e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended March 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-26542
REDHOOK ALE BREWERY, INCORPORATED
(Exact name of registrant as specified in its charter)
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| Washington
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91-1141254 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
14300 NE 145th Street, Suite 210
Woodinville, Washington 98072-9045
(Address of principal executive offices)
(425) 483-3232
(Registrant’s telephone number, including Area Code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. Check one:
Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrant’s Common Stock outstanding as May 8, 2007 was 8,315,289.
REDHOOK ALE BREWERY, INCORPORATED
FORM 10-Q
For The Quarterly Period Ended March 31, 2007
TABLE OF CONTENTS
2
PART I.
ITEM 1. Financial Statements
REDHOOK ALE BREWERY, INCORPORATED
BALANCE SHEETS
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8,072,216 |
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$ |
9,435,073 |
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Accounts receivable, net of allowance for doubtful accounts of
$75,583 and $68,808 in 2007 and 2006, respectively |
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2,799,045 |
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1,842,388 |
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Trade receivable from Craft Brands |
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1,031,509 |
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854,507 |
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Inventories |
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2,758,919 |
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2,571,732 |
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Deferred income tax asset, net |
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580,576 |
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506,886 |
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Other |
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234,565 |
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203,594 |
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Total current assets |
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15,476,830 |
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15,414,180 |
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Fixed assets, net |
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57,699,881 |
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58,076,434 |
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Investment in Craft Brands |
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489,835 |
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127,555 |
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Other assets |
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240,640 |
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222,573 |
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Total assets |
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$ |
73,907,186 |
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$ |
73,840,742 |
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LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,604,930 |
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$ |
2,233,689 |
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Trade payable to Craft Brands |
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480,104 |
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324,900 |
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Accrued salaries, wages and payroll taxes |
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1,123,433 |
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1,547,482 |
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Refundable deposits |
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2,465,730 |
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2,153,127 |
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Other accrued expenses |
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580,422 |
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380,394 |
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Current portion of long-term debt and capital lease obligations |
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464,856 |
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464,648 |
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Total current liabilities |
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7,719,475 |
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7,104,240 |
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Long-term debt and capital lease obligations, net of current portion |
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4,205,323 |
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4,321,616 |
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Deferred income tax liability, net |
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1,350,267 |
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1,548,699 |
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Other liabilities |
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186,857 |
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173,768 |
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Common stockholders’ equity: |
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Common stock, par value $0.005 per share, authorized, 50,000,000
shares; issued and outstanding, 8,308,389 shares in 2007 and
8,281,489 shares in 2006 |
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41,542 |
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41,407 |
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Additional paid-in capital |
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69,054,312 |
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68,977,402 |
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Retained
earnings (deficit) |
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(8,650,590 |
) |
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(8,326,390 |
) |
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Total common stockholders’ equity |
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60,445,264 |
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60,692,419 |
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Total liabilities and common stockholders’ equity |
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$ |
73,907,186 |
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$ |
73,840,742 |
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The accompanying notes are an integral part of these financial statements.
3
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Sales |
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$ |
9,556,932 |
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$ |
8,669,250 |
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Less excise taxes |
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1,013,970 |
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889,903 |
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Net sales |
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8,542,962 |
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7,779,347 |
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Cost of sales |
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7,806,082 |
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7,242,530 |
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Gross profit |
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736,880 |
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536,817 |
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Selling, general and administrative expenses |
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2,036,462 |
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1,713,806 |
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Income from equity investment in Craft Brands |
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678,238 |
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514,149 |
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Operating income (loss) |
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(621,344 |
) |
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(662,840 |
) |
Interest expense |
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83,187 |
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83,083 |
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Other income, net |
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115,075 |
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53,928 |
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Income (loss) before income taxes |
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(589,456 |
) |
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(691,995 |
) |
Income tax
provision (benefit) |
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(265,256 |
) |
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8,434 |
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Net income (loss) |
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$ |
(324,200 |
) |
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$ |
(700,429 |
) |
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Basic earnings (loss) per share |
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$ |
(0.04 |
) |
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$ |
(0.09 |
) |
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Diluted earnings (loss) per share |
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$ |
(0.04 |
) |
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$ |
(0.09 |
) |
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The accompanying notes are an integral part of these financial statements.
4
REDHOOK ALE BREWERY, INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
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2007 |
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2006 |
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Operating Activities |
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Net income (loss) |
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$ |
(324,200 |
) |
|
$ |
(700,429 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
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Depreciation and amortization |
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729,769 |
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763,642 |
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Deferred income taxes |
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(272,122 |
) |
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— |
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Income from equity investment in Craft Brands
less than (in excess of) cash distributions |
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(362,280 |
) |
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(114,258 |
) |
Changes in operating assets and liabilities |
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(742,533 |
) |
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(224,841 |
) |
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Net cash used in operating activities |
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(971,366 |
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(275,886 |
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Investing Activities |
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Expenditures for fixed assets |
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(352,451 |
) |
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(345,268 |
) |
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Net cash used in investing activities |
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(352,451 |
) |
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(345,268 |
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Financing Activities |
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Principal payments on debt and capital lease obligations |
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(116,085 |
) |
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(114,391 |
) |
Issuance of common stock |
|
|
77,045 |
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|
11,141 |
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Net cash used in financing activities |
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(39,040 |
) |
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(103,250 |
) |
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Increase (decrease) in cash and cash equivalents |
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(1,362,857 |
) |
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(724,404 |
) |
Cash and cash equivalents: |
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Beginning of period |
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9,435,073 |
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6,435,609 |
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End of period |
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$ |
8,072,216 |
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$ |
5,711,205 |
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The accompanying notes are an integral part of these financial statements.
5
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements and related notes of Redhook Ale Brewery, Incorporated (the
“Company”) should be read in conjunction with the financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. These financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and regulations. These
financial statements are unaudited but, in the opinion of management, reflect all material
adjustments necessary to present fairly the financial position, results of operations and cash
flows of the Company for the periods presented. 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. Merger Discussions
On
January 3, 2007, the Company publicly disseminated a press release announcing that it was
entering into preliminary discussions with Widmer Brothers Brewing Company regarding the
possibility of combining the two companies. These negotiations are continuing. In connection with
these discussions, the Company has incurred approximately $60,000 in legal, consulting and meeting
costs through March 31, 2007. These costs are reflected in the statement of operations as selling,
general and administrative expenses.
As a result of these discussions, on January 2, 2007, the Company adopted a Company-wide severance
plan that permits the payment of severance benefits to all full-time employees, other than
executive officers, in the event that an employee’s employment is terminated as a result of a
merger or other business combination with Widmer Brothers Brewing Company.
3. Inventories
Inventories consist of the following:
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March 31, |
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December 31, |
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2007 |
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2006 |
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Raw materials |
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$ |
506,947 |
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$ |
666,938 |
|
Work in process |
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868,262 |
|
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|
622,352 |
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Finished goods |
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|
353,257 |
|
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|
247,333 |
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Promotional merchandise |
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516,477 |
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|
538,339 |
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Packaging materials |
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|
513,976 |
|
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|
496,770 |
|
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|
|
|
|
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$ |
2,758,919 |
|
|
$ |
2,571,732 |
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|
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|
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|
Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
4. Craft Brands Alliance LLC
On July 1, 2004, the Company entered into agreements with Widmer Brothers Brewing Company
(“Widmer”) with respect to the operation of a joint venture sales and marketing entity, Craft
Brands Alliance LLC (“Craft Brands”). Pursuant to these agreements, the Company manufactures and
sells its product to Craft Brands at a price substantially below wholesale pricing levels; Craft
Brands, in turn, advertises, markets, sells and distributes the product to wholesale outlets in the
western United States pursuant to a distribution agreement between Craft Brands and Anheuser-Busch,
Incorporated (“A-B”).
6
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company and Widmer have entered into a restated operating agreement with Craft Brands, as
amended, (the “Operating Agreement”) that governs the operations of Craft Brands and the
obligations of its members, including capital contributions, loans and allocation of profits and
losses.
The Operating Agreement requires the Company to make certain capital contributions to support the
operations of Craft Brands. Contemporaneous with the execution of the Operating Agreement, the
Company made a 2004 sales and marketing capital contribution in the amount of $250,000. The
agreement designated this sales and marketing capital contribution be used by Craft Brands for
expenses related to the marketing, advertising and promotion of the Company’s products. The
Operating Agreement also requires an additional sales and marketing contribution in 2008 if the
volume of sales of Redhook products in 2007 in the Craft Brands territory is less than 92% of the
volume of sales of Redhook products in 2003 in the Craft Brands territory. In 2007, Widmer and
Redhook entered into an amendment to the Operating Agreement to reduce the Redhook 2008 sales and
marketing contribution to reflect the Company’s commitment to expand the production capacity of its
Washington and New Hampshire Breweries to produce more Widmer products. Redhook’s 2008 sales and
marketing contribution, if one is required, cannot exceed $310,000 and will be required to be paid
by the Company in no more than three equal installments made on or before February 1, 2008, April
1, 2008 and July 1, 2008. Because sales in the craft beer industry generally reflect a degree of
seasonality and the Company has historically operated with little or no backlog, the Company’s
ability to predict sales for future periods is limited. Accordingly, the Company cannot predict to
what degree, if at all, the Company will be required to make a 2008 sales and marketing
contribution. Widmer has a similar obligation under the Operating Agreement with respect to a 2008
sales and marketing capital contribution that is capped at $750,000. The Operating Agreement also
obligates the Company and Widmer to make other additional capital contributions only upon the
request and consent of the Craft Brands’ board of directors.
The Operating Agreement also requires the Company and Widmer to make loans to Craft Brands to
assist Craft Brands in conducting its operations and meeting its obligations. To the extent that
cash flow from operations and borrowings from financial institutions is not sufficient for Craft
Brands to meet its obligations, the Company and Widmer are obligated to lend to Craft Brands the
funds the president of Craft Brands deems necessary to meet such obligations. As of March 31, 2007
and December 31, 2006, there were no loan obligations due to the Company.
The Operating Agreement also addresses the allocation of profits and losses of Craft Brands. After
giving effect to the allocation of the sales and marketing capital contribution, if any, and after
giving effect to income attributable to the shipments of the Kona brand, which was shared
differently between the Company and Widmer through 2006, the remaining profits and losses of Craft
Brands are allocated between the Company and Widmer based on the cash flow percentages of 42% and
58%, respectively. Net cash flow, if any, will generally be distributed monthly to the Company and
Widmer based upon these cash flow percentages. No distribution will be made to the Company or
Widmer unless, after the distribution is made, the assets of Craft Brands will be in excess of its
liabilities, with the exception of liabilities to members, and Craft Brands will be able to pay its
debts as they become due in the ordinary course of business.
The Company has assessed its investment in Craft Brands pursuant to the provisions of Financial
Accounting Standards Board (“FASB”) Interpretation No. 46 Revised, Consolidation of Variable
Interest Entities — an Interpretation of ARB No. 51 (“FIN No. 46R”). FIN No. 46R clarifies the
application of consolidation accounting for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial support
from other parties or in which equity investors do not have the characteristics of a controlling
financial interest; these entities are referred to as variable interest entities. Variable interest
entities within the scope of FIN No. 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity’s expected losses, receives a majority of its expected
returns, or both. FIN No. 46R also requires disclosure of significant variable interests in
variable interest entities for which a company is not the primary beneficiary. The Company has
concluded that its investment in Craft Brands meets the definition of a variable interest entity
but that the Company is not the primary beneficiary. In accordance with FIN No. 46R, the Company
has not consolidated the financial statements of Craft
7
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
Brands with the financial statements of the Company, but instead accounted for its investment in
Craft Brands under the equity method, as outlined by Accounting Principle Board Opinion (“APB”) No.
18, The Equity Method of Accounting for Investments in Common Stock. The equity method requires that the Company recognize
its share of the net earnings of Craft Brands by increasing its investment in Craft Brands on the
Company’s balance sheet and recognizing income from equity investment in the Company’s statement of
operations. A cash distribution or the Company’s share of a net loss reported by Craft Brands is
reflected as a decrease in investment in Craft Brands on the Company’s balance sheet. The Company
does not control the amount or timing of cash distributions by Craft Brands. The Company will
periodically review its investment in Craft Brands to ensure that it complies with the guidelines
prescribed by FIN No. 46R.
For the three months ended March 31, 2007 and 2006, the Company’s share of Craft Brands’ net income
totaled $678,000 and $514,000, respectively. During the three months ended March 31, 2007 and 2006,
the Company received cash distributions of $316,000 and $400,000, respectively, representing its
share of the net cash flow of Craft Brands.
As of March 31, 2007 and December 31, 2006, the Company’s investment in Craft Brands totaled
$490,000 and $128,000.
For the three months ended March 31, 2007, shipments of the Company’s products to Craft Brands
represented approximately 44% of total Company shipments, or 28,700 barrels. For the three months
ended March 31, 2006, shipments of the Company’s products to Craft Brands represented 51% of total
Company shipments, or 29,600 barrels.
In conjunction with the sale of Redhook product to Craft Brands, the Company’s balance sheets as of
March 31, 2007 and December 31, 2006 reflect a trade payable due to Craft Brands of approximately
$480,000 and $325,000, respectively, and a trade receivable due from Craft Brands of approximately
$1,032,000 and $855,000, respectively.
5. Common Stockholders’ Equity
In conjunction with the exercise of stock options granted under the Company’s stock option plans,
the Company issued 26,900 shares of the Company’s common stock (“Common Stock”) totaling $77,000
during the three months ended March 31, 2007. During the three months ended March 31, 2006, the
Company issued 5,700 shares of Common Stock totaling $11,000.
6. Earnings (Loss) per Share
The Company follows FASB Statement of Financial Accounting Standard (“SFAS”) No. 128, Earnings per
Share. Basic earnings (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 (loss) per share includes the dilutive effect of all
outstanding stock options for periods when the Company reports net income. Outstanding stock
options have been excluded from the calculation of diluted loss per share for the three months
ended March 31, 2007 and 2006 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.
8
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings (loss) per common
share:
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|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Numerator for basic and diluted net income (loss)
per share — net income (loss) |
|
$ |
(324,200 |
) |
|
$ |
(700,429 |
) |
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share -
weighted average common shares outstanding |
|
|
8,295,276 |
|
|
|
8,225,737 |
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options on weighted average
common shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share |
|
|
8,295,276 |
|
|
|
8,225,737 |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.04 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.04 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
7. Stock-Based Compensation
The Company may grant non-qualified stock options and incentive stock options to employees,
non-employee directors and independent consultants or advisors under its 2002 Stock Option Plan
(the “2002 Plan”). The Company issues new shares of Common Stock upon exercise of stock options.
The Company also maintains the 1992 Stock Incentive Plan (the “1992 Plan”) and the Directors Stock
Option Plan (the “Directors Plan”) under which non-qualified stock options and incentive stock
options were granted to employees and non-employee directors through October 2002. Although the
1992 Plan and the Directors Plan both expired in October 2002, preventing further option grants,
the provisions of these plans remain in effect until all options terminate or are exercised.
Prior to the January 1, 2006 adoption of the SFAS No. 123R, Share-Based Payment, the Company
accounted for its employee and director stock-based compensation plans using the intrinsic value
method, as prescribed by APB No. 25, Accounting for Stock Issued to Employees. Under the intrinsic
value method, no stock-based compensation expense had been recognized in the Company’s statement of
operations because the exercise price of the Company’s stock options granted to employees and
directors equaled the fair market value of the underlying Common Stock on the date of grant. As
permitted, for all periods prior to January 1, 2006, the Company elected to adopt the disclosure
only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148.
On November 29, 2005, the board of directors of the Company approved an acceleration of vesting of
all of the Company’s unvested stock options (the “Acceleration”). The Acceleration was effective
for stock options outstanding as of December 30, 2005. These options were granted under the 1992
Plan and 2002 Plan. As a result of the Acceleration, options to acquire approximately 136,000
shares of the Company’s Common Stock, or 16% of total outstanding options, became exercisable on
December 30, 2005. Of the approximately 136,000 shares subject to the Acceleration, options to
acquire approximately 70,000 shares of the Company’s Common Stock at an exercise price of $1.865
would have otherwise fully vested in August 2006, and options to acquire approximately 66,000
shares of the Company’s Common Stock at an exercise price of $2.019 would have otherwise vested in
August 2006 and August 2007. The Acceleration did not have a material impact on 2006 results of
operations.
On January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, which revises SFAS No.
123 and supersedes APB No. 25. SFAS No. 123R requires all share-based payments to employees and
directors be recognized as expense in the statement of operations based on their fair values and
vesting periods. The Company is required to estimate the fair value of share-based payment awards
on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods
9
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
in the Company’s statement of operations. The Company elected to follow the “modified prospective”
transition method, one of two methods prescribed by the standard, for implementing SFAS No. 123R.
Under the modified prospective method, compensation cost is recognized beginning with the effective
date (i) based on the requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (ii) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.
Because no stock options were granted during the three months ended March 31, 2007 and 2006, and
because all stock options outstanding as of December 31, 2005 were fully vested prior to the January
1, 2006 adoption of SFAS No. 123R, no stock-based compensation expense was recognized in the
Company’s statement of operations for the three months ended March 31, 2007 and 2006.
Presented below is a summary of stock option plans’ activity for the three months ended March 31,
2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
| |
|
Shares |
|
|
Average |
|
|
Average |
|
|
|
|
| |
|
Subject to |
|
|
Exercise Price |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
Options |
|
|
per Share |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
Outstanding
at January 1, 2007 |
|
|
783,440 |
|
|
$ |
2.89 |
|
|
|
4.10 |
|
|
$ |
1,950,534 |
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(26,900 |
) |
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(13,550 |
) |
|
$ |
9.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
742,990 |
|
|
$ |
2.77 |
|
|
|
3.92 |
|
|
$ |
3,330,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
742,990 |
|
|
$ |
2.77 |
|
|
|
3.92 |
|
|
$ |
3,330,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of options outstanding and exercisable at
March 31, 2007 and January 1, 2007 is the difference between the stock closing price as reported by NASDAQ and the exercise price of the shares. The market values as of March 31,
2007 and January 1, 2007 were $7.24 and $5.20, respectively. As of March 31, 2007 and 2006,
there was no unrecognized stock-based compensation expense related to unvested stock options.
During the three months ended March 31, 2007 and 2006, the total intrinsic value of stock options
exercised was $95,000 and $8,000.
10
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table summarizes information for options currently outstanding and exercisable at
March 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Remaining |
|
Average |
Range
of Exercise |
|
Outstanding |
|
Contractual |
|
Exercise |
Prices |
|
& Exercisable |
|
Life (Yrs) |
|
Price |
|
|
$ |
1.485 |
|
|
to |
|
$ |
1.865 |
|
|
|
337,440 |
|
|
|
4.32 |
|
|
$ |
1.86 |
|
|
|
$ |
1.866 |
|
|
to |
|
$ |
2.019 |
|
|
|
142,434 |
|
|
|
5.41 |
|
|
$ |
2.02 |
|
|
|
$ |
2.020 |
|
|
to |
|
$ |
2.180 |
|
|
|
8,000 |
|
|
|
6.14 |
|
|
$ |
2.18 |
|
|
|
$ |
2.181 |
|
|
to |
|
$ |
2.425 |
|
|
|
6,666 |
|
|
|
5.14 |
|
|
$ |
2.43 |
|
|
|
$ |
2.426 |
|
|
to |
|
$ |
2.450 |
|
|
|
12,000 |
|
|
|
7.13 |
|
|
$ |
2.45 |
|
|
|
$ |
2.451 |
|
|
to |
|
$ |
3.150 |
|
|
|
16,000 |
|
|
|
8.15 |
|
|
$ |
3.15 |
|
|
|
$ |
3.151 |
|
|
to |
|
$ |
3.969 |
|
|
|
158,300 |
|
|
|
2.14 |
|
|
$ |
3.97 |
|
|
|
$ |
3.970 |
|
|
to |
|
$ |
5.730 |
|
|
|
38,150 |
|
|
|
1.13 |
|
|
$ |
5.73 |
|
|
|
$ |
5.731 |
|
|
to |
|
$ |
7.625 |
|
|
|
24,000 |
|
|
|
0.14 |
|
|
$ |
7.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.485 |
|
|
to |
|
$ |
7.625 |
|
|
|
742,990 |
|
|
|
3.92 |
|
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2007, options available for future grants under the 2002 Plan totaled
96,359.
8. Income Taxes
The Company records federal and state income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred income taxes or tax benefits reflect the tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes and amounts as
measured for tax purposes as well as for tax net operating loss and credit carryforwards.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109, (“FIN No. 48”). FIN No. 48 clarifies the accounting and
disclosure requirements for uncertainty in income taxes recognized in an entity’s financial statements in
accordance with SFAS No. 109. The interpretation prescribes the minimum recognition threshold and
measurement attribute required to be met before a tax position that has been taken or is expected
to be taken is recognized in the financial statements. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition, and clearly excludes uncertainty in income taxes from
guidance prescribed by FASB No. 5, Accounting for Contingencies.
FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted
this interpretation on January 1, 2007. The adoption of FIN No. 48 did not have a material impact on the
Company’s balance sheet or statement of operations.
11
REDHOOK ALE BREWERY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
As of March 31, 2007 and December 31, 2006, the Company’s deferred tax assets were primarily
comprised of net operating loss carryforwards (“NOLs”), federal and state alternative minimum tax
credit carryforwards, and state NOL carryforwards. In assessing the realizability of the deferred
tax assets, the Company considered both positive and negative evidence when measuring the need for
a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the
existence of, or generation of, taxable income during the periods in which those temporary
differences become deductible. The Company considered the scheduled reversal of deferred tax
liabilities, projected future taxable income and other factors in making this assessment. The
Company’s estimates of future taxable income take into consideration, among other items, estimates
of future taxable income related to depreciation. Based upon the available evidence, the Company
does not believe that all of the deferred tax assets will be realized. Accordingly, the Company’s
balance sheet as of March 31, 2007 and December 31, 2006 includes a valuation allowance of
$1,059,000 to cover certain federal and state NOLs that may expire before the Company is able to
utilize the tax benefit. To the extent that the Company continues to be unable to generate adequate
taxable income in future periods, the Company will not be able to recognize additional tax benefits
and may be required to record a greater valuation allowance covering potentially expiring NOLs.
There were no unrecognized tax benefits as of January 1, 2007 or March 31, 2007.
Historically, the Company has not incurred any interest or penalties associated with tax matters
and no interest or penalties were recognized during the three months ended March 31, 2007. However,
the Company has adopted a policy whereby penalties incurred in connection with tax matters will be classified as general and administrative expenses, and interest assessments incurred in connection with tax matters will be classified as interest expense.
Tax years that remain open for examination by federal and state taxing authorities include 2003,
2004, 2005, and 2006. In addition, tax years from 1996 to 2002 may be subject to examination to the
extent that the Company utilizes the NOLs from those years in its current year or future year tax
returns.
12
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words
“believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions
or their negatives identify forward-looking statements, which generally are not historical in
nature. These statements are based upon assumptions and projections that the Company believes are
reasonable, but are by their nature inherently uncertain. Many possible events or factors could
affect the Company’s future financial results and performance, and could cause actual results or
performance to differ materially from those expressed, including those risks and uncertainties
described in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006, and those described from time to time in the Company’s future reports
filed with the Securities and Exchange Commission. Caution should be taken not to place undue
reliance on these forward-looking statements, which speak only as of the date of this quarterly
report.
The following discussion and analysis should be read in conjunction with the Financial Statements
and Notes thereto of Redhook Ale Brewery, Incorporated (the “Company” or “Redhook”) included
herein, as well as the audited Financial Statements and Notes and Management’s Discussion and
Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. The discussion and analysis includes
period-to-period comparisons of the Company’s financial results. Although period-to-period
comparisons may be helpful in understanding the Company’s financial results, the Company believes
that they should not be relied upon as an accurate indicator of future performance.
Overview
Since its formation, the Company has focused its business activities on the brewing, marketing and
selling of craft beers in the United States. The Company produces its specialty bottled and draft
products in two Company-owned breweries, one in the Seattle suburb of Woodinville, Washington (the
“Washington Brewery”) and the other in Portsmouth, New Hampshire (the “New Hampshire Brewery”).
Prior to July 1, 2004, the Company’s sales consisted predominantly of sales of beer to third-party
distributors and Anheuser-Busch, Incorporated (“A-B”) through the Company’s Distribution Alliance
with A-B (the “Alliance”). Since July 1, 2004, the Company’s sales have consisted of sales of
product to Craft Brands Alliance LLC (“Craft Brands”) and A-B. Craft Brands is a joint venture
sales and marketing entity formed by the Company and Widmer Brothers Brewing Company (“Widmer”).
The Company and Widmer manufacture and sell their product to Craft Brands at a price substantially
below wholesale pricing levels; Craft Brands, in turn, advertises, markets, sells and distributes
the product to wholesale outlets in the western United States through a distribution agreement
between Craft Brands and A-B. (Due to state liquor regulations, the Company sells its product in
Washington state directly to third-party beer distributors and returns a portion of the revenue to
Craft Brands based upon a contractually determined formula.) Profits and losses of Craft Brands are
generally shared between the Company and Widmer based on the cash flow percentages of 42% and 58%,
respectively. The Company continues to sell its product in the midwest and eastern U.S. through
sales to A-B pursuant to the July 1, 2004 A-B Distribution Agreement (the “A-B Distribution
Agreement”). For additional information regarding Craft Brands and the A-B Distribution Agreement,
see Part 1, Item 1, Business “— Product Distribution” “— Relationship with
Anheuser-Busch, Incorporated” and “— Relationship with Craft Brands Alliance LLC” of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and “— Craft Brands Alliance
LLC” below. In addition to sales of beer, the Company derives other revenues from sources including
the sale of retail beer, food, apparel and other retail items in its two brewery pubs.
The Company’s gross sales and net loss for the three months ended March 31, 2007 totaled $9,557,000
and $324,000, respectively, compared to gross sales and a net loss of $8,669,000 and $700,000,
respectively, for the same period in 2006. 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, therefore, its ability to predict sales for future periods is limited.
The Company’s sales are affected by several factors, including consumer demand, price discounting
and competitive considerations. The Company competes in the highly competitive craft brewing market
as well as in the much larger specialty beer market, which encompasses producers of import beers,
major national brewers that produce fuller-flavored products, and large spirit companies and
national brewers that produce flavored alcohol beverages. Beyond the beer market, craft brewers
also face competition from producers of wines and spirits. The craft beer segment is
13
highly competitive due to the proliferation of small craft brewers, including contract brewers, and
the large number of products offered by such brewers. Imported products from foreign brewers have
enjoyed resurgence in demand since the mid-1990s. Certain national domestic brewers have also
sought to appeal to this growing demand for craft beers by producing their own fuller-flavored
products. In recent years, the specialty segment has seen the introduction of flavored alcohol
beverages, the consumers of which, industry sources generally believe, correlate closely with the
consumers of the import and craft beer products. Sales of these flavored alcohol beverages were
initially very strong, but growth rates have slowed in subsequent years. While there appears to be
fewer participants in this category than at its peak, there is still significant volume associated
with these beverages. The wine and spirits market has also experienced a surge in the past several
years, attributable to competitive pricing, increased merchandising, and increased consumer
interest in wine and spirits. Because the number of participants and number of different products
offered in this segment have increased significantly in the past ten years, the competition for
bottled product placements and especially for draft beer placements has intensified.
The Company is required to pay federal excise taxes on the sale of its beer. The excise tax burden
on beer sales increases from $7 to $18 per barrel on annual sales over 60,000 barrels and thus, if
sales volume increases, federal excise taxes would increase as a percentage of sales.
Under normal circumstances, the Company operates its brewing facilities up to seven days per week
with multiple shifts per day. Under ideal brewing conditions (which would include, among other
factors, production of a single brand in a single package), the theoretical production capacity is
approximately 250,000 barrels per year at the Washington Brewery and
210,000 barrels per year at
the New Hampshire Brewery. Because of various factors, including the following two, the Company
does not believe that it is likely that actual production volume will approximate theoretical
production capacity: (1) the Company’s brewing process, which management believes is similar to its
competitors’ brewing processes, inherently results in some level of beer loss attributable to
filtering, bottling, and keg filling; and (2) the Company routinely brews and packages various
brands and package sizes during the year.
In order to accommodate volume growth in the markets served by the New Hampshire Brewery, the
Company has expanded fermentation capacity during the last several years, bringing the brewery’s
theoretical production capacity to approximately 210,000 barrels per year. During the spring of
2007, the Company plans to add four additional 400-barrel fermenters and one 70,000 pound grain
silo, and to make process control automation upgrades to the brewery. Installation is expected to
be completed by June 2007 and cost approximately $1.3 million. This expansion will add
approximately 25,000 barrels of capacity to the New Hampshire Brewery. As with the previous
expansions, production capacity at the New Hampshire Brewery can be added in phases until the
facility reaches its maximum designed production capacity of approximately 250,000 barrels per
year, under ideal brewing conditions. Driven by various
considerations including seasonality, production schedules of various
draft products and bottled products and packages, and losses
attributable to filtering, bottling and keg filling, actual
production capacity will be less than theoretical production
capacity. In order to reduce the spread between actual and
theoretical production capacity, additional capital expenditures will
be required. The decision to add capacity is
affected by the availability of capital, construction constraints and anticipated sales in new and
existing markets.
The Company’s capacity utilization has a significant impact on gross profit. Generally, when
facilities are operating at their maximum designed production capacities, profitability is
favorably affected because fixed and semi-variable operating costs, such as depreciation and
production salaries, are spread over a larger sales base. Because current period production levels
have been below the Company’s current production capacity, gross margins have been negatively
impacted. This negative impact could be reduced if actual production increases.
In addition to capacity utilization, other factors that could affect cost of sales and gross margin
include sales to Craft Brands at a price substantially below wholesale pricing levels, sales of
contract beer at a pre-determined contract price, changes in freight charges, the availability and
prices of raw materials and packaging materials, the mix between draft and bottled product sales,
the sales mix of various bottled product packages, and fees related to the A-B Distribution
Agreement.
See Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006 for additional matters which could materially affect the Company’s business, financial
condition or future results.
14
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:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
| |
|
2007 |
|
2006 |
Sales |
|
|
111.9 |
% |
|
|
111.4 |
% |
Less excise taxes |
|
|
11.9 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales |
|
|
91.4 |
|
|
|
93.1 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8.6 |
|
|
|
6.9 |
|
Selling, general and administrative expenses |
|
|
23.8 |
|
|
|
22.0 |
|
Income from equity investment in Craft Brands |
|
|
7.9 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
| |
Operating income (loss) |
|
|
(7.3 |
) |
|
|
(8.5 |
) |
Interest expense |
|
|
0.9 |
|
|
|
1.1 |
|
Other income, net |
|
|
1.3 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes |
|
|
(6.9 |
) |
|
|
(8.9 |
) |
Income tax
provision (benefit) |
|
|
(3.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(3.8 |
)% |
|
|
(9.0 |
)% |
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
The following table sets forth, for the periods indicated, a comparison of certain items from the
Company’s Statements of Operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
Increase / |
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
% Change |
|
Sales |
|
$ |
9,556,932 |
|
|
$ |
8,669,250 |
|
|
$ |
887,682 |
|
|
|
10.2 |
% |
Less excise taxes |
|
|
1,013,970 |
|
|
|
889,903 |
|
|
|
124,067 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
8,542,962 |
|
|
|
7,779,347 |
|
|
|
763,615 |
|
|
|
9.8 |
|
Cost of sales |
|
|
7,806,082 |
|
|
|
7,242,530 |
|
|
|
563,552 |
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
736,880 |
|
|
|
536,817 |
|
|
|
200,063 |
|
|
|
37.3 |
|
Selling, general and administrative expenses |
|
|
2,036,462 |
|
|
|
1,713,806 |
|
|
|
322,656 |
|
|
|
18.8 |
|
Income from equity investment in Craft Brands |
|
|
678,238 |
|
|
|
514,149 |
|
|
|
164,089 |
|
|
|
31.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating income (loss) |
|
|
(621,344 |
) |
|
|
(662,840 |
) |
|
|
41,496 |
|
|
|
6.3 |
Interest expense |
|
|
83,187 |
|
|
|
83,083 |
|
|
|
104 |
|
|
|
0.1 |
|
Other income, net |
|
|
115,075 |
|
|
|
53,928 |
|
|
|
61,147 |
|
|
|
113.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes |
|
|
(589,456 |
) |
|
|
(691,995 |
) |
|
|
102,539 |
|
|
|
14.8 |
|
Income tax
provision (benefit) |
|
|
(265,256 |
) |
|
|
8,434 |
|
|
|
(273,690 |
) |
|
|
3,245.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(324,200 |
) |
|
$ |
(700,429 |
) |
|
$ |
376,229 |
|
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beer shipped (in barrels) |
|
|
65,300 |
|
|
|
58,000 |
|
|
|
7,300 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Sales. Total sales increased $888,000 in the first quarter of 2007 as compared to the first
quarter of 2006, impacted by the following factors:
| |
• |
|
An increase in overall pricing and shipments in the midwest and eastern United
States resulted in a $392,000 increase in 2007 first quarter sales; |
| |
| |
• |
|
A decrease in overall pricing and shipments in the western United States (not
including beer brewed on a contract basis) resulted in an $84,000 decrease in 2007
first quarter sales; |
| |
| |
• |
|
An increase in shipments of beer brewed on a contract basis, partially offset by a
decrease in pricing of these shipments, contributed a $607,000 increase in 2007 first
quarter sales; and |
| |
| |
• |
|
Pub and other sales increased $48,000 in the first quarter of 2007. |
Shipments. The following table sets forth a comparison of shipments (in barrels) for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
| |
|
Draft |
|
|
Bottle |
|
|
Total |
|
|
Draft |
|
|
Bottle |
|
|
Total |
|
|
Increase / |
|
|
|
|
| |
|
Shipments |
|
|
Shipments |
|
|
Shipments |
|
|
Shipments |
|
|
Shipments |
|
|
Shipments |
|
|
(Decrease) |
|
|
% Change |
|
A-B |
|
|
10,800 |
|
|
|
13,700 |
|
|
|
24,500 |
|
|
|
10,500 |
|
|
|
12,800 |
|
|
|
23,300 |
|
|
|
1,200 |
|
|
|
5.2 |
% |
Craft Brands |
|
|
8,600 |
|
|
|
20,100 |
|
|
|
28,700 |
|
|
|
9,300 |
|
|
|
20,300 |
|
|
|
29,600 |
|
|
|
(900 |
) |
|
|
(3.0 |
) |
Contract brewing |
|
|
8,600 |
|
|
|
2,600 |
|
|
|
11,200 |
|
|
|
4,200 |
|
|
|
— |
|
|
|
4,200 |
|
|
|
7,000 |
|
|
|
166.7 |
|
Pubs and other |
|
|
700 |
|
|
|
200 |
|
|
|
900 |
|
|
|
700 |
|
|
|
200 |
|
|
|
900 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipped |
|
|
28,700 |
|
|
|
36,600 |
|
|
|
65,300 |
|
|
|
24,700 |
|
|
|
33,300 |
|
|
|
58,000 |
|
|
|
7,300 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company shipments increased 12.6% during the first quarter of 2007 as compared to the first
quarter of 2006, primarily driven by a substantial increase in shipments of beer brewed on a
contact basis. Total sales volume for the quarter ended March 31, 2007 increased to 65,300 barrels
from 58,000 barrels for the same quarter in 2006. Shipments of the Company’s packaged products
increased 10% while shipments of the Company’s draft products increased 16%. Excluding the impact
of shipments of beer brewed on a contract basis, the Company’s shipments of bottled beer have
steadily increased as a percentage of total beer shipments since the mid-1990’s. In the first
quarter of 2007, 62.8% of total shipments, excluding beer brewed under a contract brewing
arrangement, were shipments of bottled beer versus 61.8% in the same period in 2006.
Contributing significantly to the 7,300 barrel increase in the Company’s total shipments is an
increase of 7,000 barrels of beer brewed at the Washington Brewery under contract brewing
arrangements with Widmer. In connection with the Supply, Distribution and Licensing Agreement with
Craft Brands, if shipments of the Company’s products in the Craft Brands territory decrease as
compared to the previous year’s shipments, the Company has the right to brew Widmer products in an
amount equal to the lower of (i) the Company’s product shipment decrease or (ii) the Widmer product
shipment increase (the “Contractual Obligation”). In addition, pursuant to the Manufacturing and
Licensing
Agreement with Widmer, the Company may, at Widmer’s request, brew more beer for Widmer than the
amount obligated by the Supply, Distribution and Licensing Agreement with Craft Brands. This
Manufacturing and Licensing Agreement with Widmer expires December 31, 2007. Under these contract
brewing arrangements, the Company brewed and shipped 11,200 barrels and 4,200 barrels of Widmer
beer in the first quarter of 2007 and 2006, respectively. Of these shipments, approximately
68% of first quarter 2007 barrels were in excess of the Contractual Obligation and none of the
first quarter 2006 barrels were in excess of the Contractual Obligation. Excluding shipments under
these arrangements, 2007 first quarter shipments of the Company’s draft and bottled products were
nearly flat, resulting in a 0.7% increase in total Company shipments in the first quarter of 2007
as compared to the same quarter in 2006. Driven by the Contractual Obligation as well as Widmer’s
production needs, the Company anticipates that beer brewed and shipped in 2007 under the contract
brewing arrangements with Widmer will increase significantly over 2006 levels. The Company expects
this level of contract brewing for Widmer to end in the first half of 2008 as Widmer brings its own
additional capacity on-line. The Company is evaluating alternatives to utilize the capacity that
will become available upon the termination of the contract brewing. If the Company is unable to
achieve significant growth through its own products or other alternative products, the Company may
have significant unabsorbed overhead that would generate unfavorable financial results.
16
Included in the Company’s total shipments (as shipments through A-B in the table above) are
shipments of Widmer Hefeweizen, a golden unfiltered wheat beer that is one of the leading American
style Hefeweizens sold in the U.S. The Company brews Widmer Hefeweizen at the New Hampshire Brewery
and distributes the beer through A-B in the midwest and eastern U.S. under license from Widmer. In
2003, the Company entered into a licensing agreement with Widmer to produce and sell the Widmer
Hefeweizen brand in states east of the Mississippi River. In March 2005, the Widmer Hefeweizen
distribution territory was expanded to include all of the Company’s midwest and eastern markets.
The term of this agreement expires on February 1, 2008, with additional one-year automatic renewals
unless either party notifies the other of its desire to have the term expire at the end of the then
existing term at least 150 days prior to such expiration. The agreement may be terminated by either
party at any time without cause pursuant to 150 days notice or for cause by either party under
certain conditions. Additionally, Redhook and Widmer have entered into a separate agreement
providing that if Widmer terminates the licensing agreement or causes it to expire before December
31, 2009, Widmer will pay the Company a lump sum payment, intended to partially compensate the
Company for capital equipment expenditures made at the New Hampshire Brewery to support the sales
growth of Widmer Hefeweizen. During the term of this agreement, Redhook will not brew, advertise,
market, or distribute any product that is labeled or advertised as a “Hefeweizen” or any similar
product in the agreed upon midwest and eastern territory. Brewing and selling of Redhook’s
Hefe-weizen was discontinued in conjunction with this agreement. The Company shipped 6,300 barrels
and 6,500 barrels of Widmer Hefeweizen during the first quarter of 2007 and 2006, respectively. The
Company believes that the agreement increases capacity utilization and has strengthened the
Company’s product portfolio. If the Widmer licensing agreement were terminated early, or if Widmer
gave notice of its election to terminate the agreement according to its term on February 1, 2008,
the Company would evaluate alternatives to utilize the capacity, either through new and existing
Redhook products or alternative brewing relationships. If the Company is unable to utilize the
capacity, the loss of revenue and the resulting excess capacity in the New Hampshire Brewery would
have an adverse effect on the Company’s financial performance.
Excluding shipments of beer brewed under the contract brewing arrangement with Widmer and under the
Widmer Hefeweizen licensing agreement, total Company shipments, in the U.S., increased by 600
barrels, or 1% in 2007 as compared to 2006.
At March 31, 2007 and 2006, the Company’s products were distributed in 48 states. Shipments in the
midwest and eastern United States increased by 5% compared to the same 2006 period while shipments
in the western United States served by Craft Brands decreased 3% during the same period.
Sales in the first quarter of 2007 to Craft Brands represented approximately 44% of total
shipments, or 28,700 barrels, compared to 51%, or 29,600 barrels in the same 2006 quarter.
Contributing most significantly to the decline in shipments in the western U.S. were a 22% decline
in shipments to Oregon, attributable in part to price increases taken in early 2007, an 11% decline
in shipments to Colorado, also due to highly competitive market pricing, and a 1% decline in
shipments to Washington. A significant portion of the Company’s sales continue to be in the Pacific
Northwest region, which the Company believes is one of the most competitive craft beer markets in
the U.S., both in terms of number of market participants and consumer awareness. The Company
continues to face extreme competitive pressure in Washington state, which is not only the Company’s
largest market but is also its oldest market. From 2000 through 2006, the Company had experienced a
24% decline in sales volume in Washington state.
In the first three months of 2007, sales of the Company’s products in the Craft Brands territory
declined by 1% compared to the same period in 2006. Pricing of the Company’s products has increased
and the level of promotion and discounting has declined, allowing the Company to achieve higher
revenue per barrel; however, management believes there is a direct correlation to lower sales
caused by higher net pricing. During this same period, Craft Brands has continued to experience
success in selling Widmer and Kona products. Although the Company enjoys the benefits of those
successes through its profit-sharing arrangement with Craft Brands, the Company believes it is
critical for Craft Brands to deliver success with the Redhook products in addition to the other
products. The Company has communicated this concern to Craft Brands and is working with Craft
Brands’ management to establish new brand management throughout the portfolio of Redhook products.
Craft Brands also responded to this concern by re-emphasizing its commitment to Redhook products.
While Craft Brands has set goals and objectives to improve performance of the Redhook products in
2007, the first quarter 2007 goals were not met. The Company continues to work with Craft Brands
management to improve performance.
Sales in the midwest and eastern United States in the first quarter of 2007 represented
approximately 38% of total shipments, or 24,500 barrels, compared to 40%, or 23,300 barrels in the
same 2006 quarter. Contributing most
17
significantly to the sales growth in the first quarter of 2007
were increased sales to states in the southeastern U.S., offset by declines in sales in several New
England states.
Pricing and Fees. The Company sells its product at wholesale pricing levels in the midwest
and eastern U.S., at lower than wholesale pricing levels to Craft Brands in the western U.S., and
at agreed-upon pricing levels for beer brewed on a contract basis.
Redhook continues to sell its product at wholesale pricing levels in the midwest and eastern U.S.
through sales to A-B. Average wholesale revenue per barrel for draft products, net of discounts,
improved approximately 5% in the first quarter of 2007 compared to the same quarter in 2006. This
increase in pricing accounted for an increase of approximately $66,000 in total sales. Average
wholesale revenue per barrel for bottle products, net of discounts, increased approximately 5% in
2007 compared to 2006. This increase in pricing accounted for an increase of approximately $116,000
in total sales. Seldom, if ever, are pricing changes driven by an inflationary period. Instead,
pricing changes implemented by the Company generally follow pricing changes initiated by large
domestic or import brewing companies. While the Company has implemented modest price increases
during the past few years, some of the benefit has been offset by competitive promotions and
discounting. Additionally, the Company may experience a decline in sales in certain regions
following a price increase.
The Company sells its product to Craft Brands at a price substantially below wholesale pricing
levels pursuant to the Supply, Distribution and Licensing Agreement with Craft Brands; Craft
Brands, in turn, advertises, markets, sells and distributes the product to wholesale outlets in the
western U.S. through a distribution agreement between Craft Brands and A-B. The prices that the
Company charges Craft Brands for draft product and for bottled product are determined by
contractually defined formulas and are based on the twelve month average pricing ending September
of the previous year for all Redhook and Widmer draft product and for all Redhook and Widmer
bottled product sold by Craft Brands. The prices are adjusted on January 1st of each
year. Average revenue per barrel for draft products sold to Craft Brands increased approximately 1%
in 2007 compared to 2006. This increase in pricing accounted for an increase of approximately
$10,000 in total sales. Average revenue per barrel for bottle products sold to Craft Brands
decreased 1% in 2007 compared to 2006 resulting in a decrease of $19,000 in total sales.
Average revenue per barrel on beer brewed on a contract basis for Widmer pursuant to the Supply,
Distribution and Licensing Agreement with Craft Brands is generally at a price substantially lower
than wholesale pricing levels. After the Contractual Obligation has been fulfilled pursuant to the
Supply, Distribution and Licensing Agreement with Craft Brands, the price charged Widmer for any
additional barrels brewed declines pursuant to the Manufacturing and Licensing Agreement with
Widmer. Average revenue per barrel for draft beer brewed on a contract basis decreased 8% in 2007
compared to 2006 resulting in a decrease of $31,000 in total sales. In the first quarter of 2007,
the Company began shipping bottled beer under this contract brewing arrangement.
In connection with all sales through the July 1, 2004 A-B Distribution Agreement, the Company pays
a Margin fee to A-B. The Margin does not apply to sales to the Company’s retail operations or to
dock sales. The Margin also does not apply to the Company’s sales to Craft Brands because Craft
Brands pays a comparable fee to A-B on its resale of the product. The A-B Distribution Agreement
also provides that the Company shall pay an additional fee on shipments that exceed shipments in
the same territory during fiscal 2003 (the “Additional Margin”). For the three
months ended March 31, 2007, the Margin was paid to A-B on shipments totaling 24,500 barrels to
approximately 500 distribution points. For the three months ended in March 31, 2006, the Margin was paid to
A-B on shipments totaling, 23,300 barrels to approximately 457
distribution points. Because first quarter 2007 and 2006 shipments in
the midwest and eastern U.S. exceeded 2003 first quarter shipments in
the same territory, the Company paid the Additional Margin
on 10,500 and 9,300 barrels,
respectively. The Margin is
reflected as a reduction of sales in the Company’s statement of operations.
Retail Operations and Other Sales. Sales in the Company’s retail operations and other
sales increased $48,000 to $1,103,000 in 2007 from $1,056,000 in 2006, primarily as the result of
an increase in beer, food and merchandise sales.
Excise Taxes. Excise taxes increased $124,000 to $1,014,000 for the first quarter of 2007 compared
to $890,000 for the same 2006 period, primarily the result of the overall increase in shipments.
The Company continues to be responsible for federal and state excise taxes for all shipments,
including those to Craft Brands and brewed under contract. The comparability of excise taxes as a
percentage of net sales is impacted by: average revenue per barrel; the mix of sales in the midwest
and eastern United States, sales to Craft Brands, sales of beer brewed on contract basis, and pub
sales; and the estimated annual average federal and state excise tax rates.
18
Cost of Sales. Comparing the first quarter of 2007 to the first quarter of 2006, cost of sales
increased by $564,000 but decreased as a percentage of net sales and on a per barrel basis.
Although the Company experienced some increases in packaging, raw materials and repairs, the 12.6%
increase in first quarter 2007 shipments resulted in fixed and semi-variable operating costs, such
as depreciation and production salaries, being lower on a per barrel basis.
The Company’s cost of sales includes a licensing fee of $83,000 and $75,000 for the first quarters
of 2007 and 2006, respectively, in connection with the Company’s shipment of 6,300 barrels and
6,500 barrels of Widmer Hefeweizen in the midwest and eastern United States pursuant to a licensing
agreement with Widmer.
Based upon the breweries’ combined theoretical production capacity under optimal year-round brewing
conditions of 115,000 barrels and 93,750 barrels for the first three months of 2007 and 2006, the
utilization rates were 57% and 62%, respectively. Capacity utilization rates are calculated by
dividing the Company’s total shipments by the combined theoretical production capacity.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the
first quarter of 2007 increased $323,000 to $2,036,000 from expenses of $1,714,000 in the same 2006
quarter. The increase is primarily attributable to an increase in accounting-related fees related
to the implementation of Sarbanes-Oxley Section 404, legal, consulting and meeting costs incurred
in connection with merger discussions, salary increases and modest increases in sales and marketing
expenditures.
Income from Equity Investment in Craft Brands. After giving effect to income attributable to the
Kona brand, which was shared differently between the Company and Widmer through 2006, the Craft
Brands operating agreement dictates that remaining profits and losses of Craft Brands are allocated
between the Company and Widmer based on the cash flow percentages of 42% and 58%, respectively. For
the quarter ended March 31, 2007, the Company’s share of Craft Brands’ net income totaled $678,000.
For the quarter ended March 31, 2006, the Company’s share of Craft Brands’ net income totaled
$514,000. Net cash flow of Craft Brands, if any, is generally distributed monthly to the Company
based on the Company’s cash flow percentage of 42%. In the first quarter of 2007, the Company
received cash distributions of $316,000, representing its share of the net cash flow of Craft
Brands. In the first quarter of 2006, the Company received cash distributions of $400,000.
Interest Expense. Interest expense was unchanged at $83,000 for the first quarter of 2007 and
2006. Higher average interest rates in the first quarter of 2007, partially offset by a declining
term loan balance, resulted in no change in interest expense.
Other Income, net. Other income, net increased by $61,000 to $115,000 for the first quarter of
2007 from $54,000 for the first quarter of 2006, primarily as a result of a $39,000 increase in
interest income earned on interest-bearing deposits.
Income Taxes. The Company’s effective income tax rate was a 45.0% benefit for the quarter ending
March 31, 2007 and a 1.2% expense for the quarter ending March 31, 2006. Both periods include a
provision for current state taxes. The Company has estimated its effective tax rate to be 45.0% in
2007, driven by projected 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 2006, the Company increased the valuation
allowance that covers net tax operating loss carryforwards and other net deferred tax assets. The
valuation allowance covers a portion of the Company’s deferred tax assets, specifically certain
federal and state NOLs that may expire before the Company is able to utilize the tax benefit.
Realization of the benefit is dependent on the Company’s ability to generate future U.S. taxable
income. To the extent that the Company is unable to generate adequate taxable income in future
periods, the Company will not be able to recognize additional tax benefits and may be required to
record a greater valuation allowance covering potentially expiring NOLs.
19
Craft Brands Alliance LLC
The Company has accounted for its investment in Craft Brands under the equity method, as outlined
by Accounting Principle Board Opinion (“APB”) No. 18, The Equity Method of Accounting for
Investments in Common Stock. Pursuant to APB No. 18, the Company has recorded its share of Craft
Brands’ net income in the Company’s statement of operations as income from equity investment in
Craft Brands. The following discussion should be read in conjunction with the financial statements
and notes thereto of Craft Brands Alliance LLC, filed with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2006, in Item 15. Exhibits and Financial Statement Schedules in
accordance with Rule 3-09 of Regulation S-X.
The following summarizes a comparison of certain items included in Craft Brands’ statement of
operations for the quarters ended March 31, 2007 and 2006. Certain reclassifications have been made
to the prior year’s financial statements to conform to the current year presentation. The effects
of the reclassifications did not affect net income or the profit allocation.
Sales. Craft Brands’ sales totaled $16,881,000 for the first quarter of 2007 compared to
$15,915,000 for the first quarter of 2006. In addition to selling 28,700 barrels of the Company’s
product to wholesalers in the western United States in the first quarter of 2007 and 29,600 barrels
in the first quarter of 2006, Craft Brands also sold Widmer and Kona products. Total Craft Brands
shipments increased approximately 1.9% as compared to shipments in the three-month period of 2006.
Average wholesale revenue per barrel for all draft products sold by Craft Brands, net of discounts,
increased 2% in the first quarter of 2007 as compared to the same quarter in 2006. Average
wholesale revenue per barrel for all bottle products sold by Craft Brands, net of discounts,
increased 3% in the first quarter of 2007 as compared to the same period in 2006. For the quarter
ended March 31, 2007, average wholesale revenue per barrel for all products sold by Craft Brands
was nearly flat compared to average wholesale revenue per barrel on direct sales to wholesalers by
the Company during the same period. Craft Brands also pays fees to A-B in connection with sales to
A-B that are comparable to fees paid by the Company.
Cost of Sales. Cost of sales of Craft Brands totaled $12,011,000 for the first quarter of 2007
compared to $11,699,000 for the first quarter of 2006. The increase in cost of sales over the 2006
quarter is attributable to higher sales volume, an increase in prices charged by the Company and
Widmer for draft product sold to Craft Brands, and higher freight, slightly offset by a decrease in
prices charged by the Company and Widmer for bottled product sold to Craft Brands. Craft Brands
purchases product from the Company and Widmer at a price substantially below wholesale pricing
levels pursuant to the Supply, Distribution, and Licensing Agreement between Craft Brands and each
of the Company and Widmer.
Selling, General and Administrative Expenses. Craft Brands’ selling, general and administrative
expenses totaled $3,161,000 for the first quarter of 2007 compared to $2,940,000 for the first
quarter of 2006, reflecting all advertising, marketing and promotion efforts for the Redhook,
Widmer and Kona brands. During the quarter ended March 31, 2007, higher sales and marketing costs
of approximately $97,000, attributable to adding several new positions and an increase in the cost
of promotional materials, contributed to the increase compared to 2006.
Net Income. Craft Brands’ net income totaled $1,615,000 for the first quarter of 2007 compared to
$1,227,000 for the first quarter of 2006. The Company’s share of Craft Brands’ net income totaled
$678,000 for the first quarter of 2007 compared to $514,000 for the first quarter of 2006. After
giving effect to income attributable to the Kona brand, which was shared differently between the
Company and Widmer through 2006, the Craft Brands operating agreement dictates that remaining
profits and losses of Craft Brands are allocated between the Company and Widmer based on the cash
flow percentages of 42% and 58%, respectively.
20
Outlook
Shipments in April 2007, including shipments of beer brewed on a contract basis and shipments of
Widmer Hefeweizen in the midwest and east under the licensing agreement with Widmer, increased
19.8% to 27,700 barrels as compared to shipments of 23,100 barrels in April 2006. Excluding
shipments of Widmer Hefeweizen brewed on a contract basis at the Washington Brewery and shipments
of Widmer Hefeweizen in the midwest and east under the licensing agreement with Widmer, shipments
of Redhook products increased 11.6% in April 2007 compared to April 2006, reflecting an increase of
25% in shipments in the midwest and eastern United States and an increase of 4% in the Craft Brands
territory. The Company believes that sales volume for the first month of a quarter should not be
relied upon as an accurate indicator of results for future periods. 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, therefore, its ability to predict sales for
future periods is limited.
Liquidity and Capital Resources
The Company has required capital principally for the construction and development of its production
facilities. Historically, 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 and working capital and capital expenditure requirements through cash on
hand, operating cash flow and bank borrowings, and to the extent required and available, offerings
of debt or equity securities.
The Company had $8,072,000 and $9,435,000 of cash and cash equivalents at March 31, 2007 and
December 31, 2006, respectively. At March 31, 2007, the Company had working capital of $7,757,000.
The Company’s long-term debt as a percentage of total capitalization (long-term debt and common
stockholders’ equity) was 6.5% at March 31, 2007 compared to 6.6% at December 31, 2006. Cash used
by operating activities increased to $971,000 in the first quarter of 2007 from $276,000 for the
same period in 2006. Cash used by operating activities was higher in 2007 as a result of normal
fluctuations in operating assets and liabilities.
During the three months ended March 31, 2007, the Company’s capital
expenditures totaled $352,000,
including approximately $303,000 related to the expansion of fermentation capacity in the New
Hampshire Brewery. Capital expenditures for fiscal year 2007 are expected to total approximately
$3.0 million, including the $352,000 incurred to date. Capital expenditures will be funded with
operating cash flows. In June 2007, the Company plans to bring
on-line an additional 25,000 barrels
of fermentation capacity at the New Hampshire Brewery at an estimated cost of $1.3 million.
The Company has a credit agreement with a bank under which a term loan (the “Term Loan”) is
provided. In June 2006, the credit agreement was amended to extend the maturity date from June 5,
2007 to June 5, 2012. The Term Loan is secured by substantially all of the Company’s assets.
Interest on the Term Loan accrues at London Inter Bank Offered Rate (“LIBOR”) plus 1.75% and the
Company has the option to fix the applicable interest rate for up to twelve months by selecting
LIBOR for one- to twelve- month periods as a base. As of March 31, 2007, there was $4,613,000
outstanding on the Term Loan, and the Company’s one-month LIBOR-based borrowing rate was 7.1%. The
termination of the A-B Distribution Agreement for any reason would constitute an event of default
under the credit agreement and the bank may declare the entire outstanding loan balance immediately
due and payable. If this were to occur, the Company could seek to refinance its Term Loan with one
or more banks or obtain additional equity capital; however, there can be no assurance the Company
would be able to access additional capital to meet its needs or that such additional capital would
be at commercially reasonable terms.
The terms of the credit agreement require the Company to meet certain financial covenants. The
Company was in compliance with all covenants for the quarter ended March 31, 2007 and expects that
it will remain in compliance with its debt covenants for the next twelve months. In December 2001,
March 2003, February 2004 and October 2004, the credit agreement was amended to modify several
financial covenants. In January 2006, the credit agreement was amended to eliminate the tangible
net worth covenant (shareholders’ equity less intangible assets) as of the year ended December 31,
2005. These modifications to the financial covenants have reduced the likelihood that a violation
of the covenants by the Company will occur in the future. However, if the Company were to report a
significant net loss for one or more quarters within a time period covered by the financial
covenants, one or more of the covenants would be negatively impacted and could result in a
violation. Failure to meet the covenants required by the credit
21
agreement is an event of default and, at its option, the bank could deny a request for a waiver and
declare the entire outstanding loan balance immediately due and payable. In such a case, the
Company would seek to refinance the loan with one or more banks, potentially at less desirable
terms. However, there can be no guarantee that additional financing would be available at
commercially reasonable terms, if at all.
The following table summarizes the financial covenants required by the Term Loan and the Company’s
current level of compliance with these covenants:
| |
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|
|
|
|
|
|
|
| |
|
|
|
|
|
Quarter Ended |
| |
|
Required by Term Loan |
|
March 31, 2007 |
Capital ratio |
|
Less than: 1.25:1 |
|
|
0.22:1 |
|
Working capital |
|
Greater than: $1,900,000 |
|
$ |
7,757,355 |
|
Fixed charge coverage ratio |
|
Greater than: 1.15:1 |
|
|
3.390:1 |
|
Critical Accounting Policies and Estimates
The Company’s financial statements are based upon the selection and application of significant
accounting policies that require management to make significant estimates and assumptions.
Management believes that the following are some of the more critical judgment areas in the
application of the Company’s accounting policies that currently affect its financial condition and
results of operations. Judgments and uncertainties affecting the application of these policies may
result in materially different amounts being reported under different conditions or using different
assumptions.
Income Taxes. The Company records federal and state income taxes in accordance with Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 109,
Accounting for Income Taxes. Deferred income taxes or tax benefits reflect the tax effect of
temporary differences between the amounts of assets and liabilities for financial reporting
purposes and amounts as measured for tax purposes as well as for tax net operating loss and credit
carry forwards.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109, (“FIN No. 48”). FIN No. 48 clarifies the accounting and
disclosure requirement for uncertainty in income taxes recognized in an entity’s financial statements in
accordance with SFAS No. 109. The interpretation prescribes the minimum recognition threshold and
measurement attribute required to be met before a tax position that has been taken or is expected
to be taken is recognized in the financial statements. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition, and clearly scopes income taxes out of FASB No. 5, Accounting for Contingencies.
FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted
this interpretation on January 1, 2007. The adoption of FIN No. 48 did not have a material impact on the
Company’s balance sheet or statement of operations.
As of March 31, 2007, the Company’s deferred tax assets were primarily comprised of net operating
loss carryforwards (“NOLs”) of $26.5 million, or $9.0 million tax-effected; federal and state
alternative minimum tax credit carryforwards of $166,000; and state NOL carryforwards of $214,000
tax-effected. In assessing the realizability of the deferred tax assets, the Company considered
both positive and negative evidence when measuring the need for a valuation allowance. The ultimate
realization of deferred tax assets is dependent upon the existence of, or generation of, taxable
income during the periods in which those temporary differences become deductible. The Company
considered the scheduled reversal of deferred tax liabilities, projected future taxable income and
other factors in making this assessment. The Company’s estimates of future taxable income takes
into consideration, among other items, estimates of future taxable income related to depreciation.
Based upon the available evidence, the Company does not believe that all of the deferred tax assets
will be realized. Accordingly, the Company’s balance sheet includes a valuation allowance to cover
certain federal and state NOLs that may expire before the Company is able to utilize the tax
benefit. As of March 31, 2007, the Company had a valuation allowance of $1,059,000. To the extent
that the Company continues to be unable to generate adequate taxable income in future periods, the
Company will not be able to recognize additional tax benefits and may be required to record a
greater valuation allowance covering potentially expiring NOLs.
There were no unrecognized tax benefits as of January 1, 2007 or March 31, 2007.
22
Historically, the Company has not incurred any interest or penalties associated with tax matters
and no interest or penalties were recognized during the three months
ended March 31, 2007. However, the Company has adopted a policy whereby penalties incurred in
connection with tax matters will be classified as general and administrative expenses, and interest assessments incurred in connection with tax matters will be classified as interest expense.
Tax years that remain open for examination by federal and state taxing authorities include 2003,
2004, 2005, and 2006. In addition, tax years from 1996 to 2002 may be subject to examination to the
extent that the Company utilizes the NOLs from those years in its current year or future year tax
returns.
Long-Lived Assets. The Company evaluates potential impairment of long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes procedures for review of recoverability and measurement of impairment, if necessary, of
long-lived assets, goodwill and certain identifiable intangibles. When facts and circumstances
indicate that the carrying values of long-lived assets may be impaired, an evaluation of
recoverability is performed by comparing the carrying value of the assets to projected future
undiscounted cash flows in addition to other quantitative and qualitative analyses. Upon indication
that the carrying value of such assets may not be recoverable, the Company will recognize an
impairment loss by a charge against current operations. Fixed assets are grouped at the lowest
level for which there are identifiable cash flows when assessing impairment. During 2006, the
Company performed an analysis of its brewery assets to determine if an impairment might exist. The
Company’s estimate of future undiscounted cash flows indicated that such carrying values were
expected to be recovered. Nonetheless, it is possible that the estimate of future undiscounted cash
flows may change in the future, resulting in the need to write down those assets to their fair
value.
Investment in Craft Brands Alliance LLC. The Company has assessed its investment in Craft Brands
pursuant to the provisions of FASB Interpretation No. 46 Revised, Consolidation of Variable
Interest Entities — an Interpretation of ARB No. 51 (“FIN No. 46R”). FIN No. 46R clarifies the
application of consolidation accounting for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial support
from other parties or in which equity investors do not have the characteristics of a controlling
financial interest; these entities are referred to as variable interest entities. Variable interest
entities within the scope of FIN No. 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity’s expected losses, receives a majority of its expected
returns, or both. FIN No. 46R also requires disclosure of significant variable interests in
variable interest entities for which a company is not the primary beneficiary. The Company has
concluded that its investment in Craft Brands meets the definition of a variable interest entity
but that the Company is not the primary beneficiary. In accordance with FIN No. 46R, the Company
has not consolidated the financial statements of Craft Brands with the financial statements of the
Company, but instead accounted for its investment in Craft Brands under the equity method, as
outlined by APB No. 18, The Equity Method of Accounting for Investments in Common Stock. The equity
method requires that the Company recognize its share of the net earnings of Craft Brands by
increasing its investment in Craft Brands on the Company’s balance sheet and recognizing income
from equity investment in the Company’s statement of operations. A cash distribution or the
Company’s share of a net loss reported by Craft Brands is reflected as a decrease in investment in
Craft Brands on the Company’s balance sheet. The Company does not control the amount or timing of
cash distributions by Craft Brands. For the three months ended March 31, 2007 and 2006, the Company
recognized $678,000 and $514,000, respectively, of undistributed earnings related to its investment
in Craft Brands. During the same period in 2007 and 2006, the Company received cash distributions
of $316,000 and $400,000, respectively, representing its share of the net cash flow of Craft
Brands. The Company’s share of the earnings of Craft Brands contributed a significant portion of
income to the Company’s results of operations. The Company will periodically review its investment
in Craft Brands to insure that it complies with the guidelines prescribed by FIN No. 46R.
Revenue Recognition. The Company recognizes revenue from product sales, net of excise taxes,
discounts and certain fees the Company must pay in connection with sales to A-B, when the products
are shipped to customers. Although title and risk of loss do not transfer until delivery of the
Company’s products to A-B or the A-B distributor, the Company recognizes revenue upon shipment
rather than when title passes because the time between shipment and delivery is short and product
damage claims and returns are immaterial. The Company recognizes revenue on retail sales at the
time of sale. The Company recognizes revenue from events at the time of the event.
23
Recent Accounting Pronouncements
In June 2006, the FASB ratified the consensuses of EITF No. 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation). EITF No. 06-3 indicates that the income statement
presentation on either a gross basis or a net basis of the taxes within the scope of the issue is
an accounting policy decision. The Company’s accounting policy is to present the taxes within the
scope of EITF No. 06-3 on a gross basis. In accordance with the guidance presented in EITF No.
06-3, the Company’s statements of operations separately disclose excise taxes, thus following the
approach described as the “gross basis”.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. An enterprise shall disclose the cumulative effect of the change on retained
earnings in the statement of financial position as of the date of adoption and such disclosure is
required only in the year of adoption. On January 1, 2007, the Company adopted FIN No. 48; the
adoption did not have a material effect on its results of operations or financial condition.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 clarifies the SEC staff’s beliefs regarding the process of quantifying
financial statement misstatements and is effective for fiscal years ending after November 15, 2006.
On January 1, 2007, the Company adopted SAB No. 108; the adoption did not have a material effect on
the Company’s results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. The standard applies whenever other standards require,
or permit, assets or liabilities to be measured at fair value. This statement is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Early adoption is permitted. The adoption of SFAS No. 157 as of December 31, 2006 did not have a
material impact on the Company’s results of operations or financial condition.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted. The Company is currently evaluating the requirements of SFAS No. 159 and has not yet
determined the impact on the financial statements.
24
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has assessed its vulnerability to certain market risks, including interest rate risk
associated with financial instruments included in cash and cash equivalents and long-term debt. Due
to the nature of these investments and the Company’s investment policies, the Company believes that
the risk associated with interest rate fluctuations related to these financial instruments does not
pose a material risk.
The Company did not have any derivative financial instruments as of March 31, 2007.
ITEM 4. Controls and Procedures
The Company has carried out an evaluation of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or
15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q. Based upon
that evaluation, the Chief Executive Officer, President and Chief
Operating Officer, and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective.
No changes in the Company’s internal control over financial reporting were identified in connection
with the evaluation that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II. Other Information
ITEM 1. Legal Proceedings
The Company is involved from time to time in claims, proceedings and litigation arising in the
normal course of business. The Company believes that, to the extent that it exists, any pending or
threatened litigation involving the Company or its properties will not likely have a material
adverse effect on the Company’s financial condition or results of operations.
ITEM 1A. Risk Factors
Information regarding risk factors affecting the Company appears in Part I, Item 1A. Risk Factors
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been
no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form
10-K except as described below:
We may experience a shortage in kegs necessary to distribute our draft beer. The Company
distributes its draft beer in kegs that are owned by the Company as well as leased from A-B and a
third-party vendor. During periods when the Company experiences stronger sales, the Company relies
on kegs leased from A-B and the third-party vendor to address the additional demand. As shipments
of draft beer increase, the Company may experience a shortage of available kegs to fill sales
orders. If the Company cannot meet its keg requirements through either lease or purchase, the
Company may be required to delay some draft shipments. Such delays could have an adverse impact on
the Company’s sales and relationships with its wholesalers, A-B and Craft Brands. The Company is
currently reviewing other alternatives for leasing or purchasing kegs. There is no assurance,
though, that the Company will be successful securing additional kegs.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
25
ITEM 5. Other Information
None.
ITEM 6. Exhibits
The following exhibits are filed as part of this report.
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31.1
|
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Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of President and Chief Operating Officer of Redhook Ale
Brewery, Incorporated pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
31.3
|
|
Certification of Chief Financial Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act Rule 13a-14(a) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act 13a-14(b) and 18 U.S.C. Section
1350 |
|
|
|
32.2
|
|
Certification of President and Chief Operating Officer of Redhook Ale
Brewery, Incorporated pursuant to Exchange Act 13a-14(b) and 18
U.S.C. Section 1350 |
|
|
|
32.3
|
|
Certification of Chief Financial Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act 13a-14(b) and 18 U.S.C. Section
1350 |
26
SIGNATURES
Pursuant to the requirements 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.
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REDHOOK ALE BREWERY,
INCORPORATED |
|
| |
| May 11, 2007 |
BY: /s/ Jay T. Caldwell
|
|
| |
Jay T. Caldwell |
|
| |
Chief Financial Officer
and Treasurer |
|
| |
27