<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-26542
---------------------------
REDHOOK ALE BREWERY, INCORPORATED
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1141254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3400 PHINNEY AVENUE NORTH 98103-8624
SEATTLE, WASHINGTON
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 548-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No__
Common stock, par value $.005 per share: 7,687,486 shares outstanding as of
March 31, 1998.
Page 1 of 14 sequentially numbered pages
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REDHOOK ALE BREWERY, INCORPORATED
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets
March 31, 1998 and December 31, 1997 ........................ 3
Statements of Operations
Three Months Ended March 31, 1998 and 1997 .................. 4
Condensed Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 .................. 5
Notes to Financial Statements..................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................... 13
</TABLE>
2
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PART I.
ITEM 1. FINANCIAL STATEMENTS
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents .................... $ 837,832 $ 892,165
Accounts Receivable .......................... 1,852,962 1,588,368
Inventories .................................. 2,281,166 2,815,782
Income Taxes Receivable ...................... 1,494,864 1,124,813
Other ........................................ 450,339 519,515
----------- -----------
Total Current Assets ....................... 6,917,163 6,940,643
Fixed Assets, Net .............................. 88,257,572 88,761,436
Other Assets ................................... 887,089 1,067,264
----------- -----------
Total Assets ............................. $96,061,824 $96,769,343
=========== ===========
LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ............................. $ 2,370,343 $ 2,290,012
Accrued Salaries, Wages and Payroll Taxes .... 1,069,161 1,322,966
Refundable Deposits .......................... 1,146,133 1,166,070
Other Accrued Expenses ....................... 395,063 231,816
Current Portion of Long-Term Debt ............ 589,507 591,759
----------- -----------
Total Current Liabilities .................. 5,570,207 5,602,623
----------- -----------
Long-Term Debt, Net of Current Portion ......... 9,729,571 9,873,973
----------- -----------
Deferred Income Taxes .......................... 4,129,680 3,987,519
----------- -----------
Other Liabilities .............................. -- 40,546
----------- -----------
Convertible Redeemable Preferred Stock ......... 15,977,355 15,966,255
----------- -----------
Common Stockholders' Equity:
Common Stock, Par Value $0 005 per Share,
Authorized, 50,000,000 Shares;
Issued and Outstanding,
7,687,486 Shares in 1998 and
7,687,486 Shares in 1997 ................... 38,438 38,438
Additional Paid-In Capital ................... 56,888,633 56,805,633
Retained Earnings ............................ 3,727,940 4,454,356
----------- -----------
Total Common Stockholders' Equity ........ 60,655,011 61,298,427
----------- -----------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity .......... $96,061,824 $96,769,343
=========== ===========
</TABLE>
See Accompanying Notes
3
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REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales ...................................... $ 8,504,610 $ 8,868,210
Less Excise Taxes .......................... 809,623 874,356
----------- -----------
Net Sales .................................. 7,694,987 7,993,854
Cost of Sales .............................. 6,140,847 6,371,882
----------- -----------
Gross Profit ............................... 1,554,140 1,621,972
Selling, General and Administrative Expenses 2,329,186 2,421,142
----------- -----------
Operating Loss ............................. (775,046) (799,170)
Interest Expense ........................... 181,458 --
Other Income-- Net ......................... 15,300 18,311
----------- -----------
Loss before Income Taxes ................... (941,204) (780,859)
Income Taxes Benefit ....................... (225,888) (292,822)
----------- -----------
Net Loss ................................... $ (715,316) $ (488,037)
=========== ===========
Basic Loss per Share ....................... $ (0.09) $ (0.06)
=========== ===========
Diluted Loss per Share ..................... $ (0.09) $ (0.06)
=========== ===========
</TABLE>
See Accompanying Notes
4
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REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss .......................................... $ (715,316) $ (488,037)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Depreciation and Amortization ................. 906,085 801,202
Deferred Income Tax Provision ................. 142,161 (111,345)
Net Change in Operating Assets and Liabilities (56,884) (108,274)
----------- -----------
Net Cash Provided by Operating Activities ......... 276,046 93,546
----------- -----------
INVESTING ACTIVITIES
Expenditures for Fixed Assets ..................... (266,725) (2,683,840)
Other ............................................. -- (5,659)
----------- -----------
Net Cash Used in Investing Activities ............. (266,725) (2,689,499)
----------- -----------
FINANCING ACTIVITIES
Proceeds from Debt ................................ -- 2,050,000
Repayments on Debt ................................ (146,654) (582,725)
Officer Note Repayment and Other, Net ............. 83,000 1,332
----------- -----------
Net Cash (Used in) Provided by Financing Activities (63,654) 1,468,607
----------- -----------
Decrease in Cash and Cash Equivalents ............. (54,333) (1,127,346)
Cash and Cash Equivalents:
Beginning of Year ............................... 892,165 1,162,352
----------- -----------
End of Period ................................... $ 837,832 $ 35,006
=========== ===========
</TABLE>
See Accompanying Notes
5
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REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The accompanying financial statements
include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements are unaudited and condensed, and
do not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company, for the
periods presented, have been made. All such adjustments were of a normal,
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year.
2. EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board 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 excludes the effect of
all outstanding convertible redeemable preferred stock and outstanding stock
options for the three months ended March 31, 1998 and 1997 because their effect
is antidilutive. The calculation uses the treasury stock method in determining
the resulting incremental average equivalent shares outstanding when they are
dilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Basic earnings (loss) per share computation:
Numerator:
Net income (loss) .................... $ (715,316) $ (488,037)
----------- -----------
Denominator:
Weighted-average common shares ....... 7,687,486 7,685,619
----------- -----------
Basic earnings (loss) per share .. $ (0.09) $ (0.06)
=========== ===========
Diluted earnings (loss) per share computation:
Numerator:
Net income (loss) .................... $ (715,316) $ (488,037)
----------- -----------
Denominator:
Weighted-average common shares ....... 7,687,486 7,685,619
----------- -----------
Diluted earnings (loss) per share $ (0.09) $ (0.06)
=========== ===========
</TABLE>
6
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REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Finished goods ........ $1,071,665 $1,387,933
Raw materials ......... 747,689 879,836
Promotional merchandise 287,205 328,064
Packaging materials ... 174,607 219,949
---------- ----------
$2,281,166 $2,815,782
========== ==========
</TABLE>
Finished goods include beer held in fermentation prior to the filtration and
packaging process.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included herein.
OVERVIEW
Since its formation, the Company has focused its business activities on
the brewing, marketing and selling of craft beers. For the three months ended
March 31, 1998, the Company had gross sales of $8,505,000, a decrease of 4.1%
from the three months ended March 31, 1997. The Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an accurate indicator of future performance. The Company's sales consist
predominantly of sales of beer to third-party distributors and Anheuser-Busch,
Inc. ("A-B") through the Distribution Alliance. In addition, the Company derives
other revenues from the sale of beer, food, apparel and other retail items in
its brewery pubs. The Company is required to pay federal 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 volume declined 4.9% for the three months ended March
31, 1998, compared to the same period in 1997. In addition to the level of
consumer demand in existing markets, the Company's sales are also affected by
other factors such as competitive considerations, including the increased number
of craft brewers and promotional pricing, the opening of new distribution
territories and new product introductions. Sales in the craft beer industry
generally reflect a degree of seasonality, with the first quarter historically
being the slowest and the 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 company-wide annual production capacity from approximately 3,000
barrels at its first brewery in the Ballard neighborhood of Seattle in 1982 to
approximately 425,000 barrels as of March 31, 1998. 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 company-wide capacity
utilization rate. The Company's capacity utilization has a significant impact on
gross profit. When facilities are operating at their maximum designed production
capacities, profitability is favorably affected by spreading fixed and
semivariable operating costs, such as depreciation and production salaries, over
a larger sales base. Most capital costs associated with building a new brewery,
and fixed and semivariable costs related to operating a new brewery, are
incurred prior to, or upon commencement of, production at a facility. Because
the actual production level may be substantially below the facility's maximum
designed production capacity, gross margins are negatively impacted. This impact
is reduced when actual production 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 1997. The Company is analyzing its
current and future production capacity requirements. While the Fremont Brewery
continues to serve as a backup facility to the Woodinville Brewery, the Company
is considering other alternatives for the brewery and its equipment. Factors
considered in the analysis include the near-term outlook
8
<PAGE> 9
for the craft beer industry, the expected value of the equipment under various
scenarios and the Company's ability to extend the lease of the Fremont Brewery
building.
In addition to capacity utilization, the Company expects other factors to
influence profit margins, including higher costs associated with the development
of newer distribution territories, such as increased shipping, marketing and
sales personnel costs; fees related to the distribution agreement with A-B;
changes in packaging and other material costs; and changes in product sales mix.
The incremental cost of shipping beer from the Company's breweries will continue
to increase as the volume of beer supplied to more distant markets increases.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Considerations: Issues and Uncertainties."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
------ ------
<S> <C> <C>
Sales ...................................... 110.5 % 110.9 %
Less Excise Taxes .......................... 10.5 10.9
------ ------
Net Sales .................................. 100.0 100.0
Cost of Sales .............................. 79.8 79.7
------ ------
Gross Profit ............................... 20.2 20.3
Selling, General and Administrative Expenses 30.3 30.3
------ ------
Operating Income (Loss) .................... (10.1) (10.0)
Interest Income (Expense) -- Net ........... (2.1) 0.2
------ ------
Income (Loss) Before Income Taxes .......... (12.2) (9.8)
Provision (Benefit) for Income Taxes ....... (2.9) (3.7)
------ ------
Net Income (Loss) .......................... (9.3)% (6.1)%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Sales. Total sales decreased 4.1% to $8,505,000 for three months ended
March 31, 1998, compared to $8,868,000 for the comparable 1997 period, as a 4.9%
decrease in total sales volumes and relatively stable prices were partially
offset by a small increase in other sales. Total sales volumes for the first
quarter of 1998 decreased to 48,900 barrels from 51,400 barrels for the same
period in 1997. Sales volume in Washington State, the Company's largest market,
increased slightly in the first quarter of 1998 compared to the first quarter of
1997. The competitive landscape continues to be affected by the increase in the
number of craft beer companies and the number of different products they offer.
The Company's other sales totaled $690,000 for first quarter of 1998, compared
to $628,000 for first quarter of 1997. At March 31, 1998 and 1997, the Company
was selling beer in 47 states.
Excise Taxes. Excise taxes decreased to $810,000, or 10.5% of net sales,
for first quarter of 1998, compared to $874,000, or 10.9% of net sales, for the
comparable period of 1997.
Cost of Sales. Cost of sales decreased to $6,141,000 for three months
ended March 31, 1998 from $6,372,000 for same period in 1997, primarily due to
the lower sales volume and the positive effect of decreased production costs at
the Fremont Brewery, partially offset by an increase in depreciation expense
related to the kegging and cold storage facility in Woodinville. Cost of sales,
as a percentage of net sales, was substantially unchanged at 79.8% for the 1998
period, compared to 79.7% for the 1997 period, despite the
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lower sales volume and increased depreciation. The company-wide utilization rate
of maximum designed capacity was 34% and 36% for three months ended March 31,
1998 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,329,000 for the first three months of
1998 from $2,421,000 for the same period of 1997 due to reductions in both sales
and marketing, and administrative costs. These expenses remained unchanged, as a
percentage of net sales, at 30.3% for both the 1998 and 1997 periods. The first
quarter is historically the slowest quarter for promotional expenditures.
Interest Expense. Interest expense totaled $181,000 for the first quarter
of 1998 as the result of substantially all construction in progress being placed
in service on July 1, 1997. All interest costs incurred in first quarter of 1997
were capitalized to the construction projects.
Other Income -- Net. Other income -- net, decreased slightly to $15,000
for the first three months of 1998, compared to $18,000 for the same 1997
period.
Income Taxes. The Company's effective income tax rate decreased to a 24.0%
benefit for the first quarter of 1998 from a 37.5% benefit for the first quarter
of 1997. The change is primarily the result of lower estimated pre-tax results
for the full year of 1998, relative to other components of the tax provision
calculation, such as the exclusion of a portion of meals and entertainment
expenses from tax return deductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $838,000 and $892,000 of cash and cash equivalents at
March 31, 1998 and December 31, 1997, respectively. At March 31, 1998, the
Company had working capital of $1,347,000. The Company's long-term debt as a
percentage of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was unchanged at 11.9% as of March 31, 1998 and December
31, 1997. Cash provided by operating activities totaled $276,000 and $94,000 for
the three months ended March 31, 1998 and 1997, respectively.
On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of March 31, 1998, there was $8.7
million outstanding on the Secured Facility and the Company's one-month
IBOR-based borrowing rate was approximately 6.9%. In addition, the Company has a
$10 million unsecured revolving credit facility with the same bank through June
5, 1999, and as of March 31, 1998, 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 the three months ended March 31, 1998 totaled
$267,000, including $22,000 that was accrued at December 31, 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.
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CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance or
sales volumes, although this Quarterly Report contains certain other types of
forward-looking statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written and
oral presentations made by the Company, include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions that the Company believes
are reasonable, but are by their nature inherently uncertain. In all cases,
there can be no assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ materially from those
projected depending on a variety of factors, including, but not limited to, the
issues discussed below, the successful execution of market development and other
plans and the availability of financing. While Company management is optimistic
about the Company's long-term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its growth outlook and any
forward-looking statements.
Effect of Competition on Future 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 and in the first three months
of 1998, due primarily to slower sales in the highly competitive craft beer
market. If negative sales trends were to continue, the Company's future sales
and results of operations would be adversely affected. The Company has
historically operated with little or no backlog and, therefore, its ability to
predict sales for future periods is limited.
Sales Prices. Future prices the Company charges for its products may
decrease from historical levels, depending on competitive factors in the
Company's various markets. The Company has participated in price promotions with
its wholesalers and their retail customers in most of its markets. The number of
markets in which the Company participates in price promotions and the frequency
of such promotions is expected to increase in the future.
Variability of Gross Margin and Cost of Sales. The Company anticipates
that its future gross margins will fluctuate and may decline as a result of many
factors, including disproportionate depreciation and other fixed and
semivariable operating costs, during periods when the Company's breweries are
producing below maximum designed production capacity. The Company's high level
of fixed and semivariable operating costs causes gross margin to be very
sensitive to relatively small increases or decreases in sales volume. In
addition, other factors that could affect cost of sales include changes in:
shipping costs, availability and prices of raw materials and packaging
materials, mix between draft and bottled product sales, and Federal or state
excise taxes. Also, as sales volumes through the Distribution Alliance increase,
the alliance fee, and other staging and administrative costs, would increase.
Advertising and Promotional Costs. While the Company has historically done
very limited advertising, market and competitive considerations could make a
significant increase in such spending appropriate. In addition, market and
competitive considerations could require an increase in other promotional costs
associated with developing existing and new markets.
Relationship with Anheuser-Busch, Incorporated. Most of the Company's
future sales are expected to be through the Distribution Alliance with A-B. If
the Distribution Alliance were to be terminated, or if the relationship between
A-B and the Company were to deteriorate, the Company's sales and results of
operations could be materially adversely affected. While the Company believes
that the benefits of the Distribution Alliance, in particular access to
distributors and distribution efficiencies, offset costs associated with the
Alliance, there can be no assurance that these costs will not have a negative
impact on the Company's profit margins in the future.
11
<PAGE> 12
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 16%
of the Company's sales during the first three months of 1998. Substantially all
of the remaining sales volumes are now through the Distribution Alliance to A-B
affiliated distributors, most of whom are independent wholesalers. The loss of
K&L or the termination of the Distribution Alliance could have a material
adverse impact on the Company's sales and results of operations.
Customer Acceptance, Consumer Trends and Public Attitudes. If consumers
were unwilling to accept the Company's products or if the recent trends toward
drinking craft beers were to change further, it could adversely impact the
Company's sales and results of operations. The alcoholic beverage industry has
become the subject of considerable societal and political attention in recent
years due to increasing public concern over alcohol-related social problems,
including drunk driving, underage drinking and health consequences from the
misuse of alcohol. If beer consumption in general were to come into disfavor
among domestic consumers, or if the domestic beer industry were subjected to
significant additional governmental regulation, the Company's sales and results
of operations could be adversely affected.
Impact of Year 2000. Some of the Company's computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company 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.
NEW ACCOUNTING STANDARD
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The new rules require that all items that
are recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997.
The Company has evaluated this statement and has determined that it will
have no impact on the Company's financial statements.
12
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PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this report.
10.37 Purchasing Agreement dated as of March 27, 1998, between
Registrant and Anheuser-Busch, Incorporated.
27 Financial Data Schedule for the three months ended March 31,
1998.
(B) REPORTS ON FORM 8-K
None were filed during the quarter ended March 31, 1998.
ITEMS 1, 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on May 13, 1998.
REDHOOK ALE BREWERY, INCORPORATED
BY: /s/ BRADLEY A. BERG
-------------------------------------
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
BY: /s/ DAVID H. KIRSKE
------------------------------------
David H. Kirske
Controller and Treasurer,
Principal Accounting Officer
DATE: May 13, 1998
14
<PAGE> 15
EXHIBIT INDEX
Exhibit Description
Number
- ------- -------------------------------------------------------------------
10.37 Purchasing Agreement dated as of March 27, 1998, between Registrant
and Anheuser-Busch, Incorporated.
27 Financial Data Schedule for the three months ended March 31, 1998.
<PAGE> 1
EXHIBIT 10.37
PURCHASING AGREEMENT
This Purchasing Agreement ("Agreement") is executed between Redhook
Ale Brewery, Incorporated ("Redhook") and Anheuser-Busch, Incorporated ("ABI")
as of March 27, 1998. In consideration of the covenants hereinafter set forth
and intending to be legally bound hereby, Redhook and ABI agree as follows:
1. For purposes of this Agreement, (a) "Distribution Agreement" shall
mean the Master Distributor Agreement between ABI and Redhook dated October 18,
1994 as amended to the date hereof and as it may be amended from time to time;
(b) "Packaging Materials" shall mean glass bottles and corrugated boxes, trays,
solid fiber boxes, chipboard or corrugated partitions and carrier inserts used
to package the glass bottles; (c) "Requirements" shall mean the total amount of
each Packaging Material used by Redhook in all products manufactured by Redhook
in its breweries located in Woodinville and Seattle, Washington; (d) "Supplier"
shall mean Owens-Brockway, Inc.; and (e) "Supply Agreement" shall mean the Glass
Bottle Supply Agreement dated December 21, 1995 between ABI and Supplier, as
amended to the date hereof and as it may be amended from time to time.
2. Except as provided for below, ABI agrees to source, supply and
sell to Redhook, and Redhook agrees to purchase from ABI, all of Redhook's
Requirements for Packaging Materials, such purchases and sales to commence on
April 1, 1998 (in the event Redhook has legally binding orders for Packaging
Materials placed prior to the date hereof, the purchases by Redhook pursuant to
such orders shall be deemed to reduce Redhook's Requirements hereunder).
3. Notwithstanding the provisions of Section 2 hereof, Redhook shall
have the right to purchase up to 50% of its annual Requirements (measured by the
purchase price paid by Redhook for the Packaging Materials) from an alternative
source if (i) Redhook obtains a commitment from a supplier to provide Redhook
with substantially equivalent Packaging Materials at a per unit price at least
five percent lower than that available hereunder, with respect to which
commitment ABI does not exercise the right of first refusal created by this
Section 3 or (ii) after consultation with ABI and Supplier, Redhook determines
that there is a substantial possibility that Supplier will be unable to provide
Redhook with a supply of Packaging Materials adequate for its operations (such
determination to be made in good faith and on a commercially reasonably basis).
Prior to the exercise by Redhook of the right described in Section 3(i) hereof,
Redhook shall provide ABI and Supplier with at least 30 days advance written
notice (such 30 day period to begin no sooner than upon the expiration of ABI's
right of first refusal described below), such notice to indicate the quantities
of Packaging Materials to be purchased by Redhook from the alternative source.
Nothing in this section shall prohibit Redhook from
receiving unsolicited proposals from suppliers or from
soliciting proposals for the purchase and sale of Packaging Materials but
Redhook shall not disclose to any supplier the unit pricing paid
<PAGE> 2
by Redhook hereunder. Redhook shall not accept any commitment from any supplier
for the purchase and sale of Packaging Materials for use in its State of
Washington operations pursuant to the right described in Section 3(i) hereof
without providing ABI in writing a 30 day right of first refusal.
4. Supplier shall be the source for all Packaging Materials to be
purchased and sold pursuant to this Agreement. Redhook shall place all orders
for Packaging Materials directly with Supplier in a format agreed upon between
Redhook and Supplier and shall instruct Supplier to deliver all Packaging
Materials to Redhook's premises at Woodinville or Seattle, Washington.
Contemporaneously with placing each order with Supplier, Redhook shall notify
ABI in writing of such order, the quantities of Packaging Materials to be
purchased and sold pursuant to such order and the expected date of delivery of
such Packaging Materials. On or before November 30 of each year during the term
of this Agreement, Redhook shall provide Supplier and ABI with Redhook's best
estimate of Redhook's anticipated Requirements for Packaging Materials for the
next succeeding calendar year in a format satisfactory to each of Redhook and
Supplier. On or before the last business day of each month, Redhook shall
provide Supplier and ABI with a rolling three month forecast of Redhook's
anticipated Requirements for Packaging Materials in a format satisfactory to
each of Redhook and Supplier. On or before the last business day of each week,
Redhook shall provide Supplier and ABI with its estimated requirements for the
next succeeding week in a format satisfactory to each of Redhook and Supplier.
5. The purchase price to be paid by Redhook for Packaging Materials
shall be the price quoted by Supplier to ABI for such Packaging Materials,
without giving effect to any rebates, annual or periodic adjustments, discounts
or price or volume incentives otherwise available to ABI. Redhook shall pay to
ABI the purchase price for any delivery of Packaging Materials within 10
calendar days of Redhook's acceptance of such delivery. At the option of ABI,
ABI may obtain payment of the purchase price, in whole or in part, by reducing
the amounts otherwise payable by ABI to Redhook pursuant to the Distribution
Agreement. If ABI elects to obtain payment by such method, ABI shall provide
Redhook with reasonable detail concerning the amounts owed by Redhook, and ABI
shall make such offset only against amounts due to be paid by ABI on or after
the date on which Redhook's payment for the Purchasing Materials would otherwise
have been due. In the event that with respect to any delivery of Packaging
Materials, ABI determines to obtain payment of any portion of the purchase price
therefor other than by means of such reduction, ABI shall provide to Redhook
written notice of such determination and Redhook shall pay to ABI such portion
of the purchase price by wire transfer of immediately available funds to an
account specified in writing by ABI (or by such other means as may be agreed
upon between ABI and Redhook) on or prior to the later of (i) 10 calendar days
after Redhook's receipt and acceptance of such delivery and (ii) 5 calendar days
after such notification.
6. ABI shall have no responsibility or liability for any of the
conditions, properties, deliveries or specifications of the Packaging Materials.
With respect to any
2
<PAGE> 3
order or delivery of Packaging Materials, Supplier's compliance with its
obligations under the terms of the Supply Agreement shall be deemed to satisfy
the rights of Redhook hereunder. At the request of Redhook, ABI shall assign to
Redhook all rights that ABI has against Supplier with respect to any Packaging
Materials that are delivered or were to be delivered to Redhook hereunder. In
the event that Redhook and Supplier are engaged in a dispute concerning any
delivery or order of Packaging Materials, Redhook shall not withhold payment of
any portion of the purchase price therefor unless (i) under the circumstances
such action is permitted to a purchaser under applicable law or under the rights
ABI has under the terms of the Supply Agreement and (ii) Redhook has notified
ABI in writing at least three business days prior to the date payment of the
purchase price would otherwise be required that it intends to withhold payment
of the purchase price. In the event of a dispute between Redhook and Supplier,
ABI shall use commercially reasonable best efforts to assist Redhook to resolve
such dispute equitably and shall provide Redhook with information in reasonable
detail concerning the provisions of the Supply Agreement pertinent to such
dispute. In the event that Redhook satisfies the requirements of this section
and duly and timely notifies ABI that it shall not pay the purchase price for
any delivery or order, then ABI shall not seek payment for such delivery or
order from Redhook until the earlier of such time (a) as Redhook instructs ABI
that it is willing to pay the purchase price or (b) as Redhook no longer
satisfies the criteria set forth in this section for withholding payment.
7. (a) Except as otherwise provided in this Section 7, the
obligations of ABI and Redhook to purchase and sell Packaging Materials shall
continue until such time as the Supply Agreement is no longer in force.
(i) In the event that the Supply Agreement expires or is
terminated for any reason, then the purchase and sale obligations of Redhook and
ABI under this Agreement shall terminate on the date of expiration or
termination. ABI shall provide Redhook reasonable advance notice prior to any
expiration or termination of the Supply Agreement, to the extent reasonably
practicable.
(ii) In the event that Supplier and ABI amend any
provision of the Supply Agreement (including any provision relating to the term
thereof) that ABI reasonably expects to affect materially the benefits or
obligations of Redhook hereunder, ABI shall promptly notify Redhook thereof,
providing Redhook with information in reasonable detail concerning such
amendment. Within 30 days after receipt of such notification and information,
Redhook may, at its option, notify ABI and Supplier that it is terminating the
purchase and sale obligations of Redhook and ABI under this Agreement, such
notice to be provided no less than 30 days prior to the date of termination.
(b) Either party shall have the right to terminate the purchase
and sale obligation of Redhook and ABI under this Agreement, without prejudice
to any other legal rights to which such terminating party may be entitled, upon
the occurrence of any one or more of the following:
3
<PAGE> 4
(i) any default by the other party in the performance of
any of the provisions of this Agreement or by the Supplier in the performance of
its obligations under the Supply Agreement, which default is not cured within 30
days after written notice of such default;
(ii) the Distribution Agreement is duly terminated;
(iii) an assignment by the other party for the benefit of
creditors; or the commencement by the other party of a voluntary case or
proceeding or the consent to or the acquiescence by the other party in the entry
of an order for relief against it in an involuntary case or proceeding under any
bankruptcy, reorganization, insolvency or similar law;
(iv) the appointment of a trustee or receiver or similar
officer of any court for the other party or for a substantial part of the
property of the other party, whether with or without the consent of the other
party, which is not terminated within 60 days from the date of appointment;
(v) the institution of bankruptcy, reorganization,
insolvency or liquidation proceedings against the other party without such
proceedings being dismissed within 60 days from the date of the institution
thereof.
(c) In the event that the orders and deliveries of Packaging
Materials made by Supplier to Redhook have failed in respects material to
Redhook's State of Washington operations to comply with the terms of the Supply
Agreement and Redhook determines (such determination to be made in good faith
and on a commercially reasonable basis) that such failures are likely to
continue, Redhook may terminate the purchase and sale obligations of Redhook and
ABI under this Agreement upon 30 days written notice to ABI and Supplier.
(d) In the sole judgment of Redhook, Redhook may terminate the
purchase and sale obligations of Redhook and ABI under this Agreement by written
notice to ABI and Supplier delivered on or prior to October 31, such termination
to be effective on the next succeeding January 1.
(e) In the event that ABI determines (such determination to be
made in good faith and on a commercially reasonable basis) that Supplier is
likely to be unable to supply Packaging Materials to Redhook without reducing
the amount of Packaging Materials that it would otherwise deliver to ABI, at the
option of ABI, ABI may suspend deliveries of Packaging Materials hereunder to
Redhook upon 30 days written notice to Redhook to the extent necessary to assure
that Supplier is able to satisfy ABI's operational requirements for Packaging
Materials as determined by ABI (the determination by ABI of such operational
requirements to be made in good faith and on a commercially reasonable basis).
Deliveries of Packaging Materials to Redhook will
4
<PAGE> 5
promptly resume upon ABI receiving assurances that it determines to be
reasonable (such determination to be made in good faith and on a commercially
reasonable basis) that Supplier's delivery of Packaging Materials to Redhook
will not reduce the amount of Packaging Materials that Supplier would otherwise
deliver to ABI. If any such suspension occurs and would be reasonably expected
to have a material adverse effect on Redhook's operations, Redhook may terminate
the purchase and sale of obligations of Redhook and ABI under this Agreement
upon 30 days advance written notice to ABI and Supplier.
(f) In the event of any termination of the purchase and sale of
obligations of Redhook and ABI under this Agreement for any reason, at the
option of ABI, Redhook shall purchase from Supplier any inventory of Packaging
Materials produced or purchased by Supplier prior to the date of termination in
contemplation of the sale by Supplier of such Packaging Materials to Redhook.
Such purchases shall be in the ordinary course of business at the pricing
previously provided for under this Agreement, and on a delivery and payment
schedule that would have been applicable if the Agreement had not been
terminated.
8. Redhook shall, and Redhook shall cause its officers, directors,
employees, agents and other representatives to, treat in confidence and not
disclose to others any of the material terms of this Agreement including the
unit pricing hereunder, or any other information disclosed to Redhook by ABI
pursuant to this Agreement, except to the extent that (A) any such information
is generally available to the public, (B) is acquired from a third party
rightfully having such information, (C) is already in their possession prior to
disclosure hereunder or is acquired by such party independently from any
disclosures pursuant to this Agreement or (D) as required by applicable law or
regulation. With respect to the foregoing confidentiality obligations, ABI
acknowledges that Redhook is likely to be required to file this Agreement with
the Securities and Exchange Commission as a material contract and will be
required to disclose the existence of this Agreement. Redhook agrees that any
such disclosure shall be limited in scope and detail to the extent permitted
under the applicable securities laws.
With respect to the foregoing confidentiality obligations, Redhook
acknowledges that it has been informed that an unauthorized disclosure of the
terms of the purchasing agreements and arrangements between ABI and Supplier
could result in the termination of such agreements and arrangements and the
supply of Packaging Materials thereunder, or the loss of substantial commercial
benefits to ABI thereunder. In addition to other remedies available to ABI, in
the event of Redhook's breach of its foregoing confidentiality obligations, ABI
shall be entitled to injunctive and other equitable relief against Redhook to
prevent any such breach and, to the extent that any breach by Redhook of its
confidentiality obligations hereunder causes or contributes to the termination
of any purchasing agreements or arrangements between ABI and Supplier, Redhook
shall be liable to such extent for any harm or damages resulting to ABI from
such termination.
5
<PAGE> 6
9. Redhook represents, warrants and covenants that all Packaging
Materials purchased by Redhook hereunder shall be used by Redhook in its
manufacture and packaging of malt beverage products and that Redhook shall not
resell any Packaging Materials prior to such materials being used by Redhook in
the manufacturing and packaging of malt beverage products.
10. (a) Redhook shall indemnify, protect, defend and hold harmless
each of ABI, Anheuser-Busch Companies, Inc. ("A-BC"), other direct and indirect
subsidiaries of A-BC, and each of their respective directors, officers,
employees and agents, from and against all claims, liabilities, losses, damages,
injuries, demands, actions, causes of action, suits, proceedings, judgments and
reasonable expenses, including without limitation attorneys' fees, court costs
and other legal expenses arising from, connected with or attributable to (a) a
violation or breach or alleged violation or breach of any other agreements or
obligations to which Redhook is a party or by which it or its assets are bound
arising out of Redhook's execution and delivery of, or performance of its
obligations under, this Agreement and (b) Redhook's violation of its obligations
hereunder. In the event that Redhook fails to comply with any of its obligations
under this Agreement, at the option of ABI, ABI may perform such obligations on
behalf of Redhook and Redhook shall immediately reimburse ABI for all costs
incurred by ABI thereby.
(b) ABI shall indemnify, protect, defend and hold harmless each of
Redhook, its direct and indirect subsidiaries and each of their respective
directors, officers, employees and agents, from and against all claims,
liabilities, losses, damages, injuries, demands, actions, causes of action,
suits, proceedings, judgments and reasonable expenses, including without
limitation attorneys' fees, court costs and other legal expenses arising from,
connected with or attributable to (a) a violation or breach or alleged violation
or breach of any other agreements or obligations to which ABI is a party or by
which it or its assets are bound arising out of ABI's execution and delivery of,
or performance of its obligations under, this Agreement and (b) ABI's violation
of its obligations hereunder. In the event that ABI fails to comply with any of
its obligations under this Agreement, at the option of Redhook, Redhook may
perform such obligations on behalf of ABI and ABI shall immediately reimburse
Redhook for all costs incurred by Redhook thereby.
6
<PAGE> 7
11. All notices from one party to the other under the terms of this
Agreement, unless otherwise directed, shall be delivered by hand or by a
responsible overnight courier providing reasonable proof of delivery, addressed
to the parties at the addresses indicated below, and shall be deemed delivered
on the date of receipt if by hand delivery or the first business day succeeding
the date of posting, if sent by overnight courier:
If to Redhook:
Redhook Ale Brewery, Incorporated
3400 Phinney Avenue North
Seattle, Washington 98103
Attn: Chief Financial Officer
If to ABI:
Anheuser-Busch Companies, Inc.
One Busch Place
St. Louis, Missouri 63118
Attention: Vice President, Corporate Purchasing
and
Anheuser-Busch, Incorporated
One Busch Place
St. Louis, Missouri 63118
Attention: Vice President, Wholesaler System Development
12. This Agreement is not assignable or transferable, in whole or in
part, by Redhook without the prior written consent of ABI.
13. At the request of Redhook, ABI shall discuss with Redhook and
negotiate in good faith with Redhook concerning means by which ABI can assist
Redhook in purchasing Packaging Materials for use at Redhook's Portsmouth, New
Hampshire brewery at the lowest practicable price. In the event that the
purchase and sale obligations of Redhook and ABI under this Agreement are
terminated pursuant to Section 7(a) hereof, ABI shall discuss with Redhook and
negotiate in good faith with Redhook concerning means by which ABI can assist
Redhook in purchasing Packaging Materials at the lowest practicable price.
14. (a) No term or provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
preceding or succeeding breach, and no failure
7
<PAGE> 8
by either party to exercise any right or privilege hereunder shall be deemed a
waiver of such party's rights or privileges hereunder or shall be deemed a
waiver of such party's rights to exercise the same at any subsequent time or
times hereunder.
(b) This Agreement shall be deemed to have been made and entered
into in the State of Missouri and shall be governed by the laws of Missouri,
without regard to the principles thereof regarding conflicts of laws.
(c) This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same instrument.
(d) This Agreement and the Consent, Waiver and Amendment between
ABI and Redhook dated as of September 19, 1997 constitute the entire agreement
among the parties hereto and supersede any prior understandings, agreements or
representations by or among the parties hereto, written or oral, to the extent
they are related in any way to the subject matter hereof.
(e) ABI hereby represents and warrants that it has no knowledge
of the existence of any occurrence or development that would reasonably be
expected to result in the termination of the Supply Agreement (other than its
expiration pursuant to its terms).
IN WITNESS WHEREOF, this Agreement is executed on behalf of the
parties hereto by their duly authorized officers as of the day and year first
above written.
ANHEUSER-BUSCH, INCORPORATED
By /s/ BRUCE M. SANDISON
---------------------------------------
Vice President
Wholesaler System Development
REDHOOK ALE BREWERY, INCORPORATED
By /s/ PAUL S. SHIPMAN
---------------------------------------
President and Chief Executive Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 837,832
<SECURITIES> 0
<RECEIVABLES> 1,862,962
<ALLOWANCES> 10,000
<INVENTORY> 2,281,166
<CURRENT-ASSETS> 6,917,163
<PP&E> 98,466,610
<DEPRECIATION> 10,209,038
<TOTAL-ASSETS> 96,061,824
<CURRENT-LIABILITIES> 5,570,207
<BONDS> 9,729,571
15,977,355
0
<COMMON> 38,438
<OTHER-SE> 60,616,573
<TOTAL-LIABILITY-AND-EQUITY> 96,061,824
<SALES> 7,694,987<F1>
<TOTAL-REVENUES> 7,694,987<F1>
<CGS> 6,140,847
<TOTAL-COSTS> 8,470,033
<OTHER-EXPENSES> (15,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,458
<INCOME-PRETAX> (941,204)
<INCOME-TAX> (225,888)
<INCOME-CONTINUING> (715,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (715,316)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
<FN>Sales and Total Revenue are net of federal
and state excise taxes.
</FN>
</TABLE>
