-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HOCnV7q1FUJk2o+ZBBmblrGTpxgDUB0IX4YVGvkCIy2wgeszXcqlnLugI4I9ldMn t4lngResxwOlOt9MHwpH3g== 0000891020-00-000615.txt : 20000329 0000891020-00-000615.hdr.sgml : 20000329 ACCESSION NUMBER: 0000891020-00-000615 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDHOOK ALE BREWERY INC CENTRAL INDEX KEY: 0000892222 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 911141254 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26542 FILM NUMBER: 581026 BUSINESS ADDRESS: STREET 1: 3400 PHINNEY AVE N CITY: SEATTLE STATE: WA ZIP: 98103 BUSINESS PHONE: 2065488000 MAIL ADDRESS: STREET 1: 3400 PHINNEY AVE N CITY: SEATTLE STATE: WA ZIP: 98103 10-K405 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-26542 REDHOOK ALE BREWERY, INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 91-1141254 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 3400 PHINNEY AVENUE NORTH 98103 SEATTLE, WASHINGTON (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 548-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.005 PER SHARE RIGHTS TO PURCHASE COMMON STOCK (TITLE OF CLASS) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price on February 29, 2000, as reported on NASDAQ, was $15,335,595.(1) The number of shares of the registrant's Common Stock outstanding as of February 29, 2000, was 7,687,786. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement relating to the registrant's 2000 Annual Meeting of Stockholders to be held on May 23, 2000, are incorporated by reference into Part III of this Report. - --------------- (1) Excludes shares held of record on that date by directors and executive officers and greater than 10% shareholders of the registrant. Exclusion of such shares should not be construed to indicate that any such person directly or indirectly possesses the power to direct or cause the direction of the management of the policies of the registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 REDHOOK ALE BREWERY, INCORPORATED FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I. ITEM 1. Business.................................................... 1 ITEM 2. Properties.................................................. 14 ITEM 3. Legal Proceedings........................................... 15 ITEM 4. Submission of Matters to a Vote of Security Holders......... 15 ITEM 4A. Executive Officers of the Company........................... 15 PART II. ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 16 ITEM 6. Selected Financial Data..................................... 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 23 ITEM 8. Financial Statements and Supplementary Data................. 24 ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures................................. 42 PART III. ITEM 10. Directors and Executive Officers of the Registrant.......... 42 ITEM 11. Executive Compensation...................................... 42 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................ 42 ITEM 13. Certain Relationships and Related Transactions.............. 42 PART IV. ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K...... 42
i 3 PART I. ITEM 1. BUSINESS Redhook Ale Brewery, Incorporated ("Redhook" or the "Company") is one of the leading brewers of craft beers in the United States and has been at the forefront of the domestic craft brewing segment since the Company's formation in 1981. Redhook produces its specialty bottled and draft products in two technologically-advanced, company-owned breweries, one in the Seattle suburb of Woodinville, Washington and the other in Portsmouth, New Hampshire. By operating its own small-batch breweries, the Company believes it is better able to control the quantities, types and flavors of beer produced, while optimizing the quality and consistency of its products. Management believes that the Company's significant production capacity is of the highest quality compared to that of any domestic craft brewer and that Redhook is the only domestic craft brewer that owns and operates substantial production facilities in both a western region and eastern region of the United States. The Company currently produces eight styles of beer, marketed under distinct brand names. The Company's flagship brand is Redhook E.S.B., and its other principal products include Redhook India Pale Ale, Redhook Hefe-Weizen, Blackhook Porter, Double Black Stout brewed with Starbucks(R) coffee, and its seasonal offerings Redhook Blonde Ale, Winterhook, and Redhook Nut Brown Ale. In addition to its principal products, the Company periodically develops and markets new products to test and measure consumer response to varying styles and flavors. The Company distributed its products through a network of third-party wholesale distributors and a long-term distribution alliance with Anheuser-Busch, Incorporated ("A-B") (the "Distribution Alliance" or the "Alliance") in 48 states as of December 31, 1999. INDUSTRY BACKGROUND The Company is a leader in the relatively small craft brewing segment of the U.S. brewing industry, which includes regional specialty brewers such as the Company, contract brewers, microbreweries and brewpubs. Craft beers are distinguishable from other domestically produced beers by their fuller flavor and adherence to traditional European brewing styles. According to industry sources, shipments in the craft beer segment were essentially flat at approximately 5.6 million barrels in 1998, yet represented less than 3% of the approximately 200 million barrels shipped by domestic producers within the United States. Although 1999 information is not yet available, the 1999 U.S. craft beer segment volume is expected to be approximately the same as the 1998 volume. While the segment volume growth slowed significantly, the number of craft brewers in the U.S. has grown dramatically, from 627 at the end of 1994 to approximately 1,400 as of December 31, 1999. During 1998 and 1999, the number of craft brewers was substantially unchanged relative to the preceding years. At the turn of this century, the U.S. brewing industry was comprised of nearly 2,000 breweries, most of which were small operations that produced distinctive beers for local markets. Fewer than 1,000 of these breweries reopened following Prohibition. During the ensuing decades, competition in the beer industry came to focus on a narrowing of product offerings to less distinctive beer styles (principally pale lagers and pilsners): to please the broadest possible segment of the population; for economies of scale; to facilitate mass production techniques; to lower costs and lighten flavor profiles through the use of less barley and more corn, rice and other adjuncts; use of pasteurization processes to prolong shelf-life; and marketing a few major brand names on a national basis, principally through mass-media advertising. As a result of these competitive factors, extensive industry consolidation occurred. Currently, according to industry sources, the five largest domestic brewers account for approximately 90% of domestic beer shipments. By the early 1980s, annual domestic consumption of beer produced by U.S. brewers had plateaued at approximately 180 million barrels. Over the past decade, per capita annual domestic beer consumption has declined slightly, due to increasing health and safety consciousness and the changing tastes, affluence and consumption attitudes of the maturing generation of beer drinkers born after World War II. A growing number of consumers began to migrate away from less flavorful mass-marketed beers toward greater taste and broader variety in their malt beverages, mirroring similar trends in other beverage and cuisine categories. 1 4 Initially, foreign brewers were the principal beneficiaries of these evolving consumption patterns. Even though the principal European, Canadian and Mexican imported beers are also mass-produced, many represent a fuller-flavored alternative to the national brands produced in the United States. By the latter half of the 1980s, a substantial new domestic industry segment had developed in response to the increasing consumer demand for fuller-flavored beers. Across the country, a proliferation of regional specialty brewers (annually selling more than 15,000 barrels of craft beer brewed at their own facilities), contract brewers (selling craft beer brewed by a third party to the contract brewer's specifications), microbreweries (selling less than 15,000 barrels per year), and brewpubs (combination restaurant-breweries) emerged to form the craft beer industry. The strength of consumer demand has enabled certain craft brewers, such as the Company, to evolve from microbreweries into regional specialty brewers by constructing larger breweries, while still adhering to the traditional European brewing methods that characterize the craft brewing segment. Other craft brewers have sought to take advantage of growing consumer demand by hiring certain brewers of typical American-style lagers to perform contract brewing at their otherwise underutilized brewing facilities. Certain national brewers of mass-produced beers have also sought to appeal to this growing demand for craft beers by introducing their own fuller-flavored products. Also, in recent years imported products from foreign brewers have enjoyed a resurgence in demand and that has contributed to the reduced volume growth in the craft beer segment. BUSINESS STRATEGY The Company's principal business objective is to be the leading brewer of craft beers in the United States. Redhook seeks to achieve this objective by expanding penetration in existing markets. The central elements of the Company's business strategy include: - Production of High-Quality Craft Beers. The Company is committed to the production of a variety of distinctive, flavorful craft beers. The Company brews its craft beers according to traditional European brewing styles and methods, using only high-quality ingredients and technologically advanced brewing equipment. The Company does not intend to compete directly in terms of production style, pricing or extensive mass-media advertising with the mass-marketed national brands. - Control of Production in Company-Owned Breweries. The Company builds, owns and operates its own brewing facilities to optimize the quality and consistency of its products and to achieve the greatest control over its production costs. Management believes that its ability to engage in constant product innovation and its control over product quality are critical competitive advantages. Accordingly, the Company does not hire third parties to perform contract brewing of any of its products. - Production Economies through Technologically-Advanced Equipment. The Company's technologically-advanced, highly automated breweries are designed to produce beer in small batches, while attaining production economies through automation rather than scale. The Company believes that its investment in technological leadership enables it to optimize employee productivity, to contain operating costs, to produce innovative beer styles and tastes, and to achieve the production flexibility afforded by small-batch brewing, with minimal loss of efficiency and process reliability. - Strategic Distribution Alliance with Industry Leader. In October 1994, the Company entered into a long-term distribution agreement with A-B, pursuant to which Redhook distributes its products in substantially all of its markets through A-B's wholesale distribution network. A-B's network consists of over 700 wholesale distributors, who are for the most part geographically contiguous and independently owned and operated. The Alliance with A-B enabled the Company to expand its distribution to new markets more quickly and without the delays, costs and potential gaps or overlaps in coverage associated with developing a network of distributors on a piecemeal basis. As an independent company, Redhook maintains complete control over the production and marketing of its product. - Operation of Regional Brewing Facilities. Management believes that by locating its production facilities in proximity to the key regional markets it serves, the Company is able to enjoy distinct competitive advantages, including shortened delivery times to maximize product freshness, reduced 2 5 shipping costs, established consumer identification with the Company's brands, and enhanced familiarity with local consumer tastes. If additional capacity is required Redhook may construct additional brewing facilities in the future, in select locations in the United States, with the capability to produce Redhook's principal products, as well as to offer select products to respond to local taste preferences. By pursuing this strategy, Redhook believes that it will be able to preserve its reputation and prestige as a regional craft brewer. - Promotion of Products. While the Company has done very limited advertising prior to 1999, based upon market and competitive considerations the Company determined that a significant increase in such spending is appropriate. Accordingly, in 1999 the Company undertook a brand investment program that significantly increased advertising expenses with the objective of establishing momentum towards capturing a larger share of the fragmented craft beer market. The approximately $2.5 million in increased spending was focused on key markets and often accompanied by significantly increased advertising expenditures by certain of our distributors. This increase in advertising expenditures could continue indefinitely if the results are sufficiently positive on the Company's business. In addition, the Company markets its products to distributors, retailers and consumers through a variety of specialized training and promotional methods. The Company actively trains its distributors and retailers in understanding the brewing process, the craft beer segment and Redhook products. Promotional methods include introducing Redhook products on draft in pubs and restaurants, using promotional items including tap handles, glassware and coasters, and participating in local festivals to increase brand name recognition. In addition, the Company's prominently located breweries feature pubs and retail outlets and offer guided tours to further increase consumer awareness of Redhook. The Company has historically believed that its training and promotional methods are as effective in communicating and educating consumers as broad-based, less flexible mass-media beer advertising campaigns. PRODUCTS The Company produces a variety of styles of full-flavored craft beers using traditional European brewing methods. The Company brews its beers using only high-quality hops, malted barley, wheat, rye and other natural ingredients, and does not use any rice, corn, sugar, syrups or other adjuncts. The Company's beers are marketed on the basis of freshness and distinctive flavor profiles. To help maintain full flavor, the Company's products are not pasteurized. As a result, it is appropriate that they be kept cool so that oxidation and heat- induced aging will not adversely affect the original taste, and that they be distributed and served as soon as possible, generally within approximately three months after packaging to maximize freshness and flavor. The Company distributes its products only in glass bottles and kegs, and its products are freshness dated for the benefit of consumers. The Company presently produces eight principal brands, each with its own distinctive combination of flavor, color and clarity: Redhook E.S.B. The Company's flagship brand, Redhook E.S.B., which accounted for approximately 66% of the Company's sales in 1999, is a full, rich, well-rounded, amber-colored ale with a sweet toasted malt flavor balanced by a pleasant floral/herbal liveliness derived from Tettnang hops. Redhook India Pale Ale. A premium English pub-style bitter ale, Redhook IPA, is pale and aggressively hopped, has a brassy color imparted by caramelized malt, an herbal aroma characteristic of Northwest Cascade hops, and a crisp, dry finish. Redhook Hefe-Weizen. This wheat beer is unfiltered and named hefe-weizen, which means "wheat beer with yeast." Leaving the yeast in, instead of filtering it out, accentuates the wheat flavor and adds visual appeal. Blackhook Porter. A London-style Porter, Blackhook has an ebony tone, a pleasant "burnt" character produced by highly roasted black barley, and a dark malt flavor suggesting coffee and chocolate, balanced by lively hopping. 3 6 Double Black Stout. A rich, imperial stout enhanced by the addition of an extract of Starbucks(R) coffee. Dark malts and the coffee create a big roasty flavor that is rounded out with a touch of honey. Redhook Blonde Ale. A delicious, thirst-quenching golden ale. The combination of lightly roasted barley, subtle hops, and a touch of wheat create a perfectly balanced and distinctively drinkable ale. Blonde Ale is available during the spring and summer months. Winterhook. A rich seasonal holiday ale formulated specially each year for cold-weather enjoyment, Winterhook typically is deep in color and rich in flavor, with complex flavors and a warm finish. Winterhook is available during the fall and winter months. Redhook Nut Brown Ale. A malty ale with a hint of sweetness in the finish. The combination of six barley malts and two hop varieties result in a surprisingly smooth, well-balanced dark beer. Nut Brown Ale is available during the late winter and early spring. In an effort to be responsive to varying consumer style and flavor preferences, the Company also periodically engages in the development and testing of new products. The Company believes that the continued success of craft brewers will be affected by their ability to be innovative and attentive to consumer desires for new and distinctive taste experiences while maintaining consistently high product quality. The Company may also consider producing low-alcohol beer or other low-alcohol or nonalcoholic beverages (such as root beer, fruit beers, craft sodas and ciders). The Company's technologically-advanced breweries allow it to produce small-batch experimental ales within two to three weeks. These experimental products are periodically developed and typically produced in draft form only for on-premise test marketing at the Company's pubs and selected retail sites. If the initial consumer reception of an experimental brew is sufficiently positive, then its taste and formula are refined, as necessary, and a new Redhook brand may be created. Redhook India Pale Ale, Redhook Nut Brown Ale, and Double Black Stout are examples of products that were developed in this manner. Other such products have included ales such as Barley Wine, Honey Stout, Oatmeal Stout, Scotch Ale and Wit, and lagers such as Marzen and Pilsner. BREWING OPERATIONS The Brewing Process. Beer is made primarily from four natural ingredients: malted grain, hops, yeast and water. The grain most commonly used in brewing is barley, owing to its distinctive germination characteristics, which make it easy to ferment. The Company uses the finest barley malt, typically using strains of barley having two rows of grain in each ear. A wide variety of hops may be used to add seasoning to the brew; some varieties best confer bitterness, while others are chosen for their ability to impart distinctive aromas to the beer. Nearly all the yeasts used to induce or augment fermentation of beer are of the species Saccharomyces cerevisiae, which includes both the top-fermenting yeasts used in ale production and the bottom-fermenting yeasts associated with lagers. The brewing process begins when the malt supplier soaks the barley grain in water, thereby initiating germination, and then dries and cures the grain through kilning. This process, known as "malting," breaks down complex carbohydrates and proteins so that they can be easily extracted. The malting process also imparts color and flavor characteristics to the grain. The cured grain, referred to as "malt," is then sold to the brewery. At the brewery, various malts are cracked by milling, and mixed with warm water. This mixture, or "mash," is heated and stirred in the mash tun, allowing the simple carbohydrates and proteins to be converted into fermentable sugars. Naturally occurring enzymes help facilitate this process. The mash is then strained and rinsed in the lauter tun to produce a residual liquid, high in fermentable sugars, called "wort," which then flows into a brew kettle to be boiled, concentrated and clarified. Hops are added during the boil to impart bitterness, balance and aroma. The specific mixture of hops and the brewing time and temperature further affect the flavor of the beer. After the boil, the wort is strained and cooled before it is moved to a fermentation cellar, where specially cultured yeast is added to induce fermentation. During fermentation, the wort's sugars are metabolized by the yeast cells, producing carbon dioxide and alcohol. Some of the carbon dioxide is recaptured and absorbed back into the beer, providing a natural source of carbonation. After fermentation, the beer is cooled for several days while the beer is clarified and full flavor develops. Filtration, the final step for a filtered beer, removes unwanted yeast. At this point, the beer is in its peak condition and ready for bottling or 4 7 keg racking. The entire brewing process of ales, from mashing through filtration, is typically completed in 14 to 21 days, depending on the formulation and style of the product being brewed. Redhook Ale Brew Process Brewing Equipment. The Company uses only technologically advanced and highly automated small-batch brewing equipment. The Woodinville Brewery employs a 100-barrel mash tun; lauter tun; wort receiver; wort kettle; whirlpool kettle; five 70,000-pound, one 35,000-pound and two 25,000-pound grain silos; two 100-barrel, fifty-four 200-barrel, and ten 600-barrel fermenters; and, two 300-barrel and four 400-barrel bright tanks. The Portsmouth Brewery employs a 100-barrel mash tun; lauter tun; wort receiver; wort kettle; whirlpool kettle; three 70,000-pound and two 35,000-pound grain silos; three 100-barrel and sixteen 400-barrel fermenters; two 200-barrel and two 400-barrel bright tanks; and an anaerobic waste-water treatment facility which completes the process cycle. Both breweries use advanced microfiltration technology, including a diatomaceous earth pad filter to eliminate unwanted yeast and to extend shelf life. In early 1998, operations at the Fremont Brewery were terminated, the Fremont production assets were written down to the estimated net realizable value. During 1999, the Company sold substantially all of that equipment. See discussion in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Bottling and Kegging. The Company packages its craft beers in both bottles and kegs. Both of the Company's breweries have fully automated, technologically-advanced bottling and keg lines. The bottle filler at each brewery utilizes a carbon dioxide environment during bottling designed to ensure that minimal oxygen is dissolved in the beer, thereby extending shelf life. Redhook uses the latest keg technology, which is preferred by many draft beer retailers because the kegs are designed to be easier to handle and lift, to consume less floor space, to have more consistent flow and to reduce waste. Quality Control. The Woodinville Brewery was designed to be the center of the quality control and analysis function. The Company monitors production and quality control at both of its breweries with central coordination at the Woodinville Brewery. Both the Woodinville and Portsmouth breweries have an on-site laboratory where microbiologists and lab technicians supervise on-site yeast propagation, monitor product 5 8 quality, test products, measure color and bitterness, and test for oxidation and unwanted bacteria. The Company also regularly utilizes independent laboratories for product analysis. Ingredients and Raw Materials. The Company currently obtains all of its malted barley from three suppliers and its premium-quality select hops, grown in the Pacific Northwest, from three competitive sources. The Company periodically purchases small lots of European hops, which it uses to achieve a special hop character in certain of its beers. Redhook believes that alternate sources of malted barley and hops are available at competitive prices. In order to ensure the supply of the hop varieties used in its products, the Company enters into supply contracts for its hop requirements. The Company currently cultivates its own Saccharomyces cerevisiae yeast supply. The Company has available to it multiple competitive sources for packing materials, such as bottles, labels, six-pack carriers, crowns and shipping cases. PRODUCT DISTRIBUTION Redhook's products are available for sale directly to consumers in draft and bottles at restaurants, bars and liquor stores, as well as in bottles at supermarkets, warehouse clubs and convenience stores. Like substantially all craft brewers, the Company's products are delivered to these retail outlets through a network of local distributors, whose principal business is the distribution of beer and in some cases other alcoholic beverages, and who traditionally have local distribution relationships with one or more national beer brands. The Company, together with its distributors, markets its products to retail outlets and relies on its distributors to provide regular delivery to retailers, to maintain retail shelf space and to oversee timely rotation of inventory to ensure the freshness of its products. The Company also offers its products directly to consumers at the Company's three on-premise retail establishments, the Trolleyman pub in Fremont, the Forecasters Public House in Woodinville, and the Cataqua Public House in Portsmouth, New Hampshire. In October 1994, the Company entered into the Distribution Alliance with A-B pursuant to which Redhook distributes its products in new markets exclusively through A-B's wholesale distribution network. If an A-B distributor does not agree to carry the Company's products, the Company may select a non-A-B distributor for that territory. The exclusivity provisions of the A-B Distribution Agreement do not apply to territories currently subject to distribution arrangements with non-Alliance distributors until such arrangements expire. During 1996, Redhook changed the distribution in substantially all of the significant markets previously served by non-A-B wholesalers to distribution through the Alliance. Prior to establishing the Alliance with A-B, the Company distributed its products regionally through distributors, many of which were A-B affiliated, in eight western states: Washington, California (northern), Oregon, Idaho, Montana, Wyoming, Colorado and Alaska. The Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an independent A-B distributor responsible for distribution in most of King County, Washington, which includes Seattle, accounted for approximately 17% of total sales in each of 1999, 1998 and 1997. As of December 31, 1999, the Company had 27 non-Alliance distributors. The Company expects the percentage of sales represented by non-Alliance distributors to continue to decline as the Company expands its sales through the Alliance. A-B, whose products accounted for approximately 47% of total domestic beer sales by volume in 1999, distributes its products throughout the United States through a network of about 700 wholesale distributors, which are for the most part geographically contiguous and independently owned and operated. The Company believes that the typical A-B distributor is financially stable and has both a long-standing presence and a substantial market share of beer sales in its territory. Redhook chose to align itself with A-B through the Alliance as an integral part of its growth strategy, and to provide access to quality distribution throughout the nation. Redhook was the first and is the largest independent craft brewer to have a formal distribution agreement with a major U.S. brewer. The Company believes that access to A-B's distribution network enabled it to enter targeted new markets more rapidly and with more thorough penetration of the available customer base in the territory. The Distribution Alliance allowed the Company to retain control over the selection and timing of new market introductions. The Company believes that the existence of the Alliance, presentations by Redhook's management at A-B's distributor conventions, A-B communications about Redhook in printed distributor materials, and A-B- 6 9 supported opportunities for Redhook to educate A-B distributors about its specialty products result in increased awareness of and demand for Redhook products among A-B's distributors. The Company believes that local beer distribution territories have tended to become dominated by a smaller number of distributors. That belief is based upon distribution limitations on the number of brands they can effectively manage and higher expectations for product quality and consistency, and marketing support. Management believes that the Company's competitors in the craft beer segment generally negotiate distribution relationships separately with distributors in each locality and, as a result, typically distribute through a variety of wholesalers representing differing national beer brands with uncoordinated territorial boundaries. Because A-B's distributors are assigned territories that generally are contiguous, the Alliance enables the Company to reduce the gaps and overlaps in distribution coverage often experienced by the Company's competitors. As a result, the Company believes the Alliance provides the Company with significant advantages over competitors in the craft beer industry, who generally are unable to achieve the distribution efficiencies afforded by the Alliance network. The Distribution Alliance enabled the Company to accelerate the distribution of its products into new markets. The Company's products were distributed in 48 states at the end of 1999. As of December 31, 1999, the Company had 700 Alliance distributors, accounting for approximately 66% of the Company's sales volume in 1999. In addition, sales to non-Alliance A-B affiliated distributors accounted for 28% of the Company's sales volume in 1999. Under the Alliance, the Company is responsible for marketing its products to A-B's distributors, as well as to retailers and consumers. The A-B distributors then place orders with the Company, through A-B, for Redhook products. The Company separately packages and ships the orders in refrigerated trucks to the A-B distribution center nearest to the distributor or, under certain circumstances, directly to the distributor. Generally, the Company sells its products to A-B at the same list prices paid by non-Alliance distributors in the respective markets, net of the Alliance fee. The Company pays an Alliance fee to A-B, determined by a formula, that effectively reduces the total gross profit margin earned on sales to A-B. However, management believes that the benefits of the Alliance, particularly the potential for increased sales volume, and efficiencies in delivery, state reporting and licensing, billing and collections created by the Alliance are significant to the Company's business. Under the Alliance, the Company has granted A-B the first right to distribute Redhook products in the United States and Mexico, except in those territories already subject to distribution agreements with non-Alliance distributors, in which case such right does not commence until the existing arrangements expire. A-B additionally has a first right to distribute new Redhook products in non-Alliance territories. In exchange, prior to October 1997, A-B could not acquire an interest between 10% and 50% of the common stock of, or distribute the products of, any other U.S.-based small brewer (producing or distributing less than 1,000,000 barrels annually) that distributes beer in those areas where the Company distributes its products, without the Company's approval. After October 1997, if A-B were to agree to distribute the products of any U.S.-based small brewer in areas where the Company's products are distributed, without the Company's approval, the Alliance fee would be substantially reduced on sales of Redhook products in such areas. SALES AND MARKETING Prior to 1999, the Company had engaged in very limited media advertising to market its products, choosing instead to stimulate consumer demand by educating consumers and wholesalers as to the distinctive qualities of its products, and by sponsoring localized promotions designed to enhance Redhook's word-of-mouth reputation. The Company maintains a sales and marketing staff whose efforts are focused principally on local promotions, programs for on-premise consumer and retailer education, and distributor training and assistance. The Company seeks to identify its products with local markets by participating in or sponsoring cultural and community events, local music and other entertainment venues, local craft beer festivals and cuisine events, and local professional sporting events, as well as the limited use of print and billboard advertising. 7 10 While the Company has previously done very limited advertising, based upon market and competitive considerations the Company determined that a significant increase in such spending is appropriate. Accordingly, in 1999 the Company undertook a brand investment program that significantly increased advertising expenses with the objective of establishing momentum towards capturing a larger share of the fragmented craft beer market. The increased spending on radio, print and billboard advertising, as well as sponsorships, was focused in key markets and was often accompanied by significantly increased advertising expenditures by certain of our distributors. The Company's sales and marketing staff also offers education, training and other support to wholesale distributors of the Company's products. Because the Company's wholesalers generally also distribute much higher-volume national beer brands and commonly distribute other specialty brands, a critical function of the sales and marketing staff is to elevate each distributor's awareness of the Company's products and to retain the distributor's interest in promoting increased sales of these products. This is accomplished primarily through personal contact with each distributor, including on-site sales training, educational tours of the Company's breweries and promotional activities and expenditures shared with the distributors. The Company's sales representatives also provide other forms of support to wholesale distributors, such as direct contact with restaurant and grocery chain buyers, direct involvement in the design of grocery store displays, stacking and merchandising of beer inventory and supply of point-of-sale materials. The Company's sales representatives devote considerable effort to the promotion of on-premise consumption at participating pubs and restaurants. The Company believes that educating retailers about the freshness and quality of the Company's products will in turn allow retailers to assist in educating consumers. The Company considers on-premise product sampling and education to be among its most effective tools for building brand identity with consumers and establishing word-of-mouth reputation. On-premise marketing is also accomplished through a variety of other point-of-sale tools, such as neon signs, tap handles, coasters, table tents, banners, posters, glassware and menu guidance. The periodic distribution of the Company's experimental products in limited quantities to selected pubs and restaurants is another example of on-premise marketing designed to increase consumer awareness. The Company's breweries also play a significant role in increasing consumer awareness of the Company's products and enhancing Redhook's image as a regional brewer. More than 29,800 visitors participated in tours at the Company's breweries in 1999. Each of the Company's breweries has a retail pub on-site where the Company's products are served. In addition, the breweries have meeting rooms that the public can rent for business meetings, parties and holiday events, and that the Company uses to entertain and educate distributors, retailers and the media about the Company's products. See Item 2. "Properties." The Company also sells various items of apparel and memorabilia bearing the Company's trademarks at its pubs, which the Company believes create further awareness of the Company's beers and reinforce the Company's quality image. To further promote retail bottled product sales and in response to local competitive conditions, the Company regularly offers "post-offs," or price discounts to distributors in most of its markets in response to local competitive conditions. Distributors and retailers usually participate in the cost of these price discounts. COMPETITION 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 competes primarily with other participants in the craft beer segment, producers of imported beers and mass-market national brewers. See "Industry Background." The number of participants and number of different products offered in this segment have increased significantly in recent years, thereby intensifying competition for the bottled product placements and especially for draft beer placements. Competition within the domestic craft beer segment is based on product quality, taste, consistency and freshness; ability to differentiate products; promotional methods and product support; transportation costs; distribution coverage, local appeal and price. A significant portion of the Company's past sales growth has been achieved through increasing sales 8 11 in the Pacific Northwest region, which the Company believes is one of the most competitive craft beer markets in the United States in terms of number of market participants and consumer awareness. Craft beers represented approximately 10% of total beer sales in Washington and Oregon during 1999. Because of the strong demand for the Company's products in this region, the Company has not historically encountered significant pricing pressures relative to those found in other regions, although regular "post-offs" are offered. In 1999, 1998 and 1997, the sales for the Company, and many of its competitors, declined in Washington State compared to 1996. The Company's Washington State 1999 sales volumes decreased 3.9% compared to 1998. As the Company expanded its distribution network outside the Pacific Northwest region, and as other craft brewers expanded their distribution to the Pacific Northwest, Redhook has encountered increasing competition from microbreweries, other regional specialty brewers such as Sierra Nevada Brewing Company and Anchor Brewing Company, as well as from contract brewers such as Pete's Brewing Company and Boston Beer Company. Although certain of these competitors distribute their products nationally and may have greater financial and other resources than the Company, management believes that the Company possesses certain competitive advantages, including its technologically-advanced, company-owned production facilities and the availability of a uniform, nation-wide distribution system. The Company also competes against producers of imported beers, such as Heineken, Molson, Modelo (Corona), Becks and Labatts. Most of these foreign brewers have significantly more financial and other resources than the Company. Although imported beers currently account for a much greater share of the U.S. beer market than craft beers, the Company believes that regional craft brewers possess certain competitive advantages over some importers, including lower transportation and no importation costs, proximity to and familiarity with local consumers, a higher degree of product freshness, eligibility for lower federal excise taxes and absence of currency fluctuations. In response to the growth of the craft beer segment, most of the major domestic brewers have introduced fuller-flavored beers. Although these product offerings are intended to compete with craft beers, many of them are brewed according to methods used by the major national brewers. The Company believes that certain of the major national brewers, with their superior financial resources, access to raw materials and established distribution networks, may seek further participation in the craft beer segment through the acquisition of equity positions in, or the formation of distribution alliances with, existing craft brewers. Although increased participation of the major national brewers will likely increase competition for market share and heighten price sensitivity within the craft beer segment, the Company believes that their participation will tend to increase advertising, distribution and consumer education and awareness of craft beers, and thus may contribute to further growth of this industry segment. REGULATION The Company's business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary to the Company's brewery and pub operations and the sale of alcoholic beverages are required from various agencies, including the U.S. Treasury Department, Bureau of Alcohol, Tobacco and Firearms (the "BATF"); the United States Department of Agriculture; the United States Food and Drug Administration; state alcohol regulatory agencies in the states in which the Company sells its products; and state and local health, sanitation, safety, fire and environmental agencies. In addition, the beer industry is subject to substantial federal excise taxes, although the Company benefits from favorable treatment granted to brewers producing less than 2 million barrels per year. Management believes that the Company currently has all licenses, permits and approvals necessary for its current operations. However, existing permits or licenses could be revoked if the Company were to fail to comply with the terms of such permits or licenses, and additional permits or licenses could in the future be required for the Company's existing or expanded operations. If licenses, permits or approvals necessary for the Company's brewery or pub operations were unavailable or unduly delayed, or if any such permits or licenses were revoked, the Company's ability to conduct its business could be substantially and adversely affected. 9 12 Alcoholic Beverage Regulation and Taxation Each of the Company's breweries and pubs is subject to licensing and regulation by a number of governmental authorities. The Company operates its breweries under federal licensing requirements imposed by the BATF. The BATF requires the filing of a "Brewer's Notice" upon the establishment of a commercial brewery. In addition, commercial brewers are required to file an amended Brewer's Notice every time there is a material change in the brewing process or brewing equipment, change in the brewery's location, change in the brewery's management or a material change in the brewery's ownership. The Company's operations are subject to audit and inspection by the BATF at any time. In addition to the regulations imposed by the BATF, the Company's breweries are subject to various regulations concerning retail sales, pub operations, deliveries and selling practices in states in which the Company sells its products. Failure by the Company to comply with applicable federal or state regulations could result in limitations on the Company's ability to conduct its business. The BATF's permits can be revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond premises, and to abide by federal alcoholic beverage production and distribution regulations, or if holders of 10% or more of the Company's equity securities are found to be of questionable character. Permits from state regulatory agencies can be revoked for many of the same reasons. The U.S. federal government currently imposes an excise tax of $18 per barrel on beer produced for consumption in the United States. However, any brewer with production under 2 million barrels per year instead pays federal excise tax in the amount of $7 per barrel on the first 60,000 barrels it produces annually. While the Company is not aware of any plans by the federal government to reduce or eliminate this benefit to small brewers, any such reduction in a material amount could have an adverse effect on the Company. In addition, the Company would lose the benefit of this rate structure if it exceeds the 2 million barrel production threshold. Individual states also impose excise taxes on alcoholic beverages in varying amounts, which have also been subject to change. It is possible that excise taxes will be increased in the future by both the federal government and several states. In addition, increased excise taxes on alcoholic beverages have in the past been considered in connection with various governmental budget-balancing or funding proposals. Any such increases in excise taxes, if enacted, could adversely affect the Company. State and Federal Environmental Regulation The Company's brewery operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, air emissions, water discharges and the handling and disposal of wastes. While the Company has no reason to believe the operations of its facilities violate any such regulation or requirement, if such a violation were to occur, the Company's business may be adversely affected. In addition, if environmental regulations were to become more stringent in the future, the Company could be adversely affected. Dram Shop Laws The serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server's being held liable to third parties for injuries caused by the intoxicated customer. The Company's pubs have addressed this concern by establishing early closing hours and employee training and designated-driver programs. Large uninsured damage awards against the Company could adversely affect the Company's financial condition. RELATIONSHIP WITH ANHEUSER-BUSCH, INCORPORATED In October 1994, the Company entered into the Alliance with A-B. The Alliance consists of a long-term national distribution agreement (the "A-B Distribution Agreement") and an investment by A-B in the Company (the "A-B Investment Agreement"). The Alliance gives the Company access to A-B's domestic network of over 700 wholesale distributors, while the Company maintains control over the production and marketing of its products. Pursuant to the A-B Investment Agreement, A-B invested approximately $30 million to purchase the Company's Series B Preferred Stock (the "Series B Preferred Stock") and 10 13 common stock of the Company ("Common Stock"), including newly-issued shares concurrent with the Company's initial public offering. A-B Distribution Agreement The A-B Distribution Agreement has a stated term of 20 years, but is subject to earlier termination (i) by either party after 10 years, (ii) by either party upon an uncured material breach by the other party of certain provisions of the Series B Preferred Stock, the A-B Investment Agreement, the A-B Distribution Agreement and certain related A-B investment documents, or upon the insolvency of the other party, (iii) by A-B upon (a) acquisition by another large alcoholic beverage competitor of 10% or greater equity ownership of the Company and a seat on the Company's Board of Directors or (b) a deterioration of the Company's financial condition that results from a change in ownership of the Company and materially adversely affects its ability to perform under the A-B Distribution Agreement, or (iv) by A-B following (a) any action by the Company that in A-B's sole determination damages the reputation or image of A-B or the brewing industry (for example, production of a high-alcohol beer, defamation of A-B or its products or contamination of the Company's products, but not poor operating results, an unsuccessful product introduction or competition with A-B's products), (b) any acquisition of, agreement to acquire, or institution of a tender or exchange offer to acquire a percentage of the Company's equity securities equal to or greater than that held by A-B, (c) certain agreements pursuant to which the Company would merge into or consolidate with another corporation or sell substantially all of its assets or certain of its trademarks, or (d) the failure to appoint a successor acceptable to A-B in the event Paul S. Shipman ceases to function as the Company's Chief Executive Officer. The term "Extraordinary Termination" refers to the termination by A-B of the A-B Distribution Agreement for any of the reasons described under clause (iv) above. A-B Investment Agreement Pursuant to the A-B Investment Agreement, A-B purchased 236,756 shares of Common Stock for $7.00 per share in October 1994 and 1,289,872 shares of Series B Preferred Stock for $12.61 per share in November 1994. A-B Preemptive Rights. Pursuant to the A-B Investment Agreement, A-B exercised its right in connection with the Company's public offering in August 1995 to purchase 716,714 shares of Common Stock at $17.00 per share in order to maintain its 25% ownership percentage of the Common Stock on a Fully Diluted Basis (as defined below). A-B has no further preemptive rights. A-B Standstill and Transfer Restrictions. Pursuant to the A-B Investment Agreement, A-B has agreed that neither it nor its affiliates will acquire any Common Stock, or any option, right or warrant to acquire, or security convertible or exchangeable into Common Stock, if such purchase or acquisition would result in A-B and its affiliates holding in the aggregate in excess of 30% (prior to November 16, 2001) of the outstanding shares of Common Stock, calculated on a Fully Diluted Basis (the "A-B Standstill"). Certain increases in A-B's beneficial ownership resulting from involuntary acquisitions or decreases in the number of outstanding shares are excluded from the A-B Standstill. The A-B Standstill terminates prior to November 16, 2001 if (i) any person unaffiliated with A-B directly or indirectly: (a) becomes a beneficial owner of, or enters into an agreement to acquire, commences a tender offer or exchange offer to acquire, or announces the intention to acquire and, in A-B's reasonable judgment, has a reasonable likelihood of acquiring as a result thereof, 30% or more of the outstanding shares of Common Stock, calculated on a Fully Diluted Basis; (b) enters into an agreement to consolidate with the Company, to have the Company merged into or with it or to enter into a share exchange with the Company (other than any merger, consolidation or share exchange in which the holders of the Company's outstanding voting securities immediately preceding such transaction will, immediately after such transaction, own capital stock possessing more than 50% of the aggregate voting power and economic rights of the outstanding capital stock of the entities surviving such transaction); or (c) enters into an agreement to acquire all or substantially all of the Company's assets or certain trademarks or trade names; (ii) the Company announces its intention to enter into any agreement described above; or (iii) at any time continuing directors (defined as directors as of 11 14 the date of the Company's initial public offering, directors subsequently elected whose nomination was approved by a majority of the continuing directors, and directors designated by A-B) cease to constitute at least a majority of the Company's Board of Directors. If the A-B Standstill is terminated but the underlying transaction giving rise to termination of the A-B Standstill does not in fact transpire, the A-B Standstill will be reinstated as if such event had not occurred if A-B has not increased its ownership above the standstill limitation in the interim. The A-B Investment Agreement further provides that, to the extent A-B's ownership exceeds the limits permitted under the A-B Standstill as the result of a rights offering while such obligations are still in effect, A-B will, in certain circumstances, take steps to divest itself of such shares no later than the later of (i) one year from the date of such purchase or acquisition and (ii) the earliest period in which such shares may be sold pursuant to Rule 144 under the Securities Act of 1933, as amended. The A-B Investment Agreement imposes further restrictions on A-B's ability to transfer Series B Preferred Stock and Common Stock, including, subject to certain exceptions (including sales of less than 3% of the outstanding Common Stock, or sales pursuant to the exercise of registration rights), a limited right of first refusal in favor of the Company on proposed sales of Common Stock by A-B, an outright prohibition of sales by A-B of more than 12.5% of the Common Stock on a Fully Diluted Basis to any single person or group, or of any Common Stock to brewers of malt beverages, and a prohibition on any sale of Series B Preferred Stock prior to an Extraordinary Termination of the A-B Distribution Agreement. A-B Board Representation. Under the A-B Investment Agreement, A-B has the right to designate a number of nominees based on its percentage ownership, but not less than two, so long as A-B holds at least 20% of the Common Stock on a Fully Diluted Basis (which number will be rounded up to the next highest whole number if not a whole number). A-B's percentage ownership on a "Fully Diluted Basis," as defined in the A-B Investment Agreement is calculated based on the assumption that all outstanding shares of Series B Preferred Stock and other convertible securities are converted into Common Stock, that all outstanding warrants and stock options (other than stock options granted to officers, directors and employees under the Company's option plans) have been exercised in full, and that all holdings of A-B and its affiliated companies are aggregated. Currently, there are no outstanding options or warrants that would be included in the calculation of outstanding shares on a Fully Diluted Basis. The Company is obligated to use reasonable efforts to cause the election of the nominees designated by A-B. If the designees are not elected, the Company is obligated to take certain remedial measures, and A-B is entitled to elect the same number of directors by class voting under the terms of the Series B Preferred Stock. A-B also has a contractual right to have one of its Board designees sit on each committee of the Company's Board of Directors. Covenants Binding the Company. The Company has agreed, pursuant to the A-B Investment Agreement, that it will not, without A-B's consent, (i) enter into any acquisition or investment transaction involving an aggregate purchase price exceeding 50% of the book value of the Company's assets prior to such transaction; (ii) enter into any transaction involving the transfer of specified trademarks or trade names or of assets representing more than 50% of the book value of the Company's assets prior to such transaction; (iii) issue or sell to any person (including A-B), or amend its capital structure to authorize the issuance of, equity securities except within certain permitted categories, including pursuant to (a) the conversion of the Series B Preferred Stock, (b) a stock split or the exercise of any outstanding option, (c) the issuance of Common Stock in an initial public offering not exceeding 25% of the Common Stock outstanding (assuming conversion of all Preferred Stock) as of the closing date for the sale of the Series B Preferred Stock to A-B, (d) other issuances not exceeding in the aggregate 20% of the shares of Common Stock and Series B Preferred Stock (as if converted) outstanding at the beginning of each two-year period commencing on January 1, 1995 and on January 1 of every second year thereafter, and (e) issuances under certain antitakeover plans; (iv) authorize or issue any shares of capital stock ranking equal or prior to the Series B Preferred Stock as to dividend or liquidation rights, or entitled to more than one vote per share or to class voting on any matter (except as required by Washington corporation law) or to ordinary voting power in the election of directors (other than Common Stock), or authorize or issue any new class or series of common shares; (v) issue or sell any equity securities to persons having revenues of $100 million or more from the production or distribution of alcoholic beverages in North and South America; (vi) afford to any other person 12 15 or group the right to designate a number of the Company's directors equal to or greater than the largest number A-B is contractually entitled to designate; (vii) enter into any transaction with any affiliate of the Company except under certain circumstances; (viii) engage in any material respect in any business other than producing and distributing beverages; (ix) enter into a merger, consolidation or share exchange with another corporation, except for transactions meeting multiple criteria (including, among others, survival of the Company and no change in control); or (x) amend its Articles or Bylaws in certain respects. These covenants, as well as A-B's contractual Board and committee representation rights, terminate upon the earliest of (i) a reduction in the ownership of A-B and its affiliates to less than the greater of (a) 610,000 shares of Common Stock (assuming conversion and exercise of all convertible securities, options and warrants and ignoring any stock split or other recapitalization) and (b) 7.5% of the Common Stock calculated on a Fully Diluted Basis, (ii) an increase in the ownership of A-B and its affiliates to more than 30% of the Common Stock calculated on a Fully Diluted Basis, (iii) an Extraordinary Termination of the A-B Distribution Agreement, (iv) termination of the A-B Distribution Agreement by Redhook on the basis of an uncured breach by, or insolvency of, A-B, and (v) termination of the A-B Distribution Agreement by either party at the end of 2004 or the expiration thereof at the end of 2014. TRADEMARKS The Company has obtained U.S. trademark registrations for the marks and corresponding logo designs for: Ballard Bitter, Blackhook, Redhook, Redhook ESB, Wheathook, Winterhook, Double Black Stout and Blueline. The Company has also obtained U.S. trademark registrations for Forecasters, Trolleyman, and Cataqua. The Redhook mark and certain other Company marks are also registered or pending in various foreign countries. The Company regards its Redhook and other trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any infringing uses that could materially affect its current business or any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company's policy is to pursue registration of its marks in its markets whenever possible and to oppose vigorously any infringement of its marks. EMPLOYEES At December 31, 1999, the Company had 196 employees, including 58 in production, 81 in the pubs, 41 in sales and marketing, and 16 in various corporate office and brewery administration positions. Of these, 2 in production, 47 in the pubs, 6 in sales and marketing, and 2 in administration are part-time employees. The Company believes its relations with its employees to be good. 13 16 ITEM 2. PROPERTIES The Company currently operates two technologically-advanced, highly automated small-batch breweries, one in the Seattle suburb of Woodinville, Washington and the other in Portsmouth, New Hampshire. See Notes 3, 4 and 10 of the Notes to Financial Statements included elsewhere herein. The Fremont Brewery. In June 1987, the Company leased the historic Fremont brewery building and hired German brewery engineers to design and install a brewery to meet its special requirements. Production began in 1989 with an annual capacity of approximately 30,000 barrels. As the result of further expansion that included construction of a kegging and warehousing facility, capacity increased in stages to approximately 75,000 barrels per year by 1993. The Company leases the brewery building, which covers approximately 26,000 square feet. The brewery building is currently occupied by the Trolleyman pub and the Company's corporate offices. The lease expires in October 2002, unless the five-year extension option is exercised. The Company owns adjacent warehousing facility and land, which covers approximately 23,000 square feet. 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 Financial Accounting Standards Board ("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 previously leased approximately 7,600 square feet of adjacent office space under a lease that originally expired in 2001. During 1998, the Company exercised its option to terminate that lease and moved its corporate offices into the Fremont Brewery building. The Woodinville Brewery. In 1993, the Company acquired approximately 22 acres (17 of which are developable) in Woodinville, Washington, a suburb of Seattle, to build a second brewery and packaging facility. The site is across the street from the Chateau Ste. Michelle Winery, next to the Columbia Winery and visible from a popular bicycle path. The Woodinville Brewery is housed in an approximately 88,000-square-foot building that currently includes a 100-barrel brewhouse, fermentation cellars, filter rooms, grain storage silos, a bottling line, dry storage, a cooler, a water pre-treatment system and loading docks. This building also includes a retail merchandise outlet and the Forecasters Public House, a 4,000 square-foot family-oriented pub that seats 200 and features an outdoor beer garden that seats an additional 200. This brewery also has a 4,000 square-foot special events room accommodating up to 250 people. The Woodinville Brewery began limited operations in September 1994 with an annual capacity of approximately 60,000 barrels. Completion of an outdoor tank farm during 1996 brought the Woodinville Brewery to its maximum designed production capacity of approximately 250,000 barrels per year. During 1997, the Company completed construction of a 40,000 square-foot keg filling, cold storage, distribution and office facility adjacent to the brewery building. The Portsmouth Brewery. In May 1995, the Company subleased approximately 23 acres in Portsmouth, New Hampshire to build a brewery and a bottling and kegging facility to supply eastern U.S. markets. The sublease expires in 2047, and contains two seven-year extension options. The Portsmouth Brewery is modeled after the Woodinville Brewery and is similarly equipped, but is larger in design, covering 125,000 square feet to accommodate all phases of the Company's brewing operations under one roof. Included is a retail merchandise outlet, the Cataqua Public House, a 4,000 square-foot family-oriented pub with an outdoor beer garden, and a special events room accommodating up to 250 people. Production began in late October 1996, with an initial capacity of approximately 100,000 barrels per year. The Company plans to phase in additional capacity as needed, up to the maximum designed production capacity of approximately 250,000 barrels per year. 14 17 ITEM 3. LEGAL PROCEEDINGS The Company believes that neither it nor its properties are currently involved in, or subject to, any pending legal proceedings, which, if determined adversely to the Company, would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY Paul S. Shipman (47) -- President, Chief Executive Officer and Chairman of the Board Mr. Shipman is one of the Company's founders and has served as its President since September 1981, Chairman of the Board since November 1992, and Chief Executive Officer since June 1993. Prior to founding the Company, Mr. Shipman was a marketing analyst for the Chateau Ste. Michelle Winery from 1978 to 1981. Mr. Shipman received his Bachelor's degree in English from Bucknell University in 1975 and his Master's degree in Business Administration from the Darden Business School, University of Virginia, in 1978. Bradley A. Berg (42) -- Executive Vice President and Chief Financial Officer Mr. Berg has served as the Company's Chief Financial Officer since December 1994. He was the Vice President and Chief Financial Officer of Holly Residential Properties, Inc., a NYSE-listed company engaged in the ownership and operation of multi-family residential properties, from February 1994 to December 1994. Mr. Berg served as Vice President and Controller of Burlington Resources Inc., a NYSE-listed natural resources holding company, from November 1989 to February 1994. Prior to joining Burlington Resources Inc., he was a Partner with the certified public accounting firm of Coopers & Lybrand. Mr. Berg received his Bachelor's degree in Accounting from the University of Northern Iowa in 1979. David J. Mickelson (40) -- Executive Vice President and Chief Operating Officer Mr. Mickelson has served in his current position since March 1995, and from April 1994 to March 1995 he was the Company's Vice President and General Manager. From July 1992 to December 1994, he served as its Chief Financial Officer, and was also named General Manager in January 1994. He served as the Company's Controller from 1987 to July 1992, and additionally was elected Treasurer in 1989. From 1985 to 1987 he was the Controller for Certified Foods, Inc. and from 1981 to 1985 served as a loan officer with Barclays Bank PLC. Mr. Mickelson received his Bachelor's degree in Business Administration from the University of Washington in 1981. Pamela J. Hinckley (46) -- Vice President, Sales and Marketing Ms. Hinckley has served in her current position since June 1996. From March 1995 to May 1996 she served as the Company's Vice President, Marketing. She served as the Company's Marketing Director from August 1992 to March 1995 and its Retail Tourism Manager from August 1988 to August 1992. From 1984 to 1988, she was the wine buyer for a Seattle-area specialty food and wine retailer and from 1982 to 1984 she was the retail and tourism manager for Stevenot Winery. Ms. Hinckley received her Bachelor's degree in Psychology from Suffolk University in 1974. Allen L. Triplett (41) -- Vice President, Brewing Mr. Triplett has served in his current position since March 1995, and from 1987 to March 1995 he was the Company's Production Manager. He has worked in virtually every facet of production since joining the Company in 1985. Mr. Triplett has taken extensive coursework at the Siebel Institute of Brewing and the University of California at Davis. He received his Bachelor's degree in Petroleum Engineering from the University of Wyoming in 1985. 15 18 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company effected its initial public offering of Common Stock on August 16, 1995, and since that date the Company's Common Stock has traded on the NASDAQ National Market. The table below sets forth, for the fiscal quarters, indicated the reported high and low sale prices of the Company's Common Stock, as reported on the NASDAQ National Market.
HIGH LOW ------ ------ 1999 First quarter.................................... $6.563 $4.500 Second quarter................................... $4.625 $3.625 Third quarter.................................... $4.094 $2.750 Fourth quarter................................... $3.375 $1.875 1998 First quarter.................................... $7.625 $4.875 Second quarter................................... $7.000 $5.500 Third quarter.................................... $6.500 $3.813 Fourth quarter................................... $5.375 $4.000
As of March 17, 2000, there were 797 recordholders of Common Stock, although the Company believes that the number of beneficial owners of its Common Stock is substantially greater. The Company has not paid any dividends, other than a one-time extraordinary dividend in 1994 from the proceeds of the sale of Series B Preferred Stock to A-B. That dividend totaled $9,071,354 ($2.00 per share) and was paid on all Series A Preferred Stock and common shares outstanding (except those owned by A-B). The Company anticipates that for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of its business and that it will not pay cash dividends. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial condition of the Company and general business conditions. Payment of dividends is also restricted by terms of the Series B Preferred Stock. 16 19 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The selected statement of operations and balance sheet data for, and as of the end of, each of the five years in the period ended December 31, 1999, are derived from the financial statements of the Company. The operating data are derived from unaudited information maintained by the Company.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) STATEMENT OF OPERATIONS DATA: Sales.................................... $35,459 $35,962 $37,894 $39,410 $28,426 Less Excise Taxes........................ 3,265 3,321 3,608 3,732 2,532 ------- ------- ------- ------- ------- Net Sales................................ 32,194 32,641 34,286 35,678 25,894 Cost of Sales............................ 22,613 23,917 25,963 23,581 16,970 ------- ------- ------- ------- ------- Gross Profit............................. 9,581 8,724 8,323 12,097 8,924 Special Valuation Provision(1)........... -- 5,173 -- -- -- Selling, General and Administrative Expenses............................... 11,290 9,086 9,981 7,853 4,606 ------- ------- ------- ------- ------- Operating Income (Loss).................. (1,709) (5,535) (1,658) 4,244 4,318 Interest Expense......................... 533 679 378 -- 24 Other Income (Expense), Net.............. (49) 127 93 615 678 ------- ------- ------- ------- ------- Income (Loss) Before Income Taxes........ (2,291) (6,087) (1,943) 4,859 4,972 Income Tax Provision (Benefit)........... (768) (2,076) (544) 1,773 1,790 ------- ------- ------- ------- ------- Net Income (Loss)........................ $(1,523) $(4,011) $(1,399) $ 3,086 $ 3,182 ======= ======= ======= ======= ======= Basic Earnings (Loss) per Share.......... $ (0.20) $ (0.52) $ (0.18) $ 0.40 $ 0.63 Diluted Earnings (Loss) per Share........ $ (0.20) $ (0.52) $ (0.18) $ 0.34 $ 0.44 OPERATING DATA (IN BARRELS): Beer Shipped............................. 197,600 202,300 214,600 224,700 158,700 Production Capacity, End of Period(2).... 350,000 350,000 425,000 425,000 245,000
DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- BALANCE SHEET DATA (IN THOUSANDS): Cash and Cash Equivalents........................ $ 5,463 $ 3,010 $ 892 $ 1,162 $24,677 Working Capital.................................. 2,635 1,666 1,338 850 21,385 Total Assets..................................... 87,707 89,528 96,769 95,124 86,638 Long-term Debt, Net of Current Portion........... 7,425 7,875 9,874 6,191 1,825 Convertible Redeemable Preferred Stock........... 16,055 16,011 15,966 15,922 15,877 Common Stockholders' Equity...................... 55,859 57,326 61,298 62,630 59,579
- --------------- (1) Represents a non-cash valuation provision to write-down Fremont production assets. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Based on the Company's estimate of normal production capacity of equipment installed as of the end of such period. Amounts do not reflect maximum designed production capacity. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto included herein. OVERVIEW Since its formation, the Company has focused its business activities on the brewing, marketing and selling of craft beers. For the year ended December 31, 1999, the Company had gross sales of $35,459,000, a decrease of 1.4% from 1998. Sales for the second half of 1999 increased 5.3% over sales in the comparable 1998 period. Those positive trends were experienced in most of the Company's regions. The Company believes that period-to-period comparisons of its financial results should not be relied upon as an accurate indicator of future performance. The Company's sales consist predominantly of sales of beer to third-party distributors and A-B through the Distribution Alliance. In addition, the Company derives other revenues from sources including 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 2.3% in 1999, compared to 1998, although in the last six months of 1999 sales volumes increased by 6.1% compared to the corresponding 1998 period. 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 and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. The Company has historically operated with little or no backlog, and its ability to predict sales for future periods is limited. Under normal circumstances, the Company generally operates its brewing facilities up to five days per week, two shifts per day. The Company increased its company-wide annual production capacity from approximately 3,000 barrels in 1982 to approximately 350,000 barrels as of December 31, 1999. Production capacity of each facility can be 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 anticipated sales in new and existing markets. The Portsmouth, New Hampshire brewery began commercial production during October 1996. The Portsmouth Brewery's current production capacity is approximately 100,000 barrels per year and its maximum designed production capacity is approximately 250,000 barrels per year. Additional capital expenditures and production personnel will be required to bring the Portsmouth Brewery to its maximum designed capacity. Upon the opening of the Portsmouth Brewery, the Company's maximum designed production capacity increased from 325,000 barrels per year to 575,000 barrels per year, prior to the 75,000 decrease related to the Fremont Brewery (see discussion below), resulting in a significant decline in the company-wide capacity utilization rate. The Company's maximum designed capacity was 500,000 barrels per year at December 31, 1999. 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, 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 FASB Statement No. 121, 18 21 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. As of December 31, 1999, the Company has sold substantially all of the equipment for an amount approximately equal to its estimated net realizable value. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Considerations: Issues and Uncertainties." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Statements of Operations expressed as a percentage of net sales.
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ Sales............................................... 110.1% 110.2% 110.5% Less Excise Taxes................................... 10.1 10.2 10.5 ------ ------ ------ Net Sales........................................... 100.0 100.0 100.0 Cost of Sales....................................... 70.2 73.3 75.7 ------ ------ ------ Gross Profit........................................ 29.8 26.7 24.3 Special Valuation Provision......................... -- 15.8 -- Selling, General and Administrative Expenses........ 35.1 27.8 29.1 ------ ------ ------ Operating Income (Loss)............................. (5.3) (16.9) (4.8) Interest Expense.................................... 1.7 2.1 1.1 Other Income (Expense) -- Net....................... (0.1) 0.4 0.2 ------ ------ ------ Income (Loss) before Income Taxes................... (7.1) (18.6) (5.7) Income Tax Provision (Benefit)...................... (2.4) (6.3) (1.6) ------ ------ ------ Net Income (Loss)................................... (4.7)% (12.3)% (4.1)% ====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Sales. Total sales decreased 1.4% to $35,459,000 in 1999, compared to $35,962,000 in 1998, as a 2.3% decrease in total sales volumes were partially offset by a slight increase in other sales and a small increase in average beer prices. Total sales volumes in 1999 decreased 2.3% to 197,600 barrels from 202,300 barrels in 1998. West Coast sales decreased 4.2% in 1999, including a 3.9% decline in Washington State, the Company's largest market. The competitive landscape has been affected by the increase in the number of craft beer companies and the number of different products they offer, as well as increased competition from imported beers. Sales other than wholesale beer sales, primarily retail pub revenues, totaled $3,743,000 in 1999, compared to $3,673,000 in 1998. At December 31, 1999 and 1998, the Company's products were distributed in 48 states. Excise Taxes. Excise taxes decreased to $3,264,000, or 10.1% of net sales in 1999, compared to $3,321,000, or 10.2% of net sales in 1998. Cost of Sales. Cost of sales decreased 5.5% to $22,613,000 in 1999, compared to $23,917,000 in 1998, primarily due to the lower sales volume, decreased packaging and other material costs, increased efficiencies and the positive effect of curtailing production at the Fremont Brewery. Cost of sales, as a percentage of net sales, decreased to 70.2% in 1999, compared to 73.3% in 1998. The combined utilization rate of maximum 19 22 designed capacity for the operating breweries was 39.5% and 39.0% for years ended December 31, 1999 and 1998, respectively. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $11,290,000 in 1999, compared to $9,086,000 in 1998 due to the advertising and promotional program which began in mid-1999. As a percentage of net sales, these expenses were 35.1% and 27.8% for years ended December 31, 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. Interest Expense. Interest expense decreased to $533,000 in 1999, compared to $679,000 in 1998, 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 $212,000 in 1999 compared to $127,000 in 1998 due to a higher average balance of interest- bearing deposits. Income Taxes. The Company's effective income tax rate was a 33.5% benefit in 1999, compared to a 34.1% benefit in 1998. The difference between the 1999 and 1998 effective rates is primarily the result of a significantly lower pre-tax loss in 1999, relative to other components of the tax provision calculation, such as the exclusion of a portion of meals and entertainment expenses from tax return deductions. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Sales. Total sales decreased 5.1% to $35,962,000 in 1998, compared to $37,894,000 in 1997, as a 5.7% decrease in total sales volumes and a small decrease in prices were partially offset by an increase in other sales. Total sales volumes in 1998 decreased 5.7% to 202,300 barrels from 214,600 barrels in 1997. West Coast sales decreased 5.5% for the same period, including a 1.4% decline in Washington State, the Company's largest market. The competitive landscape has been affected by the increase in the number of craft beer companies and the number of different products they offer, as well as increased competition from imported beers. Sales other than wholesale beer sales, primarily retail pub revenues, totaled $3,673,000 in 1998, compared to $3,406,000 in 1997. At December 31, 1998 and 1997, the Company's products were distributed in 48 states. Excise Taxes. Excise taxes decreased to $3,321,000, or 10.2% of net sales in 1998, compared to $3,608,000, or 10.5% of net sales in 1997. Cost of Sales. Cost of sales decreased 7.9% to $23,917,000 in 1998, compared to $25,963,000 in 1997, primarily due to the lower sales volume, decreased packaging costs and the positive effect of curtailing production at the Fremont Brewery, partially offset by an increase in depreciation expense related to the kegging and cold storage facility completed in June 1997. Cost of sales, as a percentage of net sales, decreased to 73.3% in 1998, compared to 75.7% in 1997. The combined utilization rate of maximum designed capacity for the operating breweries was 39.0% and 37.2% for years ended December 31, 1998 and 1997, respectively. The increase reflects the Fremont Brewery shutdown in the first half of 1998, offset partially by lower total volume. Special Valuation Provision. In the quarter ended June 30, 1998, the Fremont production assets were written down to an estimate of their net realizable value in compliance with FASB Statement No. 121. The write-down was recorded through a non-cash valuation provision totaling $5.2 million. The Company sold substantially all of these assets during 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $9,086,000 in 1998, compared to $9,981,000 in 1997 due primarily to cost saving measures that reduced sales and marketing costs. As a percentage of net sales, these expenses were 27.8% and 29.1% for years ended December 31, 1998 and 1997, respectively. 20 23 Interest Expense. Interest expense increased to $679,000 in 1998, compared to $378,000 in 1997. Substantially all interest costs incurred in the first six months of 1997 were capitalized to the Woodinville construction project that was completed in June 1997. Other Income (Expense) -- Net. Other income -- net, increased slightly to $127,000 in 1998, compared to $93,000 in 1997. The increase was due to an increase in the average balance of interest-bearing deposits in 1998. Income Taxes. The Company's effective income tax rate was a 34.1% benefit in 1998, compared to a 28.0% benefit in 1997. The difference between the 1998 and 1997 effective rates is primarily the result of a significantly lower pre-tax loss in 1997, 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 $5,463,000 and $3,010,000 of cash and cash equivalents at December 31, 1999 and 1998, respectively. At December 31, 1999, the Company had working capital of $2,635,000. 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 December 31, 1999 and 1998, respectively. Cash provided by operating activities totaled $2,857,000 and $5,035,000 in 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 December 31, 1999, there was $7.9 million outstanding on the Secured Facility, and the Company's one-month LIBOR- based borrowing rate was approximately 7.7%. 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 December 31, 1999, there were no borrowings outstanding on this facility. The Revolving Facility is secured with the same assets that are collateral for the Secured Facility. Interest accrues at a variable rate based on the London Inter Bank Offered Rate ("LIBOR"), plus 1.25% to 2.00% for the Secured Facility depending on the Company's debt-to-tangible net worth ratio. The interest rate for the Revolving Facility is the applicable LIBOR plus 1.00% to 2.00%, depending on the Company's debt service-to-cash flow ratio. The Company can fix the rate by selecting LIBOR 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 the significantly higher advertising expenditures, and 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 1999 totaled $1,141,000. Capital expenditures for 2000 are expected to total approximately $1,000,000. The Company has certain commitments, contingencies and uncertainties relating to its normal operations. Management believes that any such commitments, contingencies or uncertainties, including any environmental uncertainties, will not have a material adverse effect on the Company's financial position or results of operations. CERTAIN CONSIDERATIONS: ISSUES AND UNCERTAINTIES The Company does not provide forecasts of future financial performance or sales volumes, although this Annual Report contains certain other types of forward-looking statements that involve risks and uncertainties. The Company may, in discussions of its future plans, objectives and expected performance in periodic reports filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by the Company, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Section 21E of the Securities 21 24 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 the subsequent years, 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 may 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, the sales mix of various bottled product packages 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 1999. 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. See "Part 1, Item 1 -- Business -- Product Distribution, and Relationship With Anheuser-Busch, Incorporated" for a further description of the relationship with A-B. If the Distribution Alliance were to be terminated, or if the relationship between A-B and the Company were to deteriorate, the Company's sales and results of operations could be materially adversely affected. While the Company believes that the benefits of the Distribution Alliance, in particular distribution and material cost efficiencies, offset costs associated with the Alliance, there can be no assurance that these costs will not have a negative impact on the Company's profit margins in the future. Dependence on Third-Party Distributors. The Company relies heavily on third-party distributors for the sale of its products to retailers. The Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an A-B affiliated wholesaler in the Seattle area, accounted for approximately 17% of the Company's sales in 1999. Substantially all of the remaining sales volumes are now through the Distribution Alliance to A-B 22 25 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. Effect of Sales Trends on Brewery Efficiency and Operations. In recent years the Company's sales volumes have declined between two to five percent per year. Those declines coincided with significantly slower sales growth in the highly competitive craft beer segment. The Company's breweries have been operating at production levels substantially below their actual and maximum designed capacities. Operating breweries at low capacity utilization rates negatively impacts gross margins and operating cash flows generated by the production facilities. In 1998, the Company permanently curtailed production at its Fremont Brewery and wrote the related assets down to their estimated net realizable value. The Company will continue to evaluate whether it expects to recover the costs of its two remaining production facilities over the course of their useful lives. Impact of Year 2000. The Company previously discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed software upgrades and testing of systems. The Company experienced no significant disruptions in critical information technology and operational systems and believes those systems successfully responded to the Year 2000 date change. The Company incurred less than $75,000 of costs during 1999 in connection with upgrades and modifications of its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", to defer the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company anticipates that the adoption of this new accounting standard will not have a material impact on its financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any derivative financial instruments as of December 31, 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." 23 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REDHOOK ALE BREWERY, INCORPORATED INDEX TO FINANCIAL STATEMENTS
PAGE ---- AUDITED FINANCIAL STATEMENTS: Report of Ernst & Young LLP, Independent Auditors........... 25 Balance Sheets as of December 31, 1999 and 1998............. 26 Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997....................................... 27 Statements of Common Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.................................................. 28 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................... 29 Notes to Financial Statements............................... 30
24 27 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Redhook Ale Brewery, Incorporated We have audited the accompanying balance sheets of Redhook Ale Brewery, Incorporated as of December 31, 1999 and 1998, and the related statements of operations, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redhook Ale Brewery, Incorporated as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Seattle, Washington January 28, 2000 25 28 REDHOOK ALE BREWERY, INCORPORATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS Current Assets: Cash and Cash Equivalents................................. $ 5,462,779 $ 3,010,448 Accounts Receivable....................................... 1,174,853 1,525,708 Inventories............................................... 2,406,797 2,267,410 Income Taxes Receivable................................... -- 469,272 Other..................................................... 331,481 303,623 ----------- ----------- Total Current Assets................................... 9,375,910 7,576,461 Fixed Assets, Net........................................... 77,739,550 80,211,312 Assets Held for Sale........................................ -- 1,105,475 Other Assets................................................ 591,431 634,781 ----------- ----------- Total Assets...................................... $87,706,891 $89,528,029 =========== =========== LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable.......................................... $ 2,743,971 $ 2,231,602 Accrued Salaries, Wages and Payroll Taxes................. 1,408,552 1,451,936 Refundable Deposits....................................... 1,571,028 1,310,366 Other Accrued Expenses.................................... 567,206 466,734 Current Portion of Long-Term Debt......................... 450,000 450,000 ----------- ----------- Total Current Liabilities.............................. 6,740,757 5,910,638 ----------- ----------- Long-Term Debt, Net of Current Portion...................... 7,425,000 7,875,000 ----------- ----------- Deferred Income Taxes....................................... 1,627,067 2,405,889 ----------- ----------- Convertible Redeemable Preferred Stock...................... 16,055,055 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 Shares in 1998..................... 38,439 38,438 Additional Paid-In Capital................................ 56,989,631 56,888,633 Retained Earnings (Deficit)............................... (1,169,058) 398,776 ----------- ----------- Total Common Stockholders' Equity................. 55,859,012 57,325,847 ----------- ----------- Total Liabilities, Preferred Stock and Common Stockholders' Equity........................... $87,706,891 $89,528,029 =========== ===========
See Accompanying Notes 26 29 REDHOOK ALE BREWERY, INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Sales............................................... $35,458,710 $35,962,126 $37,894,468 Less Excise Taxes................................... 3,264,311 3,320,824 3,608,166 ----------- ----------- ----------- Net Sales........................................... 32,194,399 32,641,302 34,286,302 Cost of Sales....................................... 22,613,468 23,917,360 25,962,672 ----------- ----------- ----------- Gross Profit........................................ 9,580,931 8,723,942 8,323,630 Special Valuation Provision......................... -- 5,172,650 -- Selling, General and Administrative Expenses........ 11,290,271 9,086,312 9,981,469 ----------- ----------- ----------- Operating Income (Loss)............................. (1,709,340) (5,535,020) (1,657,839) Interest Expense.................................... 533,360 678,516 378,444 Other Income (Expense) -- Net....................... (48,192) 126,862 92,998 ----------- ----------- ----------- Income (Loss) before Income Taxes................... (2,290,892) (6,086,674) (1,943,285) Income Tax Provision (Benefit)...................... (767,458) (2,075,494) (544,319) ----------- ----------- ----------- Net Income (Loss)................................... $(1,523,434) $(4,011,180) $(1,398,966) =========== =========== =========== Basic Earnings (Loss) per Share..................... $ (0.20) $ (0.52) $ (0.18) =========== =========== =========== Diluted Earnings (Loss) per Share................... $ (0.20) $ (0.52) $ (0.18) =========== =========== ===========
See Accompanying Notes 27 30 REDHOOK ALE BREWERY, INCORPORATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ---------------------- ADDITIONAL COMMON PAID-IN RETAINED STOCKHOLDERS' SHARES PAR VALUE CAPITAL EARNINGS EQUITY --------- --------- ----------- ----------- ------------- Balance, December 31, 1996... 7,685,486 $38,428 $56,652,764 $ 5,938,659 $62,629,851 Other, Net................. 2,000 10 152,869 (85,337) 67,542 Net Loss................... -- -- -- (1,398,966) (1,398,966) --------- ------- ----------- ----------- ----------- Balance, December 31, 1997... 7,687,486 38,438 56,805,633 4,454,356 61,298,427 Other, Net................. -- -- 83,000 (44,400) 38,600 Net Loss................... -- -- -- (4,011,180) (4,011,180) --------- ------- ----------- ----------- ----------- Balance, December 31, 1998... 7,687,486 38,438 56,888,633 398,776 57,325,847 Other, Net................. 300 1 100,998 (44,400) 56,599 Net Loss................... -- -- -- (1,523,434) (1,523,434) --------- ------- ----------- ----------- ----------- Balance, December 31, 1999... 7,687,786 $38,439 $56,989,631 $(1,169,058) $55,859,012 ========= ======= =========== =========== ===========
See Accompanying Notes 28 31 REDHOOK ALE BREWERY, INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- OPERATING ACTIVITIES Net Income (Loss)................................... $(1,523,434) $(4,011,180) $(1,398,966) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization.................. 3,271,381 3,343,377 3,399,217 Deferred Income Tax Provision (Benefit)........ (778,822) (1,581,630) 404,827 Special Valuation Provision.................... -- 5,172,650 -- Loss on Disposal of Fixed Assets............... 265,415 -- -- Changes in Operating Assets and Liabilities: Accounts Receivable.......................... 350,855 62,660 463,223 Inventories.................................. (139,387) 548,372 (586,406) Income Taxes Receivable...................... 469,272 655,541 (697,738) Other Current Assets......................... (27,858) 215,892 49,099 Other Assets................................. 56,249 317,581 83,670 Accounts Payable and Other Accrued Expenses.................................. 696,054 38,380 (115,822) Accrued Salaries, Wages and Payroll Taxes.... (43,384) 128,970 102,754 Refundable Deposits.......................... 260,662 144,296 215,144 ----------- ----------- ----------- Net Cash Provided by Operating Activities........... 2,857,003 5,034,909 1,919,002 ----------- ----------- ----------- INVESTING ACTIVITIES Expenditures for Fixed Assets....................... (1,140,603) (937,419) (6,401,745) Proceeds from Sale of Assets and Other, Net......... 1,084,932 78,525 (41,800) ----------- ----------- ----------- Net Cash Used in Investing Activities............... (55,671) (858,894) (6,443,545) ----------- ----------- ----------- FINANCING ACTIVITIES Proceeds from Debt.................................. -- -- 5,350,000 Repayments on Debt.................................. (450,000) (2,140,608) (1,207,586) Officer Note Repayment and Other, Net............... 100,999 82,876 111,942 ----------- ----------- ----------- Net Cash Provided by (Used in) Financing Activities........................................ (349,001) (2,057,732) 4,254,356 ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents.... 2,452,331 2,118,283 (270,187) Cash and Cash Equivalents: Beginning of Year................................. 3,010,448 892,165 1,162,352 ----------- ----------- ----------- End of Year....................................... $ 5,462,779 $ 3,010,448 $ 892,165 =========== =========== ===========
See Accompanying Notes 29 32 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Redhook Ale Brewery, Incorporated (the "Company") was incorporated on May 4, 1981 for the purpose of brewing, marketing and selling craft beers. Its operations consist of corporate headquarters and a pub in the Fremont area of Seattle, Washington; a brewery in the Seattle suburb of Woodinville, Washington; and, a brewery in Portsmouth, New Hampshire. As of December 31, 1999, the Company's products were distributed in 48 states. In 1994, the Company signed an agreement (the "Distribution Alliance" or the "Alliance") with Anheuser-Busch, Incorporated ("A-B"), pursuant to which the Company utilizes A-B's national distribution network to distribute its products. In addition, A-B purchased 1,289,872 shares of Series B convertible redeemable preferred stock (the "Series B Preferred Stock") and 236,756 newly issued shares of common stock in connection with the Distribution Alliance. As of December 31, 1999, A-B owned 25% of the Company's voting stock. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of these instruments. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Fixed Assets Fixed assets are stated at cost. Significant additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. Upon disposition of fixed assets, any gains or losses are reflected in the statement of operations. The Company provides for depreciation and amortization using the straight-line method to recognize the costs over the following estimated useful lives: Buildings.................................... 31 - 40 years Brewery equipment............................ 20 - 25 years Leasehold improvements....................... Lesser of lease term or useful life Furniture, fixtures and other equipment...... 2 - 10 years Vehicles..................................... 5 years
Revenue Recognition The Company recognizes revenue from product sales when the products are shipped to customers. Income Taxes The Company accounts for income taxes under the liability method, whereby deferred taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. These deferred tax assets and liabilities are measured under the provisions of the currently enacted tax laws. Advertising Expenses Advertising costs, including production costs, are expensed as incurred. For the years ended December 31, 1999, 1998, and 1997, advertising expenses totaled $2,753,000, $265,000, and $147,000, respectively. 30 33 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) Segment Information The Company operates in one principal business segment as a manufacturer of beer and ales, across domestic markets. Earnings (Loss) per Share Basic net loss per share is calculated using the weighted-average number of shares of common stock outstanding. The calculation of adjusted weighted-average shares outstanding for purposes of computing diluted earnings per share includes the dilutive effect of all outstanding convertible redeemable preferred stock and outstanding stock options for the periods when the Company reports net income. The convertible preferred stock and outstanding stock options have been excluded from the calculation of diluted loss per share for the years ended December 31, 1999, 1998 and 1997, because their effect is antidilutive. The calculation uses the treasury stock method and the as if converted method in determining the resulting incremental average equivalent shares outstanding as applicable. Comprehensive Income (Loss) As of January 1, 1998, the Company has adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The Company has no items of comprehensive income (loss). Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes standards for recognition, measurement, and reporting of derivatives and hedging activities and is effective for the Company's year ending December 31, 2000. The Company anticipates that the adoption of this new accounting standard will not have a material impact on the Company's financial statements. 31 34 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES Inventories consist of the following:
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- Finished goods...................................... $1,059,460 $ 862,246 Raw materials....................................... 814,106 998,133 Promotional merchandise............................. 342,071 222,042 Packaging materials................................. 191,160 184,989 ---------- ---------- $2,406,797 $2,267,410 ========== ==========
Finished goods include beer held in fermentation prior to the filtration and packaging process. 3. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Land and improvements............................. $ 5,263,864 $ 5,172,000 Buildings......................................... 35,454,397 35,328,317 Brewery equipment................................. 44,949,789 44,773,526 Furniture, fixtures and other equipment........... 3,903,916 3,774,972 Leasehold improvements............................ 171,466 172,726 Vehicles.......................................... 136,568 136,568 Other............................................. 12,333 83,548 ----------- ----------- 89,892,333 89,441,657 Less accumulated depreciation and amortization.... 12,152,783 9,230,345 ----------- ----------- $77,739,550 $80,211,312 =========== ===========
4. SPECIAL VALUATION PROVISION 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. As of April 1998, the Company stopped depreciating these assets, thereby reducing the Company's depreciation expense for 1998 by approximately $330,000. The write-down was recorded in the statement of operations on a separate line as a Special Valuation Provision. These assets are presented as Assets Held For Sale on the balance sheet as of December 31, 1998, at their estimated net realizable value of $1.1 million. As of December 31, 1999, the Company has sold substantially all of the equipment for an amount approximately equal to its estimated net realizable value. 32 35 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) The special valuation provision and the related assets held for sale were recorded as follows: 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 ===========
5. DEBT Long-term debt consists of the following:
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- Secured Facility, payable to bank monthly at $37,500, plus accrued interest, interest at 7.7% at December 31, 1999, due 2002.................... $7,875,000 $8,325,000 Current portion..................................... (450,000) (450,000) ---------- ---------- $7,425,000 $7,875,000 ========== ==========
Annual principal payments required on long-term debt: 2000............................. $ 450,000 2001............................. 450,000 2002............................. 6,975,000 ---------- $7,875,000 ==========
In June 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 December 31, 1999, there was $7.9 million outstanding on the Secured Facility, and the Company's one-month LIBOR-based borrowing rate was approximately 7.7%. 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 December 31, 1999, there were no borrowings outstanding on this facility. The Company can elect to extend the borrowing period for advances on the Revolving Facility to five years on predetermined terms. The Company agreed to secure the Revolving Facility with the same assets that are collateral for the Secured Facility. Interest accrues at a variable rate based on the London Inter Bank Offered Rate ("LIBOR"), 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 LIBOR 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 service-to-cash flow ratio. The fair market value of the Company's variable-rate approximates its carrying value. The Secured Facility and Revolving Facility are secured by substantially all of the Company's assets. In addition, the Company was in compliance with applicable covenants including minimum debt service ratios and a minimum tangible net worth. 33 36 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company made interest payments totaling $530,000, $692,000 and $587,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest capitalized as a part of construction costs for the year ended December 31, 1997 totaled $270,000. No interest was capitalized in 1999 and 1998. Included in other assets are capitalized loan fees with a net unamortized balance of $26,000 and $17,000 at December 31, 1999 and 1998, respectively. 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK Convertible redeemable preferred stock outstanding is as follows:
DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- Series B, par value $0.005 per share, issued and outstanding 1,289,872 shares; net of unamortized offering costs.................................. $16,055,055 $16,010,655 =========== ===========
There are 10,000,000 shares of preferred stock authorized. During 1993, the Board of Directors designated 1,242,857 preferred shares as Series A Preferred Stock. In August 1993, the Company sold all such designated shares of Series A Preferred Stock to existing common shareholders, institutional investors and other qualified or accredited investors for approximately $8.7 million, or $7.00 per share. All shares of Series A Preferred Stock were automatically converted to an equal number of common shares upon the closing of the Company's initial public offering in August 1995. During 1994, the Board of Directors designated 1,289,872 preferred shares as Series B Preferred Stock. In November 1994, the Company sold all shares of Series B Preferred Stock to A-B for approximately $16.3 million, or $12.61 per share. A-B's ownership percentage of the Company is limited to 25% of the outstanding Common Stock, assuming the conversion of all outstanding Preferred Stock. That percentage limitation increases to 30% for the period November 1999 through November 2001. The Company has reserved shares of common stock to issue if these Series B Preferred Stock shares were converted to common stock. Each share of Series B Preferred Stock is entitled to as many votes as the number of shares of common stock into which it is convertible. The conversion rate is one share of common stock for each share of preferred stock, subject to antidilution adjustment under certain circumstances. The Series B Preferred Stock is convertible to common stock at any time by its holder and is subject to automatic conversion under certain circumstances on December 31, 2004 or December 31, 2014. Under the terms of the Series B Preferred Stock purchase agreement, the Company is required to meet various affirmative and negative covenants. These covenants limit the Company's ability to issue shares of its capital stock without prior approval. The holders of Series B Preferred Stock and converted Series A Preferred Stock also are entitled to certain contractual registration rights. Holders of Series B Preferred Stock generally are entitled to receive dividends at a rate equal to any dividends declared on common stock, when and if dividends are declared by the Company's Board of Directors. In addition, under certain circumstances relating to the termination of the Distribution Alliance by A-B, the Series B Preferred Stock would prospectively accumulate preferential dividends until stock redemption at a fixed annual rate based on the ten-year U.S. Treasury rate, plus 2.75%. Holders of Series B Preferred Stock also have mandatory redemption rights and liquidation preferences equal to $12.61 per share, plus any accumulated and unpaid dividends. The Company is required to redeem all shares of outstanding Series B Preferred Stock on December 31, 2004, or on December 31, 2014, under certain other conditions relating to a termination of the Distribution Alliance by A-B. 34 37 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) The difference between the issuance price, net of offering costs, of the convertible redeemable preferred stock and the redemption value is accreted through the redemption date by a charge to retained earnings of $44,000 per year. 7. COMMON STOCKHOLDERS' EQUITY Note Receivable for Stock Purchase The Company's President had an interest-bearing loan for $100,000 outstanding at December 31, 1998 related to the exercise of stock options in 1994. The loan, paid in full during 1999, was secured by Company stock held by the officer and is included as a reduction in common stockholders' equity. Principal payments received on the loan have been reflected in the Statement of Cash Flows as a financing activity and as an increase in common stockholders' equity. The note, including interest accruing at 5.9% per year, was due no later than September 30, 2001. Sale of Common Stock In August 1995, the Company completed the sale of 2,193,492 shares of common stock through an initial public offering and 716,714 common shares in a concurrent private placement to A-B (collectively, the "Offerings") at a price of $17.00 per share. The net proceeds of the Offerings totaled approximately $46 million. All of the 1,242,857 shares of Series A convertible preferred stock automatically converted to an equal number of common shares upon closing of the Offerings. Stock Option Plans In 1993, the Company's shareholders approved the 1992 Stock Incentive Plan (the "Plan") and the Directors Stock Option Plan (the "Directors Plan"). Under the Plan, as amended in May 1996, the approval provides for 1,270,000 shares of common stock for options. The approval, as amended in May 1996, also provides for 170,000 shares of common stock for options under the Directors Plan. Employee options generally vest over a five-year period and director options vest over a six-month period. Vested options are generally exercisable for ten years from the date of grant. In September 1990, the Company reserved 120,000 shares of common stock for its 1990 Incentive Stock Option Plan. Options for 120,000 shares were granted at that time with an exercise price equal to the estimated fair market value. The exercise price increased from the original price by 5% per year until full vesting occurred. These options vested over five years and are exercisable for ten years from the date of grant. Under the terms of the Company's incentive stock option plans, employees and directors may be granted options to purchase the Company's common stock at no less than 100% of the market price on the date the option is granted. At December 31, 1999, 1998 and 1997, a total of 67,821, 314,001, and 545,071 options, respectively, were available for future grants under the plans. 35 38 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which established accounting and reporting standards for stock-based employee compensation plans. Statement 123 defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. As permitted under Statement 123, the Company has elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees ("Opinion 25"). Accordingly, because the grant price equals the market price on the date of grant, no compensation expense is recognized for stock options issued to employees. Had compensation cost for the Company's stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by Statement 123, the Company's net income (loss) and earnings (loss) per share for the years ended December 31, 1999, 1998 and 1997 would have been impacted as indicated in the following table. Pursuant to the provisions of Statement 123, the pro forma results shown below only reflect the impact of options granted subsequent to 1994.
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Reported net income (loss).................. $(1,523,434) $(4,011,180) $(1,398,966) Pro forma net income (loss)................. (2,083,754) (4,570,357) (1,966,482) Reported basic and diluted earnings (loss) per share................................. $ (0.20) $ (0.52) $ (0.18) Pro forma basic and diluted earnings (loss) per share................................. $ (0.27) $ (0.59) $ (0.26)
The fair value of options granted (which is amortized to expense over the option vesting period in determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1999 1998 1997 ----- ----- ----- 5 5 5 Expected life of option yrs... yrs. yrs. Risk-free interest rate.................................... 5.25% 4.73% 6.47% Expected volatility of the Company's stock................. 50.0% 50.0% 50.0% Expected dividend yield on the Company's stock............. 0.0% 0.0% 0.0%
The weighted average estimated fair value of options granted during the years ended December 31, is as follows:
1999 1998 1997 -------- -------- ---------- Total number of options granted................... 293,950 295,950 294,500 Estimated fair value of each option granted....... $ 1.69 $ 2.97 $ 5.29 Total estimated fair value of all options granted......................................... $496,776 $878,971 $1,557,905
In accordance with Statement 123, the weighted average estimated fair value of stock options granted is required to be based on a theoretical statistical model using the preceding Black-Scholes assumptions. In actuality, because Company stock options do not trade on a secondary exchange, employees can receive no value nor derive any benefit from holding stock options under these plans without an increase, above the grant price, in the market price of the Company's stock. Such an increase in stock price would benefit all stockholders commensurately. Refer to the table below for the weighted average grant price for options granted during 1999, 1998, and 1997. 36 39 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) Presented below is a summary of stock option plans' activity for the years shown:
WEIGHTED OPTIONS WEIGHTED SHARES OF AVERAGE EXERCISABLE AVERAGE COMMON STOCK EXERCISE AT EXERCISE UNDER THE PLAN PRICE END OF YEAR PRICE -------------- -------- ----------- -------- Balance at December 31, 1996....... 589,472 291,312 $11.84 Granted.......................... 294,500 $ 9.92 Exercised........................ (2,000) 3.33 Canceled......................... (96,390) 13.84 --------- Balance at December 31, 1997....... 785,582 346,592 12.37 Granted.......................... 295,950 5.73 Exercised........................ -- -- Canceled......................... (64,880) 12.87 --------- Balance at December 31, 1998....... 1,016,652 478,872 12.39 Granted.......................... 293,950 3.97 Exercised........................ (300) 3.33 Canceled......................... (47,770) 10.22 --------- Balance at December 31, 1999....... 1,262,532 631,272 11.84 =========
The following table summarizes information for options currently outstanding and exercisable at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE - ----------------- ----------- ----------- -------- ----------- -------- $ 1.65 to $ 3.33......... 70,500 2.28 $2.92 70,500 $ 2.92 3.97 to 3.97......... 287,400 9.38 3.97 24,000 3.97 5.73 to 5.73......... 272,960 8.38 5.73 74,560 5.73 7.00 to 10.13......... 311,820 6.43 9.53 179,220 9.09 11.50 to 25.50......... 319,852 5.39 18.55 282,992 18.07 --------- ------- $ 1.65 to $25.50......... 1,262,532 7.03 $9.36 631,272 $11.84 ========= =======
The Company has reserved approximately 1.3 million shares of common stock for future issuance related to potential stock option exercises. 37 40 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) Shareholder Rights Agreement In September 1995, the Company's Board of Directors adopted a shareholder rights agreement (the "Rights Agreement"). Pursuant to the Rights Agreement, holders of common stock have certain rights to purchase common stock that are exercisable only in certain circumstances (the "Rights"). The Rights trade together with the common stock until the Distribution Date. The "Distribution Date" shall occur on the earlier of: (i) ten days following the date that the Company learns that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 20% or more of the outstanding common stock and (ii) such date as may be designated by the Company's Board following the commencement of, or announcement of an intention to make, a tender or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding common stock. Each Right will not be exercisable until the Distribution Date. If any person becomes an Acquiring Person, the Rights will entitle each holder of a Right (other than those held by an Acquiring Person (or any affiliate or associate of any Acquiring Person)) to purchase, for $120 per Right (the "Purchase Price"), that number of shares of common stock which at the time of the transaction would have a market value of twice the Purchase Price. The Rights Agreement provides certain exceptions for beneficial ownership by for up to 30% of the Company's common stock. The Rights, which are not currently exercisable, expire on September 22, 2005, but may be redeemed at any time by the Company for $0.001 per Right. 8. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per common share:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Basic and diluted earnings (loss) per share computation: Numerator: Net income (loss).............. $(1,523,434) $(4,011,180) $(1,398,966) ----------- ----------- ----------- Denominator: Weighted-average common shares....................... 7,687,687 7,687,486 7,686,510 ----------- ----------- ----------- Basic and diluted earnings (loss) per share.......... $ (0.20) $ (0.52) $ (0.18) =========== =========== ===========
38 41 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 --------- ----------- --------- Current................................ $ 11,364 $ (493,864) $(949,146) Deferred............................... (778,822) (1,581,630) 404,827 --------- ----------- --------- $(767,458) $(2,075,494) $(544,319) ========= =========== =========
The Company's effective income tax rate was 33.5%, 34.1% and 28.0% for the years ended December 31, 1999, 1998 and 1997, respectively. In 1997, the effective rate was lower than the federal statutory rate due primarily to lower pre-tax results relative to other components of the tax provision calculation, such as the exclusion of a portion of meals and entertainment expenses from tax return deductions. In 1998 and 1999, the effect of state income taxes was substantially offset by items such as the excluded deductions. Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting purposes and the bases used for income tax return purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- Deferred tax liabilities: Tax-over-book depreciation........................ $9,239,665 $7,444,840 Other............................................. 377,173 405,785 ---------- ---------- 9,616,838 7,850,625 Deferred tax assets: NOL and AMT credit carryforwards.................. 7,815,813 5,124,426 Other............................................. 173,958 320,310 ---------- ---------- 7,989,771 5,444,736 ---------- ---------- Net deferred tax liability.......................... $1,627,067 $2,405,889 ========== ==========
As of December 31, 1999, the Company had net operating loss carryforwards of $20.0 million and alternative minimum tax credit carryforwards of $184,000 which can be utilized to offset regular tax liabilities in future years. The alternative minimum tax credit carryforwards, which have no expiration date, and the tax benefit of the net operating loss carryforwards, substantially all of which expire from 2012 through 2019, are the primary components of the Company's deferred tax asset presented above. 39 42 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS In 1999, the Company had operating leases for its Fremont Brewery facility and certain office premises. During 1998, the Company exercised its option to terminate the office lease early and moved its corporate offices into the Fremont Brewery building. Terms of the brewery premises lease include annual rental payment adjustments to reflect changes in the Consumer Price Index. In 1997, the Company exercised its option to extend the lease through October 2002. The Company has an option to extend the lease for one additional five-year period In May 1995, the Company entered into an agreement to lease the land on which the New Hampshire Brewery was constructed. The initial lease period runs through April 2047 and may be extended at the Company's option for two additional seven-year terms. The sublease also provides the Company with the first right of refusal to purchase the premises should the sublessor receive an offer to sell the property to a third party. The monthly rent commenced upon the completion of the facility, and can escalate up to 5% at the end of every five-year period. Rent expense for the years ended December 31, 1999, 1998 and 1997 totaled $536,000, $862,000 and $845,000, respectively. For a portion 1998, and all of 1997, rent expense included a fee in lieu of property taxes on the New Hampshire Brewery. Minimum aggregate future lease payments under noncancelable operating leases as of December 31, 1999 are as follows: 2000............................ $ 527,498 2001............................ 527,498 2002............................ 482,262 2003............................ 256,082 2004............................ 255,163 Thereafter...................... 10,596,943 ----------- $12,645,446 ===========
The Company periodically enters into commitments to purchase certain raw materials in the normal course of business. The Company has entered into purchase commitments to ensure it has the necessary supply of hops to meet future production requirements. Those commitments are for crop years through 2003. The Company believes that hop commitments in excess of future requirements, if any, will not materially affect its financial condition or results of operations. 11. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) savings plan for employees age 21 years or older with at least six months of service. The maximum employee contribution is 15% of the participant's compensation. The Company matches 100% of each dollar contributed by a participant, with a maximum matching contribution of 4% of a participant's compensation. The Company's contributions to the plan vest at varying rates up to five years depending upon the employee's years of service and totaled $178,000, $189,000 and $197,000 in 1999, 1998 and 1997, respectively. 40 43 REDHOOK ALE BREWERY, INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. FINANCIAL INSTRUMENTS, MAJOR CUSTOMERS, AND RELATED-PARTY TRANSACTIONS Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing deposits. The Company's interest-bearing deposits are placed with major financial institutions. Wholesale distributors and A-B account for substantially all accounts receivable; therefore, this concentration risk is limited due to the number of distributors, their geographic dispersion, and state laws regulating the financial affairs of distributors of alcoholic beverages. The Company's most significant non-Alliance wholesaler, K&L Distributors, Inc., an independent A-B distributor, accounted for approximately 17% of total sales in 1999, 1998 and 1997. The sales to A-B through the Distribution Alliance represented 58%, 58% and 60% of total sales, or $20,712,000, $20,878,000 and $22,647,000 (net of an approximate 2% alliance fee), in 1999, 1998 and 1997, respectively. Additional fees incurred by the Company for A-B administrative and handling charges totaled $188,000, $183,000 and $191,000 in 1999, 1998 and 1997, respectively. The Company purchased certain materials through A-B totaling $3,999,000, $4,462,000 and $2,420,000 in 1999, 1998, and 1997, respectively. Net amount due to A-B was $415,000 and $74,000, as of December 31, 1999 and December 31, 1998, respectively. 13. INTERIM FINANCIAL DATA (UNAUDITED)
1999 QUARTER ENDED 1998 QUARTER ENDED ----------------------------------------- ----------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 ------- -------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales............................... $8,853 $9,623 $9,309 $7,675 $8,387 $9,152 $ 9,918 $8,505 Less Excise Taxes................... 803 894 866 703 740 838 933 810 ------ ------ ------ ------ ------ ------ ------- ------ Net Sales........................... 8,050 8,729 8,443 6,972 7,647 8,314 8,985 7,695 Cost of Sales....................... 5,878 5,850 5,785 5,100 5,752 5,800 6,224 6,141 ------ ------ ------ ------ ------ ------ ------- ------ Gross Profit........................ 2,172 2,879 2,658 1,872 1,895 2,514 2,761 1,554 Special Valuation Provision......... -- -- -- -- -- -- 5,173 -- Selling, General and Administrative Expenses.......................... 2,976 3,058 3,085 2,172 2,042 2,211 2,504 2,329 ------ ------ ------ ------ ------ ------ ------- ------ Operating Income (Loss)............. (804) (179) (427) (300) (147) 303 (4,916) (775) Interest Expense and Other Income, Net............................... (78) (328) (80) (95) (107) (125) (154) (166) ------ ------ ------ ------ ------ ------ ------- ------ Income (Loss) Before Taxes.......... (882) (507) (507) (395) (254) 178 (5,070) (941) Income Tax Provision (Benefit)...... (274) (177) (178) (138) (93) 29 (1,786) (226) ------ ------ ------ ------ ------ ------ ------- ------ Net Income (Loss)................... $ (608) $ (330) $ (329) $ (257) $ (161) $ 149 $(3,284) $ (715) ====== ====== ====== ====== ====== ====== ======= ====== Basic and Diluted Earnings (Loss) per Share......................... $(0.08) $(0.04) $(0.04) $(0.03) $(0.02) $ 0.02 $ (0.43) $(0.09) ====== ====== ====== ====== ====== ====== ======= ====== Barrels Shipped..................... 49.6 53.5 51.4 43.1 46.8 50.4 56.2 48.9
41 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Company's directors and executive officers is incorporated by reference from the Company's definitive proxy statement for its 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement") under the captions "Board of Directors" or "Executive Compensation." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the 2000 Proxy Statement caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2000 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference from the 2000 Proxy Statement under the caption "Certain Transactions." PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K The following documents are filed as part of this report: 1. Financial Statements and Financial Statement Schedules. See Index to Financial Statements at Item 8 on page 24 of this report. All other financial statement schedules are omitted because they were not required or the required information is included in the Financial Statements or Notes thereto. 2. Exhibit Index is included in the Form 10-K filed with Securities and Exchange Commission. 42 45 [INTENTIONALLY LEFT BLANK] 43 46 [INTENTIONALLY LEFT BLANK] 44 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on March 28, 2000. REDHOOK ALE BREWERY, INCORPORATED By: /s/ BRADLEY A. BERG ------------------------------------ Bradley A. Berg Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ PAUL S. SHIPMAN President, Chief Executive March 28, 2000 - ----------------------------------------------------- Officer and Chairman of the Paul S. Shipman Board (Principal Executive Officer) /s/ BRADLEY A. BERG Executive Vice President and March 28, 2000 - ----------------------------------------------------- Chief Financial Officer Bradley A. Berg (Principal Financial Officer) /s/ ANNE M. MUELLER Controller and Treasurer March 28, 2000 - ----------------------------------------------------- (Principal Accounting Officer) Anne M. Mueller /s/ M. COLLEEN BECKEMEYER Director March 28, 2000 - ----------------------------------------------------- M. Colleen Beckemeyer /s/ GORDON A. BOWKER Director March 28, 2000 - ----------------------------------------------------- Gordon A. Bowker /s/ JOHN T. CARLETON Director March 28, 2000 - ----------------------------------------------------- John T. Carleton /s/ FRANK H. CLEMENT Director March 28, 2000 - ----------------------------------------------------- Frank H. Clement /s/ JERRY D. JONES Director March 28, 2000 - ----------------------------------------------------- Jerry D. Jones /s/ BRUCE M. SANDISON Director March 28, 2000 - ----------------------------------------------------- Bruce M. Sandison /s/ WALTER F. WALKER Director March 28, 2000 - ----------------------------------------------------- Walter F. Walker /s/ DENNIS P. WESTON Director March 28, 2000 - ----------------------------------------------------- Dennis P. Weston
45 48 REDHOOK ALE BREWERY, INCORPORATED REPORT OF MANAGEMENT To the Stockholders and Directors of Redhook Ale Brewery, Incorporated: The accompanying financial statements have been prepared by management in conformity with generally accepted accounting principles. The fairness and integrity of these financial statements, including any judgments, estimates and selection of appropriate generally accepted accounting principles, are the responsibility of management, as is all other information presented in this Annual Report. In the opinion of management, the financial statements are fairly stated, and, to that end, the Company maintains a system of internal control which: provides reasonable assurance that transactions are recorded properly for the preparation of financial statements; safeguards assets against loss or unauthorized use; maintains accountability for assets; and requires proper authorization and accounting for all transactions. Management is responsible for the effectiveness of internal control. This is accomplished through established accounting and other control systems, policies and procedures, employee selection and training, appropriate delegation of authority and segregation of responsibilities. Our independent auditors provide an objective independent review by their audit of the Company's financial statements. Their audit is conducted in accordance with generally accepted auditing standards and includes a review of internal accounting control to the extent deemed necessary for the purposes of their audit. The Audit Committee of the Board of Directors is composed entirely of Directors who are not employees of the Company. They meet regularly with the independent auditors and management to review the work of each and to ensure that each is properly discharging its financial reporting and internal control responsibilities. To ensure complete independence, the independent auditors have full and free access to the Audit Committee to discuss the results of their audits, the adequacy of internal auditing controls and the quality of financial reporting. March 28, 2000 /s/ BRADLEY A. BERG Bradley A. Berg Executive Vice President and Chief Financial Officer /s/ ANNE M. MUELLER Anne M. Mueller Controller and Treasurer Principal Accounting Officer 46 49 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Amendment to and Second Restatement of Articles of Incorporation of Registrant dated November 15, 1994; Articles of Amendment, dated November 15, 1994; and Articles of Amendment, dated June 15, 1995(1) 3.2 Amended and Restated Bylaws of Registrant, dated April 2, 1991; Amendment to the Bylaws of Registrant, dated August 9, 1993; Amendments to Bylaws of Registrant, dated October 11, 1994(1) 10.1 Securities Purchase Agreement dated as of July 21, 1993, between the Registrant and GE Capital Redhook Investment Corp.(1) 10.2 Securities Purchase Agreement dated as of July 21, 1993, among Registrant and certain investors(1) 10.3 Amendment No. 2 dated as of October 18, 1994, to Securities Purchase Agreement dated as of July 21, 1993 (see Exhibits 10.1 and 10.2)(1) 10.4 Investment Agreement dated as of October 18, 1994, between the Registrant and Anheuser-Busch, Incorporated(1) 10.5 Registration Rights Agreement dated as of August 9, 1993, between the Registrant and Purchasers (as defined therein)(1) 10.6 Amendment No. 1 dated as of October 18, 1994, to Registration Rights Agreement dated as of August 9, 1993(1) 10.7 Registration Rights Agreement dated as of October 18, 1994, between Registrant and Anheuser-Busch, Incorporated(1) 10.8 Employment Agreement between Registrant and Paul Shipman, dated October 18, 1994(1) 10.9 Multi-Tenant Lease between the Quadrant Corporation and Registrant, dated June 1, 1987, as amended, November 5, 1987, February 1, 1988, March 29, 1988, June 27, 1988, October 27, 1988, June 18, 1991, October 1, 1991, December 22, 1992 and March 31,1993(1) 10.10 Lease Agreement between Lake Union Center Phase One Limited Partnership and Registrant, dated December 15, 1994(1) 10.11 Sublease between Pease Development Authority as Sublessor and Registrant as Sublessee, dated May 30, 1995(1) 10.12 Agreement between Owner (Registrant) and Construction Manager (Seattle Construction Services, Inc.) for Phase I of the New Brewery; Woodinville, Washington, dated May 1, 1993(1) 10.13 Agreement Between Owner (Registrant) and Construction Manager (Seattle Construction Services, Inc.) for Redhook's New Hampshire Brewery Facility, dated September 14, 1994(1) 10.14 Amended and Restated Registrant's Directors Stock Option Plan(1) 10.15 Registrant's Incentive Stock Option Plan, dated September 12, 1990(1) 10.16 1992 Stock Incentive Plan, approved October 20, 1992, as amended, October 11, 1994 and May 25, 1995(1) 10.17 New York Life Insurance Policy No. 44 939 338 for Paul Shipman, dated July 1, 1993(1) 10.18 Amended and Restated Credit Agreement between U.S. Bank of Washington, National Association and Registrant, dated June 5, 1995(1) 10.19 Loan Agreement between the City of Seattle Industrial Development Corporation and Registrant, dated November 1, 1991(1)
50
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.20 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 1, 1991, as amended, June 5, 1995(1) 10.21 Master Distributor Agreement between Registrant and Anheuser-Busch, Incorporated, dated October 18, 1994(1)(8) 10.22 Amendment No. 3 dated as of July 27, 1995, to Securities Purchase Agreement dated as of July 21, 1993 (see Exhibits 10.1 and 10.2)(1) 10.23 Amendment dated as of July 25, 1995, between the Registrant and GE Capital Redhook Investment Corp.(1) 10.24 Assignment of Sublease and Assumption Agreement dated as of July 1, 1995, between Registrant and Redhook of New Hampshire, Inc. (see Exhibit 10.11)(1) 10.25 Letter Agreement dated as of July 31, 1995, between Registrant and Anheuser-Busch, Incorporated(1) 10.26 Employment Agreement between Registrant and Bradley A. Berg, dated December 20, 1999 10.27 Employment Agreement between Registrant and David J. Mickelson, dated December 20, 1999 10.28 Employment Agreement between Registrant and Allen L Triplett, dated December 20, 1999 10.29 Employment Agreement between Registrant and Pamela J. Hinckley, dated December 20, 1999 10.30 Amendment No. 1 dated as of June 26, 1996, to Master Distribution Agreement between Registrant and Anheuser-Busch, Incorporated, dated October 18, 1994(3) 10.31 Amendment dated as of February 27, 1996, to Registrant's 1992 Stock Incentive Plan, as amended(3) 10.32 Amendment dated as of February 27, 1996, to Amended and Restated Registrant's Directors Stock Option Plan(3) 10.33 Amendment dated as of July 25, 1996, to Registrant's 1992 Stock Incentive Plan, as amended(3) 10.34 First Amendment dated as of July 25, 1996, to Amended and Restated Credit Agreement between U.S. Bank of Washington, National Association and Registrant, dated June 5, 1995(4) 10.35 Second Amendment to Amended and Restated Credit Agreement between U.S. Bank of Washington, National Association and Registrant, dated September 15, 1997(5) 10.36 Consent, Waiver and Amendment, dated September 19, 1997, to Master Distributor Agreement between Registrant and Anheuser-Busch, Incorporated, dated October 18, 1994(5) 10.37 Purchasing Agreement dated as of March 27, 1998, between and Anheuser-Busch, Incorporated(6)(8) 10.38 Third Amendment to Amended and Restated Credit Agreement between U.S. Bank of Washington, National Association and Registrant, dated February 22, 1999(7) 10.39 Amended and Restated Rights Agreement between Registrant and ChaseMellon Shareholder Services, LLC, dated as of May 12, 1999(7) 10.40 First Amendment to Employment Agreement between Registrant and Paul Shipman, dated May 6, 1999(7)
51
EXHIBIT NUMBER DESCRIPTION ------- ----------- 21.1 Subsidiaries of the Registrant(1) 23.1 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule for the year ended December 31, 1999
- --------------- (1) Incorporated by reference to same exhibit number as in the Company's Registration Statement on Form S-1, Registrant No. 33-94166. (2) Incorporated by reference to same exhibit number as in the Company's Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to same exhibit number as in the Company's Form 10-Q for the quarter ended June 30, 1996. (4) Incorporated by reference to same exhibit number as in the Company's Form 10-Q for the quarter ended September 30, 1996. (5) Incorporated by reference to same exhibit number as in the Company's Form 10-Q for the quarter ended September 30, 1997. (6) Incorporated by reference to same exhibit number as in the Company's Form 10-Q for the quarter ended March 31, 1998. (7) Incorporated by reference to same exhibit number as in the Company's Form 10-Q for the quarter ended March 31, 1999. (8) Confidential treatment has been granted for portions of this document. EX-10.26 2 EMPLOYMENT AGREEMENT WITH BRADLEY A. BERG 1 EXHIBIT 10.26 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the first day of January, 2000, between Employer, Redhook Ale Brewery, Incorporated ("Employer") and Bradley A. Berg ("Employee"). 1. Explanatory Statement a. Employer is engaged in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages and other beverages. b. Employee has specialized expertise in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages, and other beverages and is the current Executive Vice President and Chief Financial Officer of Employer. c. Employee accepts continued employment with Employer and agrees to render the services for Employer on the terms and conditions set forth in this Agreement. 2. Term of Employment. The term of this Agreement commences on January 1, 2000 and, subject to the further provisions of this Agreement, ends on December 31, 2000. 3. Employment. Employer employs Employee as Executive Vice President and Chief Financial Officer and Employee agrees to render services for and on behalf of Employer under the direction and supervision of the Chief Executive Officer. The Chairman of the Board of Directors or the Board of Directors may assign other executive duties to Employee. Employee shall provide these services professionally and competently and shall devote substantially all of Employee's business time to his services hereunder. 4. Compensation. Employer will pay Employee as compensation for services rendered under this Agreement as follows: a. a minimum base salary equal to the salary in effect at the commencement of this Agreement, in accordance with Employer's normal payroll policies; b. a performance bonus in an amount to be determined by the Compensation Committee of the Board of Directors, conditioned on Employer's reaching or exceeding year-end performance goals as those goals are specified in Employer's annual business plan, in addition to consideration of other achievements during the year. c. the same vacation, retirement, and other fringe benefits provided other executive employees of Employer. 2 d. an automobile, which may be used by Employee for personal and business use and shall pay the ordinary and reasonable expenses associated with operation of the automobile; however, Employee shall account to Employer for the personal use of the automobile which in turn shall be reported by Employer as income to Employee in accordance with the regulations of the Internal Revenue Service. If at any time the rules regarding personal use of business automobiles are changed by the Internal Revenue Service, this Agreement shall be modified to assure compliance in a manner that is as favorable to Employee as permitted by such rules. If Employer does not provide an automobile for Employee, Employee will receive a monthly car allowance in an amount to be determined by the Compensation Committee. e. The Board of Directors in its sole discretion may review Employee's compensation for upward adjustment. 5. Termination of Employment. a. Employer may at its option terminate the employment of Employee with no further obligation to compensate Employee through written notice to Employee for any of the following reasons: (1) Employee materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach; or (2) Employee is unable for any reason other than death or disability to perform the material duties of the position for longer than one hundred and eighty (180) consecutive days; or (3) Employee has engaged in conduct which in the event he were to remain employed by Employer would substantially and adversely impair the interests of Employer; or (4) Employee repeatedly refuses to obey lawful directions of Employer's Chief Executive Officer or Board of Directors. b. Employer may at its option terminate the employment of Employee through written notice to Employee for any other reason; however, in the event of such termination: (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.b., will continue to vest according to that schedule and all other unvested options/shares will be canceled; 2 3 (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.b., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of the Employee's compensation under this Section 5.b.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. c. Employee may at his option terminate his employment with Employer under this Agreement through written notice to Employer for the following reasons: (1) Employer materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach and action required to cure the breach; (2) Employer is declared bankrupt or a receiver is appointed for longer than 180 days; (3) Employer liquidates or otherwise ceases business operations; (4) Employer requires relocation of Employee's place of work outside of King County, Washington d. In the event that Employee elects to terminate his employment under Section 5.c.(1) or Section 5.c.(4): (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.d., will continue to vest according to that schedule and all other unvested options/shares will be canceled; (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.d., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of Employee's compensation under this Section 5.d.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. e. Employee's termination of employment for any other reason shall constitute a material breach of this Agreement, and shall terminate Employer's obligations under this Agreement, without limiting Employer's rights to pursue other remedies at law or in equity; and 3 4 f. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment for any reason. 6. Confidential Information and Goodwill. a. Employee will acquire knowledge of Employer's confidential information. Confidential information is information which is of a unique nature relating to the Employer's business operations, internal structure, financial affairs, programs, recipes, formulations, brewing methods, systems, procedures, manuals, confidential reports, lists of customers and prospective customers, sales and marketing methods, as well as the amount, nature and type of product, equipment and methods used and preferred by Employer's customers and the prices paid by Employer's customers or any other information which is confidential or proprietary or otherwise not available to the general public. Disclosure of this confidential information could cause substantial loss to the Employer. Employee agrees that Employee will not for any purpose disclose any confidential information obtained by Employee during employment with the Employer to any person or entity. b. Employee may have access to records of the Employer. Records are all contracts, agreements, financial books, instruments and documents, client lists, memoranda, data, reports, recipes, formulations, brewing records, tapes, rolodexes, telephone and address books, letters, research, card decks, listings, programming, and any other instruments, records or documents relating or pertaining to manufacturing or customer sales by Employer or Employee, the services rendered by Employee, or the business of the Employer. Records will remain in Employer's property. When Employee's employment terminates, Employee will return to Employer all records and will neither make nor retain any copies of any records after termination of employment. c. During the term of this Agreement and thereafter, Employee shall diligently, legally and freely perform his duties as set forth in this Agreement and shall take no action that would damage the goodwill of the Employer. During the term of this Agreement and thereafter, Employee agrees that he will not make any oral or written statement to any third party that is intended to, or does, call into question the (1) conduct, business practices or business judgment of the Employer or any of its officers, directors or business partners; or (2) quality of the Employer's products or services. 7. Restrictive Covenants. a. Employee will perform services which have a unique value to Employer which if used in competition with Employer could cause serious and irreparable harm to Employer. Employee will develop goodwill for Employer through personal contact with customers and others who have business relationships with Employer. This goodwill, which is a proprietary asset of Employer, may follow Employee after the employment with Employer terminates. Employee agrees that for a period of one (1) year following the termination of this Agreement, Employee will not, unless given prior written consent by Employer: 4 5 (1) solicit for employment or employ any other person or entity any person who is employed by Employer during the same time as Employee. Employee will not persuade or attempt to persuade any customer, supplier, distributor, retailer, person or entity which is a customer or supplier to Employer during the time of Employee's employment with Employer, to discontinue business with Employer and its affiliates or modify the terms of business between itself and Employer or its affiliates. (2) engage or act, either as a consultant, independent contractor, proprietor, stockholder, partner, employee, officer, or in any other capacity, in any business which brews, packages, markets or distributes alcoholic malt beverages in any state of the continental United States or in any foreign country where Employer brewed, packaged, marketed or distributed alcoholic malt beverages during the term of this Agreement. b. If any provision or portion of this section of the Agreement is held unreasonable, unlawful, or unenforceable by a court of competent jurisdiction, the provision will be deemed to be modified to the extent necessary for the provision to be legally enforceable to the fullest extent permitted by applicable law. Any court of competent jurisdiction may enforce any provision of this section or modify any provision in order that the provision will be enforced by the court to the fullest extent permitted by applicable law. c. Violation by Employee of the provisions of Sections 6 or 7 of this Agreement could cause irreparable injury to Employer and there is no adequate remedy at law for violation of those provisions. Employer has, in addition to other legal or equitable remedies, the right to enjoin Employee in a court of equity from violating those provisions. The cessation of Employee's compensation under Section 5 shall in no way limit the damages available to the Employer upon violation by Employee of Sections 6 or 7 of this Agreement. 8. Employee's Death or Disability. In the event that Employee dies or becomes disabled during the period that Employee is employed by Employer under this Agreement, Employer shall pay for a period of six (6) months the compensation, other than the annual performance bonus, then in effect on the date of Employee's death, or date that notice of Employee's disability is received, to Employee or to Employee's estate or legal guardian. In the event that Employee dies within one year after Employee's employment has been terminated pursuant to Section 5.b., Section 5.c.(1) or Section 5.c.(4), Employer shall continue to pay Employee's estate the compensation, other than the annual performance bonus, then in effect on the date of Employee's death until the first anniversary of the date Employee's employment terminated, whereupon Employer's obligation to pay compensation under Section 5 shall cease. In addition, the options/shares granted to the Employee that are scheduled to vest during the twelve (12) month period under Section 5.b.(2) and Section 5.d.(2) shall vest immediately and be exercisable for a period of six (6) months from the date of Employee's death. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment due to disability. 5 6 9. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand delivered and a signed receipt is given or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to: Secretary of the Board of Directors Redhook Ale Brewery, Incorporated 3400 Phinney Avenue North Seattle, Washington 98103 and if to Employee to: Bradley A. Berg 23306 SE 16th Pl. Issaquah, Washington 98029 or at any other address as either party notifies the other of in writing. 10. Miscellaneous. a. This Agreement binds and benefits Employer and its successors and assigns. This Agreement binds and benefits Employee and Employee's heirs, personal and legal representatives, and guardians. No portion of this Agreement or interest in it may be assigned by Employee. b. The terms and provisions of this Agreement may not be modified except by written instrument duly executed by Employer and Employee. c. This Agreement will be governed by and enforced and construed in accordance with the laws of the State of Washington. Venue for an action to enforce this Agreement shall be in Superior Court for King County, Washington. d. In any dispute arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. e. In the event of a breach of this Agreement, the non-breaching party may maintain an action for specific performance against the party who is alleged to have breached any of the terms of the Agreement. This subsection will not be construed to limit in any manner any other rights or remedies an aggrieved party may have by virtue of any breach of this Agreement. f. Each of the parties has the right to waive compliance with any obligation of this Agreement, but a waiver by any party of any obligation will not be deemed a waiver of compliance with any other obligation or of its right to seek redress for any breach of any obligation on any subsequent occasion, nor will any waiver be deemed effective unless in writing and signed by the party so waiving. 6 7 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement. "EMPLOYER" Redhook Ale Brewery, Incorporated By PAUL S. SHIPMAN /S/ Date: December 20, 1999 --------------------------------------- Its President & Chief Executive Officer "EMPLOYEE" By BRADLEY A. BERG /S/ Date: December 20, 1999 --------------------------------------- Bradley A. Berg 7 EX-10.27 3 EMPLOYMENT AGREEMENT WITH DAVID J. MICKELSON 1 EXHIBIT 10.27 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the first day of January, 2000, between Employer, Redhook Ale Brewery, Incorporated ("Employer") and David J. Mickelson ("Employee"). 1. Explanatory Statement a. Employer is engaged in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages and other beverages. b. Employee has specialized expertise in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages, and other beverages and is the current Executive Vice President and Chief Operating Officer of Employer. c. Employee accepts continued employment with Employer and agrees to render the services for Employer on the terms and conditions set forth in this Agreement. 2. Term of Employment. The term of this Agreement commences on January 1, 2000 and, subject to the further provisions of this Agreement, ends on December 31, 2000. 3. Employment. Employer employs Employee as Executive Vice President and Chief Operating Officer and Employee agrees to render services for and on behalf of Employer under the direction and supervision of the Chief Executive Officer. The Chairman of the Board of Directors or the Board of Directors may assign other executive duties to Employee. Employee shall provide these services professionally and competently and shall devote substantially all of Employee's business time to his services hereunder. 4. Compensation. Employer will pay Employee as compensation for services rendered under this Agreement as follows: a. a minimum base salary equal to the salary in effect at the commencement of this Agreement, in accordance with Employer's normal payroll policies; b. a performance bonus in an amount to be determined by the Compensation Committee of the Board of Directors, conditioned on Employer's reaching or exceeding year-end performance goals as those goals are specified in Employer's annual business plan, in addition to consideration of other achievements during the year. c. the same vacation, retirement, and other fringe benefits provided other executive employees of Employer. 2 d. an automobile, which may be used by Employee for personal and business use and shall pay the ordinary and reasonable expenses associated with operation of the automobile; however, Employee shall account to Employer for the personal use of the automobile which in turn shall be reported by Employer as income to Employee in accordance with the regulations of the Internal Revenue Service. If at any time the rules regarding personal use of business automobiles are changed by the Internal Revenue Service, this Agreement shall be modified to assure compliance in a manner that is as favorable to Employee as permitted by such rules. If Employer does not provide an automobile for Employee, Employee will receive a monthly car allowance in an amount to be determined by the Compensation Committee. e. The Board of Directors in its sole discretion may review Employee's compensation for upward adjustment. 5. Termination of Employment. a. Employer may at its option terminate the employment of Employee with no further obligation to compensate Employee through written notice to Employee for any of the following reasons: (1) Employee materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach; or (2) Employee is unable for any reason other than death or disability to perform the material duties of the position for longer than one hundred and eighty (180) consecutive days; or (3) Employee has engaged in conduct which in the event he were to remain employed by Employer would substantially and adversely impair the interests of Employer; or (4) Employee repeatedly refuses to obey lawful directions of Employer's Chief Executive Officer or Board of Directors. b. Employer may at its option terminate the employment of Employee through written notice to Employee for any other reason; however, in the event of such termination: (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.b., will continue to vest according to that schedule and all other unvested options/shares will be canceled; 2 3 (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.b., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of the Employee's compensation under this Section 5.b.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. c. Employee may at his option terminate his employment with Employer under this Agreement through written notice to Employer for the following reasons: (1) Employer materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach and action required to cure the breach; (2) Employer is declared bankrupt or a receiver is appointed for longer than 180 days; (3) Employer liquidates or otherwise ceases business operations; d. In the event that Employee elects to terminate his employment under Section 5.c.(1): (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.d., will continue to vest according to that schedule and all other unvested options/shares will be canceled; (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.d., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of Employee's compensation under this Section 5.d.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. e. Employee's termination of employment for any other reason shall constitute a material breach of this Agreement, and shall terminate Employer's obligations under this Agreement, without limiting Employer's rights to pursue other remedies at law or in equity; and 3 4 f. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment for any reason. 6. Confidential Information and Goodwill. a. Employee will acquire knowledge of Employer's confidential information. Confidential information is information which is of a unique nature relating to the Employer's business operations, internal structure, financial affairs, programs, recipes, formulations, brewing methods, systems, procedures, manuals, confidential reports, lists of customers and prospective customers, sales and marketing methods, as well as the amount, nature and type of product, equipment and methods used and preferred by Employer's customers and the prices paid by Employer's customers or any other information which is confidential or proprietary or otherwise not available to the general public. Disclosure of this confidential information could cause substantial loss to the Employer. Employee agrees that Employee will not for any purpose disclose any confidential information obtained by Employee during employment with the Employer to any person or entity. b. Employee may have access to records of the Employer. Records are all contracts, agreements, financial books, instruments and documents, client lists, memoranda, data, reports, recipes, formulations, brewing records, tapes, rolodexes, telephone and address books, letters, research, card decks, listings, programming, and any other instruments, records or documents relating or pertaining to manufacturing or customer sales by Employer or Employee, the services rendered by Employee, or the business of the Employer. Records will remain in Employer's property. When Employee's employment terminates, Employee will return to Employer all records and will neither make nor retain any copies of any records after termination of employment. c. During the term of this Agreement and thereafter, Employee shall diligently, legally and freely perform his duties as set forth in this Agreement and shall take no action that would damage the goodwill of the Employer. During the term of this Agreement and thereafter, Employee agrees that he will not make any oral or written statement to any third party that is intended to, or does, call into question the (1) conduct, business practices or business judgment of the Employer or any of its officers, directors or business partners; or (2) quality of the Employer's products or services. 7. Restrictive Covenants. a. Employee will perform services which have a unique value to Employer which if used in competition with Employer could cause serious and irreparable harm to Employer. Employee will develop goodwill for Employer through personal contact with customers and others who have business relationships with Employer. This goodwill, which is a proprietary asset of Employer, may follow Employee after the employment with Employer terminates. Employee agrees that for a period of one (1) year following the termination of this Agreement, Employee will not, unless given prior written consent by Employer: 4 5 (1) solicit for employment or employ any other person or entity any person who is employed by Employer during the same time as Employee. Employee will not persuade or attempt to persuade any customer, supplier, distributor, retailer, person or entity which is a customer or supplier to Employer during the time of Employee's employment with Employer, to discontinue business with Employer and its affiliates or modify the terms of business between itself and Employer or its affiliates. (2) engage or act, either as a consultant, independent contractor, proprietor, stockholder, partner, employee, officer, or in any other capacity, in any business which brews, packages, markets or distributes alcoholic malt beverages in any state of the continental United States or in any foreign country where Employer brewed, packaged, marketed or distributed alcoholic malt beverages during the term of this Agreement. b. If any provision or portion of this section of the Agreement is held unreasonable, unlawful, or unenforceable by a court of competent jurisdiction, the provision will be deemed to be modified to the extent necessary for the provision to be legally enforceable to the fullest extent permitted by applicable law. Any court of competent jurisdiction may enforce any provision of this section or modify any provision in order that the provision will be enforced by the court to the fullest extent permitted by applicable law. c. Violation by Employee of the provisions of Sections 6 or 7 of this Agreement could cause irreparable injury to Employer and there is no adequate remedy at law for violation of those provisions. Employer has, in addition to other legal or equitable remedies, the right to enjoin Employee in a court of equity from violating those provisions. The cessation of Employee's compensation under Section 5 shall in no way limit the damages available to the Employer upon violation by Employee of Sections 6 or 7 of this Agreement. 8. Employee's Death or Disability. In the event that Employee dies or becomes disabled during the period that Employee is employed by Employer under this Agreement, Employer shall pay for a period of six (6) months the compensation, other than the annual performance bonus, then in effect on the date of Employee's death, or date that notice of Employee's disability is received, to Employee or to Employee's estate or legal guardian. In the event that Employee dies within one year after Employee's employment has been terminated pursuant to Section 5.b. or Section 5.c.(1), Employer shall continue to pay Employee's estate the compensation, other than the annual performance bonus, then in effect on the date of Employee's death until the first anniversary of the date Employee's employment terminated, whereupon Employer's obligation to pay compensation under Section 5 shall cease. In addition, the options/shares granted to the Employee that are scheduled to vest during the twelve (12) month period under Section 5.b.(2) and Section 5.d.(2) shall vest immediately and be exercisable for a period of six (6) months from the date of Employee's death. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment due to disability. 5 6 9. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand delivered and a signed receipt is given or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to: Secretary of the Board of Directors Redhook Ale Brewery, Incorporated 3400 Phinney Avenue North Seattle, Washington 98103 and if to Employee to: David J. Mickelson 23912 - 24th Drive SE Bothell, Washington 98021 or at any other address as either party notifies the other of in writing. 10. Miscellaneous. a. This Agreement binds and benefits Employer and its successors and assigns. This Agreement binds and benefits Employee and Employee's heirs, personal and legal representatives, and guardians. No portion of this Agreement or interest in it may be assigned by Employee. b. The terms and provisions of this Agreement may not be modified except by written instrument duly executed by Employer and Employee. c. This Agreement will be governed by and enforced and construed in accordance with the laws of the State of Washington. Venue for an action to enforce this Agreement shall be in Superior Court for King County, Washington. d. In any dispute arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. e. In the event of a breach of this Agreement, the non-breaching party may maintain an action for specific performance against the party who is alleged to have breached any of the terms of the Agreement. This subsection will not be construed to limit in any manner any other rights or remedies an aggrieved party may have by virtue of any breach of this Agreement. f. Each of the parties has the right to waive compliance with any obligation of this Agreement, but a waiver by any party of any obligation will not be deemed a waiver of compliance with any other obligation or of its right to seek redress for any breach of any obligation on any subsequent occasion, nor will any waiver be deemed effective unless in writing and signed by the party so waiving. 6 7 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement. "EMPLOYER" Redhook Ale Brewery, Incorporated By PAUL S. SHIPMAN /S/ Date: December 20, 1999 --------------------------------------- Its President & Chief Executive Officer "EMPLOYEE" By DAVID J. MICKELSON /S/ Date: December 20, 1999 --------------------------------- David J. Mickelson 7 EX-10.28 4 EMPLOYMENT AGREEMENT WITH ALLEN L. TRIPLETT 1 EXHIBIT 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the first day of January, 2000, between Employer, Redhook Ale Brewery, Incorporated ("Employer") and Allen L. Triplett ("Employee"). 1. Explanatory Statement a. Employer is engaged in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages and other beverages. b. Employee has specialized expertise in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages, and other beverages and is the current Vice President, Brewing of Employer. c. Employee accepts continued employment with Employer and agrees to render the services for Employer on the terms and conditions set forth in this Agreement. 2. Term of Employment. The term of this Agreement commences on January 1, 2000 and, subject to the further provisions of this Agreement, ends on December 31, 2000. 3. Employment. Employer employs Employee as Vice President, Brewing and Employee agrees to render services for and on behalf of Employer under the direction and supervision of the Chief Executive Officer. The Chairman of the Board of Directors or the Board of Directors may assign other executive duties to Employee. Employee shall provide these services professionally and competently and shall devote substantially all of Employee's business time to his services hereunder. 4. Compensation. Employer will pay Employee as compensation for services rendered under this Agreement as follows: a. a minimum base salary equal to the salary in effect at the commencement of this Agreement, in accordance with Employer's normal payroll policies; b. a performance bonus in an amount to be determined by the Compensation Committee of the Board of Directors, conditioned on Employer's reaching or exceeding year-end performance goals as those goals are specified in Employer's annual business plan, in addition to consideration of other achievements during the year. c. the same vacation, retirement, and other fringe benefits provided other executive employees of Employer. 2 d. an automobile, which may be used by Employee for personal and business use and shall pay the ordinary and reasonable expenses associated with operation of the automobile; however, Employee shall account to Employer for the personal use of the automobile which in turn shall be reported by Employer as income to Employee in accordance with the regulations of the Internal Revenue Service. If at any time the rules regarding personal use of business automobiles are changed by the Internal Revenue Service, this Agreement shall be modified to assure compliance in a manner that is as favorable to Employee as permitted by such rules. If Employer does not provide an automobile for Employee, Employee will receive a monthly car allowance in an amount to be determined by the Compensation Committee. e. The Board of Directors in its sole discretion may review Employee's compensation for upward adjustment. 5. Termination of Employment. a. Employer may at its option terminate the employment of Employee with no further obligation to compensate Employee through written notice to Employee for any of the following reasons: (1) Employee materially breaches any of provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach; or (2) Employee is unable for any reason other than death or disability to perform the material duties of the position for longer than one hundred and eighty (180) consecutive days; or (3) Employee has engaged in conduct which in the event he were to remain employed by Employer would substantially and adversely impair the interests of Employer; or (4) Employee repeatedly refuses to obey lawful directions of Employer's Chief Executive Officer or Board of Directors. b. Employer may at its option terminate the employment of Employee through written notice to Employee for any other reason; however, in the event of such termination: (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.b., will continue to vest according to that schedule and all other unvested options/shares will be canceled; 2 3 (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.b., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of the Employee's compensation under this Section 5.b.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. c. Employee may at his option terminate his employment with Employer under this Agreement through written notice to Employer for the following reasons: (1) Employer materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach and action required to cure the breach; (2) Employer is declared bankrupt or a receiver is appointed for longer than 180 days; (3) Employer liquidates or otherwise ceases business operations; d. In the event that Employee elects to terminate his employment under Section 5.c.(1): (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.d., will continue to vest according to that schedule and all other unvested options/shares will be canceled; (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.d., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of Employee's compensation under this Section 5.d.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. e. Employee's termination of employment for any other reason shall constitute a material breach of this Agreement, and shall terminate Employer's obligations under this Agreement, without limiting Employer's rights to pursue other remedies at law or in equity; and 3 4 f. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment for any reason. 6. Confidential Information and Goodwill. a. Employee will acquire knowledge of Employer's confidential information. Confidential information is information which is of a unique nature relating to the Employer's business operations, internal structure, financial affairs, programs, recipes, formulations, brewing methods, systems, procedures, manuals, confidential reports, lists of customers and prospective customers, sales and marketing methods, as well as the amount, nature and type of product, equipment and methods used and preferred by Employer's customers and the prices paid by Employer's customers or any other information which is confidential or proprietary or otherwise not available to the general public. Disclosure of this confidential information could cause substantial loss to the Employer. Employee agrees that Employee will not for any purpose disclose any confidential information obtained by Employee during employment with the Employer to any person or entity. b. Employee may have access to records of the Employer. Records are all contracts, agreements, financial books, instruments and documents, client lists, memoranda, data, reports, recipes, formulations, brewing records, tapes, rolodexes, telephone and address books, letters, research, card decks, listings, programming, and any other instruments, records or documents relating or pertaining to manufacturing or customer sales by Employer or Employee, the services rendered by Employee, or the business of the Employer. Records will remain in Employer's property. When Employee's employment terminates, Employee will return to Employer all records and will neither make nor retain any copies of any records after termination of employment. c. During the term of this Agreement and thereafter, Employee shall diligently, legally and freely perform his duties as set forth in this Agreement and shall take no action that would damage the goodwill of the Employer. During the term of this Agreement and thereafter, Employee agrees that he will not make any oral or written statement to any third party that is intended to, or does, call into question the (1) conduct, business practices or business judgment of the Employer or any of its officers, directors or business partners; or (2) quality of the Employer's products or services. 7. Restrictive Covenants. a. Employee will perform services which have a unique value to Employer which if used in competition with Employer could cause serious and irreparable harm to Employer. Employee will develop goodwill for Employer through personal contact with customers and others who have business relationships with Employer. This goodwill, which is a proprietary asset of Employer, may follow Employee after the employment with Employer terminates. Employee agrees that for a period of one (1) year following the termination of this Agreement, Employee will not, unless given prior written consent by Employer: 4 5 (1) solicit for employment or employ any other person or entity any person who is employed by Employer during the same time as Employee. Employee will not persuade or attempt to persuade any customer, supplier, distributor, retailer, person or entity which is a customer or supplier to Employer during the time of Employee's employment with Employer, to discontinue business with Employer and its affiliates or modify the terms of business between itself and Employer or its affiliates. (2) engage or act, either as a consultant, independent contractor, proprietor, stockholder, partner, employee, officer, or in any other capacity, in any business which brews, packages, markets or distributes alcoholic malt beverages in any state of the continental United States or in any foreign country where Employer brewed, packaged, marketed or distributed alcoholic malt beverages during the term of this Agreement. b. If any provision or portion of this section of the Agreement is held unreasonable, unlawful, or unenforceable by a court of competent jurisdiction, the provision will be deemed to be modified to the extent necessary for the provision to be legally enforceable to the fullest extent permitted by applicable law. Any court of competent jurisdiction may enforce any provision of this section or modify any provision in order that the provision will be enforced by the court to the fullest extent permitted by applicable law. c. Violation by Employee of the provisions of Sections 6 or 7 of this Agreement could cause irreparable injury to Employer and there is no adequate remedy at law for violation of those provisions. Employer has, in addition to other legal or equitable remedies, the right to enjoin Employee in a court of equity from violating those provisions. The cessation of Employee's compensation under Section 5 shall in no way limit the damages available to the Employer upon violation by Employee of Sections 6 or 7 of this Agreement. 8. Employee's Death or Disability. In the event that Employee dies or becomes disabled during the period that Employee is employed by Employer under this Agreement, Employer shall pay for a period of six (6) months the compensation, other than the annual performance bonus, then in effect on the date of Employee's death, or date that notice of Employee's disability is received, to Employee or to Employee's estate or legal guardian. In the event that Employee dies within one year after Employee's employment has been terminated pursuant to Section 5.b. or Section 5.c.(1), Employer shall continue to pay Employee's estate the compensation, other than the annual performance bonus, then in effect on the date of Employee's death until the first anniversary of the date Employee's employment terminated, whereupon Employer's obligation to pay compensation under Section 5 shall cease. In addition, the options/shares granted to the Employee that are scheduled to vest during the twelve (12) month period under Section 5.b.(2) and Section 5.d.(2) shall vest immediately and be exercisable for a period of six (6) months from the date of Employee's death. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment due to disability. 5 6 9. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand delivered and a signed receipt is given or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to: Secretary of the Board of Directors Redhook Ale Brewery, Incorporated 3400 Phinney Avenue North Seattle, Washington 98103 and if to Employee to: Allen L. Triplett 902 W. Fulton Seattle, Washington 98119 or at any other address as either party notifies the other of in writing. 10. Miscellaneous. a. This Agreement binds and benefits Employer and its successors and assigns. This Agreement binds and benefits Employee and Employee's heirs, personal and legal representatives, and guardians. No portion of this Agreement or interest in it may be assigned by Employee. b. The terms and provisions of this Agreement may not be modified except by written instrument duly executed by Employer and Employee. c. This Agreement will be governed by and enforced and construed in accordance with the laws of the State of Washington. Venue for an action to enforce this Agreement shall be in Superior Court for King County, Washington. d. In any dispute arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. e. In the event of a breach of this Agreement, the non-breaching party may maintain an action for specific performance against the party who is alleged to have breached any of the terms of the Agreement. This subsection will not be construed to limit in any manner any other rights or remedies an aggrieved party may have by virtue of any breach of this Agreement. f. Each of the parties has the right to waive compliance with any obligation of this Agreement, but a waiver by any party of any obligation will not be deemed a waiver of compliance with any other obligation or of its right to seek redress for any breach of any obligation on any subsequent occasion, nor will any waiver be deemed effective unless in writing and signed by the party so waiving. 6 7 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement. "EMPLOYER" Redhook Ale Brewery, Incorporated By PAUL S. SHIPMAN /S/ Date: December 20, 1999 --------------------------------------- Its President & Chief Executive Officer "EMPLOYEE" By ALLEN L. TRIPLETT Date: December 20, 1999 ---------------------------------------- Allen L. Triplett 7 EX-10.29 5 EMPLOYMENT AGREEMENT WITH PAMELA J. HINCKLEY 1 EXHIBIT 10.29 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the first day of January, 2000, between Employer, Redhook Ale Brewery, Incorporated ("Employer") and Pamela J. Hinckley ("Employee"). 1. Explanatory Statement a. Employer is engaged in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages and other beverages. b. Employee has specialized expertise in the business of brewing, packaging, marketing, and distributing alcoholic malt beverages, and other beverages and is the current Vice President, Sales and Marketing of Employer. c. Employee accepts continued employment with Employer and agrees to render the services for Employer on the terms and conditions set forth in this Agreement. 2. Term of Employment. The term of this Agreement commences on January 1, 2000 and, subject to the further provisions of this Agreement, ends on December 31, 2000. 3. Employment. Employer employs Employee as Vice President, Sales and Marketing and Employee agrees to render services for and on behalf of Employer under the direction and supervision of the Chief Executive Officer. The Chairman of the Board of Directors or the Board of Directors may assign other executive duties to Employee. Employee shall provide these services professionally and competently and shall devote substantially all of Employee's business time to her services hereunder. 4. Compensation. Employer will pay Employee as compensation for services rendered under this Agreement as follows: a. a minimum base salary equal to the salary in effect at the commencement of this Agreement, in accordance with Employer's normal payroll policies; b. a performance bonus in an amount to be determined by the Compensation Committee of the Board of Directors, conditioned on Employer's reaching or exceeding year-end performance goals as those goals are specified in Employer's annual business plan, in addition to consideration of other achievements during the year. c. the same vacation, retirement, and other fringe benefits provided other executive employees of Employer. 2 d. an automobile, which may be used by Employee for personal and business use and shall pay the ordinary and reasonable expenses associated with operation of the automobile; however, Employee shall account to Employer for the personal use of the automobile which in turn shall be reported by Employer as income to Employee in accordance with the regulations of the Internal Revenue Service. If at any time the rules regarding personal use of business automobiles are changed by the Internal Revenue Service, this Agreement shall be modified to assure compliance in a manner that is as favorable to Employee as permitted by such rules. If Employer does not provide an automobile for Employee, Employee will receive a monthly car allowance in an amount to be determined by the Compensation Committee. e. The Board of Directors in its sole discretion may review Employee's compensation for upward adjustment. 5. Termination of Employment. a. Employer may at its option terminate the employment of Employee with no further obligation to compensate Employee through written notice to Employee for any of the following reasons: (1) Employee materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach; or (2) Employee is unable for any reason other than death or disability to perform the material duties of the position for longer than one hundred and eighty (180) consecutive days; or (3) Employee has engaged in conduct which in the event he were to remain employed by Employer would substantially and adversely impair the interests of Employer; or (4) Employee repeatedly refuses to obey lawful directions of Employer's Chief Executive Officer or Board of Directors. b. Employer may at its option terminate the employment of Employee through written notice to Employee for any other reason; however, in the event of such termination: (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.b., will continue to vest according to that schedule and all other unvested options/shares will be canceled; 2 3 (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.b., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of the Employee's compensation under this Section 5.b.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. c. Employee may at her option terminate her employment with Employer under this Agreement through written notice to Employer for the following reasons: (1) Employer materially breaches any of the provisions of this Agreement and fails to cure the breach within thirty (30) days after receiving specific written notice of the breach and action required to cure the breach; (2) Employer is declared bankrupt or a receiver is appointed for longer than 180 days; (3) Employer liquidates or otherwise ceases business operations; d. In the event that Employee elects to terminate her employment under Section 5.c.(1): (1) Employer shall continue to pay Employee for one (1) additional year the compensation, other than the annual performance bonus, then in effect on the date that notice of termination is received; (2) All outstanding unvested options/shares granted to the Employee that are scheduled to vest within one (1) year from the date that notice of termination is received under this Section 5.d., will continue to vest according to that schedule and all other unvested options/shares will be canceled; (3) If Employee violates Sections 6 or 7 of this Agreement, Employer's obligation to continue to pay Employee's compensation, as described in this Section 5.d., shall immediately terminate, and the Employer will have no further obligation to Employee pursuant to this Agreement, provided that the cessation of Employee's compensation under this Section 5.d.(3) shall not limit Employer's rights to pursue other remedies at law or in equity. e. Employee's termination of employment for any other reason shall constitute a material breach of this Agreement, and shall terminate Employer's obligations under this Agreement, without limiting Employer's rights to pursue other remedies at law or in equity; and 3 4 f. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment for any reason. 6. Confidential Information and Goodwill. a. Employee will acquire knowledge of Employer's confidential information. Confidential information is information which is of a unique nature relating to the Employer's business operations, internal structure, financial affairs, programs, recipes, formulations, brewing methods, systems, procedures, manuals, confidential reports, lists of customers and prospective customers, sales and marketing methods, as well as the amount, nature and type of product, equipment and methods used and preferred by Employer's customers and the prices paid by Employer's customers or any other information which is confidential or proprietary or otherwise not available to the general public. Disclosure of this confidential information could cause substantial loss to the Employer. Employee agrees that Employee will not for any purpose disclose any confidential information obtained by Employee during employment with the Employer to any person or entity. b. Employee may have access to records of the Employer. Records are all contracts, agreements, financial books, instruments and documents, client lists, memoranda, data, reports, recipes, formulations, brewing records, tapes, rolodexes, telephone and address books, letters, research, card decks, listings, programming, and any other instruments, records or documents relating or pertaining to manufacturing or customer sales by Employer or Employee, the services rendered by Employee, or the business of the Employer. Records will remain in Employer's property. When Employee's employment terminates, Employee will return to Employer all records and will neither make nor retain any copies of any records after termination of employment. c. During the term of this Agreement and thereafter, Employee shall diligently, legally and freely perform her duties as set forth in this Agreement and shall take no action that would damage the goodwill of the Employer. During the term of this Agreement and thereafter, Employee agrees that he will not make any oral or written statement to any third party that is intended to, or does, call into question the (1) conduct, business practices or business judgment of the Employer or any of its officers, directors or business partners; or (2) quality of the Employer's products or services. 7. Restrictive Covenants. a. Employee will perform services which have a unique value to Employer which if used in competition with Employer could cause serious and irreparable harm to Employer. Employee will develop goodwill for Employer through personal contact with customers and others who have business relationships with Employer. This goodwill, which is a proprietary asset of Employer, may follow Employee after the employment with Employer terminates. Employee agrees that for a period of one (1) year following the termination of this Agreement, Employee will not, unless given prior written consent by Employer: 4 5 (1) solicit for employment or employ any other person or entity any person who is employed by Employer during the same time as Employee. Employee will not persuade or attempt to persuade any customer, supplier, distributor, retailer, person or entity which is a customer or supplier to Employer during the time of Employee's employment with Employer, to discontinue business with Employer and its affiliates or modify the terms of business between itself and Employer or its affiliates. (2) engage or act, either as a consultant, independent contractor, proprietor, stockholder, partner, employee, officer, or in any other capacity, in any business which brews, packages, markets or distributes alcoholic malt beverages in any state of the continental United States or in any foreign country where Employer brewed, packaged, marketed or distributed alcoholic malt beverages during the term of this Agreement. b. If any provision or portion of this section of the Agreement is held unreasonable, unlawful, or unenforceable by a court of competent jurisdiction, the provision will be deemed to be modified to the extent necessary for the provision to be legally enforceable to the fullest extent permitted by applicable law. Any court of competent jurisdiction may enforce any provision of this section or modify any provision in order that the provision will be enforced by the court to the fullest extent permitted by applicable law. c. Violation by Employee of the provisions of Sections 6 or 7 of this Agreement could cause irreparable injury to Employer and there is no adequate remedy at law for violation of those provisions. Employer has, in addition to other legal or equitable remedies, the right to enjoin Employee in a court of equity from violating those provisions. The cessation of Employee's compensation under Section 5 shall in no way limit the damages available to the Employer upon violation by Employee of Sections 6 or 7 of this Agreement. 8. Employee's Death or Disability. In the event that Employee dies or becomes disabled during the period that Employee is employed by Employer under this Agreement, Employer shall pay for a period of six (6) months the compensation, other than the annual performance bonus, then in effect on the date of Employee's death, or date that notice of Employee's disability is received, to Employee or to Employee's estate or legal guardian. In the event that Employee dies within one year after Employee's employment has been terminated pursuant to Section 5.b. or Section 5.c.(1), Employer shall continue to pay Employee's estate the compensation, other than the annual performance bonus, then in effect on the date of Employee's death until the first anniversary of the date Employee's employment terminated, whereupon Employer's obligation to pay compensation under Section 5 shall cease. In addition, the options/shares granted to the Employee that are scheduled to vest during the twelve (12) month period under Section 5.b.(2) and Section 5.d.(2) shall vest immediately and be exercisable for a period of six (6) months from the date of Employee's death. Employee shall continue to be subject to the restrictions in Sections 6 and 7 of this Agreement following termination of employment due to disability. 5 6 9. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand delivered and a signed receipt is given or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to: Secretary of the Board of Directors Redhook Ale Brewery, Incorporated 3400 Phinney Avenue North Seattle, Washington 98103 and if to Employee to: Pamela J. Hinckley 6722 - 16th Avenue NW Seattle, Washington 98117 or at any other address as either party notifies the other of in writing. 10. Miscellaneous. a. This Agreement binds and benefits Employer and its successors and assigns. This Agreement binds and benefits Employee and Employee's heirs, personal and legal representatives, and guardians. No portion of this Agreement or interest in it may be assigned by Employee. b. The terms and provisions of this Agreement may not be modified except by written instrument duly executed by Employer and Employee. c. This Agreement will be governed by and enforced and construed in accordance with the laws of the State of Washington. Venue for an action to enforce this Agreement shall be in Superior Court for King County, Washington. d. In any dispute arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. e. In the event of a breach of this Agreement, the non-breaching party may maintain an action for specific performance against the party who is alleged to have breached any of the terms of the Agreement. This subsection will not be construed to limit in any manner any other rights or remedies an aggrieved party may have by virtue of any breach of this Agreement. f. Each of the parties has the right to waive compliance with any obligation of this Agreement, but a waiver by any party of any obligation will not be deemed a waiver of compliance with any other obligation or of its right to seek redress for any breach of any obligation on any subsequent occasion, nor will any waiver be deemed effective unless in writing and signed by the party so waiving. 6 7 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement. "EMPLOYER" Redhook Ale Brewery, Incorporated By PAUL S. SHIPMAN /S/ Date: December 20, 1999 --------------------------------------- Its President & Chief Executive Officer "EMPLOYEE" By PAMELA J. HINCKLEY /S/ Date: December 20, 1999 --------------------------------------- Pamela J. Hinckley 7 EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the 1992 Stock Incentive Plan, as amended, and the Amended and Restated Directors Stock Option Plan of Redhook Ale Brewery, Incorporated of our report dated January 28, 2000 with respect to the financial statements of Redhook Ale Brewery, Incorporated included in the Annual Report (Form 10-K) for the year ended December 31, 1999. ERNST & YOUNG LLP Seattle, Washington March 24, 2000 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 5,462,779 0 1,184,853 10,000 2,406,797 9,375,910 89,892,333 12,152,783 87,706,891 6,740,757 7,425,000 16,055,055 0 38,439 55,820,573 87,706,891 32,194,399 32,194,399 22,613,468 33,903,739 48,192 0 533,360 (2,290,892) (767,458) (1,523,434) 0 0 0 (1,523,434) (0.20) (0.20) Sales and Total Revenues are net of federal and state excise taxes. Includes a $260,000 non-cash loss related to a key exchange.
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