<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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: 7,687,786 shares outstanding as of
September 30, 1999.
Page 1 of 15 sequentially numbered pages
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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets
September 30, 1999 and December 31, 1998 ............. 3
Statements of Operations
Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998 .... 4
Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 ........ 5
Notes to Financial Statements ............................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K .............................. 14
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents ...................................... $ 5,063,442 $ 3,010,448
Accounts Receivable ............................................ 1,795,799 1,525,708
Inventories .................................................... 2,460,797 2,267,410
Income Taxes Receivable ........................................ -- 469,272
Other .......................................................... 484,445 303,623
------------ -----------
Total Current Assets ......................................... 9,804,483 7,576,461
Fixed Assets, Net ................................................ 78,144,300 80,211,312
Assets Held for Sale ............................................. 38,549 1,105,475
Other Assets ..................................................... 591,748 634,781
------------ -----------
Total Assets ............................................... $ 88,579,080 $89,528,029
============ ===========
LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable ............................................... $ 2,733,046 $ 2,231,602
Accrued Salaries, Wages and Payroll Taxes ...................... 1,456,637 1,451,936
Refundable Deposits ............................................ 1,530,101 1,310,366
Other Accrued Expenses ......................................... 449,711 466,734
Current Portion of Long-Term Debt .............................. 450,000 450,000
------------ -----------
Total Current Liabilities .................................... 6,619,495 5,910,638
------------ -----------
Long-Term Debt, Net of Current Portion ........................... 7,537,500 7,875,000
------------ -----------
Deferred Income Taxes ............................................ 1,900,511 2,405,889
------------ -----------
Convertible Redeemable Preferred Stock ........................... 16,043,955 16,010,655
------------ -----------
Common Stockholders' Equity:
Common Stock, Par Value $0.005 per Share, Authorized,
50,000,000 Shares; Issued and Outstanding, 7,687,786 Shares
in 1999 and 7,687,486 in 1998 ................................ 38,439 38,438
Additional Paid-In Capital ..................................... 56,989,631 56,888,633
Retained Earnings (Deficit) .................................... (550,451) 398,776
------------ -----------
Total Common Stockholders' Equity .......................... 56,477,619 57,325,847
------------ -----------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity ............................ $ 88,579,080 $89,528,029
============ ===========
</TABLE>
See Accompanying Notes
3
<PAGE> 4
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Sales ......................................... $ 9,622,583 $9,152,137 $ 26,606,183 $ 27,575,174
Less Excise Taxes ............................. 893,217 838,154 2,461,322 2,580,938
----------- ---------- ------------ ------------
Net Sales ..................................... 8,729,366 8,313,983 24,144,861 24,994,236
Cost of Sales ................................. 5,850,494 5,800,275 16,736,245 18,165,215
----------- ---------- ------------ ------------
Gross Profit .................................. 2,878,872 2,513,708 7,408,616 6,829,021
Special Valuation Provision ................... -- -- -- 5,172,650
Selling, General and Administrative Expenses .. 3,057,387 2,210,543 8,314,220 7,044,171
----------- ---------- ------------ ------------
Operating Income (Loss) ....................... (178,515) 303,165 (905,604) (5,387,800)
Interest Expense .............................. 133,430 173,632 391,527 535,642
Other Income (Expense) -- Net ................. (195,369) 49,085 (112,001) 90,962
----------- ---------- ------------ ------------
Income (Loss) before Income Taxes ............. (507,314) 178,618 (1,409,132) (5,832,480)
Income Tax Expense (Benefit) .................. (177,560) 29,449 (493,205) (1,982,206)
----------- ---------- ------------ ------------
Net Income (Loss) ............................. $ (329,754) $ 149,169 $ (915,927) $ (3,850,274)
=========== ========== ============ ============
Basic Earnings (Loss) per Share ............... $ (0.04) $ 0.02 $ (0.12) $ (0.50)
=========== ========== ============ ============
Diluted Earnings (Loss) per Share ............. $ (0.04) $ 0.02 $ (0.12) $ (0.50)
=========== ========== ============ ============
</TABLE>
See Accompanying Notes
4
<PAGE> 5
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ............................................. $ (915,927) $(3,850,274)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities:
Depreciation and Amortization .................... 2,446,928 2,529,090
Special Valuation Provision ...................... -- 5,172,650
Loss on Disposal of Fixed Assets ................. 260,000 --
Deferred Income Taxes ............................ (505,378) (1,491,353)
Net Change in Operating Assets and Liabilities ... 924,711 2,465,360
----------- -----------
Net Cash Provided by Operating Activities ............ 2,210,334 4,825,473
----------- -----------
INVESTING ACTIVITIES
Expenditures for Fixed Assets ........................ (769,320) (877,664)
Proceeds from Sale of Assets and Other, Net .......... 848,481 16,000
----------- -----------
Net Cash Provided by (Used in) Investing Activities .. 79,161 (861,664)
----------- -----------
FINANCING ACTIVITIES
Repayments on Debt ................................... (337,500) (2,028,108)
Officer Note Repayment and Other, Net ................ 100,999 82,876
----------- -----------
Net Cash Used in Financing Activities ................ (236,501) (1,945,232)
----------- -----------
Increase in Cash and Cash Equivalents ................ 2,052,994 2,018,577
Cash and Cash Equivalents:
Beginning of Year .................................. 3,010,448 892,165
----------- -----------
End of Period ...................................... $ 5,063,442 $ 2,910,742
=========== ===========
</TABLE>
See Accompanying Notes
5
<PAGE> 6
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. The accompanying financial statements
include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements are unaudited and condensed, and
do not contain all of the information required by generally accepted accounting
principles to be included in a full set of financial statements. In the opinion
of management, all material adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company, for the
periods presented, have been made. All such adjustments were of a normal,
recurring nature. The results of operations for such interim periods are not
necessarily indicative of the results of operations for the full year.
2. EARNINGS (LOSS) PER SHARE
The calculation of adjusted weighted-average shares outstanding for
purposes of computing diluted earnings per share includes the dilutive effect of
all outstanding convertible redeemable preferred stock and outstanding stock
options for the periods in which the Company reports net income. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share computation:
Numerator:
Net income (loss) ........................ $ (329,754) $ 149,169 $ (915,927) $(3,850,274)
----------- ---------- ----------- -----------
Denominator:
Weighted-average common shares ........... 7,687,786 7,687,486 7,687,654 7,687,486
----------- ---------- ----------- -----------
Basic earnings (loss) per share ...... $ (0.04) $ 0.02 $ (0.12) $ (0.50)
=========== ========== =========== ===========
Diluted earnings (loss) per share computation:
Numerator:
Net income (loss) ........................ $ (329,754) $ 149,169 $ (915,927) $(3,850,274)
----------- ---------- ----------- -----------
Denominator:
Weighted-average common shares ........... 7,687,786 7,687,486 7,687,654 7,687,486
----------- ---------- ----------- -----------
Effect of dilutive securities:
Series B convertible preferred stock ... -- 1,289,872 -- --
Stock options, net ..................... -- 20,806 -- --
----------- ---------- ----------- -----------
Dilutive potential common shares ......... -- 1,310,678 -- --
Denominator for diluted earnings
(loss) per share ....................... 7,687,786 8,998,164 7,687,654 7,687,486
----------- ---------- ----------- -----------
Diluted earnings (loss) per share .. $ (0.04) $ 0.02 $ (0.12) $ (0.50)
=========== ========== =========== ===========
</TABLE>
6
<PAGE> 7
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods ....................... $1,079,985 $ 862,246
Raw materials ........................ 837,157 998,133
Promotional merchandise .............. 304,696 222,042
Packaging materials .................. 238,959 184,989
---------- ----------
$2,460,797 $2,267,410
========== ==========
</TABLE>
Finished goods include beer held in fermentation prior to the filtration
and packaging process.
4. ASSETS HELD FOR SALE
In January 1998, production at the Fremont Brewery was significantly
reduced and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("Statement 121"), the Fremont production assets were written down to an
estimate of their net realizable value in the quarter ended June 30, 1998. The
write-down was recorded through a non-cash valuation provision totaling $5.2
million. The special valuation provision, net of the related income tax benefit,
totaled $3.4 million.
The Company has sold substantially all of the equipment for cash and a
$230,000 note receivable totaling an amount approximately equal to the assets'
estimated net realizable value. The note receivable is due in December 1999, and
bears interest at a rate of 10% per annum. The remaining assets are presented as
Assets Held for Sale on the balance sheet as of September 30, 1999, at their
estimated fair market value of $39,000.
The special valuation provision and the related assets held for sale were
recorded in the three-month period ended June 30, 1998, as follows:
<TABLE>
<S> <C>
Brewery equipment .......................................... $ 8,577,598
Building ................................................... 1,068,824
-----------
9,646,422
Less accumulated depreciation and amortization ............. (3,389,772)
-----------
Net book value ............................................. 6,256,650
Estimated net realizable value of Assets Held for Sale...... (1,184,000)
-----------
Estimated impairment ....................................... 5,072,650
Reserve for disposal related costs.......................... 100,000
-----------
Special Valuation Provision ................................ 5,172,650
Income tax benefit ......................................... (1,810,428)
-----------
Special Valuation Provision, net of income tax benefit ..... $ 3,362,222
===========
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and Notes thereto included herein.
OVERVIEW
Since its formation, the Company has focused its business activities on the
brewing, marketing and selling of craft beers. For the nine months ended
September 30, 1999, the Company had gross sales of $26,606,000, a decrease of
3.5% from the nine months ended September 30, 1998. 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 primarily 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 fluctuates, federal excise taxes would change as a percentage of sales.
The Company's sales volume declined 4.7% to 148,100 barrels for the nine
months ended September 30, 1999, compared to the same period in 1998. 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 number of craft brewers and promotional pricing, competition from
foreign and large domestic brewers and new product introductions. The
competitive landscape has been affected by the number of craft beer companies
and the number of different products they offer, as well as increased
competition from imported beers. Sales in the craft beer industry generally
reflect a degree of seasonality, with the first and fourth quarters historically
being the slowest and the rest of the year typically demonstrating relatively
stronger sales. The Company has historically operated with little or no backlog,
and its ability to predict sales for future periods is limited. The Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an accurate indicator of future performance.
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 350,000 barrels as of September 30, 1999, after the 75,000 barrel
decrease related to the Fremont Brewery (see discussion below). Production
capacity of each facility can be added in phases until the facility reaches its
maximum designed production capacity. 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.
The Company's maximum designed production capacity at September 30, 1999,
totaled 500,000 barrels per year, 250,000 barrels at both the Woodinville and
Portsmouth breweries. 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 production 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. Gross
margins are negatively impacted when actual production levels are substantially
below the facility's maximum designed production capacity. This impact is
reduced when actual production levels increase.
In January 1998, production at the Fremont Brewery was significantly
reduced, and the brewery served as a backup facility to the Woodinville Brewery.
During the quarter ended June 30, 1998, the Company analyzed its current and
future production capacity requirements and its plans for the Fremont Brewery
production assets. Based upon that analysis, the Company decided to permanently
curtail the Fremont Brewery operations and sell substantially all of those
production assets. In compliance with Statement 121, the Fremont production
assets were written down to an estimate of their net realizable value in the
quarter ended June 30, 1998. The write-down was recorded through a non-cash
valuation provision totaling $5.2 million. The special valuation provision, net
of the related income tax benefit, totaled $3.4 million.
8
<PAGE> 9
In addition to capacity utilization, the Company expects other factors to
influence profit margins, including changes in expenditures for advertising and
promotion; higher costs associated with the development of newer distribution
territories, such as increased shipping, advertising, marketing and sales
personnel costs; fees related to the distribution agreement with A-B; changes in
packaging and other material costs; and changes in product sales mix. The
incremental cost of shipping beer from the Company's breweries will increase if
the volume of beer supplied to more distant markets increases.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Considerations: Issues and Uncertainties."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales ...................................... 110.2% 110.1% 110.2% 110.3%
Less Excise Taxes .......................... 10.2 10.1 10.2 10.3
----- ----- ----- -----
Net Sales .................................. 100.0 100.0 100.0 100.0
Cost of Sales .............................. 67.0 69.8 69.3 72.7
----- ----- ----- -----
Gross Profit ............................... 33.0 30.2 30.7 27.3
Special Valuation Provision ................ -- -- -- 20.7
Selling, General and Administrative Expenses 35.0 26.6 34.4 28.2
----- ----- ----- -----
Operating Income (Loss) .................... (2.0) 3.6 (3.7) (21.6)
Interest Income (Expense)-- Net ............ (3.8) (1.5) (2.1) (1.7)
----- ----- ----- -----
Income (Loss) Before Income Taxes .......... (5.8) 2.1 (5.8) (23.3)
Provision (Benefit) for Income Taxes ....... (2.0) 0.3 (2.0) (7.9)
----- ----- ----- -----
Net Income (Loss) .......................... (3.8)% 1.8% (3.8)% (15.4)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Sales. Sales increased 5.1% to $9,623,000 for three months ended September
30, 1999, compared to $9,152,000 for the comparable 1998 period, resulting from
a 6.2% increase in sales volume partially offset by slightly lower pricing, net
of promotional discounts. Sales volumes for the third quarter of 1999 increased
to 53,500 barrels from 50,400 barrels for the same period in 1998. Sales volume
in Washington State, the Company's largest market, decreased 3.6% to 19,400
barrels. Sales other than wholesale beer sales, primarily retail pub revenues,
totaled $1,211,000 in the three months ended September 30, 1999, compared to
$1,180,000 in the comparable 1998 period. At September 30, 1999 and 1998, the
Company's products were distributed in 48 states.
Excise Taxes. Excise taxes increased to $893,000, or 10.2% of net sales,
for the third quarter of 1999, compared to $838,000, or 10.1% of net sales, for
the comparable period of 1998.
Cost of Sales. Cost of sales increased to $5,850,000 for three months ended
September 30, 1999 from $5,800,000 for the same period in 1998, primarily due to
the effect of higher sales volume, substantially offset by decreased raw
material and other costs, and increased efficiency. The combined utilization
rate of maximum designed capacity for the operating breweries was 42.8% and
40.3% for quarters ended September 30, 1999 and 1998, respectively. Cost of
sales, as a percentage of net sales, decreased to 67.0% for the 1999 period,
compared to 69.8% for the 1998 period.
9
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,057,000 for the third quarter of 1999
from $2,211,000 for the same period of 1998. As a percentage of net sales, these
expenses were 35.0% and 26.6% for the quarters ended September 30, 1999 and
1998, respectively. The increase is due primarily to the June 1999 launch of an
advertising campaign in three key markets, partially offset by cost savings such
as office rent and compensation. The Company expects to continue its
significantly increased advertising spending for the remainder of 1999. The
Company spent approximately $800,000 on the advertising campaign in the third
quarter of 1999.
Interest Expense. Interest expense totaled $133,000 for the third quarter
of 1999, compared to $174,000 for the comparable 1998 period, reflecting lower
outstanding debt and lower average interest rates.
Other Income (Expense) -- Net. The 1999 third quarter includes a non-cash
loss of $260,000 related to the exchange of some one-half barrel kegs for new
one-sixth barrel kegs. Excluding the loss, other income increased to $65,000 in
the third quarter of 1999, compared to $49,000 in the same 1998 quarter due to a
higher average balance of interest-bearing deposits.
Income Taxes. The Company's effective income tax rate was 35.0% for the
third quarter of 1999 compared to 16.5% for the third quarter of 1998. The tax
rate for the third quarter of 1998 of 16.5% adjusted the nine months ended
September 30, 1998 tax rate to 26%, excluding the 35% tax benefit of the June
1998, special valuation provision. The lower 1998 tax rate was 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 the tax return deductions.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Sales. Sales decreased 3.5% to $26,606,000 for the nine months ended
September 30, 1999, compared to $27,575,000 for the comparable 1998 period, as a
4.7% decrease in total sales volumes was partially offset by a slight increase
in average sales prices. Sales volumes for the first nine months of 1999
decreased to 148,100 barrels from 155,400 barrels for the same period in 1998.
Sales volume in Washington State, the Company's largest market, decreased 5.3%
for the first nine months of 1999 compared to the same 1998 period. The
Company's other sales totaled $2,890,000 for the nine months ended September 30,
1999, compared to $2,823,000 for the comparable 1998 period.
Excise Taxes. Excise taxes decreased to $2,461,000, or 10.2% of net sales,
for the first nine months of 1999, compared to $2,581,000, or 10.3% of net
sales, for the comparable period of 1998.
Cost of Sales. Cost of sales decreased to $16,736,000 for nine months ended
September 30, 1999 from $18,165,000 for same period in 1998, primarily due to
the lower sales volume, the positive effect of decreased costs at the Fremont
Brewery and decreased packaging and other material costs. The combined
utilization rate of maximum designed capacity for the operating breweries was
39.5% for nine months ended September 30, 1999 and 1998. Cost of sales, as a
percentage of net sales, decreased to 69.3% for the 1999 period, compared to
72.7% for the 1998 period.
Special Valuation Provision. In the nine months ended September 30, 1998,
the Fremont production assets were written down to an estimate of their net
realizable value in compliance with FASB Statement No. 121. The write-down was
recorded through a non-cash valuation provision totaling $5.2 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $8,314,000 for the first nine months of
1999 from $7,044,000 for the same period of 1998. As a percentage of net sales,
these expenses were 34.4% and 28.2% for the nine months ended September 30, 1999
and 1998, respectively. The increase was primarily due to the June 1999 launch
of an advertising campaign in three key markets, offset partially by reductions
in sales personnel and other marketing costs in early 1998, in addition to lower
rent and compensation expense. The Company spent approximately $1.6 million on
advertising during the nine months ended September 30, 1999.
10
<PAGE> 11
Interest Expense. Interest expense totaled $392,000 for the nine months of
1999, compared to $536,000 for the comparable 1998 period, reflecting lower
outstanding debt and, lower average interest rates.
Other Income (Expense) -- Net. The 1999 period includes a non-cash loss of
$260,000 related to the exchange of some one-half barrel kegs for new one-sixth
barrel kegs. Excluding the loss, other income increased to $148,000 in 1999,
compared to $91,000 in 1998 due to a higher average balance of interest-bearing
deposits.
Income Taxes. The Company's effective income tax rate increased to 35.0%
for the nine months ended September 30, 1999 from 34.0% for the same period in
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5,063,000 and $3,010,000 of cash and cash equivalents at
September 30, 1999 and December 31, 1998, respectively. At September 30, 1999,
the Company had working capital of $3,185,000. The Company's long-term debt as a
percentage of total capitalization (long-term debt, preferred stock and common
stockholders' equity) was 9.9% and 10.2% as of September 30, 1999 and December
31, 1998, respectively. Cash provided by operating activities totaled $2,210,000
and $4,825,000 for the nine months ended September 30, 1999 and 1998,
respectively. The amounts include the collection of income tax refunds totaling
approximately $500,000 and $1 million, in the respective periods.
On June 5, 1997, the Company converted the $9 million outstanding balance
of its secured bank facility (the "Secured Facility") to a five-year term loan
with a 20-year amortization schedule. As of September 30, 1999, there was $8.0
million outstanding on the Secured Facility, and the Company's one-month
IBOR-based borrowing rate was approximately 6.6%. In addition, the Company has a
$10 million revolving credit facility (the "Revolving Facility") with the same
bank through July 1, 2001, and as of September 30, 1999, there were no
borrowings outstanding on this facility. The Secured Facility and the Revolving
Facility are secured by substantially all of the Company's assets. Interest
accrues at a variable rate based on the Inter Bank Offered Rate ("IBOR"), plus
1.25% to 2.00% for the Secured 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 interest rate for the Revolving
Facility is the applicable LIBOR plus 1.00% to 2.00%, depending on the Company's
debt-to-cash flow ratio.
The Company has required capital principally for the construction and
development of its technologically-advanced production facilities. To date, the
Company has financed its capital requirements through cash flow from operations,
bank borrowings and the sale of common and preferred stock. The Company expects
to meet its future financing needs, including the significant increase in
advertising expenditures, and working capital and capital expenditure
requirements, through cash on hand, operating cash flow, proceeds from the sale
of Assets Held for Sale and, to the extent required and available, bank
borrowings and offerings of debt or equity securities.
Capital expenditures for the nine months ended September 30, 1999, totaled
$769,000. Capital expenditures for 1999 are expected to total approximately
$900,000.
The Company has certain commitments, contingencies and uncertainties
relating to its normal operations. Management believes that any such
commitments, contingencies or uncertainties, including any environmental
uncertainties, will not have a material adverse effect on the Company's
financial position or results of operations.
11
<PAGE> 12
CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES
The Company does not provide forecasts of future financial performance or
sales volumes, although this Quarterly Report contains certain other types of
forward-looking statements that involve risks and uncertainties. The Company
may, in discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written and
oral presentations made by the Company, include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions that the Company believes
are reasonable, but are by their nature inherently uncertain. In all cases,
there can be no assurance that such assumptions will prove correct or that
projected events will occur. Actual results could differ materially from those
projected depending on a variety of factors, including, but not limited to, the
issues discussed below, the successful execution of market development and other
plans and the availability of financing. While Company management is optimistic
about the Company's long-term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its business prospects and any
forward-looking statements.
Effect of Competition on Future Sales. The domestic market in which the
Company's craft beers are sold is highly competitive due to the proliferation of
small craft brewers, including contract brewers, the increase in the number of
products offered by such brewers, increased competition from imported beers 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 declined in
1997, 1998 and in the first nine months of 1999, due primarily to slower sales
in the highly competitive draft beer market. If negative sales trends were to
continue, the Company's future sales and results of operations would be
adversely affected. The Company has historically operated with little or no
backlog and, therefore, its ability to predict sales for future periods is
limited.
Sales Prices. Future prices the Company charges for its products may
decrease from historical levels, depending on competitive factors in the
Company's various markets. The Company has participated in price promotions with
its wholesalers and their retail customers in most of its markets. The number of
markets in which the Company participates in price promotions and the frequency
of such promotions are 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 previously done
very limited advertising, based upon market and competitive considerations the
Company has determined that a significant increase in such spending is
appropriate. Accordingly, in June 1999 the Company began a brand investment
program that significantly increased advertising and related costs in the 1999
second and third quarters. The increased advertising expenses are expected to
continue into the year 2000 with the objective of establishing momentum towards
capturing a larger share of the fragmented craft beer market. This increased
spending has significantly increased the Company's net losses and decreased its
stockholders' equity. 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
12
<PAGE> 13
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 16.5%
of the Company's sales in the first nine months of 1999. Substantially all of
the remaining sales volumes are now through the Distribution Alliance to A-B
affiliated distributors, most of whom are independent wholesalers. A disruption
of wholesalers' or A-B's ability to distribute products efficiently due to any
significant operational problems such as wide-spread labor union strikes, or the
loss of K&L Distributors 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 general consumer trends
caused a decrease in the demand for beer, including craft beer, it could
adversely impact the Company's sales and results of operations. 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 had time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. In addition, some of the
microprocessors and control systems integrated in the Company's operations were
not programmed to recognize dates beyond the year 1999. This could have caused a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, operate certain production equipment or engage in similar normal
business activities.
The Company completed an assessment of its information systems and has
completed and tested software upgrades so that those computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company believes that the new software will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions do not function properly, the Year 2000 compliance issue could have
a significant negative adverse impact on the results of operations of the
Company. The costs associated with all software upgrades or modifications
totaled less than $75,000.
The Company is working directly with key vendors, service providers and
business partners, such as A-B, malt and packaging suppliers, and utilities, in
order to avoid any business interruptions in the year 2000 and thereafter. Steps
have been taken to understand key third parties' ability to continue providing
services and products through the change to 2000. The Company sent out detailed
questionnaires to key third parties to verify Year 2000 readiness and is
conducting on-going risk analysis based upon the responses to those
questionnaires. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of third parties to complete their
Year 2000 compliance process in a timely fashion could have a material adverse
effect on the Company's results of operations.
In addition, the Company is in the process of completing its contingency
planning for all risk areas. The contingency plans include, among other things,
manual "work-arounds" for potential software and hardware failures, and an
increase in year-end inventory to allow for production disruptions that could
occur in January 2000. The project is expected to be completed prior to any
potential negative impact on the Company's operations or information systems.
The costs and timing of the project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but
13
<PAGE> 14
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. In February 1998, the FASB issued Statement No. 132,
Disclosures about Pensions and Other Postretirement Benefits. All of those
statements were effective for the year ended December 31, 1998. Statement Nos.
130 and 132 are not applicable to the Company's operations. The disclosures
prescribed by Statement No. 131 are not required for the Company because retail
pub revenues, the largest component of sales other than wholesale beer sales, do
not meet the minimum quantitative thresholds.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
September 30, 1999. However, the Company is exposed to interest rate risk. The
Company's long-term debt bears interest at a rate that is tied to a variable
rate. Information pertaining to the Company's debt balance and terms is set
forth in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in Note 5 of "Notes to Financial Statements"
included in the Company's Annual Report on Form 10-K.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this report.
27 Financial Data Schedule for the nine months ended September 30,
1999.
(b) REPORTS ON FORM 8-K
None were filed during the quarter ended September 30, 1999.
ITEMS 1, 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on November 12, 1999.
REDHOOK ALE BREWERY, INCORPORATED
BY: /s/ Bradley A. Berg
-------------------------------------
Bradley A. Berg
Executive Vice President and
Chief Financial Officer
BY: /s/ Anne M. Mueller
-------------------------------------
Anne M. Mueller
Controller and Treasurer,
Principal Accounting Officer
DATE: November 12, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,063,442
<SECURITIES> 0
<RECEIVABLES> 1,805,799
<ALLOWANCES> 10,000
<INVENTORY> 2,460,797
<CURRENT-ASSETS> 9,804,483
<PP&E> 89,484,938
<DEPRECIATION> (11,340,638)
<TOTAL-ASSETS> 88,579,080<F1>
<CURRENT-LIABILITIES> 6,619,495
<BONDS> 7,537,500
16,043,955
0
<COMMON> 38,439
<OTHER-SE> 56,439,180
<TOTAL-LIABILITY-AND-EQUITY> 88,579,080
<SALES> 24,144,861<F2>
<TOTAL-REVENUES> 24,144,861<F2>
<CGS> 16,736,245
<TOTAL-COSTS> 25,050,465
<OTHER-EXPENSES> 112,001<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 391,527
<INCOME-PRETAX> (1,409,132)
<INCOME-TAX> (493,205)
<INCOME-CONTINUING> (915,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (915,927)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>Total Assets includes Assets Held for Sale of $38,549.
<F2>Sales and Total Revenues are net of federal and state excise taxes.
<F3>Includes a $260,000 non-cash loss related to a keg exchange.
</FN>
</TABLE>
