-----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, PRRo8lWVFXgCe/r2yaOogcgJD5qsGYk1GzsZPH59kR+j4SGgIB5zl09K5LJ/PGQ7 RIh/ezY9XR4erg3hK2qsZQ== 0000891020-97-001056.txt : 19970811 0000891020-97-001056.hdr.sgml : 19970811 ACCESSION NUMBER: 0000891020-97-001056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970808 SROS: NASD 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26542 FILM NUMBER: 97653501 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-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 0-26542 --------------------------- REDHOOK ALE BREWERY, INCORPORATED (Exact name of registrant as specified in its charter) WASHINGTON 91-1141254 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3400 PHINNEY AVENUE NORTH, SEATTLE, WASHINGTON 98103-8624 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 548-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common stock, par value $.005 per share: 7,686,686 shares outstanding as of June 30, 1997. Page 1 of 14 sequentially numbered pages ================================================================================ 2 REDHOOK ALE BREWERY, INCORPORATED FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Balance Sheets June 30, 1997 and December 31, 1996..................... 3 Statements of Income Three Months Ended June 30, 1997 and 1996 and Six Months Ended June 30, 1997 and 1996............. 4 Condensed Statements of Cash Flows Six Months Ended June 30, 1997 and 1996................. 5 Notes to Financial Statements.................................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 7 PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders.................. 12 ITEM 6. Exhibits and Reports on Form 8-K..................................... 13
2 3 PART I. ITEM 1. FINANCIAL STATEMENTS REDHOOK ALE BREWERY, INCORPORATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1997 1996 ----------- ----------- (Unaudited) ASSETS Current Assets: Cash and Cash Equivalents ........................................ $ 2,048,230 $ 1,162,352 Accounts Receivable .............................................. 1,994,349 2,051,591 Inventories ...................................................... 2,579,868 2,229,376 Income Taxes Receivable .......................................... 513,445 427,075 Other ............................................................ 589,591 1,725,942 ----------- ----------- Total Current Assets ........................................... 7,725,483 7,596,336 Fixed Assets, Net .................................................. 89,154,881 86,357,559 Other Assets ....................................................... 1,102,534 1,170,144 ----------- ----------- Total Assets ................................................. $97,982,898 $95,124,039 =========== =========== LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable ................................................. $ 2,773,768 $ 4,075,699 Accrued Salaries, Wages, and Payroll Taxes ....................... 1,164,696 1,220,212 Refundable Deposits .............................................. 1,095,439 950,926 Other Accrued Expenses ........................................... 371,162 367,025 Current Portion of Long-Term Debt ................................ 587,094 132,554 ----------- ----------- Total Current Liabilities ...................................... 5,992,159 6,746,416 ----------- ----------- Long-Term Debt, Net of Current Portion ............................. 10,170,874 6,190,764 ----------- ----------- Deferred Income Taxes .............................................. 3,638,896 3,582,692 ----------- ----------- Other Liabilities .................................................. 46,070 52,461 ----------- ----------- Convertible Redeemable Preferred Stock ............................. 15,944,055 15,921,855 ----------- ----------- Common Stockholders' Equity: Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000 Shares; Issued and Outstanding, 7,686,686 Shares in 1997 and 7,685,486 Shares in 1996........................................ 38,434 38,428 Additional Paid-In Capital ....................................... 56,652,973 56,652,764 Retained Earnings ................................................ 5,499,437 5,938,659 ----------- ----------- Total Common Stockholders' Equity ............................ 62,190,844 62,629,851 ----------- ----------- Total Liabilities, Preferred Stock and Common Stockholders' Equity .............................. $97,982,898 $95,124,039 =========== ===========
See Accompanying Notes 3 4 REDHOOK ALE BREWERY, INCORPORATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ----------------------------- 1997 1996 1997 1996 ---------- ----------- ------------ ----------- Sales ...................................... $9,976,073 $10,302,381 $ 18,844,283 $18,857,226 Less Excise Taxes .......................... 974,584 992,077 1,848,940 1,825,816 ---------- ----------- ------------ ----------- Net Sales .................................. 9,001,489 9,310,304 16,995,343 17,031,410 Cost of Sales .............................. 6,354,498 5,797,721 12,726,380 10,852,782 ---------- ----------- ------------ ----------- Gross Profit ............................... 2,646,991 3,512,583 4,268,963 6,178,628 Selling, General and Administrative Expenses ................................. 2,518,020 1,862,108 4,939,162 3,394,274 ---------- ----------- ------------ ----------- Operating Income (Loss) .................... 128,971 1,650,475 (670,199) 2,784,354 Interest Expense ........................... 5,782 -- 5,782 -- Other Income - Net ......................... 19,234 188,490 37,545 445,996 ---------- ----------- ------------ ----------- Income (Loss) before Income Taxes ......... 142,423 1,838,965 (638,436) 3,230,350 Provision (Benefit) for Income Taxes ....... 71,408 671,223 (221,414) 1,179,078 ---------- ----------- ------------ ----------- Net Income (Loss) .......................... $ 71,015 $ 1,167,742 $ (417,022) $ 2,051,272 ========== =========== ============ =========== Net Income (Loss) per Share ................ $ 0.01 $ 0.13 $ (0.05) $ 0.22 ========== =========== ============ =========== Weighted Average Common and Common Equivalent Shares Outstanding ............ 9,010,991 9,158,239 7,686,019 9,159,485 ========== =========== ============ ===========
See Accompanying Notes 4 5 REDHOOK ALE BREWERY, INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, ----------------------------- 1997 1996 ----------- ------------ OPERATING ACTIVITIES Net Income (Loss) .................................... $ (417,022) $ 2,051,272 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization .................... 1,614,071 858,275 Deferred Income Tax Provision .................... 56,204 563,814 Net Change in Operating Assets and Liabilities ... (50,353) (918,793) ----------- ------------ Net Cash Provided by Operating Activities ............ 1,202,900 2,554,568 ----------- ------------ INVESTING ACTIVITIES Expenditures for Fixed Assets ........................ (4,724,609) (19,339,488) Other ................................................ (27,278) (13,461) ----------- ------------ Net Cash Used in Investing Activities ................ (4,751,887) (19,352,949) ----------- ------------ FINANCING ACTIVITIES Proceeds from Debt ................................... 5,350,000 11,500,000 Repayments on Debt .................................. (915,350) (11,560,805) Other ................................................ 215 13,875 ----------- ------------ Net Cash Provided by (Used in) Financing Activities .. 4,434,865 (46,930) ----------- ------------ Increase (Decrease) in Cash and Cash Equivalents ..... 885,878 (16,845,311) Cash and Cash Equivalents: Beginning of Year .................................. 1,162,352 24,676,600 ----------- ------------ End of Period ...................................... $ 2,048,230 $ 7,831,289 =========== ============
See Accompanying Notes 5 6 1. BASIS OF PRESENTATION The accompanying financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K. The accompanying financial statements include the accounts of Redhook Ale Brewery, Incorporated (the "Company") and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements are unaudited, condensed and do not contain all of the information required by generally accepted accounting principles to be included in a full set of financial statements. In the opinion of management, all material adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company, for the periods presented, have been made. All such adjustments were of a normal, recurring nature. The results of operations for such interim periods are not necessarily indicative of the results of operations for the full year. 2. EARNINGS PER SHARE Earnings per share is based on the weighted average common and common equivalent shares outstanding during the respective periods. The calculation of average common equivalent shares outstanding includes the effect of all outstanding convertible redeemable preferred stock and outstanding stock options for the quarters ended June 30, 1997 and 1996 and the six-month period ended June 30, 1996. The convertible preferred stock and outstanding stock options have been excluded from the calculation for the six-month period ended June 30, 1997 because their effect is anti-dilutive. The calculation uses the treasury stock method in determining the resulting incremental common equivalent shares outstanding. 3. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 1997 1996 ---------- ---------- Finished goods ......................... $1,377,972 $1,264,480 Raw materials .......................... 515,618 282,603 Promotional merchandise................. 393,469 511,089 Packaging materials .................... 292,809 171,204 ---------- ---------- $2,579,868 $2,229,376 ========== ==========
Finished goods include beer held in fermentation prior to the filtration and packaging process. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Financial Statements and Notes thereto included herein. OVERVIEW Since its formation, the Company has focused its business activities on the brewing, marketing and selling of craft beers. For the six months ended June 30, 1997, the Company had gross sales of $18,844,000 compared to $18,857,000 in the comparable period of 1996. The Company believes that period-to-period comparisons of its financial results should not be relied upon as an accurate indicator of future performance. The Company's sales consist predominantly of sales of beer to third-party distributors and Anheuser-Busch, Inc. ("A-B") through the Distribution Alliance. In addition, the Company derives other revenues from the sale of beer, food, apparel and other retail items in its brewery pubs. The Company is required to pay federal excise taxes on sales of its beer. The excise tax burden on beer sales increases from $7 to $18 per barrel on annual production over 60,000 barrels and thus, if sales volumes increase, federal excise taxes would increase as a percentage of sales. The Company's sales growth slowed significantly in late 1996 and that trend has continued into 1997. In addition to the level of consumer demand in existing markets, the Company's sales are also affected by other factors such as the opening of new distribution territories, new product introductions and competitive considerations, including the increasing number of craft brewers and promotional pricing. Sales in the craft beer industry generally reflect a degree of seasonality, with the first quarter historically being the weakest and the second half of the year typically demonstrating stronger sales in connection with summer activities and fall and early winter holidays. The Company has historically operated with little or no backlog, and its ability to predict sales for future periods is limited. Under normal circumstances, the Company generally operates its brewing facilities up to five days per week, two shifts per day. To meet the demand for its products, the Company increased its annual production capacity, from approximately 3,000 barrels at its first brewery in the Ballard neighborhood of Seattle in 1982 to approximately 425,000 barrels as of June 30, 1997. Production capacity of each facility is added in phases until the facility reaches its maximum designed production capacity. The timing of each phase is affected by the availability of capital, construction constraints and the Company's plans for an orderly entry into selected new markets and growth in existing markets. The Portsmouth, New Hampshire Brewery began commercial production during October 1996. The Portsmouth Brewery's initial production capacity is approximately 100,000 barrels per year and its maximum designed production capacity is approximately 250,000 barrels per year. Additional capital expenditures and production personnel will be required to bring the Portsmouth Brewery to its maximum designed capacity. Upon the opening of the Portsmouth Brewery, the Company's maximum designed production capacity increased from 325,000 barrels per year to 575,000 barrels per year, resulting in a significant decline in the capacity utilization rate. The Company's capacity utilization has a significant impact on its gross profit. When facilities are operating at their maximum designed production capacity, 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 initial production level is substantially below the facility's maximum designed production capacity, gross margins are negatively impacted. This impact is reduced as the facility's actual production increases. In addition to capacity utilization, the Company expects other factors to influence profit margins, including higher costs associated with the opening of new distribution territories, such as increased shipping, marketing and sales personnel costs; fees related to the distribution agreement with A-B; changes in packaging and other material costs; and changes in product sales mix. The incremental cost of shipping beer from the Company's breweries will increase as the volume of beer supplied to more distant markets increases. The commencement of production at the Portsmouth Brewery has reduced shipping expenses to eastern U.S. markets. 7 8 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 Income expressed as a percentage of net sales.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------- ----------------- 1997 1996 1997 1996 ------ ----- ----- ------- Sales ...................................... 110.8% 110.7.% 110.9% 110.7% Less Excise Taxes .......................... 10.8 10.7 10.9 10.7 ----- ----- ----- ------- Net Sales .................................. 100.0 100.0 100.0 100.0 Cost of Sales .............................. 70.6 62.3 74.9 63.7 ----- ----- ----- ------- Gross Profit ............................... 29.4 37.7 25.1 36.3 Selling, General and Administrative Expenses ................................. 28.0 20.0 29.1 19.9 ----- ----- ----- ------- Operating Income (Loss) .................... 1.4 17.7 (4.0) 16.4 Other Income - Net ......................... 0.2 2.0 0.2 2.6 ----- ----- ----- ------- Income (Loss) Before Income Taxes .......... 1.6 19.7 (3.8) 19.0 Provision (Benefit) for Income Taxes ....... 0.8 7.2 (1.3) 7.0 ----- ----- ----- ------- Net Income (Loss) .......................... 0.8% 12.5% (2.5)% 12.0% ===== ===== ===== =======
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 Sales. Total sales decreased by 3.2% to $9,976,000 in the second quarter of 1997 from $10,302,000 in the comparable 1996 period, primarily due to a 4.9% decrease in total sales volumes to 56,400 barrels from 59,300 barrels, that was partially offset by an increase in other sales. At June 30, 1997, the Company was selling beer in 47 states compared to 44 states at June 30, 1996. The total second quarter sales volume decline included a 4.8% decrease in West Coast sales. Washington state, the Company's largest market, declined 3.5% in the second quarter of 1997 compared to the second quarter of 1996. The competitive landscape has been affected by the continued increase in the number of craft beer companies and the number of different products they offer. The Company's other sales totaled $882,000 for the second quarter of 1997, compared to $803,000 for the same period in 1996. Excise Taxes. Excise taxes decreased to $975,000, or 10.8% of net sales in the second quarter of 1997, from $992,000, or 10.7% of net sales in the comparable quarter of 1996, reflecting decreased sales volumes. Cost of Sales. Cost of sales increased to $6,354,000 in the second quarter of 1997 from $5,798,000 in the comparable quarter of 1996, primarily due to the impact of the operating costs related to the new brewery in Portsmouth, New Hampshire, that was partially offset by the effects of decreases in sales volume, freight expense and packaging costs. Cost of sales, as a percentage of net sales, increased to 70.6% in the second quarter of 1997 compared to 62.3% in the comparable period of 1996, primarily due to an increase in the fixed and semi-variable costs associated with operating the new brewery, partially offset by freight savings on shipments to eastern markets and a decrease in packaging costs. The utilization rate of the breweries' maximum designed capacity was 39% and 73% in the three months ended June 30, 1997 and 1996, respectively. The utilization rate decreased in the 1997 period due to the increase in capacity associated with the commissioning of the Portsmouth Brewery during the fourth quarter of 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $2,518,000 in the second quarter of 1997 from $1,862,000 in the comparable quarter of 1996. The increase is 8 9 primarily related to the Company's expansion into new markets in new states and within states previously served. These expenses increased as a percentage of net sales to 28.0% in 1997 from 20.0% in 1996, primarily attributable to additional sales personnel and related expenses in new markets, and increased promotional and marketing expenses in the Company's existing markets that are increasingly competitive. Interest Expense. Interest expense totaled $6,000 in the second quarter of 1997. There was no interest expense in the comparable quarter of 1996 as all interest incurred was capitalized as part of brewery construction costs. Substantially all construction-in-progress was placed in service as of July 1, 1997, therefore, the Company's interest expense will increase significantly for periods after that date. Other Income - Net. Other income - net, decreased to $19,000 in the second quarter of 1997 compared to $188,000 in the comparable quarter of 1996. The decrease is due primarily to a decline in income from short-term investments as available funds were invested in the Portsmouth and Woodinville breweries. Income Taxes. The Company's effective income tax rate increased to 50% in the second quarter of 1997 from 36.5% in the second quarter of 1996. The increase is the result of lower pretax income relative to other components of the tax provision calculation, such as the meals and entertainment exclusion, and the Company's expansion into new states and the corresponding expected increase in state income taxes. SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Sales. Total sales were substantially unchanged at $18,844,000 for the first six months of 1997 compared to $18,857,000 for the comparable 1996 period, as a 1.1% decrease in total sales volumes was substantially offset by an increase in other sales. Although total sales volumes for the six months ended June 30, 1997 decreased to 107,800 barrels from 109,000 barrels in the comparable 1996 period, West Coast sales decreased approximately 5.3% for the same period, including a 5.2% decline in Washington state, the Company's largest market. The competitive landscape has been affected by the continued increase in the number of craft beer companies and the number of different products they offer. The Company's other sales totaled $1,510,000 in the first six months of 1997, compared to $1,393,000 for the same period in 1996. Excise Taxes. Excise taxes were substantially unchanged at $1,849,000, or 10.9% of net sales in the first six months of 1997, compared to $1,826,000, or 10.7% of net sales in the comparable period of 1996. Cost of Sales. Cost of sales increased to $12,726,000 in the first six months of 1997 from $10,853,000 in the comparable period of 1996, primarily due to the impact of the operating costs related to the new brewery in Portsmouth, New Hampshire that was partially offset by the effects of decreases in sales volume, freight expense and packaging costs. Cost of sales, as a percentage of net sales, increased to 74.9% in the first six months of 1997 compared to 63.7% in comparable 1996 period, primarily due to an increase in fixed and semi-variable costs associated with operating the new brewery, partially offset by freight savings on shipments to eastern markets and a decrease in packaging costs. The utilization rate of the breweries' maximum designed capacity was 38% and 67% in the six months ended June 30, 1997 and 1996, respectively. The utilization rate decreased in the 1997 period due to the increase in capacity associated with the commissioning of the Portsmouth Brewery. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $4,939,000 in the first six months of 1997 from $3,394,000 in the comparable 1996 period. The increase is primarily related to the Company's expansion into new markets in new states and within states previously served. These expenses increased as a percentage of net sales to 29.1% in 1997 from 19.9% in 1996, primarily attributable to additional sales personnel and related expenses in new markets, and increased promotional and marketing expenses in the Company's existing markets that are increasingly competitive. Other Income - Net. Other income - net, decreased to $38,000 in first six months of 1997 compared to $446,000 in the comparable 1996 period. The decrease is due primarily to a decline in income from short-term investments as available funds were invested in the Portsmouth and Woodinville breweries. 9 10 LIQUIDITY AND CAPITAL RESOURCES The Company had $2,048,000 and $1,162,000 of cash and cash equivalents at June 30, 1997 and December 31, 1996, respectively. At June 30, 1997, the Company had working capital of $1,733,000. The Company's long-term debt as a percentage of total capitalization (long-term debt, preferred stock and common stockholders' equity) was 12.1% and 7.5% as of June 30, 1997, and December 31, 1996, respectively. On June 5, 1997, the Company elected to convert the $9 million outstanding balance of its secured bank facility (the "Secured Facility") to a five-year term loan with a 20-year amortization schedule. As of June 30, 1997, there was $9 million outstanding on the Secured Facility and the Company's one-month IBOR-based borrowing rate was approximately 7.25%. In addition, the Company has a $10 million unsecured revolving credit facility with the same bank through June 5, 1998, and as of June 30, 1997, there were no borrowings outstanding on this facility. Interest accrues at a variable rate based on the Inter Bank Offered Rate ("IBOR"), plus 1.25% to 2.75% for the Secured Facility, and plus 1.00% to 2.50% on the unsecured facility, depending on the Company's debt-to-tangible net worth ratio. The Company can fix the rate by selecting IBOR for one- to twelve-month periods as a base. The Company requires 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. Capital expenditures for the six months ended June 30, 1997 totaled $4.7 million. The capital expenditures related primarily to the kegging and cold storage facility under construction at the Woodinville Brewery. Capital expenditures for 1997 are expected to total approximately $5 million. The Company expects to meet its future financing needs, including working capital and capital expenditure requirements, through cash on hand, operating cash flow and, to the extent required and available, bank borrowings and offerings of debt or equity securities. 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, but this Quarterly Report does contain certain other types of forward-looking statements that involve risks and uncertainties. The Company may, in discussions of its future plans, objectives and expected performance in periodic reports filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by the Company, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on assumptions which the Company believes are reasonable, but are by their nature inherently uncertain. In all cases, there can be no assurance that such assumptions will prove correct or that projected events will occur. Actual results could differ materially from those projected depending on a variety of factors, including, but not limited to, the issues discussed below, the successful execution of expansion and other plans and the availability of financing. While Company management is optimistic about the Company's long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its growth outlook and any forward-looking statements. Effect of Competition on Future Growth. The domestic market in which the Company's craft beers are sold is highly competitive due to the continuing proliferation of small craft brewers, including contract brewers, the increase in the number of products offered by such brewers and the introduction of fuller-flavored products by major national brewers. The Company's revenue growth rate began to slow in late 1996, due primarily to slower than expected sales in its highly competitive West Coast markets. If the West Coast sales trends were to continue or 10 11 growth in other markets were to slow, the Company's future sales could be materially 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. In certain markets, the Company has participated in price promotions with its wholesalers and their retail customers. The number of markets in which the Company participates in price promotions and the frequency of such promotions is expected to increase in the future. Variability of Gross Margin and Cost of Sales. The Company anticipates that its future gross margins will fluctuate and may decline as a result of many factors, including disproportionate depreciation and other fixed and semivariable operating costs, during periods when the Company's breweries are producing below maximum designed production capacity. The Company's high level of fixed and semivariable operating costs causes gross margin to be very sensitive to relatively small increases or decreases in sales volume. In addition, other factors that could affect cost of sales include changes in: shipping costs, availability and prices of raw materials and packaging materials, mix between draft and bottled product sales, and Federal or state excise taxes. Also, as sales volumes through the Company's Distribution Alliance with Anheuser-Busch, Incorporated ("A-B") increase, the alliance fee, and other staging and administrative costs, will increase. Advertising and Promotional Costs. While the Company has historically done very limited advertising, market and competitive considerations could make a significant increase in such spending appropriate. In addition, market and competitive considerations could require a significant increase in other promotional costs associated with developing existing and new markets. Relationship with A-B. Most of the Company's future sales are expected to be through the Distribution Alliance with A-B. If the Distribution Alliance were to be terminated, or if the relationship between A-B and the Company were to deteriorate, the Company's sales growth and profitability could be materially adversely affected. While the Company believes that the benefits of the Distribution Alliance, in particular increased sales volume, access to distributors and distribution efficiencies, offset related 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 18% of the Company's sales during 1996. Substantially all of the remaining sales volumes are now through the Distribution Alliance to A-B affiliated distributors, most of whom are independent wholesalers. The loss of K&L or the termination of the Distribution Alliance could have a material adverse impact on the Company's sales and profitability. Customer Acceptance, Consumer Trends and Public Attitudes. If consumers were unwilling to accept the Company's products or if the recent trends toward drinking craft beers were to change, it could adversely impact the Company's sales and profitability. 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 profitability could be adversely affected. 11 12 NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("SFAS 128"), which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior interim and annual periods. Under the new requirements for calculating "basic" (primary) earnings per share, the dilutive effect of common stock equivalents such as outstanding convertible preferred stock and stock options will be excluded from the calculation. The impact of SFAS 128 on previously reported earnings per share for the three and six months ended June 30, 1997 and 1996 will not be material. There will be no effect on the net loss per share for the six months ended June 30, 1997, because the effect of common stock equivalents is antidilutive and, therefore, is excluded from the calculation. The impact of Statement 128 on the calculation of "diluted" (fully diluted) earnings per share for these quarters is not expected to be material. PART II. - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 21, 1997. The following matters were voted upon by the shareholders with the results as follows: (1) The following persons were nominated by the Board of Directors and each was elected to serve as a director until the next Annual Meeting of Shareholders or until his earlier retirement, resignation or removal: Paul S. Shipman, Gordon A. Bowker, John T. Carleton, Frank H. Clement, Jerry D. Jones, William H. McNulty, Bruce M. Sandison, Walter F. Walker and Dennis P. Weston. The number of votes cast for or withheld for each director nominee was as follows:
NOMINEE FOR WITHHELD ------- --- -------- Paul S. Shipman 8,271,280 138,869 Gordon A. Bowker 8,271,520 138,629 John T. Carleton 8,270,355 139,794 Frank H. Clement 8,270,402 139,747 Jerry D. Jones 8,267,872 142,277 William H. McNulty 8,269,545 140,604 Bruce M. Sandison 8,270,805 139,344 Walter F. Walker 8,265,279 144,870 Dennis P. Weston 8,267,772 142,377
(2) The shareholders voted 8,369,089 shares in the affirmative, 28,287 shares in the negative and 12,773 shares abstained to ratify the appointment of Ernst & Young LLP, as independent auditors for the Company's year ending December 31, 1997. 12 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS The following exhibits are filed as part of this report. 11.1 Computation of Earnings Per Share 27 Financial Data Schedule (B) REPORTS ON FORM 8-K None filed during the quarter ended June 30, 1997. ITEMS 1, 2, 3 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 13 14 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on August 7, 1997. REDHOOK ALE BREWERY, INCORPORATED BY: /s/ Bradley A. Berg ------------------------------ Bradley A. Berg Executive Vice President and Chief Financial Officer BY: /s/ David H. Kirske ------------------------------- David H. Kirske Controller and Treasurer, Principal Accounting Officer DATE: August 7, 1997 14 EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 REDHOOK ALE BREWERY, INCORPORATED COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1997 1996 1997 1996 ---------- ---------- ----------- ---------- Primary and fully-diluted earnings per common share: Weighted average common shares outstanding ........... 7,686,440 7,641,364 7,686,019 7,639,768 Weighted average common equivalent shares outstanding: Series A convertible redeemable preferred stock .... -- -- -- -- Series B convertible redeemable preferred stock .... 1,289,872 1,289,872 -- 1,289,872 Stock options, net ................................. 34,679 227,003 -- 229,845 ---------- ---------- ----------- ---------- Average number of common and common equivalent shares outstanding ............... 9,010,991 9,158,239 7,686,019 9,159,485 ========== ========== =========== ========== Net Income (Loss) ...................................... $ 71,015 $1,167,742 $ (417,022) $2,051,272 ========== ========== =========== ========== Net Income (Loss) per Share ............................ $ 0.01 $ 0.13 $ (0.05) $ 0.22 ========== ========== =========== ==========
EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2,048,230 0 2,004,349 10,000 2,579,868 7,725,483 96,708,221 7,553,340 97,982,898 5,992,159 10,170,874 15,944,055 0 38,434 62,152,410 97,982,898 16,995,343 16,995,343 12,726,380 17,665,542 (37,545) 0 5,782 (638,436) (221,414) (417,022) 0 0 0 (417,022) (0.05) (0.05) Sales and Total Revenues are net of Federal and State Excise Taxes
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