343 7,993,854
<CGS> 19,272,627 12,726,380 6,371,882
<TOTAL-COSTS> 26,662,713 17,665,542 8,793,024
<OTHER-EXPENSES> (72,687) (37,545) (18,311)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 192,840 5,782 0
<INCOME-PRETAX> (948,596) (638,436) (780,859)
<INCOME-TAX> (265,806) (221,414) (292,822)
<INCOME-CONTINUING> (682,790) (417,022) (488,037)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (682,790) (417,022) (488,037)
<EPS-PRIMARY> (0.09) (0.05) (0.06)
<EPS-DILUTED> (0.09) (0.05) (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 1,162,352 1,686,551 7,831,289
<SECURITIES> 0 0 0
<RECEIVABLES> 2,061,591 2,273,000 2,599,330
<ALLOWANCES> 10,000 10,000 10,000
<INVENTORY> 2,229,376 1,852,067 1,288,737
<CURRENT-ASSETS> 7,596,336 6,303,527 12,122,991
<PP&E> 92,320,648 87,490,642 81,049,559
<DEPRECIATION> 5,963,089 5,277,842 4,794,295
<TOTAL-ASSETS> 95,124,039 89,658,259 89,192,312
<CURRENT-LIABILITIES> 6,746,416 6,328,212 6,921,730
<BONDS> 6,190,764 1,724,821 1,758,002
15,921,855 15,910,755 15,899,655
0 0 0
<COMMON> 38,428 38,428 38,427
<OTHER-SE> 62,591,423 62,455,422 61,576,830
<TOTAL-LIABILITY-AND-EQUITY> 95,124,039 89,658,259 89,192,312
<SALES> 35,678,085 26,462,208 17,031,410
<TOTAL-REVENUES> 35,678,085 26,462,208 17,031,410
<CGS> 23,580,745 16,898,029 10,852,782
<TOTAL-COSTS> 31,434,105 22,409,407 14,247,056
<OTHER-EXPENSES> (615,145) (574,668) (445,996)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 4,859,125 4,627,469 3,230,350
<INCOME-TAX> 1,773,581 1,689,026 1,179,078
<INCOME-CONTINUING> 3,085,544 2,938,443 2,051,272
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,085,544 2,938,443 2,051,272
<EPS-PRIMARY> 0.40 0.38 0.27
<EPS-DILUTED> 0.34 0.32 0.22
</TABLE>
