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 June 30, 2009
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
CRAFT BREWERS ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
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Washington
(State or other jurisdiction of
incorporation or organization)
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91-1141254
(I.R.S. Employer
Identification No.) |
929 North Russell Street
Portland, Oregon 97227
(Address of principal executive offices)
(503) 331-7270
(Registrants 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (See the definitions of larger accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act).
Check one:
Large Accelerated Filer o
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Accelerated Filer o
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Non-accelerated Filer o (Do not check if a smaller reporting company)
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Smaller Reporting Company þ
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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 registrants common stock outstanding as of August 4, 2009 was
17,005,263.
CRAFT BREWERS ALLIANCE, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2009
TABLE OF CONTENTS
2
PART I.
ITEM 1. Financial Statements
CRAFT BREWERS ALLIANCE, INC.
BALANCE SHEETS
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(Unaudited) |
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June 30, |
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December 31, |
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2009 |
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2008 |
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(Dollars in thousands except |
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per share amounts) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
247 |
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$ |
11 |
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Accounts receivable, net of allowance for doubtful accounts of $100
and $64 at June 30, 2009 and December 31, 2008, respectively |
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12,996 |
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12,499 |
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Inventories, net |
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10,769 |
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9,729 |
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Income tax receivable |
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881 |
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724 |
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Deferred income tax asset, net |
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909 |
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767 |
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Other current assets |
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4,226 |
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3,951 |
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Total current assets |
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30,028 |
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27,681 |
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Property, equipment and leasehold improvements, net |
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100,161 |
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101,389 |
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Equity investments |
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5,317 |
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5,189 |
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Intangible and other assets, net |
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13,218 |
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13,546 |
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Total assets |
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$ |
148,724 |
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$ |
147,805 |
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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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$ |
16,574 |
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$ |
15,000 |
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Accrued salaries, wages, severance and payroll taxes |
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3,305 |
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3,630 |
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Refundable deposits |
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6,610 |
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6,191 |
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Other accrued expenses |
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1,460 |
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2,393 |
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Current portion of long-term debt and capital lease obligations |
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1,438 |
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1,394 |
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Total current liabilities |
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29,387 |
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28,608 |
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Long-term debt and capital lease obligations, net of current portion |
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30,570 |
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31,834 |
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Fair value of derivative financial instruments |
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892 |
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1,252 |
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Deferred income tax liability, net |
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7,335 |
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6,552 |
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Other liabilities |
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305 |
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278 |
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Common stock, par value $0.005 per share, 50,000,000 shares authorized;
16,994,263 shares
at June 30, 2009 and 16,948,063 at December 31, 2008 issued and outstanding |
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85 |
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85 |
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Additional paid-in capital |
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122,521 |
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122,433 |
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Accumulated other comprehensive loss |
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(491 |
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(693 |
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Retained deficit |
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(41,880 |
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(42,544 |
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Total common stockholders equity |
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80,235 |
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79,281 |
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Total liabilities and common stockholders equity |
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$ |
148,724 |
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$ |
147,805 |
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The accompanying notes are an integral part of these financial statements.
3
CRAFT BREWERS ALLIANCE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months |
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Six Months |
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Ended June 30, |
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Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In thousands, except per share amounts) |
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Sales |
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$ |
37,465 |
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$ |
11,993 |
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$ |
66,694 |
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$ |
22,439 |
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Less excise taxes |
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2,323 |
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1,215 |
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4,306 |
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2,288 |
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Net sales |
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35,142 |
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10,778 |
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62,388 |
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20,151 |
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Cost of sales |
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26,133 |
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10,022 |
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47,981 |
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19,017 |
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Gross profit |
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9,009 |
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756 |
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14,407 |
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1,134 |
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Selling, general and administrative expenses |
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6,398 |
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2,451 |
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12,306 |
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4,352 |
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Merger-related expenses |
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113 |
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1,091 |
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225 |
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1,169 |
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Income from equity investment in Craft Brands |
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637 |
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1,390 |
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Operating income (loss) |
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2,498 |
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(2,149 |
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1,876 |
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(2,997 |
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Income from equity investments in Kona and FSB |
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99 |
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128 |
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Interest expense |
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(571 |
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(3 |
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(1,137 |
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(5 |
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Interest and other income, net |
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79 |
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13 |
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170 |
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57 |
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Income (loss) before income taxes |
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2,105 |
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(2,139 |
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1,037 |
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(2,945 |
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Income tax provision (benefit) |
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366 |
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(755 |
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373 |
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(1,017 |
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Net income (loss) |
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$ |
1,739 |
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$ |
(1,384 |
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$ |
664 |
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$ |
(1,928 |
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Basic and diluted earnings (loss) per share |
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$ |
0.10 |
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$ |
(0.16 |
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$ |
0.04 |
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$ |
(0.23 |
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The accompanying notes are an integral part of these financial statements.
4
CRAFT BREWERS ALLIANCE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, |
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2009 |
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2008 |
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(In thousands) |
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Operating Activities |
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Net income (loss) |
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$ |
664 |
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$ |
(1,928 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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3,700 |
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1,439 |
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Income from equity investments less than (in excess of) cash distributions |
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(128 |
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76 |
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Deferred income taxes |
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362 |
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(1,028 |
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Reserve for obsolete inventory |
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99 |
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67 |
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Loss on sale or disposal of property, equipment and leasehold improvements |
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7 |
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20 |
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Stock compensation |
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36 |
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20 |
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Other |
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(10 |
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(56 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(532 |
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982 |
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Trade receivables from Craft Brands |
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120 |
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Inventories |
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(1,385 |
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43 |
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Income tax receivable and other current assets |
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(274 |
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(693 |
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Other assets |
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40 |
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(72 |
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Accounts payable and other accrued expenses |
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641 |
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(638 |
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Trade payable to Craft Brands |
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114 |
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Accrued salaries, wages, severance and payroll taxes |
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(92 |
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1,137 |
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Refundable deposits |
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(355 |
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556 |
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Net cash provided by operating activities |
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2,773 |
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159 |
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Investing Activities |
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Expenditures for property, equipment and leasehold improvements |
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(1,431 |
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(2,641 |
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Proceeds from sale of property, equipment and leasehold improvments |
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28 |
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244 |
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Net cash used in investing activities |
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(1,403 |
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(2,397 |
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Financing Activities |
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Principal payments on debt and capital lease obligations |
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(687 |
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(8 |
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Net repayments under revolving line of credit |
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(500 |
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Issuance of common stock |
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53 |
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181 |
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Net cash provided by (used in) financing activities |
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(1,134 |
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173 |
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Increase (decrease) in cash and cash equivalents |
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236 |
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(2,065 |
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Cash and cash equivalents: |
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Beginning of period |
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11 |
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5,527 |
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End of period |
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$ |
247 |
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$ |
3,462 |
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Supplemental Disclosures |
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Cash paid for interest |
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$ |
1,194 |
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$ |
5 |
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The
accompanying notes are an integral part of these financial statements.
5
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements and related notes of the Company should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2008 (2008 Annual Report). These financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). 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. Certain reclassifications have been made to the prior years financial statements to
conform to the current year presentation. The results of operations for such interim periods are
not necessarily indicative of the results of operations for the full
year. Subsequent events were evaluated through August 12, 2009, the
date these financial statements were issued.
The financial statements as of and for the three and six months ended June 30, 2009 reflect
the July 1, 2008 merger of Widmer Brothers Brewing Company (Widmer) with and into the Company, as
more fully described in Note 2 below. These financial statements as of and for the three and six
months ended June 30, 2009 reflect the effect of the July 1, 2008 merger on the termination of the
agreements between the Company and Craft Brands Alliance LLC (Craft Brands), and the resulting
merger of Craft Brands with and into the Company. See Note 2 for further discussion of Craft
Brands.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement No. 133 (SFAS 161), which requires enhanced
disclosures about an entitys derivative and hedging activities in order to improve the
transparency of financial reporting. SFAS 161 amends and expands the disclosure requirements of
SFAS No. 133, Accounting for Derivative Instruments and Hedge Activities (SFAS 133) to provide
users of financial statements with an enhanced understanding of (i) how and why an entity uses
derivative instruments; (ii) how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related
hedged items affect an entitys financial position, results of operations, and cash flows. SFAS 161
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. On January 1, 2009, the Company adopted SFAS 161, which did not have a material
effect on the Companys financial position, results of operations or cash flows; however, the
Company was required to expand its disclosures around the use and purpose of its derivative
instruments. See Note 7 for these expanded disclosures.
In April 2009, the FASB issued FASB Staff Position (FSP) Financial Accounting Standards
(FAS) No. 107-1 and Accounting Principles Board (APB) No. 28-1, Interim Disclosures about Fair
Value of Financial Instruments, (FSP FAS 107-1), which requires disclosures about the fair value
of financial instruments in interim financial statements in addition to the current requirement for
disclosure in annual financial statements. The Company adopted FSP FAS 107-1 as of June 30, 2009.
The adoption of FSP FAS 107-1 did not have an impact on the Companys financial position, results
of operations, or cash flows; however, the Company was required to expand its disclosures around
the use and purpose of its derivative instruments. See Note 7 for these expanded disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which provides
guidance on the recognition and disclosure of events that occur after the balance sheet date but
before financial statements are issued. The Company adopted SFAS 165 as of June 30, 2009. The
adoption of SFAS 165 did not have an impact on the Companys financial position, results of
operations, or cash flows.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS 168). The new statement modifies the U.S. generally accepted accounting principles (GAAP)
hierarchy created by SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles by
establishing only two levels of GAAP: authoritative
6
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
and nonauthoritative. This is accomplished by
authorizing the FASB Accounting Standards Codification (Codification) to become the single source
of authoritative U.S. accounting and reporting standards, except for rules and interpretive
releases of the SEC under authority of the federal securities laws, which are sources of
authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements for interim
and annual periods ending after September 15, 2009. All existing accounting standard documents are
superseded and all other accounting literature not included in the Codification is considered
nonauthoritative. The Company does not anticipate the adoption of SFAS 168 will have a material
effect on the Companys financial position, results of operations, or cash flows.
2. Merger Activities
Merger with Widmer
On November 13, 2007, the Company entered into an Agreement and Plan of Merger with Widmer,
which was subsequently amended on April 30, 2008 (Merger Agreement). The Merger Agreement
provided, subject to customary conditions to closing, for a merger (the Merger) of Widmer with
and into the Company. A copy of the Merger Agreement was included as an exhibit to the Companys
current report on Form 8-K filed with the SEC on November 13, 2007. A copy of Amendment No. 1 to
the Merger Agreement was included as an exhibit to the Companys registration statement on Form
S-4/A filed with the SEC on May 2, 2008.
The Company believes that the combined entity has the potential to secure efficiencies beyond
those that had already been achieved by its existing relationships with Widmer in utilizing the two
companies production facilities and a national sales force, as well as by reducing duplicate
functions. Utilizing the combined breweries offers a greater opportunity to rationalize production
capacity in line with product demand. The sales force of the combined entity will support further
promotion of the products of its corporate investments, Kona Brewery LLC (Kona), which brews Kona
malt beverage products, and, to a lesser extent, Fulton Street Brewery, LLC (FSB), which brews
Goose Island malt beverage products.
On July 1, 2008, the Merger was consummated. Pursuant to the Merger Agreement and by operation
of law, upon the merger of Widmer with and into the Company, the Company acquired all of the
assets, rights, privileges, properties, franchises, liabilities and obligations of Widmer. Each
outstanding share of capital stock of Widmer was converted into the right to receive 2.1551 shares
of Company common stock, or 8,361,514 shares. The Merger resulted in Widmer shareholders and
existing Company shareholders each holding approximately 50% of the outstanding shares of the
Company. No Widmer shareholder exercised statutory appraisal rights in connection with the Merger.
In connection with the Merger, the name of the Company was changed from Redhook Ale Brewery,
Incorporated to Craft Brewers Alliance, Inc. The common stock of the Company continues to trade on
the Nasdaq Stock Market under the trading symbol HOOK.
Merger-Related Costs
In connection with the Merger, the Company incurred merger-related expenditures, including
legal, consulting, meeting, filing, printing and severance costs. Certain of the merger-related
expenses have been reflected in the statements of operations as incurred, while certain of the
other direct merger-related costs have been capitalized in accordance with Financial Accounting
Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations (SFAS 141). All capitalized merger costs were reclassified to goodwill upon the
closing of the Merger. As discussed in the 2008 Annual Report, the Company recorded a full
impairment of
its goodwill asset. All costs capitalized to goodwill, including any capitalized merger costs,
were charged to earnings for the year ended December 31, 2008 as a result.
These severance costs include payments to employees and officers whose employment was or will
be terminated as a result of the Merger. The Company estimates that merger-related severance
benefits totaling approximately $583,000 will be paid from the remainder of 2009 to 2011 to all
affected former Redhook employees and officers, and affected former Widmer employees. These costs
were recognized as merger-related expense in the statement of operations in accordance with SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
7
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
Pro Forma Results of Operations
The unaudited pro forma combined condensed results of operations are presented below for the
three and six months ended June 30, 2008 as if the Merger had been completed on January 1, 2008.
The unaudited condensed results of operations for the three and six months ended June 30, 2009 as
reported are presented below for comparative purposes.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
Actual |
|
Pro Forma |
|
Actual |
|
Pro Forma |
|
|
Results |
|
Results |
|
Results |
|
Results |
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
35,142 |
|
|
$ |
32,231 |
|
|
$ |
62,388 |
|
|
$ |
58,043 |
|
Income (loss) before income taxes |
|
$ |
2,105 |
|
|
$ |
(2,897 |
) |
|
$ |
1,037 |
|
|
$ |
(4,578 |
) |
Net income (loss) |
|
$ |
1,739 |
|
|
$ |
(1,903 |
) |
|
$ |
664 |
|
|
$ |
(3,007 |
) |
Basic and diluted earnings
(loss) per share |
|
$ |
0.10 |
|
|
$ |
(0.11 |
) |
|
$ |
0.04 |
|
|
$ |
(0.18 |
) |
The unaudited pro forma results of operations are not necessarily indicative of the operating
results that would have been achieved had the Merger been consummated as of the dates indicated, or
that may be achieved in the future. Rather, the unaudited pro forma combined condensed results of
operations presented above are based on estimates and assumptions that have been made solely for
the purpose of developing such pro forma results. Historical results of operations were adjusted to
give effect to pro forma events that are (1) directly attributable to the acquisition, (2)
factually supportable, and (3) expected to have a continuing impact on the combined results. These
pro forma results of operations do not give effect to any cost savings, revenue synergies or
restructuring costs which may result from the integration of Widmers operations.
Merger with Craft Brands
On July 1, 2004, the Company entered into agreements with Widmer with respect to the operation
of a joint venture sales and marketing entity, Craft Brands, including an operating agreement with
regards to Craft Brands (Operating Agreement) that governed the operations of Craft Brands and
the obligations of its members, including capital contributions, loans and allocations of profits
and losses. Pursuant to these agreements, and through June 30, 2008, the Company manufactured and
sold its product to Craft Brands at prices substantially below wholesale pricing levels; Craft
Brands, in turn, advertised, marketed, sold and distributed the product to wholesale outlets in the
Western United States pursuant to a distribution agreement between Craft Brands and Anheuser-Busch,
Inc.
In connection with the Merger, Craft Brands was also merged with and into the Company,
effective July 1, 2008. All existing agreements, including all associated future commitments and
obligations, between the Company and Craft Brands and between Craft Brands and Widmer terminated as
a result of the merger of Craft Brands.
The Operating Agreement addressed the allocation of profits and losses of Craft Brands up to
July 1, 2008. During the first six months of 2008, the Company was allocated 42% of Craft Brands
profits and losses. Net cash flow, if any, was generally distributed monthly to the Company based
upon that percentage. The Company would not have received a distribution if an event occurred that
caused the liabilities of Craft Brands, adjusted for the liabilities to its members, to be in
excess of its assets, or Craft Brands to be unable to pay its debts as those debts became due in
the ordinary course of business.
For the three and six months ended June 30, 2008, the Companys share of Craft Brands net
income totaled $637,000 and $1.4 million, respectively, and for the corresponding periods, the
Company received cash distributions of $1.0 million and $1.5 million, respectively, representing
its share of the net cash flow of Craft Brands.
8
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
The selected financial information presented for Craft Brands represents its activities for
the three and six months ended June 30, 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
Ended
June 30, 2008 |
|
|
Ended June 30, 2008 |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
21,393 |
|
|
|
$ |
38,463 |
|
Gross profit |
|
$ |
6,718 |
|
|
|
$ |
12,089 |
|
Operating income |
|
$ |
1,517 |
|
|
|
$ |
3,311 |
|
Income before income taxes |
|
$ |
1,517 |
|
|
|
$ |
3,310 |
|
Net income |
|
$ |
1,517 |
|
|
|
$ |
3,310 |
|
Shipments (in barrels) |
|
|
97,200 |
|
|
|
|
180,300 |
|
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
3,780 |
|
|
$ |
4,258 |
|
Work in process |
|
|
2,014 |
|
|
|
1,921 |
|
Finished goods |
|
|
2,480 |
|
|
|
1,624 |
|
Packaging materials, net |
|
|
1,176 |
|
|
|
950 |
|
Promotional merchandise, net |
|
|
1,249 |
|
|
|
907 |
|
Pub food, beverages and supplies |
|
|
70 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
$ |
10,769 |
|
|
$ |
9,729 |
|
|
|
|
|
|
|
|
Work in process is beer held in fermentation tanks prior to the filtration and packaging
process.
4. Other Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Deposits paid to keg lessor |
|
$ |
3,972 |
|
|
$ |
3,182 |
|
Prepaid property taxes |
|
|
|
|
|
|
177 |
|
Prepaid insurance |
|
|
88 |
|
|
|
201 |
|
Other |
|
|
166 |
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
$ |
4,226 |
|
|
$ |
3,951 |
|
|
|
|
|
|
|
|
9
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Equity Investments
Equity investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Fulton Street Brewery, LLC (FSB) |
|
$ |
4,183 |
|
|
$ |
4,103 |
|
Kona Brewery LLC (Kona) |
|
|
1,134 |
|
|
|
1,086 |
|
|
|
|
|
|
|
|
|
|
$ |
5,317 |
|
|
$ |
5,189 |
|
|
|
|
|
|
|
|
FSB
For the three and six months ended June 30, 2009, the Companys share of FSBs net income
totaled $42,000 and $80,000, respectively. As the Company acquired its interest in FSB as a result
of the Merger, it did not have a share in the earnings for the corresponding periods in the prior
year. The Companys investment in FSB was $4.2 million at June 30, 2009 and $4.1 million at
December 31, 2008, and the Companys portion of equity as reported on FSBs financial statement was
$1.9 million as of the corresponding dates. The Company has not received any cash capital
distributions associated with FSB during its ownership period. At June 30, 2009 and December 31,
2008, the Company has recorded a payable to FSB of $1.9 million and $1.1 million, respectively,
primarily for amounts owing for purchases of Goose Island-branded product. The Company has recorded
a receivable from FSB of $36,000 at December 31, 2008 primarily for marketing fees associated with
sales of Goose Island-branded product in the Companys distribution area.
Kona
For the three and six months ended June 30, 2009, the Companys share of Konas net income
totaled $57,000 and $48,000, respectively. As the Company acquired its interest in Kona as a result
of the Merger, it did not have a share in the earnings for the corresponding periods in the prior
year. The Companys investment in Kona was $1.1 million at June 30, 2009 and December 31, 2008, and
the Companys portion of equity as reported on Konas financial statement was $395,000 and
$347,000, respectively, as of the corresponding dates. The Company has not received any cash
capital distributions associated with Kona during its ownership period. At June 30, 2009 and
December 31, 2008, the Company has recorded a receivable from Kona of $3.4 million and $3.0
million, respectively, primarily related to amounts owing under the alternating proprietorship and
distribution agreements. As of June 30, 2009 and December 31, 2008, the Company has recorded a payable to Kona of $2.9 million and $1.9 million,
respectively, primarily for amounts owing for purchases of Kona-branded product.
At June 30, 2009 and December 31, 2008, the Company had outstanding receivables due from Kona
Brewing Co. (KBC) of $129,000 and $107,000, respectively. KBC and the Company are the only
members of Kona.
6. Debt and Capital Lease Obligations
The Company refinanced borrowings assumed as a result of the Merger by concurrently entering
into a loan agreement (the Loan Agreement) with Bank of America, N.A. (BofA) during July 2008.
The Loan Agreement is comprised of a $15.0 million revolving line of credit (Line of Credit),
including provisions for cash borrowings and up to $2.5 million notional amount of letters of
credit, and a $13.5 million term loan (Term Loan). The Company may draw upon the Line of Credit
for working capital and general corporate purposes. The Line of Credit matures on January 1, 2013
at which time the outstanding principal balance and any accrued but unpaid interest will be due.
At June 30, 2009, the Company had $11.5 million outstanding under the Line of Credit with $3.5
million of availability for further cash borrowing.
The Company is in compliance with all applicable contractual financial covenants at June 30,
2009, including the covenant pertaining to earnings before interest, taxes, depreciation and
amortization (EBITDA). The Company and BofA executed a loan modification to its loan agreement
effective November 14, 2008 (Modification Agreement),
10
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
as a result of the Companys inability to
meet its covenants as of September 30, 2008. BofA permanently waived the noncompliance effective
September 30, 2008, restoring the Companys borrowing capacity pursuant to the Loan Agreement.
Under the Modification Agreement, the Company may select from one of the following two
interest rate benchmarks as the basis for calculating interest on the outstanding principal balance
of the Line of Credit: the London Inter-Bank Offered Rate (LIBOR) or the Inter-Bank Offered Rate
(IBOR) (each, a Benchmark Rate). Interest accrues at an annual rate equal to the Benchmark Rate
plus a marginal rate. The Company may select different Benchmark Rates for different tranches of
its borrowings under the Line of Credit. The marginal rate is fixed at 3.50% until September 30,
2009 at which time it will vary from 1.75% to 3.50% based on the ratio of the Companys funded debt
to EBITDA, as defined. LIBOR rates may be selected for one, two, three, or six month periods, and
IBOR rates may be selected for no shorter than 14 days and no longer than six months. Accrued
interest for the Line of Credit is due and payable monthly. At June 30, 2009, the weighted-average
interest rate for the borrowings outstanding under the Line of Credit was 3.81%.
Under the Modification Agreement, a quarterly fee on the unused portion of the Line of Credit,
including the undrawn amount of the related Standby Letter of Credit, will accrue at a rate of
0.50% payable quarterly. An annual fee will be payable in advance on the notional amount of each
standby letter of credit issued and outstanding multiplied by an applicable rate ranging from 1.13%
to 1.50%.
Interest on the Term Loan will accrue on the outstanding principal balance in the same manner
as provided for under the Line of Credit, as established under the LIBOR one-month Benchmark Rate.
The interest rate on the Term Loan was 3.82% as of June 30, 2009. Accrued interest for the Term
Loan is due and payable monthly. At June 30, 2009, principal payments are due monthly in accordance
with an agreed-upon schedule set forth in the Loan Agreement. Any unpaid principal balance and
unpaid accrued interest will be due on July 1, 2018.
The Modification Agreement also revised the types of financial covenants that the Company is
required to meet for each quarter through June 30, 2009. The Company generated EBITDA under the
Modification Agreement of $4.7 million for the quarter ended June 30, 2009, as compared with the
EBITDA covenant requirement of $2.3 million for the corresponding period, and was in compliance
with the loan covenants under the Modification Agreement as of June 30, 2009. EBITDA under the
Modification Agreement is defined as EBITDA as adjusted for certain other items as defined by
either the Loan Agreement or the Modification Agreement.
Effective September 30, 2009, the Company will be required to meet the financial covenant
ratios of funded debt to EBITDA, as defined, and fixed charge coverage in the manner established
pursuant to the original Loan Agreement, but at levels specified by the Modification Agreement.
For the quarter ended June 30, 2009, the financial covenants, including required EBITDA, were
measured on a one-quarter basis; however, beginning with the third quarter of 2009, the financial
covenants under the Companys loan agreement will be measured on a trailing four-quarter basis.
Those covenants are detailed as follows:
Financial Covenants Required by Loan Agreement
as Revised by the Modification Agreement
|
|
|
|
|
Ratio of
Funded Debt to EBITDA, as defined |
|
|
|
|
As of September 30, 2009 |
|
|
4.50 to 1 |
|
From December 31, 2009 through September 30, 2010 |
|
|
3.50 to 1 |
|
From December 31, 2010 and thereafter |
|
|
3.00 to 1 |
|
|
|
|
|
|
Fixed Charge Coverage Ratio |
|
|
|
|
For the trailing four-quarter period ending
September 30, 2009
and thereafter |
|
|
1.25 to 1 |
|
The Loan Agreement is secured by substantially all of the Companys personal property and by
the real properties located at 924 North Russell Street, Portland, Oregon and 14300 NE
145th Street, Woodinville, Washington (Collateral), which comprise its larger-scale
automated Portland, Oregon brewery and its Woodinville, Washington
11
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
brewery, respectively. In
addition, the Company is restricted in its ability to declare or pay dividends, repurchase any
outstanding common stock, incur additional debt or enter into any agreement that would result in a
change in control of the Company.
As a result of the Merger, the Company assumed Widmers promissory notes signed in connection
with the acquisition of commercial real estate related to the Portland, Oregon brewery. Each
promissory note is secured by a deed of trust on the commercial real estate. The outstanding note
balance to each lender as of June 30, 2009 was $200,000, with each note bearing a fixed interest
rate of 24% per annum, subject to a one-time adjustment on July 1, 2010 to reflect the change in
the consumer price index from the date of issue, July 1, 2005, to the date of adjustment. The
promissory notes are carried at the total of stated value plus a premium reflecting the difference
between the Companys incremental borrowing rate and the stated note rate. The effective interest
rate for each note is 6.31%. Each note matures on the earlier of the individual lenders death or
July 1, 2015, but in no event prior to July 1, 2010, with prepayment of principal not allowed under
the notes terms. Interest payments are due and payable monthly.
As a result of the Merger, the Company assumed Widmers capital equipment lease obligation to
BofA, which is secured by substantially all of the brewery equipment and restaurant furniture and
fixtures located in Portland, Oregon. The outstanding balance for the capital lease as of June 30,
2009 was $6.1 million, with monthly loan payments of $119,020 required through the maturity date of
June 30, 2014. The capital lease carries an effective interest rate of 6.56%. The capital lease is
subject to a prepayment penalty equal to a specified percentage multiplied by the amount prepaid.
This specified percentage began at 4% and, except in the event of acceleration due to an event of
default, ratably declines 1% for every year the lease is outstanding until July 31, 2011, at which time
the capital lease is not subject to a prepayment penalty. The specified percentage is 3% as of June
30, 2009. In the event of acceleration due to an event of default, the prepayment penalty is
restored to 4%.
7. Derivative Financial Instruments and Fair Value Measurement
Interest Rate Swap Contracts
The Companys risk management objectives are to ensure that business and financial exposures
to risk that have been identified and measured are minimized using the most effective and efficient
methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions
contemplate associated risks and management strives to structure proposed transactions to avoid or
reduce risk whenever possible.
The Company has assessed its vulnerability to certain business and financial risks, including
interest rate risk associated with its variable-rate long-term debt. To mitigate this risk, the
Company entered into with BofA a five-year interest rate swap agreement with a total notional value
of $9.9 million (as of June 30, 2009) to hedge the variability of interest payments associated with
its variable-rate borrowings under its Term Loan. Through this swap agreement, the Company pays
interest at a fixed rate of 4.48% and receives interest at a floating-rate of the one-month LIBOR.
Since the interest rate swap hedges the variability of interest payments on variable rate debt with
similar terms, it qualifies for cash flow hedge accounting treatment under SFAS 133. As of June 30,
2009, unrealized net losses of $779,000 were recorded in accumulated other comprehensive loss as a
result of this hedge. The effective portion of the gain or loss on the derivative is reclassified
into interest expense in the same period during which the Company records interest expense
associated with the Term Loan. There was no hedge ineffectiveness recognized for the three months
ended June 30, 2009.
As a result of the Merger, the Company assumed Widmers contract with BofA for a $7.0 million
notional interest rate swap agreement. On the effective date of the Merger, the Company entered
into with BofA an equal and offsetting interest rate swap contract. Neither swap contract qualifies
for hedge accounting under SFAS 133. The assumed contract requires the Company to pay interest at a
fixed rate of 4.60% and receive interest at a floating rate of the one-month LIBOR, while the
offsetting contract requires the Company to pay interest at a floating rate of the one-month LIBOR
and receive interest at a fixed rate of 3.47%. Both contracts expire on November 1, 2010. The
Company recorded a net gain on the contracts of $19,000 and $38,000 for the three and six months
ended June 30, 2009, respectively, which was recorded to other income. The Company did not have any
similar contracts outstanding during 2008; accordingly, there were no amounts recorded to earnings
for the corresponding periods of 2008.
12
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives at June 30, 2009 |
|
|
|
Balance Sheet Location |
|
Fair Value |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under SFAS 133 |
|
|
|
|
Interest rate swap contracts |
|
Non-current liabilities derivative financial instruments |
|
$ |
779 |
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under SFAS 133 |
|
|
|
|
Interest rate swap contracts |
|
Non-current liabilities derivative financial instruments |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
All interest rate swap contracts are secured by the Collateral under the Loan Agreement.
Fair Value Measurements
The recorded value of the Companys financial instruments is considered to approximate the
fair value of the instruments, in all material respects, because the Companys receivables and
payables are recorded at amounts expected to be realized and paid, the Companys derivative
financial instruments are carried at fair value, and approximately 75% of the Companys debt
obligations are at variable rates of relatively short duration. The Companys analysis of the
remaining debt obligations, which were adjusted to their respective fair values as of the effective
date of the Merger, indicates that their fair values approximate their carrying values.
Under the three-tier fair value hierarchy established in SFAS No. 157, Fair Value Measurements
(SFAS 157), the inputs used in measuring fair value are prioritized as follows:
|
Level 1: |
|
Observable inputs (unadjusted) in active markets for identical assets and
liabilities; |
|
|
Level 2: |
|
Inputs other than quoted prices included within Level 1 that are either directly or
indirectly observable for the asset or liability, including quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in inactive markets and inputs other than quoted prices that are observable for
the asset or liability; |
|
|
Level 3: |
|
Unobservable inputs for the asset or liability, including situations where there is
little, if any, market activity or data for the asset or liability. |
The Company has assessed its assets and liabilities that are measured and recorded at fair
value within the above hierarchy and that assessment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Assessment |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Derivative financial instruments interest
rate swap contracts |
|
$ |
|
|
|
$ |
892 |
|
|
$ |
|
|
|
$ |
892 |
|
8. Common Stockholders Equity
In conjunction with the exercise of stock options under the Companys stock option plans
during the six months ended June 30, 2009 and 2008, the Company issued 28,200 shares and 72,250
shares, respectively, of common stock and received proceeds on exercise totaling $53,000 and
$181,000, respectively.
13
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
On May 29, 2009, the board of directors approved, under the 2007 Stock Incentive Plan (the
2007 Plan), a grant of 3,000 shares of fully-vested Common Stock to each non-employee director.
On June 24, 2008, the board of directors approved, under the 2007 Plan, a grant of 1,140 shares of
fully-vested Common Stock to each non-employee director except for the A-B designated directors. In
conjunction with these stock grants, the Company issued 18,000 shares and 4,560 shares of Common
Stock and recognized stock-based compensation expense of $36,000 and $20,000, respectively, in the
Companys statements of operations during the six months ended June 30, 2009 and 2008,
respectively.
Stock Plans
The Company maintains several stock incentive plans, including those discussed below, under
which non-qualified stock options, incentive stock options and restricted stock are granted to
employees and non-employee directors. The Company issues new shares of common stock upon exercise
of stock options. Under the terms of the Companys stock option plans, employees and directors may
be granted options to purchase the Companys common stock at the market price on the date the
option is granted. Under these stock option plans, stock options granted at less than the fair
value on the date of grant and stock options granted to non-employee directors are deemed to be
non-qualified stock options rather than incentive stock options.
The Companys shareholders approved the 2002 Stock Option Plan (2002 Plan) in May 2002. The
2002 Plan provides for granting of non-qualified stock options and incentive stock options to
employees, non-employee directors and independent consultants or advisors. The compensation
committee of the board of directors administers the 2002 Plan, determining the grantees, the number
of shares of common stock for which the options are exercisable and the exercise prices of such
shares, among other terms and conditions. Under the 2002 Plan, options granted to employees of the
Company through December 31, 2008 vest over a five-year period while options granted to employees
of the Company during the first quarter of 2009 vest over a four-year period. Options granted under
the 2002 Plan to the Companys directors (excluding the A-B designated directors) have become
exercisable beginning from the date of the grant up to six months following the grant date. The
maximum number of shares of common stock for which options may be granted prior to expiration of
the 2002 Plan on February 25, 2012, is 346,000. As of June 30, 2009, the 2002 Plan had 70,259
shares available for future grants of options.
The 2007 Plan was adopted by the board of directors and approved by the shareholders in May
2007. The 2007 Plan provides for stock options, restricted stock, restricted stock units,
performance awards and stock appreciation rights. While incentive stock options may only be granted
to employees, awards other than incentive stock options may be granted to employees and directors.
The 2007 Plan is administered by the compensation committee of the board of directors. A maximum of
100,000 shares of common stock are authorized for issuance under the 2007 Plan. As of June 30,
2009, the 2007 Plan had 53,240 shares available for future grants of stock-based awards.
Stock Option Plan Activity
Presented below is a summary of the Companys stock option plan activity for the six months
ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Life |
|
|
Value |
|
|
|
(In thousands) |
|
|
(Per share) |
|
|
(In years) |
|
|
(In thousands) |
|
Outstanding at December 31, 2008 |
|
|
431 |
|
|
$ |
2.61 |
|
|
|
2.4 |
|
|
$ |
|
|
Granted |
|
|
30 |
|
|
|
1.25 |
|
|
|
10.0 |
|
|
|
|
|
Exercised |
|
|
(28 |
) |
|
|
(1.87 |
) |
|
|
(2.6 |
) |
|
|
|
|
Canceled |
|
|
(29 |
) |
|
|
(3.49 |
) |
|
|
(1.1 |
) |
|
|
|
|
Expired |
|
|
(110 |
) |
|
|
(3.97 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
294 |
|
|
$ |
1.95 |
|
|
|
3.5 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
264 |
|
|
$ |
2.03 |
|
|
|
2.8 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
No stock options vested during the three months ended June 30, 2009 and 2008. The applicable
stock closing prices as reported by NASDAQ as of June 30, 2009 and December 31, 2008 were $2.04 and
$1.20, respectively. The total intrinsic value of stock options exercised during the six months
ended June 30, 2008 was approximately $11,000. At June 30, 2009, the unearned compensation
associated with the 2009 option grants was not material, and will be amortized to compensation
expense using the straight-line method over the expected vesting period of the options.
The following table summarizes information for options currently outstanding and exercisable
at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
Range of Exercise Prices |
|
Options |
|
|
Price |
|
|
Life |
|
|
Options |
|
|
Price |
|
|
Life |
|
|
|
(In thousands) |
|
|
(Per share) |
|
|
(In years) |
|
|
(In thousands) |
|
|
(Per share) |
|
|
(In years) |
|
$1.25 to $2.00 |
|
|
176 |
|
|
$ |
1.76 |
|
|
|
3.3 |
|
|
|
146 |
|
|
$ |
1.85 |
|
|
|
2.1 |
|
$2.01 to $3.00 |
|
|
102 |
|
|
|
2.11 |
|
|
|
3.4 |
|
|
|
102 |
|
|
|
2.11 |
|
|
|
3.4 |
|
$3.01 to $3.97 |
|
|
16 |
|
|
|
3.15 |
|
|
|
5.9 |
|
|
|
16 |
|
|
|
3.15 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.25 to $3.97 |
|
|
294 |
|
|
$ |
1.95 |
|
|
|
3.5 |
|
|
|
264 |
|
|
$ |
2.03 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share amounts) |
|
Numerator for basic and diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,739 |
|
|
$ |
(1,384 |
) |
|
$ |
664 |
|
|
$ |
(1,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
16,967 |
|
|
|
8,391 |
|
|
|
16,957 |
|
|
|
8,374 |
|
Dilutive effect of stock options on weighted average
common shares |
|
|
24 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share |
|
|
16,991 |
|
|
|
8,391 |
|
|
|
16,962 |
|
|
|
8,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
0.10 |
|
|
$ |
(0.16 |
) |
|
$ |
0.04 |
|
|
$ |
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain Company stock options were not included in the computation of diluted earnings (loss)
per share because the options exercise prices were greater than the average market price of the
common shares, or the impact of their inclusion would be antidilutive. Such stock options, with
exercise prices ranging from $2.02 to $3.97 per share for the second quarter of 2009 and from $1.82
to $3.97 per share for the six months ended June 30, 2009, averaged 178,000 and 368,000, for the
three and six months ended June 30, 2009, respectively. Such stock options, with exercise prices
ranging from $1.49 to $3.97 per share, averaged 636,000 and 661,000 for the three and six months
ended June 30, 2008, respectively.
15
CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
10. Comprehensive Income (Loss)
The following table sets forth the Companys comprehensive income (loss) for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
1,739 |
|
|
$ |
(1,384 |
) |
|
$ |
664 |
|
|
$ |
(1,928 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
derivative
financial
instruments, net of
tax |
|
|
181 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,920 |
|
|
$ |
(1,384 |
) |
|
$ |
866 |
|
|
$ |
(1,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Income Taxes
As of June 30, 2009, the Companys deferred tax assets were primarily comprised of federal net
operating loss carryforwards (NOLs) of $27.7 million, or $9.4 million tax-effected; state NOL
carryforwards of $331,000 tax-effected; and federal and state alternative minimum tax credit
carryforwards of $209,000 tax-effected. In assessing the realizability of its 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. Among other factors, the Company considered future taxable income generated by the
projected differences between financial statement depreciation and tax depreciation, including the
depreciation of the assets acquired in the Merger. At December 31, 2008, based upon the available
evidence, the Company believed that it was more likely than not that certain deferred tax assets
will not be realized. As a result, the Company provided a valuation allowance for those deferred
tax assets that met this criteria and recorded a valuation allowance of $1.0 million as a reduction
of the tax benefit for the year ended December 31, 2008. As the Company has NOLs that are not
offset by a valuation allowance, the Companys current period earnings are expected to be offset by
such NOLs, and the Companys assessment of NOLs that may expire in future periods remains unchanged
from December 31, 2008. Consistent with that determination, the
Company reversed the incremental increase in the valuation
allowance recorded in the first quarter of 2009, thereby maintaining a valuation allowance of $1.0
million. The effective tax rate for the first six months of 2009 was impacted by its non-deductible
expenses, partially offset by an adjustment of the accrual liability for the Widmer tax accounting
due to the filing of the short year final tax return for that entity.
To the extent that the Company is unable to generate adequate taxable income in future periods, the
Company may be required to record an additional valuation allowance to provide for potentially
expiring NOLs or other deferred tax assets for which a valuation allowance has not been previously
recorded. Any such increase would generally be charged to earnings in the period of
increase.
16
ITEM 2. Managements 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, may, plan 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 Craft
Brewers Alliance, Inc. (the Company) believes are reasonable, but are by their nature inherently
uncertain. Many possible events or factors could affect the Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2008
(2008 Annual Report), and those described
from time to time in the Companys 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 the Company included herein, as well as the audited Financial
Statements and Notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in the Companys 2008 Annual Report. The discussion and analysis includes period-to-period comparisons of the Companys
financial results. Although period-to-period comparisons may be helpful in understanding the
Companys financial results, the Company believes that they should not be relied upon as an
accurate indicator of future performance. In addition, as discussed in more detail below, the
comparability of periods is significantly affected by the July 1, 2008 merger of Widmer Brothers
Brewing Company with and into the Company.
Merger with Widmer Brothers Brewing Company
On November 13, 2007, the Company entered into an Agreement and Plan of Merger with Widmer
Brothers Brewing Company, an Oregon corporation (Widmer). On July 1, 2008, the merger of Widmer
with and into the Company was completed (the Merger). In connection with the Merger, the name of
the Company was changed from Redhook Ale Brewery, Incorporated to Craft Brewers Alliance, Inc. The
common stock of the Company continues to trade on the Nasdaq Stock Market under the trading symbol
HOOK.
The Company believes that the combined entity has the potential to secure efficiencies, beyond
those that had already been achieved by its existing relationships with Widmer, in utilizing the
two companies production facilities and a national sales force, as well as by reducing duplicate
functions. Utilizing the combined breweries offers a greater opportunity to rationalize production
capacity in line with product demand. The sales force of the combined entity will support further
promotion of the products of its corporate investments, Kona Brewery LLC (Kona), which brews Kona
malt beverage products, and to a lesser extent, Fulton Street Brewery, LLC (FSB), which brews
Goose Island malt beverage products.
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 reported gross sales and a net income
of $37.5 million and $1.7 million, respectively, for the three months ended June 30, 2009, compared
with gross sales and a net loss of $12.0 million and $1.4 million, respectively, for the
corresponding period in 2008. The Company generated basic and fully-diluted earnings per share of
$0.10 on 17.0 million shares for the second quarter of 2009
compared with a loss per share of $0.16
on 8.4 million shares for the corresponding period of 2008. The Company generated operating profit
of $2.5 million during the quarter ended June 30, 2009 compared with an operating loss of $2.1
million during the quarter ended June 30, 2008, primarily due to an improved margin for the 2009
period and a reduction in merger-related expenses, partially offset by increased selling, general
and administrative expenses and the elimination of contribution from the Companys sales and
marketing joint venture. The Companys sales volume
(shipments) totaled 162,400 barrels in the second quarter of 2009 as compared with 76,200
barrels in the second quarter of 2008.
17
The Company reported gross sales and a net income of $66.7 million and $664,000, respectively,
for the six months ended June 30, 2009, compared with gross sales and a net loss of $22.4 million
and $1.9 million, respectively, for the corresponding period in 2008. The Company generated basic
and fully-diluted earnings per share of $0.04 on 17.0 million shares for the first six months of
2009 compared with a loss per share of $0.23 on 8.4 million shares for the corresponding period of
2008. The Company generated operating profit of $1.9 million during the six months ended June 30,
2009 compared with an operating loss of $3.0 million during the six months ended June 30, 2008,
primarily due to an improved margin for the 2009 period and a reduction in merger-related expenses,
partially offset by increased selling, general and administrative expenses and the elimination of
contribution from the Companys sales and marketing joint venture. The Companys sales volume
(shipments) totaled 296,200 barrels in the first six months of 2009 as compared with 144,600
barrels in the first six months of 2008.
The comparability of the Companys results for the three and six months ended June 30, 2009
relative to the results for the same periods in 2008 is significantly impacted by the Merger.
Since July 1, 2008, the Company has produced its specialty bottled and draft Redhook-branded
and Widmer-branded products in its four Company-owned breweries, one in the Seattle suburb of
Woodinville, Washington (Washington Brewery), another in Portsmouth, New Hampshire (New
Hampshire Brewery), and two in Portland, Oregon. The two breweries in Portland, Oregon are the
Companys largest production facility (Oregon Brewery) and its smallest, a manual brewpub-style
brewery at the Rose Quarter (Rose Quarter Brewery). The Company sells these products in addition
to the Kona-branded products primarily to Anheuser-Busch, Incorporated (A-B) and its network of
wholesalers pursuant to the July 1, 2004 Master Distributor Agreement (the A-B Distribution
Agreement), as amended. These products are available in 48 states.
In addition to the sale of Redhook-branded and Widmer-branded beer, the Company also earns
revenue in connection with two operating agreements with Kona an alternating proprietorship
agreement and a distribution agreement. Pursuant to the alternating proprietorship agreement, Kona
produces a portion of its malt beverages at the Oregon Brewery. The Company sells raw materials to
Kona prior to production beginning and receives from Kona a facility leasing fee based on the
barrels brewed and packaged at the Oregon Brewery. These sales and fees are reflected as revenue in
the Companys statements of operations. Under the distribution agreement, the Company distributes
Kona-branded product, whether brewed at Konas facility or the Oregon Brewery, and then markets,
sells and distributes the Kona-branded products pursuant to the A-B Distribution Agreement.
The Company also derives other revenues from sources including the sale of retail beer, food,
apparel and other retail items in its three brewery pubs. The Company added the third pub, located
in Portland, Oregon and in the proximity of the Oregon Brewery, in the Merger.
In conjunction with the Merger, the Company acquired from Widmer a 20% equity ownership in
Kona and a 42% equity ownership in FSB. Both investments are accounted for under the equity method,
as outlined by Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock (APB 18).
Through June 30, 2008, the Company produced its specialty bottled and draft Redhook-branded
products at the Washington Brewery and the New Hampshire Brewery. The Company distributed these
products in the Midwest and Eastern United States pursuant to the A-B Distribution Agreement and in
the Western United States through Craft Brands Alliance LLC (Craft Brands). In addition to the
sale of Redhook-branded beer, the Company also brewed, marketed and sold Widmer Hefeweizen in the
Midwest and Eastern United States in conjunction with a 2003 licensing agreement with Widmer and
brewed Widmer-branded products for Widmer in connection with contract brewing arrangements.
Craft Brands was a joint venture sales and marketing entity formed by the Company and Widmer
in July 2004. The Company and Widmer manufactured and sold their products to Craft Brands at a
price substantially below wholesale pricing levels; Craft Brands, in turn, advertised, marketed,
sold and distributed the products 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 sold its product in Washington state directly to third-party beer
distributors and
18
returned a portion of the revenue to Craft Brands based upon a contractually
determined formula.) Profits and losses of Craft Brands were generally shared between the Company
and Widmer based on the cash flow percentages of 42% and 58%, respectively. In connection with the
Merger, Craft Brands was merged with and into the Company, effective July 1, 2008. All existing
agreements between the Company and Craft Brands and between Craft Brands and Widmer terminated as a
result of the merger of Craft Brands with and into the Company.
For additional information regarding A-B, Craft Brands and the A-B Distribution Agreement, see
Part 1, Item 1, Business under the headings Product Distribution, Relationship with
Anheuser-Busch, Incorporated and Relationship with
Craft Brands Alliance LLC of the Companys 2008
Annual Report.
The Companys sales are affected by several factors, including consumer demand (itself
impacted by seasonality), price discounting and competitive considerations. The Company competes in
the highly competitive craft brewing market as well as in the much larger beer, wine, spirits and
flavored alcohol markets, which encompass producers of import beers, major national brewers that
produce fuller-flavored products, large spirit companies, and national brewers that produce
flavored alcohol beverages. The craft beer segment is highly competitive due to the proliferation
of small craft brewers, including contract brewers, and the large number of products offered by
such brewers. Certain national domestic brewers have also sought to appeal to this growing demand
for craft beers by producing their own fuller-flavored products. These fuller-flavored products
have been most successful within the wheat beer category, including Shock Top Belgian White and
Blue Moon Belgian White. These beers are generally considered to be within the same category as the
Companys Hefeweizen beer, putting them in direct competition. As the national domestic brewers
have substantially greater operating and financial resources, the Company may need to expend
considerable incremental sales and marketing efforts merely to retain its competitive position
within the craft brewing market.
The wine and spirits market has also experienced significant growth in the past five years or
so, attributable to competitive pricing, increased merchandising, and increased consumer interest
in wine and spirits. 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 recent years. While there appear to be
fewer participants in the flavored alcohol category than at its peak, there is still significant
volume associated with these beverages. 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 and draft product placements has intensified.
While the craft beer market has seen a significant growth in the number of competitors, the
national domestic and international brewers have undergone a second round of consolidation,
reducing the number of market participants at the top of the beer market. A number of factors have
driven this consolidation, including the desire to capture market share and positioning as either
the largest brewer or second largest brewer in any given market. The U.S. beer market, in which the
Company competes, was once dominated by three companies, A-B, Miller Brewing Company and Adolph
Coors Company. During the past decade, Miller Brewing Company and Adolph Coors Company were merged
with international brewers, South African Brewers and Molson of Canada, respectively, to increase
the global market reach of their brands. During the second quarter of 2008, the resulting
companies, SABMiller and MolsonCoors, completed the terms of a joint venture to merge their U.S.
operations, competing under the name MillerCoors. Likewise, A-B was acquired by Belgium-based InBev
in a deal consummated in the fourth quarter of 2008. Shipments for the two entities, A-B and
MillerCoors, represented nearly 80% of the total U.S. market, including imports, for 2008.
Another factor driving this is the desire on the part of these larger consolidated national
brewers to control the rising cost of the majority of the inputs to the brewing process, primarily
barley, wheat and hops, and packaging and shipping costs. While consolidation promises to alleviate
these cost pressures for the national brewers, the Company faces these same pressures with limited
resources available to achieve similar benefits.
Management monitors the annual working capacity of each brewery in connection with production
and resource planning. Because an industry standard for defining brewery capacity does not exist,
there are numerous variables that
19
can be considered in arriving at an estimate of annual working
capacity. Following the Merger, management reviewed each facility, scrutinized the factors
important to the Company in arriving at a practical definition of capacity, and recomputed the
annual working capacity of each brewery. Among the factors that management considered in estimating
annual working capacity are:
|
|
|
Brewhouse capacity, fermentation capacity, and packaging capacity; |
|
|
|
|
A normal production year; |
|
|
|
|
The product mix and product cycle times; and |
|
|
|
|
Brewing losses and packaging losses. |
Because the conditions under which each brewery operates differ (such as age of equipment,
local environment, product mix), the impact that these factors have on the estimate of capacity
also vary by brewery. For example, while the New Hampshire Brewery and the Oregon Brewery are
constrained by the volume of beer that each can ferment (each brewery can brew more beer than it
can ferment), the Washington Brewery is constrained by the size of its brewhouse (the brewery has
adequate capacity to ferment all product that it brews).
Management did not consider the impact that seasonality clearly has on the capacity
calculation. Rather, management assumed that each brewery produces beer at 100% of working capacity
throughout a 50 week year. But because seasonality is a notable factor affecting the Companys
sales, the Company expects that the breweries capacity will be more efficiently utilized during
periods when the Companys sales are strongest and there likely will be periods when the breweries
capacity utilization will be lower.
Management estimates the annual working capacity for its breweries as follows:
|
|
|
|
|
|
|
Annual Working |
|
|
Capacity at |
|
|
June 30, 2009 |
|
|
(In barrels) |
|
|
|
|
|
Oregon Brewery (1) |
|
|
377,000 |
|
Washington Brewery |
|
|
230,000 |
|
New Hampshire Brewery |
|
|
190,000 |
|
|
|
|
|
|
|
|
|
797,000 |
|
|
|
|
|
|
|
Note 1 Excludes the annual working capacity for the Rose Quarter Brewery, which is less than
1,000 barrels. |
The Companys capacity utilization has a significant impact on gross profit. Generally, when
facilities are operating at their working 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. While current period production levels have increased, in part, due to
the seasonal fluctuations in demand, the Company still has a significant
amount of unused working
capacity. As a result, gross margins have been negatively impacted. If the Company is unable to
achieve significant sales growth on a sustained basis, the resulting excess capacity and unabsorbed
overhead of the Company will have an adverse effect on the Companys gross margins, operating cash
flows and overall financial performance.
In addition to capacity utilization, other factors that could affect cost of sales and gross
margin include 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. Prior to July 1,
2008, sales to Craft Brands at a price substantially below wholesale pricing levels and sales of
contract beer at a pre-determined contract price also affected cost of sales, gross margins and the
comparability of fiscal periods.
20
Brand Trends
Redhook Beers. The Redhook brand has lagged the trend in the growth of the craft
segment for the last several years, due in part to the life cycle of the brand familys former
flagship, ESB, which had matured in key markets even while the overall segment continued to grow.
To offset this factor, the Company engaged in systematic initiatives, including rebranding Redhook
IPA into Long Hammer IPA and relaunching this brand with new packaging and a concentrated focus as
the new Redhook flagship in January 2007. Leveraging off of the growth of the IPA category, this
rebranding effort resulted in an increase in shipments of Long Hammer IPA from 2007 to 2008 by
approximately 15%. As part of these initiatives, the Company reexamined its pricing strategy and
increased the brand family to price points comparable to the market leaders in the last couple of
years.
The Company will continue to look for niche areas of category growth for Redhook on which to
capitalize. For example, during the first quarter of 2009 the Company launched Slim Chance Light
Ale to fulfill consumer demand for full-flavored, low-calorie craft beer. In order to reconnect the
Redhook brand with the craft community, a high-end line of Redhook beers was launched in late 2008.
Each beer in this line is marketed toward the beer connoisseur, premium-priced, and only available
for a limited time.
Widmer Brothers Beers. The Widmer Brothers brand has experienced significant growth
in recent years, led by the popular consumer response to the Hefeweizen category within the craft
beer segment and the role that Widmer Hefeweizen has enjoyed as a leader in this category. This
category continues to experience positive trends nationally, but has more recently seen a
significant increase in competitive products from other craft brewers as well as offerings from
large domestic brewers such as A-Bs Shock Top Belgian White and MillerCoors Blue Moon Belgian
White attempting to participate in the same category. Widmer Hefeweizen has also been particularly
impacted by the downturn in the restaurant industry as a result of the U.S. economic recession
worsening during the fourth quarter of 2008 and continuing into the first six months of 2009. This
brand is significantly more dependent on on-premise sales than the Companys other brands.
As a result of the Merger, the Company now has the ability to sell and market other
Widmer-branded products in the Midwest and Eastern United States. This will round out the
Widmer-brand offering in these regions, giving the consumers in these areas a true Widmer brand
family to enjoy, including Drop Top Amber Ale and Drifter Pale Ale, which was launched in the first
quarter of 2009. In an effort to keep Widmer Hefeweizen top of mind with consumers and to shift
the emphasis of this brand from the on-premise market, during the second quarter of 2009, the
Company began offering Widmer Hefeweizen in the Western U.S. markets in a 5-liter steel mini keg.
The Company believes this allows consumers the opportunity to enjoy the draft experience of this
brand at home.
Except for Widmer-branded products brewed and shipped under the contract brewing arrangements
and Widmer Hefeweizen shipped under the licensing agreement, sales and shipments for Widmer-branded
product were not reflected in the Companys statements of operations prior to the Merger.
Kona Brewing Beers. Prior to its association with the Company, the Kona Brewing brand
had experienced strong growth as a result of forming relationships with Widmer and Craft Brands
beginning in 2004. Kona-branded product is relatively new outside of Hawaii and has been recently
introduced into a number of new markets in the continental United States. Kona-branded products
have experienced the rapid growth of a new brand that benefits from growing distribution and new
trial from consumers. The brand family has a clear identity, the Company markets it as Liquid
Aloha, which is easily grasped by consumers, and the beer is of high quality, making it easy to
sell to wholesalers, retailers and consumers.
Despite lapping strong launch volumes in the Kona brands biggest mainland market, California,
the brand continues to see double-digit growth in this market, suggesting that consumers have
formed a strong bond with the brand, purchasing it repeatedly. The Company identifies Longboard
Island Lager as the brand familys flagship, creating a direct connection to Hawaii with consumers.
The Company believes that the Kona brands growth potential is significant not only from organic
growth within its current markets but also from geographic expansion.
21
Sales and shipments for Kona-branded product were not reflected in the Companys statements of
operations prior to the Merger.
See Part 1, Item 1A, Risk Factors
of the Companys 2008 Annual Report
for additional matters which could
materially affect the Companys
business, financial condition or future results.
Results of Operations
The following table sets forth, for the periods indicated, certain items from the Companys
Statements of Operations expressed as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Sales |
|
|
106.6 |
% |
|
|
111.3 |
% |
|
|
106.9 |
% |
|
|
111.4 |
% |
Less excise taxes |
|
|
6.6 |
|
|
|
11.3 |
|
|
|
6.9 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales |
|
|
74.4 |
|
|
|
93.0 |
|
|
|
76.9 |
|
|
|
94.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25.6 |
|
|
|
7.0 |
|
|
|
23.1 |
|
|
|
5.6 |
|
Selling, general and administrative expenses |
|
|
18.2 |
|
|
|
22.7 |
|
|
|
19.7 |
|
|
|
21.6 |
|
Merger-related expenses |
|
|
0.3 |
|
|
|
10.1 |
|
|
|
0.4 |
|
|
|
5.8 |
|
Income from equity investment in Craft Brands |
|
|
|
|
|
|
5.9 |
|
|
|
|
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
7.1 |
|
|
|
(19.9 |
) |
|
|
3.0 |
|
|
|
(14.9 |
) |
Income from equity investments in Kona & FSB |
|
|
0.3 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
Interest expense |
|
|
(1.6 |
) |
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
Interest and other income, net |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
6.0 |
|
|
|
(19.8 |
) |
|
|
1.7 |
|
|
|
(14.6 |
) |
Income tax provision (benefit) |
|
|
1.1 |
|
|
|
(7.0 |
) |
|
|
0.6 |
|
|
|
(5.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
4.9 |
% |
|
|
(12.8 |
)% |
|
|
1.1 |
% |
|
|
(9.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures
The Companys loan agreement, as modified, subjects the Company to a financial covenant based
on earnings before interest, taxes, depreciation and amortization (EBITDA). See Liquidity and
Capital Resources. EBITDA is defined per the modified loan agreement and requires additional
adjustments, among other items, to (a) exclude merger-related expenses, (b) adjust losses (gains)
on sale or disposal of assets, and (c) exclude certain other non-cash income and expense items. For
the quarter ended June 30, 2009, the financial covenants, including required EBITDA, were measured
on a one quarter basis; however, beginning with the third quarter of 2009, the financial covenants
under the Companys loan agreement will be measured on a trailing four-quarter basis. EBITDA as
defined under the modified loan agreement was $4.7 million for the quarter ended June 30, 2009. The
following table reconciles net income to EBITDA per the modified loan agreement for the quarter
ended June 30, 2009:
22
|
|
|
|
|
|
|
For the Quarter |
|
|
|
Ended |
|
|
|
June 30, 2009 |
|
|
|
(In thousands) |
|
|
|
|
|
|
Net income |
|
$ |
1,739 |
|
Interest expense |
|
|
571 |
|
Income tax provision |
|
|
366 |
|
Depreciation expense |
|
|
1,593 |
|
Amortization expense |
|
|
288 |
|
Merger-related expenses |
|
|
113 |
|
Loss on sale or disposal of property,
equipment and leasehold improvements |
|
|
10 |
|
Stock compensation |
|
|
36 |
|
|
|
|
|
EBITDA per the modified loan agreement |
|
$ |
4,716 |
|
|
|
|
|
Three months ended June 30, 2009 compared with three months ended June 30, 2008
The following table sets forth, for the periods indicated, a comparison of certain items from
the Companys Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Increase |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
37,465 |
|
|
$ |
11,993 |
|
|
$ |
25,472 |
|
|
|
212.4 |
% |
Less excise taxes |
|
|
2,323 |
|
|
|
1,215 |
|
|
|
1,108 |
|
|
|
91.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
35,142 |
|
|
|
10,778 |
|
|
|
24,364 |
|
|
|
226.1 |
|
Cost of sales |
|
|
26,133 |
|
|
|
10,022 |
|
|
|
16,111 |
|
|
|
160.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9,009 |
|
|
|
756 |
|
|
|
8,253 |
|
|
|
N/M |
|
Selling, general and administrative expenses |
|
|
6,398 |
|
|
|
2,451 |
|
|
|
3,947 |
|
|
|
161.0 |
|
Merger-related expenses |
|
|
113 |
|
|
|
1,091 |
|
|
|
(978 |
) |
|
|
(89.6 |
) |
Income from equity investment in Craft Brands |
|
|
|
|
|
|
637 |
|
|
|
(637 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,498 |
|
|
|
(2,149 |
) |
|
|
4,647 |
|
|
|
N/M |
|
Income from equity investments in Kona and FSB |
|
|
99 |
|
|
|
|
|
|
|
99 |
|
|
|
N/M |
|
Interest expense |
|
|
(571 |
) |
|
|
(3 |
) |
|
|
(568 |
) |
|
|
N/M |
|
Interest and other income, net |
|
|
79 |
|
|
|
13 |
|
|
|
66 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,105 |
|
|
|
(2,139 |
) |
|
|
4,244 |
|
|
|
N/M |
|
Income tax provision (benefit) |
|
|
366 |
|
|
|
(755 |
) |
|
|
1,121 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,739 |
|
|
$ |
(1,384 |
) |
|
$ |
3,123 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not Meaningful
23
The following table sets forth a comparison of sales revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Increase |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
Sales
Revenues by Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-B |
|
$ |
31,360 |
|
|
$ |
4,969 |
|
|
$ |
26,391 |
|
|
|
531.1 |
% |
Craft Brands |
|
|
|
|
|
|
3,518 |
|
|
|
(3,518 |
) |
|
|
(100.0 |
) |
Contract brewing |
|
|
|
|
|
|
1,780 |
|
|
|
(1,780 |
) |
|
|
(100.0 |
) |
Alternating proprietorship |
|
|
3,441 |
|
|
|
|
|
|
|
3,441 |
|
|
|
|
|
Pubs and other (1) |
|
|
2,664 |
|
|
|
1,726 |
|
|
|
938 |
|
|
|
54.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
37,465 |
|
|
$ |
11,993 |
|
|
$ |
25,472 |
|
|
|
212.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
(1) |
|
Other includes international, non-wholesalers and other |
Gross Sales. Gross sales increased $25.5 million, or 212.4%, from $12.0 million for
the second quarter of 2008 to $37.5 million for the second quarter of 2009 primarily due to impacts
of the Merger. Other factors impacting the increase in sales revenues for the three months ended
June 30, 2009 were as follows:
|
|
Total shipments increased 86,200 barrels or 113.1% from 76,200 barrels for the second
quarter of 2008 to 162,400 barrels for the second quarter of 2009. Shipments to A-B increased
132,000 barrels from shipments of 26,900 barrels in the second quarter of 2008 to 158,900
barrels in the second quarter of 2009. This increase in shipments is primarily due to
shipments of Widmer-branded products inclusive of all shipment activities and Kona-branded
products pursuant to a distribution agreement with Kona. The Company did not sell Kona-branded
products during the three months ended June 30, 2008. Shipments for the second quarter of
2009 were also impacted by the Companys concerted efforts to stock wholesalers and
distributors prior to the seasonal demand peak for sales to consumers and by the Companys
initiatives involving its new products, which were introduced early in 2009, but were fully
absorbed by the wholesaler and distributor network during the second quarter of 2009. The
Company expects that sales to retailers (STRs) may exceed shipments for the third quarter of
2009 as wholesalers and distributors reduce their inventories over the course of the third
quarter. |
|
|
|
The increase in revenues was also due to shipments in the West being made via A-B at
wholesale pricing levels after the Merger rather than through Craft Brands at below wholesaler
pricing levels as they were prior to the Merger. Additionally, both draft and bottled
products experienced a pricing increase at the wholesale level from a year ago. |
|
|
|
Pursuant to the Merger, the Company terminated several sales and contract agreements,
including the distribution agreement with Craft Brands and the contract brewing agreement with
Widmer that led to the elimination of the associated sales revenues for these activities,
which totaled $3.5 million and $1.8 million, respectively, for the second quarter of 2008.
These sales were made at either below wholesale price levels, via Craft Brands, or at
contractually determined sales prices. |
|
|
|
Revenues included alternating proprietorship fees of $3.4 million earned from Kona for
leasing the Oregon Brewery and sales of raw materials during the second quarter of 2009 (no
such activity occurred prior to the Merger.) |
|
|
|
Revenues from pub and other sales increased by $938,000 in the second quarter of 2009
primarily due to the sales generated by the pub in Portland, Oregon, which was acquired as a
result of the Merger. |
24
Shipments Brand. The following table sets forth a comparison of shipments by brand (in
barrels) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
2009 Shipments |
|
2008 Shipments |
|
Increase |
|
% |
|
|
Draft |
|
Bottle |
|
Total |
|
Draft |
|
Bottle |
|
Total |
|
(Decrease) |
|
Change |
|
|
(In barrels) |
|
|
|
|
|
|
|
|
|
Redhook brand |
|
|
13,300 |
|
|
|
33,800 |
|
|
|
47,100 |
|
|
|
16,800 |
|
|
|
34,600 |
|
|
|
51,400 |
|
|
|
(4,300 |
) |
|
|
(8.4 |
)% |
Widmer brand (1) |
|
|
38,300 |
|
|
|
40,900 |
|
|
|
79,200 |
|
|
|
12,500 |
|
|
|
12,300 |
|
|
|
24,800 |
|
|
|
54,400 |
|
|
|
219.4 |
|
Kona brand |
|
|
11,300 |
|
|
|
24,800 |
|
|
|
36,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipped |
|
|
62,900 |
|
|
|
99,500 |
|
|
|
162,400 |
|
|
|
29,300 |
|
|
|
46,900 |
|
|
|
76,200 |
|
|
|
86,200 |
|
|
|
113.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shipments of Widmer-branded product for the three months ended June 30, 2008 are only those
products brewed and
shipped by the Company and do not include Widmer-branded products shipped by Widmer or Craft
Brands. The Companys
shipments were made pursuant to a licensing agreement and contract brewing arrangements with
Widmer, all of which were
terminated in connection with the Merger. |
Although the Company has brewed and distributed Redhook-branded beer since the creation of the
brand, the Company first began to expand its brand portfolio in 2003 when it entered into a
licensing arrangement with Widmer. Under the licensing agreement, the Company brewed Widmer
Hefeweizen in the New Hampshire Brewery and sold it in the Midwest and Eastern markets. In 2004
following the formation of Craft Brands, the Company further expanded its production of
Widmer-branded products when it entered into two contract brewing arrangements with Widmer. In the
second quarter of 2008, the Company brewed and shipped approximately 6,800 barrels of Widmer
Hefeweizen in the Midwest and Eastern United States pursuant to the licensing agreement and another
18,000 barrels of Widmer-branded products in conjunction with the contract brewing arrangements.
Although the licensing agreement and the contract brewing arrangements were terminated when the
Merger was consummated, activities similar to these still continue and are only a portion of total
Widmer-branded shipments.
Shipments of bottled and packaged beer have steadily increased as a percentage of total
shipments since the mid-1990s; however, with the Merger and the resulting consolidation of all
Widmer-branded shipping activities, this trend has reversed somewhat as a higher percentage of
Widmer-branded products are sold as draft products than the Companys historical experience. During
the three months ended June 30, 2009, 71.8% of Redhook-branded shipments were shipments of bottled
beer versus 67.3% in the three months ended June 30, 2008. Although the sales mix of Kona-branded
beer is still weighted toward bottled product, it is slightly less than Redhook-branded beer as
68.7% of Kona-branded shipments were bottled beer. The sales mix of Widmer-branded products
contrasts significantly from that of the Redhook and Kona brands with
51.6% and 49.6% of
Widmer-branded products being bottled or packaged beer in the second quarter of 2009 and 2008,
respectively. Although the average revenue per barrel for sales of bottled beer is generally 40% to
50% higher than that of draft beer, the cost per barrel is also higher, resulting in a gross margin
that is approximately 10% less than that of draft beer sales.
25
Shipments Customer. The following table sets forth a comparison of shipments by customer
(in barrels) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
2009 Shipments |
|
2008 Shipments |
|
Increase |
|
% |
|
|
Draft |
|
Bottle |
|
Total |
|
Draft |
|
Bottle |
|
Total |
|
(Decrease) |
|
Change |
|
|
(In barrels) |
|
|
|
|
|
|
|
|
|
A-B |
|
|
61,300 |
|
|
|
97,600 |
|
|
|
158,900 |
|
|
|
11,500 |
|
|
|
15,400 |
|
|
|
26,900 |
|
|
|
132,000 |
|
|
|
490.7 |
% |
Craft Brands |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,600 |
|
|
|
21,100 |
|
|
|
29,700 |
|
|
|
(29,700 |
) |
|
|
(100.0 |
) |
Contract brewing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
10,000 |
|
|
|
18,000 |
|
|
|
(18,000 |
) |
|
|
(100.0 |
) |
Pubs and other (1) |
|
|
1,600 |
|
|
|
1,900 |
|
|
|
3,500 |
|
|
|
1,200 |
|
|
|
400 |
|
|
|
1,600 |
|
|
|
1,900 |
|
|
|
118.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipped |
|
|
62,900 |
|
|
|
99,500 |
|
|
|
162,400 |
|
|
|
29,300 |
|
|
|
46,900 |
|
|
|
76,200 |
|
|
|
86,200 |
|
|
|
113.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
(1) |
|
International, non-wholesalers, pubs and other |
Prior to July 1, 2008, the Companys products were shipped through A-B in the Midwest and
Eastern United States and through Craft Brands in the West, ultimately being shipped to either a
consumer or retailer through wholesalers in the A-B distribution network. In connection with the
Merger, Craft Brands was merged with and into the Company and all shipments in the United States
began to be sold through A-B through wholesalers in the A-B distribution network.
Pricing and Fees. Average revenue per barrel on shipments of beer (excluding pubs and other)
for the second quarter of 2009 increased by 43.7% as compared with average revenue per barrel for
the corresponding period of 2008. Comparison between the two periods has been significantly
impacted by the Merger. During the second quarter of 2009, the Company sold 97.8% of its beer
through A-B at wholesale pricing levels throughout the United States. During the corresponding
period in 2008, the Company sold 35.3% of its product at wholesale pricing levels in the Midwest
and Eastern United States, another 39.0% at lower than wholesale pricing levels to Craft Brands in
the Western United States, and 23.6% at agreed-upon pricing levels for beer brewed on a contract
basis.
Management believes that most, if not all, craft brewers are weighing their pricing strategies
in the face of relatively recent increases in the costs of raw materials countered by the current
economic environment. Pricing changes implemented by the Company have generally followed 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. The Company may experience a decline in sales in certain
regions following a price increase.
In connection with all sales through the A-B Distribution Agreement, as amended, the Company
pays a Margin fee to A-B (Margin). The Margin does not apply to sales from the Companys retail
operations or to dock sales. The Margin also did not apply to the Companys sales to Craft Brands
during the second quarter of 2008 because Craft Brands paid 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 Margin fee on shipments of Redhook-, Widmer-, and Kona-branded product that exceed
shipments in the same territory during the same periods in fiscal 2003 (Additional Margin).
During the three months ended June 30, 2009, and 2008, the Margin was paid to A-B on shipments
totaling 158,900 barrels and 26,900
barrels, respectively. As 2009 shipments in the United States and 2008 shipments in the
Midwest and Eastern United States exceeded 2003 shipments in the corresponding territories, the
Company paid A-B the Additional Margin. For the three months ended June 30, 2009 and 2008, the
Company recognized expense of $1.7 million and $218,000, respectively, related to the total of
Margin and Additional Margin for A-B. These fees are reflected as a reduction of sales in the
Companys statements of operations.
As of June 30, 2009 and December 31, 2008, the net amount due to A-B under all Company
agreements with A-B totaled $308,000 and $2.3 million, respectively. In connection with the sale of
beer pursuant to the A-B Distribution Agreement, the Companys accounts receivable reflect
significant balances due from A-B, and the refundable deposits and accrued expenses reflect
significant balances due to A-B. Although the Company considers these
26
balances to be due to or from
A-B, the final destination of the Companys products is an A-B wholesaler and payments by the
wholesaler are settled through A-B. The Company purchases packaging, other materials and services
under separate arrangements; balances due to A-B under these arrangements are reflected in accounts
payable and accrued expenses. These amounts are also included in the net amount due to A-B
presented above.
Excise Taxes. Excise taxes for the three months ended June 30, 2009 increased $1.1
million, or 91.2%, primarily due to the increase in shipments of Widmer-branded products and the
effect of the marginal excise tax rate on these shipments of $18 per barrel. Excise taxes for the
second quarter of 2009 decreased as a percentage of net sales and on a per barrel basis when
compared with the corresponding 2008 period because Kona was responsible for the excise tax on the
Kona-branded shipments. The Company did not ship Kona-branded beer prior to the Merger.
Cost of Sales. Cost of sales increased $16.1 million to $26.1 million in the second
quarter of 2009 from $10.0 million in the same 2008 quarter and increased by $27.13 or 20.3% on a
per barrel basis. In contrast, cost of sales decreased as a percentage of net sales to 74.4% from
93.0% because of the significant change in product mix and pricing attributable to the Merger.
Comparability of the periods was significantly affected by the Merger and the resulting change in
operations, including an 113.1% increase in shipments, the addition of a third brewery and a third
restaurant, a change in the mix of products shipped, the addition of the alternating proprietorship
relationship, and the elimination of the licensing agreement and contract brewing arrangements.
Cost of sales for the second quarter of 2009 includes the cost to produce all Widmer-branded
products shipped as compared with the second quarter of 2008, which included only certain
activities associated with Widmer-branded products. Prior to the Merger, the Company brewed a
limited volume of Widmer-branded products pursuant to the licensing agreement and the contract
brewing arrangements. During the second quarter of 2009, shipments of Widmer-branded products
included those that would have been brewed by Widmer in the past in addition to Widmer-branded
products historically brewed by the Company. The increase in direct costs to produce this
incremental volume was only partially offset by the elimination of licensing fees paid to Widmer in
connection with the licensing agreement that terminated upon consummation of the Merger. The 2008
second quarter includes $90,000 for licensing fees paid to Widmer in connection with the Companys
shipment of 6,800 barrels of Widmer Hefeweizen in the Midwest and Eastern United States.
The annual working capacity of the Oregon Brewery acquired in the Merger is approximately
377,000 barrels, nearly the same as the combined annual working capacity of the Companys
Washington and New Hampshire Breweries prior to the Merger. As expected, cost of sales increased
significantly as a result the Oregon Brewerys fixed and semi-variable costs, including
depreciation, utilities, labor, rent, and property taxes. For example, depreciation and
amortization expense charged to cost of goods sold for the quarter ended June 30, 2009 increased by
approximately 139.6%, or $1.0 million, over depreciation and amortization expense for the second
quarter of 2008. While the fixed and semi-variable costs other than depreciation and amortization
may not have increased to the same extent as depreciation and amortization, the increases in these
costs were also substantial.
Based upon the Companys combined working capacity of 199,300 barrels and 94,200 barrels for
the second quarter of 2009 and 2008, respectively, the utilization rate was 81.5% and 80.9%,
respectively. Capacity utilization rates are calculated by dividing the Companys total shipments
by the working capacity. Current period production levels have increased, in part, due to the
seasonal fluctuations in demand, and as discussed previously, the
Companys new initiatives and sales efforts contributed to
generate a level of shipments that is not expected to be sustained
in the near team. Even at the current levels, the Company has a significant
amount of unused
working capacity, therefore the Company continues to evaluate other operating configurations
and arrangements, including contract brewing, to improve the utilization of its production
facilities. To this end, in the third quarter of 2009, the Company executed a two-year contract
brewing arrangement under which the Company will produce beer in volumes and per specifications as
designated by a third party. The Company anticipates that the volume of this contract may be
approximately 20,000 barrels in annual production, although the third party may designate a lesser
amount per the terms of the contract.
Cost of sales for the 2009 second quarter includes costs associated with two distinct Kona
revenue streams: (i) direct and indirect costs related to the alternating proprietorship
arrangement with Kona and (ii) the cost paid to Kona for the Kona-branded finished goods that are
marketed and sold by the Company to wholesalers through the A-B Distribution Agreement.
27
Inventories acquired pursuant to the Merger were recorded at their estimated fair values as of
July 1, 2008, resulting in an increase over the cost at which these inventories were stated on the
June 30, 2008 Widmer balance sheet (the Step Up Adjustment). The Step Up Adjustment, net of
amortization at December 31, 2008, totaled approximately $728,000 for raw materials acquired.
During the three months ended June 30, 2009, approximately $143,000 of the Step Up Adjustment was
expensed to cost of sales in connection with normal production and sales.
Costs for many of the Companys primary raw materials, including barley, wheat and hops,
increased significantly over the period from 2006 to 2008, and for certain of the commodities,
reached historic price levels. These increases were primarily the result of lower supplies due to
various reasons, including farmers and agricultural growers curtailing or eliminating these
commodities to grow other more lucrative crops, lower crop yields and unexpected crop losses. The
weakening exchange rate for the U.S. dollar compared with the Euro also contributed to an increase
in exports of certain commodities, particularly wheat, further restricting the supply and impacting
price levels. Over this period and continuing into 2009, the Company has utilized fixed price
contracts to mitigate its exposure to price volatility and to secure availability of these critical
inputs for its products. While shielding the Company from the immediate impact of unfavorable price
movement, future renewals of these contracts may be at price levels higher than the expiring
contracts. As the factors impacting supply described above abate and spot prices for these
commodities fall, the Company will not immediately enjoy the full impact of these favorable price
movements and contributions to gross margin for the remainder of 2009 and into the early part of
the next fiscal year while purchases under the current contracts are consummated. The Company will
continue to seek opportunities to secure longer-term pricing and security for its key raw materials
while balancing the opportunities for capturing favorable price movement as circumstances dictate.
Selling, General and Administrative Expenses. Selling, general and administrative
(SG&A) expenses for the three months ended June 30, 2009 increased $3.9 million to $6.4 million
from expenses of $2.5 million for the same period in 2008. Comparability of the two quarters is
difficult as the Merger resulted in a significant increase in SG&A functions. Prior to July 1,
2008, SG&A expense in the Companys statement of operations reflected the sales and marketing
efforts only for the Midwest and Eastern United States as Craft Brands performed these functions
for the Western United States. In the second quarter of 2009, all promotion, marketing and sales
efforts for the entire United States for all of the Companys brand products are reflected in the
Companys statement of operations.
The Company incurs costs for the promotion of its products through a variety of advertising
programs with its wholesalers and downstream retailers. These costs are included in SG&A expenses
and frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from
wholesalers for advertising and promotion activities are recorded as a reduction to SG&A expenses
in the Companys statements of operations. Reimbursements for pricing discounts to wholesalers are
recorded as a reduction to sales. The wholesalers contribution toward these activities was an
immaterial percentage of net sales for the 2009 second quarter. Depending on the industry and
market conditions, the Company may adjust its advertising and promotional efforts in a wholesalers
market if a change occurs in a cost-sharing arrangement. For the
third quarter of 2009, the Company anticipates a significant sequential
increase in its advertising and promotional activities as the Company transitions into what is
typically the seasonal peak period for shipments, the summer months, and also a time with a
significant number of festivals, special events and sponsorship opportunities in which the Company
expects to participate.
In addition, the Companys administrative and general costs increased significantly as the
merged operations represent a greater span of operations than the Company before the Merger. The
increase in administrative and general costs was primarily due to administrative salaries,
professional fees and depreciation and amortization expense for the second quarter of 2009 compared
with the prior quarter one year ago. The Company has aggressively acted to contain and control its
operating costs, seeking to leverage its sales, marketing and administrative capacities across an
expanded operating base. While the Company expects seasonal fluctuations related to its sales and
marketing efforts as discussed above, the Company believes that it has realized and will continue
to realize SG&A expense savings as a result of its cost reduction initiatives.
Merger-Related Expenses. In connection with the Merger, the Company incurred
merger-related expenditures, including legal, consulting, meeting, filing, printing and severance
costs. These expenditures have been reflected in the Companys financial statements in accordance
with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. During
the quarters ended June 30, 2009 and 2008, merger-related expenses totaling
28
$113,000 and $1.1
million, respectively, were recorded in the Companys statements of operations. The Company
consummated the Merger effective July 1, 2008, and activities directly related to the Merger have
been substantially completed.
The Company estimates that merger-related severance benefits totaling approximately $583,000
will be paid from the remainder of 2009 to 2011 to all affected former Redhook employees and
officers, and affected former Widmer employees.
The Company has recognized all costs associated with its
merger-related severance benefits, including these, in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (SFAS
146.) The Company recognized severance costs of $113,000
and $1.0 million as a merger-related expense in the
Companys statement of operations for the three months ended June 30, 2009 and 2008, respectively. The Company does not anticipate
that any additional costs will be recognized in future periods associated with the Merger.
Income from Equity Investment in Craft Brands. Because Craft Brands was merged with
and into the Company in connection with the Merger, the Company did not recognize income from its
investment in Craft Brands after June 30, 2008. For the quarter ended June 30, 2008, the Companys
share of Craft Brands net income totaled $637,000.
Income from Equity Investments in Kona and FSB. In conjunction with the Merger, the
Company acquired from Widmer a 20% equity ownership in Kona and a 42% equity ownership in FSB. Both
investments are accounted for under the equity method, as outlined by APB 18. For the quarter ended
June 30, 2009, the Companys share of Konas net income totaled $57,000 and the Companys share of
FSBs net income totaled $42,000.
Interest Expense. Interest expense increased approximately $568,000 to $571,000 in
the second quarter of 2009 from $3,000 in the second quarter of 2008 due to a higher level of debt
outstanding during the current period. In connection with the Merger, the Company assumed greater
leverage such that its average outstanding debt during the second quarter of 2009 was $33.4 million
as compared with the average outstanding debt of $41,000 during the second quarter of 2008.
Other Income, net. Other income, net increased by $66,000 to $79,000 for the second
quarter of 2009 from $13,000 for the same period of 2008, primarily attributable to fair value
gains recognized associated with the Companys interest rate swaps that do not qualify for hedge
accounting treatment and an increase in interest income. The increase in interest income for the
three months ended June 30, 2009 was due to the Company holding greater interest-bearing cash
balances at various points in the second quarter of 2009 compared with the same quarter one year
ago.
Income Taxes. The Companys provision for income taxes was $366,000 for the second
quarter of 2009 compared with an income tax benefit of $755,000 for the second quarter of 2008. The
tax provision for the second quarter of 2009 was impacted by the reversal of the $336,000 valuation
allowance established in the first quarter of 2009 as a result of the
earnings generated during the second quarter exceeding the loss
incurred during the first quarter of 2009. The tax
provision was also impacted by 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, and an adjustment of the accrual liability for the Widmer tax accounting due to the
filing of the short year final tax return for that entity. See Critical Accounting Policies
and Estimates for further discussion related to the Companys income tax provision and net
operating loss (NOL) carryforward position as of June 30, 2009.
29
Six months ended June 30, 2009 compared with six months ended June 30, 2008
The following table sets forth, for the periods indicated, a comparison of certain items from
the Companys Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Sales |
|
$ |
66,694 |
|
|
$ |
22,439 |
|
|
$ |
44,255 |
|
|
|
197.2 |
% |
Less excise taxes |
|
|
4,306 |
|
|
|
2,288 |
|
|
|
2,018 |
|
|
|
88.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
62,388 |
|
|
|
20,151 |
|
|
|
42,237 |
|
|
|
209.6 |
|
Cost of sales |
|
|
47,981 |
|
|
|
19,017 |
|
|
|
28,964 |
|
|
|
152.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,407 |
|
|
|
1,134 |
|
|
|
13,273 |
|
|
|
N/M |
|
Selling, general and administrative expenses |
|
|
12,306 |
|
|
|
4,352 |
|
|
|
7,954 |
|
|
|
182.8 |
|
Merger-related expenses |
|
|
225 |
|
|
|
1,169 |
|
|
|
(944 |
) |
|
|
(80.8 |
) |
Income from equity investment in Craft Brands |
|
|
|
|
|
|
1,390 |
|
|
|
(1,390 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,876 |
|
|
|
(2,997 |
) |
|
|
4,873 |
|
|
|
N/M |
|
Income from equity investments in Kona and FSB |
|
|
128 |
|
|
|
|
|
|
|
128 |
|
|
|
N/M |
|
Interest expense |
|
|
(1,137 |
) |
|
|
(5 |
) |
|
|
(1,132 |
) |
|
|
N/M |
|
Interest and other income, net |
|
|
170 |
|
|
|
57 |
|
|
|
113 |
|
|
|
198.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,037 |
|
|
|
(2,945 |
) |
|
|
3,982 |
|
|
|
N/M |
|
Income tax provision (benefit) |
|
|
373 |
|
|
|
(1,017 |
) |
|
|
1,390 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
664 |
|
|
$ |
(1,928 |
) |
|
$ |
2,592 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
N/M Not Meaningful |
The following table sets forth a comparison of sales revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
|
% |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Sales
Revenues by Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-B |
|
$ |
56,248 |
|
|
$ |
9,527 |
|
|
$ |
46,721 |
|
|
|
490.4 |
% |
Craft Brands |
|
|
|
|
|
|
6,914 |
|
|
|
(6,914 |
) |
|
|
(100.0 |
) |
Contract brewing |
|
|
|
|
|
|
2,956 |
|
|
|
(2,956 |
) |
|
|
(100.0 |
) |
Alternating proprietorship |
|
|
5,647 |
|
|
|
|
|
|
|
5,647 |
|
|
|
|
|
Pubs and other (1) |
|
|
4,799 |
|
|
|
3,042 |
|
|
|
1,757 |
|
|
|
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
66,694 |
|
|
$ |
22,439 |
|
|
$ |
44,255 |
|
|
|
197.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
(1) |
|
Other includes international, non-wholesalers and other |
Gross Sales. Gross sales increased $44.3 million, or 197.2%, from $22.4 million for
the first six months of 2008 to $66.7 million for the first six months of 2009 primarily due to
impacts of the Merger. Other factors impacting the increase in sales revenues for the three months
ended June 30, 2009 were as follows:
|
|
Total shipments increased 151,600 barrels or 104.8% from 144,600 barrels for the first six
months of 2008 to 296,200 barrels for the first six months of 2009. Shipments to A-B
increased 237,500 barrels from shipments of |
30
|
|
52,700 barrels in the first six months of 2008 to
290,200 barrels in the first six months of 2009. This increase in shipments is primarily due
to shipments of Widmer-branded products inclusive of all shipment activities and Kona-branded
products pursuant to a distribution agreement with Kona. The Company did not sell Kona-branded
products during the six months ended June 30, 2008. Shipments for the first six months of
2009 were also impacted by the Companys concerted efforts to stock wholesalers and
distributors prior to the seasonal demand peak for sales to consumers and by the Companys
initiatives involving its new products, which were introduced early in 2009, but were fully
absorbed by the wholesaler and distributor network during the second quarter of 2009. The
Company expects that STRs may exceed shipments for the third quarter of 2009 as wholesalers
and distributors reduce their inventories over the course of the third quarter. |
|
|
The increase in revenues was also due to shipments in the West being made via A-B at
wholesale pricing levels after the Merger rather than through Craft Brands at below wholesaler
pricing levels as they were prior to the Merger. Additionally, both draft and bottled
products experienced a pricing increase at the wholesale level from a year ago. |
|
|
|
Pursuant to the Merger, the Company terminated several sales and contract agreements,
including the distribution agreement with Craft Brands and the contract brewing agreement with
Widmer that led to the elimination of the associated sales revenues for these activities,
which totaled $6.9 million and $3.0 million, respectively, for the first six months of 2008.
These sales were made at either below wholesale price levels, via Craft Brands, or at
contractually determined sales prices. |
|
|
|
Revenues included alternating proprietorship fees of $5.6 million earned from Kona for
leasing the Oregon Brewery and sales of raw materials during the first six months of 2009 (no
such activity occurred prior to the Merger.) |
|
|
|
Revenues from pub and other sales increased by $1.8 million in the first six months of 2009
primarily due to the sales generated by the pub in Portland, Oregon, which was acquired as a
result of the Merger. |
Shipments Brand. The following table sets forth a comparison of shipments by brand (in barrels)
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
2009 Shipments |
|
2008 Shipments |
|
Increase |
|
% |
|
|
Draft |
|
Bottle |
|
Total |
|
Draft |
|
Bottle |
|
Total |
|
(Decrease) |
|
Change |
|
|
(In barrels) |
|
|
|
|
|
Redhook brand |
|
|
25,900 |
|
|
|
67,600 |
|
|
|
93,500 |
|
|
|
32,400 |
|
|
|
68,700 |
|
|
|
101,100 |
|
|
|
(7,600 |
) |
|
|
(7.5 |
)% |
Widmer brand (1) |
|
|
73,300 |
|
|
|
70,900 |
|
|
|
144,200 |
|
|
|
24,600 |
|
|
|
18,900 |
|
|
|
43,500 |
|
|
|
100,700 |
|
|
|
231.5 |
|
Kona brand |
|
|
20,200 |
|
|
|
38,300 |
|
|
|
58,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipped |
|
|
119,400 |
|
|
|
176,800 |
|
|
|
296,200 |
|
|
|
57,000 |
|
|
|
87,600 |
|
|
|
144,600 |
|
|
|
151,600 |
|
|
|
104.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shipments of Widmer-branded product for the six months ended June 30, 2008 are only those products brewed and
shipped by the Company and do not include Widmer-branded products shipped by Widmer or Craft Brands. The Companys
shipments were made pursuant to a licensing agreement and contract brewing arrangements with Widmer, all of which were
terminated in connection with the Merger. |
In the first six months of 2008, the Company brewed and shipped approximately 12,500 barrels
of Widmer Hefeweizen in the Midwest and Eastern United States pursuant to the licensing agreement
with Widmer and another 31,000 barrels of Widmer-branded products in conjunction with the contract
brewing arrangements. Although the licensing agreement and the contract brewing arrangements were
terminated when the Merger was consummated, activities similar to these still continue and are only
a portion of total Widmer-branded shipments. See Three Months Ended June 30, 2009 Compared
with Three Months Ended June 30, 2008 Gross Sales Shipments Brands for further discussion
regarding the Companys terminated licensing agreement and contract brewing arrangements with
Widmer.
31
Shipments of bottled and packaged beer have steadily increased as a percentage of total
shipments since the mid-1990s; however, with the Merger and the resulting consolidation of all
Widmer-branded shipping activities, this trend has reversed somewhat as a higher percentage of
Widmer-branded products are sold as draft products than the Companys historical experience. During
the six months ended June 30, 2009, 72.3% of Redhook-branded shipments were shipments of bottled
beer versus 68.0% in the six months ended June 30, 2008. Although the sales mix of Kona-branded
beer is still weighted toward bottled product, it is somewhat less than Redhook-branded beer as
65.5% of Kona-branded shipments were bottled beer. The sales mix of Widmer-branded products
contrasts significantly from that of the Redhook and Kona brands with 49.2% and 43.4% of
Widmer-branded products being bottled or packaged beer in the first six months of 2009 and 2008,
respectively. Although the average revenue per barrel for sales of bottled beer is generally 40% to
50% higher than that of draft beer, the cost per barrel is also higher, resulting in a gross margin
that is approximately 10% less than that of draft beer sales.
Shipments Customer. The following table sets forth a comparison of shipments by customer
(in barrels) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
2009 - Shipments |
|
2008 - Shipments |
|
Increase |
|
% |
|
|
Draft |
|
Bottle |
|
Total |
|
Draft |
|
Bottle |
|
Total |
|
(Decrease) |
|
Change |
|
|
(In barrels) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-B |
|
|
116,500 |
|
|
|
173,700 |
|
|
|
290,200 |
|
|
|
22,200 |
|
|
|
30,500 |
|
|
|
52,700 |
|
|
|
237,500 |
|
|
|
450.7 |
% |
Craft Brands |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,300 |
|
|
|
41,900 |
|
|
|
58,200 |
|
|
|
(58,200 |
) |
|
|
(100.0 |
) |
Contract brewing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,500 |
|
|
|
14,500 |
|
|
|
31,000 |
|
|
|
(31,000 |
) |
|
|
(100.0 |
) |
Pubs and other (1) |
|
|
2,900 |
|
|
|
3,100 |
|
|
|
6,000 |
|
|
|
2,000 |
|
|
|
700 |
|
|
|
2,700 |
|
|
|
3,300 |
|
|
|
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shipped |
|
|
119,400 |
|
|
|
176,800 |
|
|
|
296,200 |
|
|
|
57,000 |
|
|
|
87,600 |
|
|
|
144,600 |
|
|
|
151,600 |
|
|
|
104.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
International, non-wholesalers, pubs and other |
Pricing and Fees. Average revenue per barrel on shipments of beer (excluding pubs and other)
for the first six months of 2009 increased by 41.9% as compared with average revenue per barrel for
the corresponding period of 2008. Comparison between the two periods has been significantly
impacted by the Merger. During the first six months of 2009, the Company sold 98.0% of its beer
through A-B at wholesale pricing levels throughout the United States. During the corresponding
period in 2008, the Company sold 36.4% of its product at wholesale pricing levels in the Midwest
and Eastern United States, another 40.3% at lower than wholesale pricing levels to Craft Brands in
the Western United States, and 21.4% at agreed-upon pricing levels for beer brewed on a contract
basis.
During the six months ended June 30, 2009, and 2008, Margin was paid to A-B on shipments
totaling 290,200 barrels and 52,700 barrels, respectively. As 2009 shipments in the United States
and 2008 shipments in the Midwest and Eastern United States exceeded 2003 shipments in the
corresponding territories, the Company paid A-B the Additional Margin. For the six months ended
June 30, 2009 and 2008, the Company recognized expense of $3.1 million and $501,000, respectively,
related to the total of Margin and Additional Margin for A-B. These fees are reflected as a
reduction of sales in the Companys statements of operations.
Excise Taxes. Excise taxes for the six months ended June 30, 2009 increased $2.0
million, or 88.2%, primarily due to the increase in shipments of Widmer-branded products and the
effect of the marginal excise tax rate on these shipments of $18 per barrel. Excise taxes for the
first six months of 2009 decreased as a percentage of net sales and on a per barrel basis when compared with the corresponding 2008 period because Kona was
responsible for the excise tax on the Kona-branded shipments. The Company did not ship Kona-branded
beer prior to the Merger.
Cost of Sales. Cost of sales increased $29.0 million to $48.0 million in the first
six months of 2009 from $19.0 million in the same period of 2008 and increased by $29.29 or 22.1%
on a per barrel basis. In contrast, cost of sales decreased as a percentage of net sales to 76.9%
from 94.4% because of the significant change in product mix and pricing attributable to the Merger.
Comparability of the periods was significantly affected by the Merger and the resulting change in
operations, including a 104.8% increase in shipments, the addition of a third brewery and a third
32
restaurant, a change in the mix of products shipped, the addition of the alternating proprietorship
relationship, and the elimination of the licensing agreement and contract brewing arrangements.
Cost of sales for the first six months of 2009 includes the cost to produce all Widmer-branded
products shipped as compared with the first six months of 2008, which included only certain
activities associated with Widmer-branded products. Prior to the Merger, the Company brewed a
limited volume of Widmer-branded products pursuant to the licensing agreement and the contract
brewing arrangements. During the first six months of 2009, shipments of Widmer-branded products
included those that would have been brewed by Widmer in the past in addition to Widmer-branded
products historically brewed by the Company. The increase in direct costs to produce this
incremental volume was only partially offset by the elimination of licensing fees paid to Widmer in
connection with the licensing agreement that terminated upon consummation of the Merger. The 2008
first six months includes $165,000 for licensing fees paid to Widmer in connection with the
Companys shipment of 12,500 barrels of Widmer Hefeweizen in the Midwest and Eastern United States.
The annual working capacity of the Oregon Brewery acquired in the Merger is approximately
377,000 barrels, nearly the same as the combined annual working capacity of the Companys
Washington and New Hampshire Breweries prior to the Merger. As expected, cost of sales increased
significantly as a result the Oregon Brewerys fixed and semi-variable costs, including
depreciation, utilities, labor, rent, and property taxes. For example, depreciation and
amortization expense charged to cost of goods sold for the six months ended June 30, 2009 increased
by approximately 141.2%, or $2.0 million, over depreciation and amortization expense for the first
six months of 2008. During the six months ended June 30, 2009, approximately $246,000 of the Step
Up Adjustment to inventories was expensed to cost of sales in connection with normal production and
sales. While the fixed and semi-variable costs other than depreciation and amortization may not
have increased to the same extent as depreciation and amortization, the increases in these costs
were also substantial.
Based upon the Companys combined working capacity of 398,500 barrels and 188,400 barrels for
the first six months of 2009 and 2008, the utilization rate was 74.3% and 76.8%, respectively.
Current period production levels have increased, in part, due to seasonal fluctuations in demand,
and as discussed previously, the Company's new initiatives and sales
efforts contributed to generate a level of shipments that is not
expected to be sustained in the near term.
Cost of sales for the first six months of 2009 includes costs associated with two distinct
Kona revenue streams: (i) direct and indirect costs related to the alternating proprietorship
arrangement with Kona and (ii) the cost paid to Kona for the Kona-branded finished goods that are
marketed and sold by the Company to wholesalers through the A-B Distribution Agreement.
Selling, General and Administrative Expenses. SG&A expenses for the six months ended
June 30, 2009 increased 182.8% to $12.3 million from $4.4 million in SG&A expense for the same
period in 2008. Comparability of the two periods is difficult as the Merger resulted in a
significant increase in sales, marketing and administrative functions. Prior to July 1, 2008, SG&A
expense in the Companys statement of operations reflected the sales and marketing efforts only for
the Midwest and Eastern United States because Craft Brands performed these functions for the
Western United States. In the first six months of 2009, all promotion, marketing and sales efforts
for the entire United States for all of the Companys brand products are reflected in the Companys
statement of operations.
The Company incurs costs for the promotion of its products through a variety of advertising
programs with its wholesalers and downstream retailers. These costs are included in SG&A expenses
and frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from
wholesalers for advertising and promotion activities are recorded as a reduction to SG&A expenses
in the Companys statements of operations. Reimbursements for pricing discounts to wholesalers are recorded as a reduction to sales. The wholesalers
contribution toward these activities was an immaterial percentage of net sales for the first
six months of 2009.
In addition, the Companys general and administrative costs increased significantly as the
merged operations represent a greater span of operations than the Company before the Merger. The
increase in general and administrative costs was primarily due to administrative salaries,
professional fees and depreciation and amortization expense for the first six months of 2009
compared with the prior period one year ago.
33
Merger-Related Expenses. During the six months ended June 30, 2009 and 2008,
merger-related expenses totaling $225,000 and $1.2 million, respectively, were recorded in the
Companys statements of operations. Included in these expenses were severance expenses recorded in
accordance with SFAS 146 totaling $225,000 and $1.0 million for the six months ended June 30, 2009
and 2008, respectively. The Company does not anticipate that any additional significant costs will
be recognized in future periods associated with the Merger.
Income from Equity Investment in Craft Brands. Because Craft Brands was merged with
and into the Company in connection with the Merger, the Company did not recognize income from its
investment in Craft Brands after June 30, 2008. For the six months ended June 30, 2008, the
Companys share of Craft Brands net income totaled $1.4 million.
Income from Equity Investments in Kona and FSB. For the six months ended June 30,
2009, the Companys share of Konas net income totaled $48,000 and the Companys share of FSBs net
income totaled $80,000.
Interest Expense. Interest expense was $1.1 million for the first six months of 2009,
increasing from $5,000 in the corresponding period of 2008 due to a higher level of debt
outstanding during the current period. In connection with the Merger, the Company assumed greater
leverage such that its average outstanding debt during the first six months of 2009 was $34.0
million as compared with the average outstanding debt of $43,000 during the corresponding period of
2008.
Other Income, net. Other income, net increased by $113,000 to $170,000 for the first
six months of 2009 from $57,000 for the same period of 2008, primarily attributable to fair value
gains recognized associated with the Companys interest rate swaps that do not qualify for hedge
accounting treatment and an increase in interest income. The increase in interest income for the
six months ended June 30, 2009 was due to the Company holding greater interest-bearing cash
balances at various points in the first six months of 2009 as compared with the same period one
year ago.
Income Taxes. The Companys provision for income taxes was $373,000 for the first six
months of 2009 compared with an income tax benefit of $1.0 million for the same period of 2008. The
tax provision is driven by 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, and an adjustment of the accrual liability for the Widmer tax accounting due to the
filing of the short year final tax return for that entity. See Critical Accounting Policies and
Estimates for further discussion related to the Companys income tax provision and NOL
carryforward position as of June 30, 2009.
Liquidity and Capital Resources
The Company has required capital primarily for the construction and development of its
production facilities, support for its expansion and growth plans as they have occurred, and to
fund its working capital needs. 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 flows and borrowings under its loan agreement.
The capital resources available to the Company under its loan agreement and capital lease
obligations are discussed in further detail in Item 1, Notes to Financial Statements. See Note 6
for further discussion regarding the Companys debt obligations at June 30, 2009.
The Company had $247,000 and $11,000 of cash and cash equivalents at June 30, 2009 and
December 31, 2008, respectively. At June 30, 2009, the Company had a working capital surplus
totaling $641,000, a $1.6 million improvement from the Companys working capital position at December 31, 2008. The Companys
debt as a percentage of total capitalization (total debt and common stockholders equity) was 28.5%
and 29.5% at June 30, 2009 and December 31, 2008, respectively. Cash provided by operating
activities totaled $2.8 million for the six months ended June 30, 2009 as compared with $159,000
for the six months ended June 30, 2008.
As of June 30, 2009, the Companys available liquidity was $4.6 million, comprised of
accessible cash and cash equivalents and further borrowing capacity. Subsequent to June 30, 2009,
the Company has continued to generate
34
positive cash flows, improving its available liquidity; however, the Company anticipates that as its sales and marketing expenditures ramp up later in the
third quarter, some
amount of its available liquidity will be consumed. The Company believes that its available liquidity is
sufficient for its existing operating plans and will deploy cash flow in excess of its operating
requirements to reduce the Companys outstanding borrowings under its revolving line of credit.
Capital expenditures for the first six months of 2009 were $1.4 million compared with $2.6
million for the corresponding period in 2008. Major 2009 projects included approximately $750,000
expended for projects at the Oregon Brewery, including the installation of four 250-barrel bright
tanks, and continuation of outstanding 2008 projects totaling nearly $500,000 at the New Hampshire
Brewery, including the water treatment facility, which has enabled the Company to expand the brands
produced at that facility. As discussed below, the limitation on capital expenditures placed on
the Company by its lender, Bank of America, N.A. (BofA) pursuant to the modification of the loan
agreement has expired at the end of the second quarter of 2009. The Company expects that it will
be able to generate sufficient liquidity for the remainder of 2009 to fund its capital expenditures
at the necessary levels.
The Company is in compliance with all applicable contractual financial covenants at June 30,
2009. The Company and BofA executed a loan modification to its loan agreement effective November
14, 2008 (Modification Agreement), as a result of the Companys inability to meet its covenants
as of September 30, 2008. BofA permanently waived the noncompliance effective September 30, 2008,
restoring the Companys borrowing capacity pursuant to the loan agreement.
Effective September 30, 2009, the Company will be required to meet the financial covenant
ratios of funded debt to EBITDA, as defined, and fixed charge coverage in the manner established
pursuant to the original Loan Agreement, but at levels specified by the Modification Agreement.
For the quarter ended June 30, 2009, the financial covenants, including required EBITDA, were
measured on a one-quarter basis; however, beginning with the third quarter of 2009, the financial
covenants under the Companys loan agreement will be measured on a trailing four-quarter basis.
Those covenants are detailed as follows:
Financial Covenants Required by Loan Agreement
as Revised by the Modification Agreement
|
|
|
|
|
Ratio of Funded Debt to EBITDA, as defined |
|
|
|
|
As of September 30, 2009 |
|
|
4.50 to 1 |
|
From December 31, 2009 through September 30, 2010 |
|
|
3.50 to 1 |
|
From December 31, 2010 and thereafter |
|
|
3.00 to 1 |
|
|
|
|
|
|
Fixed Charge Coverage Ratio |
|
|
|
|
For the trailing four-quarter period ending
September 30, 2009
and thereafter |
|
|
1.25 to 1 |
|
The Loan Agreement is secured by substantially all of the Companys personal property and by
the real properties located at 924 North Russell Street, Portland, Oregon and 14300 NE
145th Street, Woodinville, Washington, which comprise its Oregon Brewery and Washington
Brewery, respectively. In addition, the Company is restricted in its ability to declare or pay
dividends, repurchase any outstanding common stock, incur additional debt or enter into any
agreement that would result in a change in control of the Company.
If the Company is unable to generate sufficient EBITDA or causes its borrowings to increase
such that it fails to meet the associated covenants as discussed above, this would result in a
violation. Failure to meet the covenants is an event of default and, at its option, BofA could deny
a request for another 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 lenders,
potentially at less desirable terms. Given the current economic environment and the tightening of
lending standards by many financial institutions, including some of the banks that the Company
might seek credit from, there can be no guarantee that additional financing would be available at
commercially reasonable terms, if at all.
35
Trend
During
the six months ended June 30, 2009, the Company has experienced a $1.6 million improvement in working
capital, due in large part to the Companys generation of
$6.1 million in EBITDA for the period partially offset by
$1.4
million in capital expenditures and $2.4 million in debt and interest payments. The Company
anticipates that further reductions of its outstanding borrowings under its
revolving line of credit may offset some of the favorable trend
noted above.
The Company recognizes the need to evaluate and improve further its operating cost structure.
Management has focused aggressively on identifying areas within the Company that can yield
significant cost savings, whether driven by the synergies of the Merger and integration or
generated by general cost-reduction programs, and executing appropriate measures to secure these
savings. The Company has been and will continue to implement these cost savings initiatives during
the remainder of 2009; however, as discussed previously, it may be constrained in these efforts
given the competitive landscape. Management believes that the Company can meet its normal cash flow
requirements and comply with the terms of its bank loan, but there is no assurance that it can do
so. The failure to meet working capital requirements could have a material adverse effect on the
Companys future operations and growth.
Critical Accounting Policies and Estimates
The Companys financial statements are based upon the selection and application of significant
accounting policies that require management to make significant estimates and assumptions.
Judgments and uncertainties affecting the application of these policies may result in materially
different amounts being reported under different conditions or using different assumptions. Our
estimates are based upon historical experience, market trends and financial forecasts and
projections, and upon various other assumptions that management believes to be reasonable under the
circumstances and at certain points in time. Actual results may differ, potentially significantly,
from these estimates.
Our critical
accounting policies, as described in our 2008 Annual Report related to inventories, investment in subsidiaries, property,
equipment and leasehold improvements, goodwill and other intangible assets, refundable deposits on
kegs, fair value measurements, revenue recognition, income taxes and share-based compensation.
There have been no material changes to our critical accounting policies since December 31, 2008,
except for the changes described below.
Income Taxes. The Company records federal and state income taxes in accordance with
FASB 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 NOL and credit
carryforwards.
As of June 30, 2009, the Companys deferred tax assets were primarily comprised of federal NOL
carryforwards of $27.7 million, or $9.4 million tax-effected; state NOL carryforwards of $331,000
tax-effected; and federal and state alternative minimum tax credit carryforwards of $209,000
tax-effected. In assessing the realizability of its 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. Among other
factors, the Company considered future taxable income generated by the projected differences
between financial statement depreciation and tax depreciation, including the depreciation of the
assets acquired in the Merger. At December 31, 2008, based upon the available evidence, the Company
believed that it is more likely than not that certain deferred tax assets will not be realized. As
a result, the Company provided a valuation allowance for those deferred tax assets that met this
criteria and recorded a valuation allowance of $1.0 million as a reduction of the tax benefit for
the year ended
36
December 31, 2008. As the Company has NOLs that are not offset by a valuation allowance, the Companys current period earnings are expected to be offset by such NOLs, and the
Companys assessment of NOLs that may expire in future periods remains unchanged from December 31,
2008. Consistent with that determination, the Company reversed the
incremental increase in the valuation allowance recorded
in the first quarter of 2009, thereby maintaining a valuation allowance of $1.0 million. The effective tax
rate for the first six months of 2009 was impacted by its non-deductible expenses, partially offset
by an adjustment of the accrual liability for the Widmer tax accounting due to the filing of the
short year final tax return for that entity.
To the extent that the Company is unable to generate adequate taxable income in future
periods, the Company may be required to record an additional valuation allowance to provide for
potentially expiring NOLs or other deferred tax assets for which a valuation allowance has not been
previously recorded. Any such increase would generally be charged to earnings in the period of
increase.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement No. 133 (SFAS 161), which requires enhanced
disclosures about an entitys derivative and hedging activities in order to improve the
transparency of financial reporting. SFAS 161 amends and expands the disclosure requirements of
SFAS No. 133, Accounting for Derivative Instruments and Hedge Activities (SFAS 133) to provide
users of financial statements with an enhanced understanding of (i) how and why an entity uses
derivative instruments; (ii) how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related
hedged items affect an entitys financial position, results of operations, and cash flows. SFAS 161
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. On January 1, 2009, the Company adopted SFAS 161, which did not have a material
effect on the Companys financial position, results of operations or cash flows; however, the
Company was required to expand its disclosures around the use and purpose of its derivative
instruments. See Item 1, Notes to Financial Statements, Note 7 for these expanded disclosures.
In April 2009, the FASB issued FASB Staff Position (FSP) Financial Accounting Standards
(FAS) No. 107-1 and Accounting Principles Board (APB) No. 28-1, Interim Disclosures about Fair
Value of Financial Instruments, (FSP FAS 107-1), which requires disclosures about the fair value
of financial instruments in interim financial statements in addition to the current requirement for
disclosure in annual financial statements. The Company adopted FSP FAS 107-1 as of June 30, 2009.
The adoption of FSP FAS 107-1 did not have an impact on the Companys financial position, results
of operations, or cash flows; however, the Company was required to expand its disclosures around
the use and purpose of its derivative instruments. See Item 1, Notes to Financial Statements, Note
7 for these expanded disclosures.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which provides
guidance on the recognition and disclosure of events that occur after the balance sheet date but
before financial statements are issued. The Company adopted SFAS 165 as of June 30, 2009. The
adoption of SFAS 165 did not have an impact on the Companys financial position, results of
operations, or cash flows.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS 168). The new statement modifies the U.S. generally accepted accounting principles (GAAP)
hierarchy created by SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles by
establishing only two levels of GAAP: authoritative and nonauthoritative. This is accomplished by
authorizing the FASB Accounting Standards Codification (Codification) to become the single source
of authoritative U.S. accounting and reporting standards, except for rules and interpretive
releases of the SEC under authority of the federal securities laws, which are sources of
authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements for interim
and annual periods ending after September 15, 2009. All existing accounting standard documents are
superseded and all other accounting literature
37
not included in the Codification is considered nonauthoritative. The Company does not anticipate the adoption of SFAS 168 will have a material
effect on the Companys financial position, results of operations, or cash flows.
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. To mitigate this risk, the Company entered into a five-year interest rate swap agreement to
hedge the variability of interest payments associated with its variable-rate borrowings. Through
this swap agreement, the Company pays interest at a fixed rate of 4.48% and receives interest at a
floating-rate of the one-month LIBOR. Since the interest rate swap hedges the variability of
interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge
accounting treatment under SFAS 133.
This interest rate swap reduces the Companys overall interest rate risk. However, due to the
remaining outstanding borrowings that continue to have variable interest rates, management believes
that interest rate risk to the Company could be material if prevailing interest rates increase
materially.
ITEM 4T. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, including the Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of the design and operation of the
Companys 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 Report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective at the reasonable assurance level.
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms promulgated by the Securities and Exchange Commission (SEC) and that such information is
accumulated and communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management believes that key controls are in place and the disclosure controls are functioning
effectively at the reasonable assurance level as of June 30, 2009.
While reasonable assurance is a high level of assurance, it does not mean absolute assurance.
Disclosure controls and internal control over financial reporting cannot prevent or detect all
errors, misstatements or fraud. In addition, the design of a control system must recognize that
there are resource constraints, and the benefits associated with controls must be proportionate to
their costs. Notwithstanding these limitations, the Companys management believes that its
disclosure controls and procedures provide reasonable assurance that the objectives of its control
system are being met.
Changes in Internal Control Over Financial Reporting
During the second quarter of 2009, no changes in the Companys internal control over financial
reporting were identified in connection with the evaluation required by Exchange Act Rule 13a-15 or
15d-15 that have materially affected, or are reasonably likely to materially affect, the Companys
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 is not likely to have a material
adverse effect on the Companys financial condition or results of operations.
38
ITEM 4. Submissions of Matters to a Vote of Security Holders
The Companys Annual Meeting of Shareholders was held on May 29, 2009 at the Oregon Brewery.
The following matters were submitted to a vote of shareholders, with the results as follows:
1. |
|
Election of seven directors to serve until the next annual meeting and until their respective
successors are elected and qualified: |
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
Timothy P. Boyle |
|
|
16,172,815 |
|
|
|
546,580 |
|
Andrew R. Goeler |
|
|
16,021,300 |
|
|
|
546,580 |
|
Kevin R. Kelly |
|
|
15,605,060 |
|
|
|
546,580 |
|
David R. Lord |
|
|
15,608,052 |
|
|
|
546,580 |
|
John D. Rogers, Jr. |
|
|
15,604,943 |
|
|
|
546,580 |
|
Anthony J. Short |
|
|
16,020,835 |
|
|
|
546,580 |
|
Kurt R. Widmer |
|
|
16,163,331 |
|
|
|
546,580 |
|
2. |
|
Ratification of the appointment of Moss Adams, LLP as the Companys independent registered
public accounting firm for the fiscal year ending December 31, 2009: |
|
|
|
|
|
|
|
For |
|
Against |
|
Abstentions |
|
15,675,771 |
|
559,274 |
|
118,643 |
ITEM 6. Exhibits
The following exhibits are filed as part of this report.
|
|
|
31.1
|
|
Certification of Chief Executive Officer of Craft Brewers Alliance, Inc.
pursuant to Exchange Act Rule 13a-14(a) |
31.2
|
|
Certification of Chief Financial Officer of Craft Brewers Alliance, Inc.
pursuant to Exchange Act Rule 13a-14(a) |
32.1
|
|
Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 |
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.
|
|
|
|
|
|
CRAFT BREWERS ALLIANCE, INC.
|
|
August 12, 2009 |
BY: |
/s/
Joseph K. OBrien |
|
|
|
Joseph K. OBrien |
|
|
|
Controller and Chief
Accounting Officer |
|
|
39