Filed
Pursuant to Rule 424(b)(3)
Registration File No. 333-149908
MEETINGS
OF SHAREHOLDERS
YOUR VOTE IS VERY IMPORTANT
To the Shareholders of Redhook Ale Brewery, Incorporated and
Widmer Brothers Brewing Company:
Redhook Ale Brewery, Incorporated, which we refer to as Redhook,
and Widmer Brothers Brewing Company, which we refer to as
Widmer, have entered into an Agreement and Plan of Merger, as
amended, which we refer to as the merger agreement, pursuant to
which Widmer will merge with and into Redhook. In connection
with the merger, each holder of shares of common or preferred
stock of Widmer will receive, in exchange for each share held,
2.1551 shares of Redhook common stock. Redhook security
holders will continue to own their existing shares of Redhook
common stock. Widmer security holders will be entitled to
receive approximately 8,361,529 shares of Redhook common
stock pursuant to the merger. Based on the closing price of
$6.12 per share reported on the Nasdaq Stock Market on
November 12, 2007, the last trading date before the first
public announcement of the merger, the approximate value of
these shares would be $51,173,000. These shares will represent
approximately 50% of the outstanding shares of the combined
company immediately following the consummation of the merger.
This percentage assumes that no security holder of Widmer
exercises statutory dissenters’ rights in connection with
the merger and that currently outstanding options held by
Redhook employees, officers, directors, and former directors to
acquire 689,140 shares of Redhook common stock are not
exercised prior to consummation of the merger.
Shares of Redhook common stock are currently listed on the
Nasdaq Stock Market under the symbol “HOOK.” On
May 12, 2008, the last trading day before the date of this
joint proxy statement/prospectus, the closing sale price of
Redhook common stock was $3.98 per share.
Redhook and Widmer are each holding a shareholders meeting in
order to obtain the shareholder approvals necessary to complete
the merger and related matters. At the Redhook annual meeting,
which will be held at 2:00 p.m., local time, on
June 24, 2008 at Redhook’s offices at 14300 NE
145th Street, Suite 210, Woodinville, Washington
98072-6950,
unless postponed or adjourned to a later date, Redhook will ask
its shareholders to approve the issuance of Redhook common stock
pursuant to the merger agreement as further described in the
accompanying joint proxy statement/prospectus, as well as to
elect directors and ratify the appointment of auditors. At the
Widmer special meeting, which will be held at 4:00 p.m.,
local time, on June 26, 2008 at Widmer’s offices at
929 North Russell Street, Portland, Oregon97227, unless
postponed or adjourned to a later date, Widmer will ask its
shareholders to, among other things, approve the merger
agreement.
After careful consideration, the directors of Redhook and
Widmer, other than those directors on the boards of Redhook and
Widmer who serve as designees of Anheuser-Busch, Incorporated
and abstained from voting, have unanimously approved the merger
agreement. Each of the Redhook and Widmer boards of directors
has determined that it is advisable to enter into the merger and
recommends that its respective shareholders vote “FOR”
the respective proposals described in the accompanying joint
proxy statement/prospectus.
More information about Redhook, Widmer and the proposed
transaction is contained in this joint proxy
statement/prospectus. Redhook and Widmer urge you to read
this joint proxy statement/prospectus carefully and in its
entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DISCUSSED UNDER “RISK FACTORS”
BEGINNING ON PAGE 19.
Redhook and Widmer thank you for your consideration and
continued support.
Paul S. Shipman
Kurt R. Widmer
Chief Executive Officer
President and Chief Executive Officer
REDHOOK ALE BREWERY, INCORPORATED
WIDMER BROTHERS BREWING COMPANY
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this joint
proxy statement/prospectus. Any representation to the contrary
is a criminal offense.
This joint proxy statement/prospectus is dated May 13,2008, and is expected to be mailed to shareholders of Redhook
and Widmer on or about May 13, 2008.
On behalf of the board of directors of Redhook Ale Brewery,
Incorporated, a Washington corporation, we are pleased to
deliver this joint proxy statement/prospectus for the proposed
merger between Redhook and Widmer Brothers Brewing Company, an
Oregon corporation, pursuant to which Widmer will merge with and
into Redhook. The annual meeting of shareholders of Redhook will
be held on June 24, 2008 at 2:00 p.m., local time, at
Redhook’s offices at 14300 NE 145th Street,
Suite 210, Woodinville, Washington
98072-6950
for the following purposes, as more fully described in the
accompanying joint proxy statement/prospectus:
1.
To elect seven directors to serve until the 2009 Annual Meeting
of Shareholders or until their earlier retirement, resignation
or removal;
2.
To consider and vote upon a proposal approving the issuance of
Redhook common stock pursuant to the Agreement and Plan of
Merger dated as of November 13, 2007, as amended, by and
between Redhook and Widmer, a copy of which is attached as
Annex A to the accompanying joint proxy
statement/prospectus;
3.
To ratify the appointment of Moss Adams LLP as Redhook’s
independent registered public accounting firm for the fiscal
year ending December 31, 2008; and
4.
To transact such other business as may properly come before the
annual meeting or any adjournment or postponement thereof.
The board of directors of Redhook has fixed May 5, 2008 as
the record date for the determination of shareholders entitled
to notice of, and to vote at, the Redhook annual meeting and any
adjournment or postponement thereof. Only holders of record of
shares of Redhook common stock at the close of business on the
record date are entitled to notice of, and to vote at, the
Redhook annual meeting. At the close of business on the record
date, Redhook had 8,380,239 shares of common stock
outstanding and entitled to vote.
Your vote is important. The affirmative vote of the majority
of shares of Redhook common stock having voting power present in
person or represented by proxy at the Redhook annual meeting is
required for approval of Redhook Proposal Nos. 2 and 3. The
affirmative vote of a plurality of shares of Redhook common
stock having voting power present in person or represented in
proxy at the Redhook annual meeting is required to elect
directors pursuant to Redhook Proposal No. 1.
Even if you plan to attend the Redhook annual meeting in
person, Redhook requests that you sign and return the enclosed
proxy to ensure that your shares will be represented at the
Redhook annual meeting if you are unable to attend. If you sign,
date and mail your proxy card without indicating how you wish to
vote, your proxy will be counted as a vote in favor of Redhook
Proposal Nos. 1, 2 and 3. If you fail to return your proxy
card and do not attend the Redhook annual meeting in person, the
effect will be that your shares will not be counted for purposes
of determining whether a quorum is present at the Redhook annual
meeting. If you do attend the Redhook annual meeting and wish to
vote in person, you may withdraw your proxy and vote in person.
Please note, however, that if your shares are held of record by
a broker, bank, or other nominee and you wish to vote at the
meeting, you must obtain from the record holder a proxy issued
in your name.
THE REDHOOK BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES
THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO,
AND IN THE BEST INTERESTS OF, REDHOOK AND ITS SHAREHOLDERS AND
HAS APPROVED SUCH PROPOSALS.
To the Shareholders of Widmer Brothers Brewing Company:
A special meeting of the shareholders of Widmer Brothers Brewing
Company, or Widmer, will be held on Thursday, June 26,2008, at 4:00 p.m., local time, at Widmer’s offices at 929
North Russell Street, Portland, Oregon97227, for the following
purposes:
1.
To consider and vote upon a proposal to approve the Agreement
and Plan of Merger dated as of November 13, 2007, as
amended, by and between Redhook Ale Brewery, Incorporated and
Widmer, a copy of which is attached as Annex A to the
accompanying joint proxy statement/prospectus, pursuant to which
Widmer will merge with and into Redhook, and each holder of
shares of common or preferred stock of Widmer will receive, in
exchange for each share held, 2.1551 shares of Redhook
common stock, as more fully described in the accompanying joint
proxy statement/prospectus.
2.
To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Shareholders of record at the close of business on May 13,2008 are entitled to vote at the special meeting and any such
adjournment or postponement.
We cannot complete the merger unless the proposal to approve the
agreement and plan of merger is approved by the affirmative vote
of the holders of a majority of the outstanding shares of Widmer
common stock. The joint proxy statement/prospectus accompanying
this notice explains the merger and merger agreement and
provides specific information concerning the special meeting.
Please review this joint proxy statement/prospectus carefully.
THE WIDMER BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER
CONTEMPLATED BY THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF
WIDMER AND ITS SHAREHOLDERS AND, ACCORDINGLY, RECOMMENDS THAT
YOU VOTE “FOR” APPROVAL OF THE MERGER AGREEMENT.
Whether or not you plan to attend the special meeting, please
complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope as soon as possible. You
may revoke the proxy at any time prior to its exercise in the
manner described in the joint proxy statement/prospectus. Any
shareholder of record present at the special meeting, including
any adjournment or postponement of it, may revoke his or her
proxy and vote personally. Executed proxies without specific
voting instructions will be voted “FOR” approval of
the merger agreement.
Please do not send any stock certificates at this time.
This joint proxy statement/prospectus incorporates by reference
important business and financial information about Redhook from
documents that Redhook has filed or may file in the future with
the Securities and Exchange Commission. For your convenience, we
are delivering to you with this joint proxy statement/prospectus
a copy of Redhook’s Annual Report on
Form 10-K,
as amended, for the fiscal year ended December 31, 2007. We
are not including in or delivering with this joint proxy
statement/prospectus any of the other documents incorporated by
reference. For a listing of all of the documents incorporated by
reference into this joint proxy statement/prospectus, see the
section entitled “Where You Can Find Additional
Information” beginning on page 151.
The documents incorporated by reference into this joint proxy
statement/prospectus are available on Redhook’s website(www.redhook.com). Redhook will also provide you copies
of these documents without charge upon written or oral request.
You may make a request for these documents by email to
Investor.Relations@Redhook.comor by mail or telephone to:
Redhook Ale Brewery, Incorporated
14300 NE 145th Street, Suite 210 Woodinville, WA98072
Attn.: Investor Relations
(425) 483-3232
All website addresses given in this joint proxy
statement/prospectus are for information only and are not
intended to be an active link or to incorporate any website
information into this joint proxy statement/prospectus.
Please note that the copy of Redhook’s Annual Report on
Form 10-K
provided to you does not include exhibits, unless the exhibits
are specifically incorporated by reference into that report or
this joint proxy statement/prospectus.
In order to receive timely delivery of requested documents in
advance of the annual meeting of Redhook shareholders and the
special meeting of Widmer shareholders, you should make your
request no later than June 17, 2008, which is five business
days prior to the date of the shareholder meetings.
ABOUT
THIS JOINT PROXY STATEMENT/PROSPECTUS
This joint proxy statement/prospectus, which forms part of a
registration statement on
Form S-4
filed with the Securities and Exchange Commission by Redhook
(File
No. 333-149908),
constitutes a prospectus of Redhook under Section 5 of the
Securities Act of 1933, as amended, which we refer to as the
Securities Act, with respect to the Redhook common stock to be
issued to Widmer shareholders as required by the merger
agreement. It also constitutes a notice of meeting and a joint
proxy statement under Section 14(a) of the Securities
Exchange Act of 1934, as amended, which we refer to as the
Exchange Act, with respect to the annual meeting of Redhook
shareholders, at which Redhook shareholders will be asked to
consider and vote upon a proposal to approve the issuance of
Redhook common stock pursuant to the merger agreement as well as
to elect directors and ratify the appointment of auditors, and,
with respect to the special meeting of Widmer shareholders, at
which Widmer shareholders will be asked to consider and vote
upon a proposal to approve the merger agreement.
The following section provides answers to frequently asked
questions about the merger. Redhook and Widmer urge you to read
carefully the entirety of this joint proxy statement/prospectus
because the information in this section does not provide all the
information that may be important to you. Additional information
is also contained in the annexes to, and the documents
incorporated by reference in, this joint proxy
statement/prospectus.
Q1:
What is the merger?
A1:
Redhook and Widmer have entered into an Agreement and Plan of
Merger dated as of November 13, 2007, as amended, which we
refer to as the merger agreement. A copy of the merger agreement
is attached to this joint proxy statement/prospectus as
Annex A. The merger agreement contains the terms and
conditions of the proposed business combination of Redhook and
Widmer. Under the merger agreement, Widmer will merge with and
into Redhook, which transaction we refer to as the merger.
Q2:
What will Widmer shareholders receive in the merger?
A2:
In connection with the merger, each holder of shares of common
or preferred stock of Widmer will receive, in exchange for each
share held, 2.1551 shares of Redhook common stock. Redhook
shareholders will continue to own their existing shares of
Redhook common stock. The shares of Redhook common stock that
Widmer security holders will be entitled to receive pursuant to
the merger are expected to represent approximately 50% of the
outstanding shares of the combined company immediately following
the consummation of the merger. This percentage assumes that no
security holder of Widmer exercises statutory dissenters’
rights in connection with the merger and that currently
outstanding options held by Redhook employees, officers,
directors, and former directors to acquire 689,140 shares
of Redhook common stock are not exercised prior to consummation
of the merger.
Q3:
Why are the two companies proposing to merge?
A3:
Redhook and Widmer believe that the merger is a natural
extension of a working relationship that has existed between the
two companies since 2003 and that the combined company will have
many advantages. For a discussion of Redhook’s and
Widmer’s reasons for the merger, please see the section
entitled “The Merger — Reasons for the
Merger” in this joint proxy statement/prospectus beginning
on page 36.
Q4:
Why am I receiving this joint proxy statement/prospectus?
A4:
You are receiving this joint proxy statement/prospectus because
you have been identified as a shareholder of either Redhook or
Widmer as of the applicable record date. Each holder of common
stock of Redhook or Widmer as of the applicable record date is
entitled to vote at such company’s shareholder meeting.
Holders of preferred stock of Widmer are entitled to notice of
its shareholder meeting but are not entitled to vote at the
meeting. This document serves as a joint proxy statement for
both Redhook and Widmer, as a solicitation of proxies for the
shareholder meetings. This document also serves as a prospectus
of Redhook offering shares of Redhook common stock in exchange
for shares of Widmer common stock and preferred stock pursuant
to the terms of the merger agreement. This joint proxy
statement/prospectus contains important information about the
merger and the shareholder meetings of Redhook and Widmer, and
you should read it carefully.
Q5:
When do you expect the merger to be consummated?
A5:
Redhook and Widmer anticipate that the consummation of the
merger will occur early in the third quarter of 2008, but cannot
predict the exact timing. For more information, please see the
section entitled “The Merger Agreement —
Conditions to the Completion of the Merger” on page 54
of this joint proxy statement/prospectus.
Q6:
What do I need to do now?
A6:
In order to determine how the merger will affect you, Redhook
and Widmer urge you to carefully read this joint proxy
statement/prospectus, including its annexes, as well as
Redhook’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, which
accompanies this joint proxy statement/
prospectus, and the other documents filed by Redhook with the
Securities and Exchange Commission under the Exchange Act that
are incorporated by reference in this joint proxy
statement/prospectus.
You may provide your proxy instructions by completing and
signing the enclosed proxy and mailing it in the enclosed return
envelope. If you are a Redhook shareholder, you may also submit
your proxy by telephone in accordance with the instructions on
the Redhook proxy card. Please provide your proxy instructions
only once and as soon as possible so that your shares can be
voted at the annual meeting of Redhook shareholders or the
special meeting of Widmer shareholders, as applicable. If you
hold your shares in “street name” through a bank,
broker or other nominee, you must instruct your bank, broker or
other nominee as to how to vote your shares using the enclosed
voting instruction card. Telephone and Internet voting may be
available in accordance with the instructions on the voting
instruction card.
Q7:
What happens if I do not return a proxy card or otherwise
provide proxy instructions?
A7:
If you are a Redhook shareholder and you fail to return your
proxy card or otherwise provide proxy instructions, your shares
will not be counted for purposes of determining whether a quorum
is present at the Redhook annual meeting, but otherwise this
failure will have no effect on the vote on the proposal to
approve the issuance of Redhook common stock pursuant to the
merger agreement, which is based solely on the number of votes
cast.
If you are a Widmer shareholder, the failure to return your
proxy card will have the same effect as voting against the
approval of the merger agreement, and your shares will not be
counted for purposes of determining whether a quorum is present
at the Widmer special meeting.
Q8:
May I vote in person?
A8:
If you are a shareholder of Redhook and your shares of Redhook
common stock are registered directly in your name with
Redhook’s transfer agent, you are considered to be the
shareholder of record with respect to those shares, and the
proxy materials and proxy card are being sent directly to you by
Redhook. If you are a Redhook shareholder of record, you may
attend the annual meeting of Redhook shareholders to be held on
June 24, 2008 and vote your shares in person. Even if you
plan to attend the Redhook annual meeting in person, Redhook
requests that you sign and return the enclosed proxy card to
ensure that your shares will be represented at the Redhook
annual meeting if you are unable to attend.
If your shares of Redhook common stock are held, not in your
name, but rather in a brokerage or bank account or by another
nominee, you are considered the beneficial owner of shares held
in “street name,” and the proxy materials are being
forwarded to you together with a voting instruction card by your
bank, broker or other nominee. As the beneficial owner, you are
also invited to attend the annual meeting of Redhook
shareholders. Because a beneficial owner is not the shareholder
of record, you may not vote these shares in person at the
Redhook annual meeting unless you obtain a legal proxy from the
broker, trustee or nominee that holds your shares, giving you
the right to vote the shares at the meeting.
If you are a shareholder of Widmer and your shares of Widmer
common stock or preferred stock are registered directly in your
name, you are considered to be the shareholder of record with
respect to those shares and the proxy materials are being sent
directly to you by Widmer. If you are a holder of record of
Widmer common stock, you may attend the special meeting of
Widmer shareholders to be held on June 26, 2008 and vote
your shares in person. Even if you plan to attend the Widmer
special meeting in person, Widmer requests that you sign and
return the enclosed proxy card to ensure that your shares will
be represented at the Widmer special meeting if you are unable
to attend.
Q9:
If my Redhook shares are held in “street name” by
my bank, broker or other nominee, will my bank, broker or other
nominee vote my shares for me?
A9:
Your broker will be able to vote your shares of Redhook common
stock on the proposal to approve the issuance of Redhook common
stock pursuant to the merger only if it receives instructions
from you. To make sure that your vote on this proposal is
counted, you should instruct your broker to vote your shares,
following the procedure provided by your broker.
May I change my vote after I have submitted a proxy or
provided proxy instructions?
A10:
Redhook shareholders of record may change their vote at any time
before their proxy is voted at the Redhook annual meeting in one
of three ways. First, a shareholder of record of Redhook can
send a written notice to the Secretary of Redhook stating that
the shareholder would like to revoke the earlier proxy. Second,
a shareholder of record of Redhook can submit new proxy
instructions on a new proxy card. Third, a shareholder of record
of Redhook can attend the Redhook annual meeting and vote in
person. Attendance alone will not revoke a proxy. If your shares
of Redhook stock are held in “street name” and you
have instructed a bank, broker or other nominee to vote your
shares of Redhook common stock, you must follow directions
received from your broker to change those instructions.
Holders of record of Widmer common stock may change their vote
at any time before their proxy is voted at the Widmer special
meeting by delivering to the Secretary of Widmer a signed notice
of revocation or a later-dated signed proxy, or by attending the
Widmer special meeting and voting in person. Attendance at the
Widmer special meeting does not in itself constitute the
revocation of a proxy.
Q11:
Should I send in my stock certificates now?
A11:
No. If you are a Widmer shareholder, after the merger is
consummated, you will receive written instructions from the
exchange agent for exchanging your certificates representing
shares of Widmer capital stock for certificates representing
shares of Redhook common stock. You will receive a cash payment
for any fractional share.
Q12:
Who is paying for this proxy solicitation?
A12:
Redhook is paying the cost of soliciting proxies, including the
printing and filing of this joint proxy statement/prospectus,
the proxy card and any additional information furnished to
shareholders. Arrangements will also be made with brokerage
firms and other custodians, nominees and fiduciaries who are
record holders of Redhook common stock for the forwarding of
solicitation materials to the beneficial owners of Redhook
common stock. Redhook will reimburse these brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket
expenses they incur in connection with the forwarding of
solicitation materials.
Q13:
Who can help answer my questions?
A13:
If you are a Redhook shareholder and would like additional
copies, without charge, of this joint proxy statement/prospectus
or if you have questions about the merger, including the
procedures for voting your shares, you should contact:
Redhook Ale Brewery, Incorporated
14300 NE 145th Street, Suite 210
Woodinville, WA
98072-6950
Tel:
(425) 483-3232
Attn: Investor Relations Investor.Relations@Redhook.com
If you are a Widmer shareholder, and would like additional
copies, without charge, of this joint proxy statement/prospectus
or if you have questions about the merger, including the
procedures for voting your shares, you should contact:
Widmer Brothers Brewing Company
929 North Russell Street Portland, OR97227
Tel:
(503) 281-2437
Attn: Investor Relations
This summary highlights selected information from this joint
proxy statement/prospectus and may not contain all of the
information that is important to you. To better understand the
merger, you should carefully read this joint proxy
statement/prospectus, including its annexes, as well as
Redhook’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, as amended,
which accompanies this joint proxy statement/prospectus, and the
other documents filed by Redhook with the Securities and
Exchange Commission under the Exchange Act that are incorporated
by reference in this joint proxy statement/prospectus. For more
information, please see the section entitled “Where You Can
Find Additional Information” beginning on page 151 of
this joint proxy statement/prospectus.
Redhook Ale Brewery, Incorporated has been an independent brewer
of craft beers in the U.S. since its formation in 1981 and
is considered to be one of the pioneers of the domestic craft
brewing segment. Redhook produces its specialty bottled and
draft products in two company-owned breweries, one in the
Seattle suburb of Woodinville, Washington, and the other in
Portsmouth, New Hampshire. By operating its own small-batch
breweries, Redhook believes that it is better able to control
the quantities, types and flavors of beer produced, while
optimizing the quality and consistency of its products.
Management believes that Redhook’s production capacity is
of high quality and that Redhook is the only domestic craft
brewer that owns and operates substantial production facilities
in both the western region and eastern region of the
U.S. Each brewery also operates a pub on the premises,
promoting Redhook’s products, offering dining and
entertainment facilities, and selling retail merchandise.
Redhook currently produces nine styles of beer, marketed under
distinct brand names. Redhook’s flagship brand is
Redhook ESB and its other principal products include
Redhook Long Hammer IPA, Redhook Blonde Ale,
Blackhook Porter, and its seasonal offerings
Sunrye, Late Harvest Autumn, Winterhook and
Copperhook Ales. Redhook also produces and sells
Widmer Hefeweizen in the midwest and eastern
U.S. under a licensing agreement with Widmer. In addition
to its principal products, Redhook periodically develops and
markets new products to test and measure consumer response to
varying styles and flavors.
Since 1997, Redhook’s products have been distributed in the
U.S. in 48 states. Prior to establishing a
distribution relationship in 1994 with Anheuser-Busch,
Incorporated, which we refer to as A-B, Redhook distributed its
products through distributors in eight western states. In
October 1994, Redhook entered into a distribution alliance with
A-B, consisting of a national distribution agreement and an
investment by A-B in Redhook. The distribution alliance gave
Redhook access to A-B’s national distribution network to
distribute its products while existing wholesalers continued to
distribute Redhook’s products outside of the distribution
alliance. Pursuant to an investment agreement, Busch Investment
Corporation, an affiliate of A-B and which we also refer to as
A-B, invested approximately $30 million to purchase Redhook
convertible redeemable preferred stock and Redhook common stock,
including shares issued concurrent with Redhook’s initial
public offering.
In August 1995, Redhook completed the sale of Redhook common
stock through an initial public offering in addition to the
common shares purchased by A-B. The net proceeds of the
offerings totaled approximately $46 million.
On July 1, 2004, Redhook completed a restructuring of its
ongoing relationship with A-B by executing two new agreements:
an exchange and recapitalization agreement and a distribution
agreement. Pursuant to the exchange and recapitalization
agreement, Redhook issued common stock to A-B in exchange for
all of the preferred stock held by A-B. The terms of the 2004
distribution agreement with A-B provide for Redhook to continue
to distribute its products in the midwest and eastern
U.S. through A-B’s national distribution network by
selling its product to A-B.
On July 1, 2004, Redhook also entered into definitive
agreements with Widmer with respect to the operation of a joint
venture, Craft Brands Alliance LLC, which we refer to as Craft
Brands. Pursuant to these agreements, Redhook and Widmer
manufacture and sell their product to Craft Brands at a price
substantially below wholesale pricing levels; Craft Brands, in
turn, advertises, markets and sells Redhook’s and
Widmer’s products to wholesale outlets in the western
U.S. through a distribution agreement between Craft Brands
and A-B.
Widmer Brothers Brewing Company 929 North Russell Street Portland, OR97227
(503) 331-7224
Widmer Brothers Brewing Company, founded by Kurt and Robert
Widmer in 1984, is one of the leading craft brewers in the
United States. Widmer produces its specialty bottled and draft
products in its company-owned brewery in Portland, Oregon. As of
April 2008, Widmer had completed a significant portion of a
$24.5 million expansion of this brewery. The project
significantly increased fermentation capacity, and added
warehouse, cold storage and shipping space. Widmer anticipates
that the remaining aspects of the expansion project that do not
directly affect production capacity will be completed by
mid-June 2008.
Widmer produces six styles of beer, including Widmer
Hefeweizen — America’s Original
Hefeweizen®,
its signature product. Other year-round offerings include
Drop Top Amber
Ale®
and Broken Halo
IPA®.
In addition to its year-round product offerings, Widmer
periodically introduces seasonal beers to the market —
such as its Snowplow Milk Stout, its annual
Oktoberfest offerings, and its “W”
Brewmasters’ Release Series. Widmer also produces
Longboard Island Lager, Fire Rock Pale Ale,
Pipeline Porter, and Wailua Wheat under a
licensing agreement with Kona Brewery LLC.
In 1997, Widmer entered into a distribution and equity alliance
with A-B. Since the formation of this alliance, substantially
all of Widmer’s sales volume has been sold through the A-B
wholesaler network. From 1997 to June 2004, pursuant to the
terms of the alliance, Widmer sold its products to A-B, which in
turn sold the products to its wholesalers. As part of the
original agreement, A-B invested $18.25 million in Widmer
in exchange for preferred stock that was converted into common
stock in 2004. As of February 29, 2008, A-B owned
approximately 40.5% of Widmer’s outstanding common stock.
In 2003, Widmer entered into a licensing agreement authorizing
Redhook to produce and sell Widmer Hefeweizen in the
midwest and eastern U.S. Redhook sells Widmer Hefeweizen
through A-B and distributes it through the A-B wholesaler
network.
In 2004, Widmer entered into agreements with Redhook with
respect to the formation and operation of Craft Brands. Craft
Brands profits are generally split 58% to Widmer and 42% to
Redhook.
In addition to Widmer’s investment in Craft Brands, Widmer
also holds minority interests in Kona Brewery LLC and in Fulton
Street Brewery, LLC, the producer of Goose Island malt beverage
products. We may refer to Kona Brewery LLC as Kona and Fulton
Street Brewery, LLC as FSB.
If the merger is completed, Widmer will merge with and into
Redhook. Widmer security holders will be entitled to receive
approximately 8,361,529 shares of Redhook common stock
pursuant to the merger, which will represent approximately 50%
of the outstanding shares of the combined company immediately
following the consummation of the merger. This percentage
assumes that no security holder of Widmer exercises
dissenters’ rights in connection with the merger and that
currently outstanding options held by Redhook employees,
officers, directors, and former directors to acquire
689,140 shares of Redhook common stock are not exercised
prior to consummation of the merger. The number of shares that
Widmer shareholders will receive in the merger will not be
affected by changes in the market price of Redhook common stock.
By virtue of the merger, Redhook will become liable for all debt
of Widmer, which totaled approximately $22,400,000 as of
December 31, 2007.
For a more complete description of the merger and the number of
shares being issued to holders of Widmer’s securities in
connection with the merger, please see the section entitled
“The Merger — Merger Consideration”
beginning on page 44 of this joint proxy
statement/prospectus.
The closing of the merger will occur no later than three
business days after the last of the conditions to the merger has
been satisfied or waived, or at another time as Widmer and
Redhook agree. It is anticipated that Craft Brands will be
eliminated in connection with the merger. Redhook and Widmer
anticipate that the consummation of the merger will occur early
in the third quarter of 2008. However, because the merger is
subject to a number of conditions, neither Redhook nor Widmer
can predict exactly when the closing will occur or if it will
occur at all.
The combined company resulting from the merger will be an
independent brewer of craft beers in the U.S. Redhook and
Widmer believe that the combined company will have the following
potential advantages:
•
The combined company will be a natural extension of a working
relationship that has existed between the two companies since
2003.
•
The merger will yield efficiencies, beyond those that have
already been achieved by the existing relationship, in utilizing
the two companies’ breweries and a national sales force, as
well as by reducing duplicate functions.
•
The national sales force of the combined company will support
further promotion of the products of Widmer’s partners,
Kona Brewery LLC, which brews Kona malt beverage products, and
Fulton Street Brewery, LLC, which brews Goose Island malt
beverage products.
•
The combined company will have greater access to capital markets
driven by increased size and expected growth rates.
Each of the boards of directors of Redhook and Widmer also
considered other reasons for the merger, as described herein.
For example, the board of directors of Redhook considered, among
other things:
•
The higher market capitalization and anticipated greater average
trading volume of the combined company should generally enhance
the market’s perception of Redhook stock and possibly lead
to additional coverage by analysts.
•
The merger could provide an opportunity to utilize
Redhook’s tax net operating loss carryforwards.
•
The merger will reduce the risk that the Redhook breweries will
have excess brewing capacity.
In addition, the Widmer board of directors approved the merger
based on a number of factors, including the following:
•
The merger will facilitate implementation of the national sales
strategy, giving the combined organization the resources to
address expanded market opportunities with the prospect for
achieving associated revenue growth.
•
Widmer brands will have access to expanded brewing capacity
through Redhook’s production facilities, which will
eliminate the need for cumbersome contract brewing arrangements
between Widmer and Redhook.
•
Widmer brands will have access to Redhook’s sales force in
the midwest and eastern U.S., which will offer an avenue to
achieving national brand status more quickly.
•
The receipt by Widmer shareholders of shares in a publicly
traded company in exchange for their Widmer shares will offer
the potential for liquidity not available to shareholders in a
privately held company.
•
The merger transaction implicitly treats the two companies as
approximately equal in value.
In connection with the merger, Redhook’s board of directors
received a written opinion from Houlihan Smith &
Company, Inc., which we refer to as Houlihan Smith, as to the
fairness, from a financial point of view and as of the date of
such opinion, to the shareholders of Redhook of the aggregate
consideration to be paid by Redhook in the merger and the other
terms of the merger. The full text of Houlihan Smith’s
written opinion, dated November 13, 2007, is attached to
this joint proxy statement/prospectus as Annex B. We
encourage you to read this opinion carefully in its entirety for
a description of the assumptions made, procedures followed,
matters considered and limitations on the review undertaken.
Houlihan Smith’s opinion was provided to Redhook’s
board of directors in its evaluation of the aggregate merger
consideration from a financial point of view to shareholders of
Redhook and does not constitute a recommendation to any
shareholder as to how to vote or act with respect to the merger.
Houlihan Smith’s opinion does not address the fairness of
the merger to Widmer shareholders.
In connection with its written opinion, Houlihan Smith reviewed
a written valuation report of Widmer prepared for Redhook by
Corporate Advisory Associates, Incorporated. The full text of
this valuation report dated May 4, 2007 is attached to this
joint proxy statement/prospectus as Annex C.
In connection with the merger, each holder of shares of common
or preferred stock of Widmer will receive, in exchange for each
share held, 2.1551 shares of Redhook common stock. Redhook
shareholders will continue to own their existing shares of
Redhook common stock. For a more complete description of what
holders of Widmer’s securities will be entitled to receive
in the merger, please see the section entitled “The Merger
Agreement — Merger Consideration” beginning on
page 53 of this joint proxy statement/prospectus.
Conditions
to Completion of the Merger (see page 54)
To consummate the merger, Redhook shareholders must approve the
issuance of Redhook common stock, which requires the affirmative
vote of the holders of a majority of the shares of Redhook
common stock present in person or represented by proxy at the
Redhook annual meeting. Widmer shareholders must approve the
merger agreement, which requires the affirmative vote of the
holders of a majority of the shares of Widmer common stock
outstanding on the record date and entitled to vote at the
Widmer special meeting. Holders of Widmer preferred stock are
not entitled to vote on approval of the merger agreement. In
addition, Redhook must receive A-B’s consent to the merger,
and A-B must waive termination rights under certain distribution
and other agreements between A-B and each of Redhook and Widmer
that will be triggered by consummation of the merger.
In addition to obtaining shareholder approval and appropriate
regulatory approvals, as described in
“— Regulatory Approvals” below, each of the
other closing conditions set forth in the merger agreement must
be satisfied or waived. For a more complete description of the
closing conditions under the merger agreement, please see the
section entitled “The Merger Agreement —
Conditions to the Completion of the Merger” beginning on
page 54, and “Agreements Related to the
Merger — Agreements with Anheuser-Busch”
beginning on page 64, of this joint proxy
statement/prospectus.
Either Redhook or Widmer can terminate the merger agreement
under certain specified circumstances, which would prevent the
merger from being consummated.
As a condition to the closing of the merger, certain
shareholders of Widmer must execute
lock-up
agreements pursuant to which these holders will generally agree
that, from the closing date of the merger to the first
anniversary of the closing, they will not directly or indirectly
sell or otherwise transfer any shares of Redhook common stock
then held or thereafter acquired without the consent of the
board of directors of Redhook. The shares of Redhook common
stock that these holders will be entitled to receive pursuant to
the merger are expected to represent approximately 46.8% of the
total number of shares of Redhook common stock issued pursuant
to the merger. This percentage assumes that no security holder
of Widmer exercises statutory dissenters’ rights in
connection with the merger.
Business
Plan for the Combined Company
The following summarizes the business plan that Redhook and
Widmer currently envision for the combined company. The combined
company will review this plan periodically with a view to
anticipating and adapting to changing economic and market
conditions.
It is anticipated that the combined company will market a
portfolio of brands consisting of Redhook branded products,
Widmer branded products, and Kona branded products through a
licensing agreement with Kona Brewery LLC. This product
portfolio will be strategically positioned to pursue volume and
revenue growth opportunities in key U.S. geographic regions.
Redhook and Widmer believe that the combined company will offer
a portfolio of brands that will appeal to a wide range of
tastes. The portfolio will be selectively marketed on a regional
basis to capitalize on local taste preferences, taking into
account the competition, product maturity and growth potential.
The combined company may expand its product portfolio to address
shifts in consumer preferences and to target other opportunities
for volume and revenue growth. These new products may be
extensions of the Widmer or Redhook brand families, or they may
be in the form of new brand development.
The combined company will produce its products in its three
breweries in Portland, Oregon, Portsmouth, New Hampshire and
Woodinville, Washington. The combined company will explore
opportunities to produce different products within the portfolio
at different locations where appropriately licensed. It is
anticipated that savings in freight and efficiencies in
production will be attainable due to different production
configurations between the plants. While the breweries will
likely produce a combination of different brands, each brewery
will retain its current brand designation.
The combined company’s board of directors will consist of a
total of two current Redhook independent directors (as defined
by Nasdaq Marketplace Rule 4200(a)(15)), two directors
designated by A-B and three directors designated by Widmer. The
Widmer designees who will join the combined company’s board
of directors are: Kurt Widmer, who will serve as Chairman of the
Board, Timothy Boyle, and Kevin Kelly. The other four Redhook
directors will be David Lord and John Rogers, Jr. and A-B
designated directors, Andrew Goeler and Anthony Short.
Messrs. Lord, Rogers and Short currently serve as Redhook
directors. Mr. Goeler has been designated by A-B to replace
John Glick, who currently serves as one of the A-B designated
Redhook directors. Paul Shipman, Redhook’s Chairman of the
Board and Chief Executive Officer, will cease to be a director
but will serve as Chairman Emeritus for a period of
approximately one year. Frank Clement, John Glick and Michael
Loughran, who currently serve as Redhook directors, also will
not continue as directors following the merger.
The following individuals will serve in the following capacities
as executive officers of Redhook following the merger:
Co-Chief Executive Officer
Terry E. Michaelson
Co-Chief Executive Officer
David J. Mickelson
Chief Financial Officer and Treasurer
Jay T. Caldwell
Chief Accounting Officer
Mark D. Moreland
Vice President, Sales
Martin J. Wall, IV
Vice President, Marketing
Timothy G. McFall
Vice President, Brewing Operations and Technology
V. Sebastian Pastore
Each of these individuals, other than Mr. Caldwell, is
expected to enter into an employment agreement with Redhook as a
condition to the closing of the merger.
In considering the recommendation of the Redhook board of
directors with respect to issuing shares of Redhook common stock
pursuant to the merger agreement, Redhook shareholders should be
aware that certain members of the board of directors and
executive officers of Redhook have interests in the merger that
may be different from, or in addition to, interests they may
have as Redhook shareholders. For example, John Glick and
Anthony Short, who serve on Redhook’s board of directors as
designees of A-B, also serve as directors of Widmer.
Mr. Short will serve as a director of the combined company
following the merger. As of February 29, 2008, A-B held of
record 2,761,713 shares of Redhook common stock, which
represented approximately 33.1% of the total number of shares of
Redhook common stock outstanding on that date. In addition, A-B
held on that date 1,534,655 shares of Widmer common stock,
which comprised approximately 40.5% of the total number of
shares of Widmer common stock outstanding on that date. If the
merger is consummated, A-B will be entitled to receive
3,307,334 shares of Redhook common stock in exchange for
its Widmer shares. When combined with existing shares of Redhook
common stock held by
A-B,
A-B’s aggregate holdings of Redhook common stock will total
6,069,047 shares, or approximately 36.3% of the total
number of shares of Redhook common stock outstanding following
the merger. This percentage assumes that no security holder of
Widmer exercises statutory dissenters’ rights in connection
with the merger and that currently outstanding options held by
Redhook employees, officers, directors, and former directors to
acquire 689,140 shares of Redhook common stock are not
exercised prior to consummation of the merger. During the course
of the merger discussions between Redhook and Widmer, A-B
representatives communicated to Redhook management that A-B
concurred that a business combination between the two companies
could be beneficial to the shareholders of Redhook. In addition,
at the request of Redhook, Messrs. Glick and Short, who
also were serving as designees of A-B on the board of Widmer,
acted as facilitators to help advance discussions regarding the
parameters of integrating the business operations and management
of the two companies, both of whose products were distributed by
A-B. David West, a representative of A-B, also participated in a
portion of these discussions. However, neither Mr. Glick,
Mr. Short or Mr. West nor any other representative of
A-B participated in negotiations regarding the economic or other
terms of the merger. In addition, Messrs. Glick and Short
each abstained during Redhook board meetings from voting and
deliberations concerning the merger.
In addition, as of February 29, 2008, directors and
executive officers of Redhook beneficially owned in the
aggregate 12.2% of the outstanding shares of Redhook common
stock.
If the merger is consummated, Paul Shipman, Redhook’s
Chairman of the Board and Chief Executive Officer, will cease to
be a director but will serve as Chairman Emeritus and provide
services as a consultant to Redhook’s board of directors
for a term of approximately one year. Upon expiration of that
term, Mr. Shipman will receive certain severance benefits
from Redhook.
It is anticipated that, following the closing of the merger, the
combined company’s accounting and information systems
functions will be located in Portland, Oregon and a new Chief
Financial Officer will be appointed. In anticipation of this
transition, Redhook has entered into a letter of agreement with
Jay T. Caldwell, its current Chief Financial Officer
and Treasurer, under which he will be paid a base salary of
$15,000 per
month, which will increase to $20,000 if his services are
required after June 30, 2008. Redhook subsequently notified
Mr. Caldwell that it expects to require his services until
August 15, 2008. Under the agreement, Mr. Caldwell is
also eligible for a specified bonus and is entitled to one year
of severance, based on a salary of $15,000 per month, and
certain other benefits if his employment is terminated by
Redhook without cause.
One of the conditions to closing under the merger agreement is
that Redhook enter into employment agreements with certain of
the other individuals who will serve as executive officers of
the combined company following the merger. Redhook anticipates
entering into an agreement with David Mickelson that will
provide for at-will employment at a fixed base salary and with a
specified bonus opportunity and severance entitlement.
In February 2008, two individuals resigned as executive officers
of Redhook. However, each has agreed to remain as a
non-executive employee of Redhook for a period of time. At the
end of the respective period for each individual, he will
receive severance equal to a specified number of months of his
base salary, together with certain other benefits, provided that
he executes a release and agrees not to compete with the
combined company for a period of one year thereafter.
The interests of Redhook’s directors and executive officers
are discussed in greater detail in the section entitled
“The Merger — Interests of Redhook’s
Directors and Executive Officers in the Merger” beginning
on page 46 in this joint proxy statement/prospectus.
John Glick, Andrew Goeler and Anthony Short serve on
Widmer’s board of directors as designees of
A-B.
Messrs. Glick and Short also serve as directors of Redhook.
Messrs. Goeler and Short will serve as directors of the
combined company following the merger. A-B is a significant
shareholder of Widmer and of Redhook, as discussed above in
greater detail in the section entitled “Summary —
Interests of Redhook’s Directors and Executive Officers in
the Merger.”
During the course of the merger discussions between Redhook and
Widmer, A-B representatives communicated to Widmer management
that A-B concurred that a business combination between the two
companies could be beneficial to the shareholders of Widmer. In
addition, Messrs. Glick and Short, who also were serving as
designees of A-B on the board of Redhook, acted as facilitators
to help advance discussions regarding the parameters of
integrating the business operations and management of the two
companies, both of whose products were distributed by A-B. David
West, a representative of A-B, also participated in a portion of
these discussions. However, neither Mr. Glick,
Mr. Goeler, Mr. Short or Mr. West nor any other
representative of A-B participated in negotiations regarding the
economic or other terms of the merger. In addition,
Messrs. Glick, Goeler and Short each abstained during
Widmer board meetings from voting and deliberations concerning
the merger.
Terry Michaelson, who is currently the President of Craft Brands
and will be Co-Chief Executive Officer of the combined company,
is a party to agreements under which he will receive certain
compensation if the merger is completed. Under a stock transfer
agreement, Kurt and Robert Widmer have agreed to transfer to
Mr. Michaelson before the closing of the merger a total of
13,600 of their shares of Widmer common stock. In addition,
pursuant to a second amended and restated consulting agreement
as of January 31, 2008, Widmer has agreed that immediately
prior to completion of the merger it will pay
Mr. Michaelson $288,000 in cash and issue to him
8,120 shares of Widmer common stock. For a period of one
year following the merger, Mr. Michaelson will be
prohibited from selling or otherwise transferring the shares of
Redhook common stock he receives in the merger in exchange for
these 8,120 shares of Widmer common stock.
As of February 29, 2008, directors and executive officers
of Widmer beneficially owned a total of 43.4% of the outstanding
shares of Widmer common stock. Also of that date, A-B
beneficially owned 40.5% and the sister of Kurt and Robert
Widmer beneficially owned 5.9% of the outstanding shares of
Widmer common stock. Beneficial ownership percentages include
Widmer common stock that will be transferred and issued to Terry
Michaelson prior to the closing of the merger, as described
above.
One of the conditions to closing under the merger agreement is
that Redhook enter into employment agreements with certain
employees of Widmer and Craft Brands who will serve as employees
of the combined
company following the merger. Redhook anticipates entering into
agreements with Kurt Widmer, Robert Widmer, Terry Michaelson,
Timothy McFall, Sebastian Pastore and Martin Wall that,
effective as of the closing of the merger, will provide for
employment of each of these individuals at specified base
salaries and with specified bonus opportunities and severance
entitlements. The agreements with Kurt Widmer and Robert Widmer
will have a term of approximately two years, and the agreements
with the other individuals will provide for at-will employment.
The interests of Widmer’s directors and executive officers
are discussed in greater detail in the section entitled
“The Merger — Interests of Widmer’s
Directors and Executive Officers in the Merger” beginning
on page 47 in this joint proxy statement/prospectus.
Each of Widmer and Redhook expects the merger to qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, or the Code. Assuming
the merger’s qualification as a reorganization, Widmer
shareholders generally will not recognize gain or loss for
United States federal income tax purposes upon the exchange
of shares of Widmer common stock and preferred stock for shares
of Redhook common stock, except with respect to cash received in
lieu of fractional shares of Redhook common stock and except for
Widmer shareholders who exercise their dissenters’ rights
with respect to the merger. Tax matters are very complicated,
and the tax consequences of the merger to a particular
shareholder will depend in part on such shareholder’s
circumstances. Accordingly, you are urged to consult your own
tax advisor for a full understanding of the tax consequences of
the merger to you, including the applicability and effect of
federal, state, local and foreign income and other tax laws.
The merger of Widmer with and into Redhook will be accounted for
under the purchase method of accounting, which means the assets
and liabilities of Widmer will be recorded, upon completion of
the merger, at their respective fair values and added to those
of Redhook.
Both Redhook and Widmer are subject to various risks associated
with their businesses and their industry. In addition, the
merger, including the possibility that the merger may not be
completed, poses a number of risks to each company and its
respective shareholders, including the following risks:
•
Obtaining required approvals and satisfying closing conditions
may delay or prevent completion of the proposed transaction.
•
If the conditions to the merger are not met or waived, the
merger will not occur.
•
Some of Redhook’s and Widmer’s officers and directors
have conflicts of interest that may influence them to support or
approve the merger without regard to your interests.
•
The number of shares of Redhook common stock to be received by
Widmer shareholders in connection with the merger is not
adjustable based on the market price of Redhook common stock, so
the merger consideration at the closing may have a greater or
lesser value than at the time the merger agreement was signed.
•
Failure to complete the merger could harm Redhook’s or
Widmer’s stock value and future business and financial
results.
•
The market price of the combined company’s common stock may
decline as a result of the merger.
•
Redhook and Widmer shareholders may not realize a benefit from
the merger commensurate with the ownership dilution they will
experience in connection with the merger.
Because the lack of a public market for the Widmer shares makes
it difficult to evaluate the fairness of the transaction, the
consideration to be paid by Redhook in the merger may
significantly exceed the fair market value of the Widmer shares.
•
The combined company will be dependent upon the continuing
relationship with A-B.
•
The terms of the amended distribution agreement with A-B may not
be favorable to the combined company.
•
Redhook’s agreements with A-B contain limitations on
Redhook’s ability to engage in or reject certain
transactions, including acquisitions and changes of control.
•
A-B will have significant control and influence over the
combined company.
•
The combined company may be unable to successfully integrate its
operations and realize all of the anticipated benefits of the
merger.
•
The combined company will be dependent upon accounting, finance
and information technology staff that may not possess experience
in a publicly traded corporate environment and may be unfamiliar
with the reporting and compliance requirements of a publicly
traded company in general or of Redhook specifically.
•
Management of the combined company intends to utilize financial,
accounting and reporting systems that have not previously been
used to support public company reporting requirements and have
not yet been reviewed or tested to insure compliance with
Sarbanes-Oxley Section 404 requirements.
•
If the combined company fails to maintain proper and effective
internal controls, its ability to produce accurate financial
statements could be impaired, which could adversely affect its
operating results, its ability to operate its business and
investors’ views of the combined company.
•
Changes in financial accounting standards or practices may cause
adverse, unexpected financial reporting fluctuations and affect
reported results of operations.
•
The integration of Widmer and Redhook may result in significant
expenses and accounting charges that adversely affect the
combined company’s operating results.
•
The combined company will be capitalized partially with
long-term debt, which will be a use of its cash flow.
•
The combined company will be dependent upon the services of its
key personnel.
•
The combined company will be dependent on distributors for the
sale of its products.
•
Increased competition could adversely affect sales and results
of operations.
•
Future price promotions to generate demand for Redhook and
Widmer products may be unsuccessful.
•
Due to the concentration of sales in the Pacific Northwest and
California, the results of operations and financial condition of
the combined company may be subject to fluctuations in regional
economic conditions.
•
The craft beer business is seasonal in nature, and the combined
company is likely to experience fluctuations in results of
operations and financial condition.
•
The gross margins of the combined company may fluctuate while
expenses remain constant.
•
Operating breweries at production levels substantially below
their current and maximum designed capacities could negatively
impact overall profit margins.
•
Changes in consumer preferences or public attitudes about the
combined company’s products could reduce demand.
The combined company will be subject to governmental regulations
affecting its breweries and pubs; the costs of complying with
governmental regulations, or the combined company’s failure
to comply with such regulations, could affect its financial
condition and results of operations.
•
An increase in excise taxes could adversely affect the combined
company’s financial condition and results of operations.
•
Changes in state laws regarding distribution arrangements may
adversely impact operations of the combined company.
•
The combined company may experience material losses in excess of
insurance coverage.
•
Loss of income tax benefits could negatively impact results of
operations.
•
The combined company may experience a shortage in kegs necessary
to distribute draft beer.
•
The combined company’s key raw materials may become
significantly more costly and adequate supplies may be difficult
to secure.
•
The combined company will be subject to the risks of litigation.
•
The combined company’s stock price may be volatile
following the merger.
•
The expiration of
lock-up
agreements entered into with certain Widmer shareholders in
connection with the merger could cause the market price of the
combined company’s common stock to decline.
•
The combined company does not anticipate paying cash dividends
in the foreseeable future and accordingly, shareholders must
rely on stock appreciation for any return on their investment in
the combined company.
•
The combined company may require additional capital in the
future to finance construction or expansion of production
facilities, and financing may not be available on acceptable
terms, if at all.
These risks are discussed in greater detail under the section
entitled “Risk Factors” beginning on page 19 of
this joint proxy statement/prospectus. Redhook and Widmer both
encourage you to read and consider all of these risks carefully.
Redhook and Widmer have each agreed to use commercially
reasonable efforts in order to obtain all regulatory approvals
required in order to consummate the merger. These approvals
include consents and authorizations relating to the regulation
of alcoholic beverages that must be obtained from various
federal and state agencies. Although neither Redhook nor Widmer
expects regulatory authorities to raise any significant
objections in connection with their review of the merger,
neither Redhook nor Widmer can assure you that they will obtain
all required regulatory approvals or that these regulatory
approvals will not contain terms, conditions or restrictions
that would be detrimental to the combined company after the
completion of the merger.
In the United States, Redhook must comply with applicable
federal and state securities laws and the rules and regulations
of the Nasdaq Stock Market in connection with the issuance of
shares of Redhook common stock and the filing of this joint
proxy statement/prospectus with the Securities and Exchange
Commission. As of the date hereof, the registration statement of
which this joint proxy statement/prospectus is a part has not
become effective. For more information about approvals or
clearances from regulatory authorities that are required in
order to consummate the merger, see the section entitled
“The Merger — Regulatory Approvals Required for
the Merger” beginning on page 48 of this joint proxy
statement/prospectus.
Under Oregon law, holders of Widmer common stock are entitled to
dissenters’ rights in connection with the merger. Holders
of Redhook common stock and holders of Widmer preferred stock
are not entitled to
dissenters’ rights in connection with the merger. For more
information about dissenters’ rights, see the provisions of
Section 60.551 to Section 60.594 of the Oregon
Business Corporation Act, which we refer to as the OBCA,
attached to this joint proxy statement/prospectus as
Annex D, and the section entitled “TheMerger — Dissenters’ Rights” beginning on
page 51 of this joint proxy statement/prospectus.
Widmer is an Oregon corporation, and the rights of its
shareholders are currently governed by the OBCA. If the merger
is completed, Widmer shareholders will become shareholders of
Redhook, and their rights will then be governed by the
Washington Business Corporation Act, which we refer to as the
WBCA, and by the articles of incorporation and bylaws of
Redhook. The rights of Redhook shareholders under the WBCA and
Redhook’s articles of incorporation and bylaws differ from
the rights of Widmer shareholders under the OBCA and
Widmer’s articles of incorporation and bylaws, as more
fully described under the section entitled “Comparison of
Rights of Holders of Redhook Stock and Widmer Stock”
beginning on page 140 of this joint proxy
statement/prospectus.
The following selected statement of operations and balance sheet
data of Redhook for and as of the end of each of the fiscal
years in the five-year period ended December 31, 2007 have
been derived from the audited financial statements of Redhook.
The operating data have been derived from unaudited information
maintained by Redhook.
This information is only a summary and should be read in
conjunction with the audited financial statements of Redhook and
the notes thereto and the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
included in Redhook’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, as filed with
the Securities and Exchange Commission and as accompanying this
joint proxy statement/prospectus.
Statement of Operations Data (in thousands, except earnings
(loss) per share):
Net sales
$
41,470
$
35,714
$
31,099
$
33,372
$
38,715
Income (loss) from continuing operations
(1,330
)
603
(837
)
(850
)
(1,676
)
Net income (loss)
(939
)
516
(1,200
)
(1,255
)
(1,839
)
Basic earnings (loss) per share
$
(0.11
)
$
0.06
$
(0.15
)
$
(0.18
)
$
(0.30
)
Diluted earnings (loss) per share
$
(0.11
)
$
0.06
$
(0.15
)
$
(0.18
)
$
(0.30
)
EBITDA
$
2,050
$
3,987
$
2,227
$
2,210
$
1,407
Operating Data (in barrels):
Beer shipped(1)
316,900
271,600
225,300
216,400
228,800
Balance Sheet Data (in thousands, except book value per
common share):
Cash and cash equivalents
$
5,527
$
9,435
$
6,436
$
5,590
$
6,123
Working capital
5,714
8,310
5,232
3,661
4,511
Total assets
71,390
73,841
72,578
74,128
77,131
Long-term debt(2)
47
4,786
5,211
5,625
6,075
Convertible redeemable preferred stock
—
—
—
—
16,233
Common stockholders’ equity
$
60,080
$
60,692
$
60,027
$
61,161
$
47,916
Common shares outstanding
8,354
8,281
8,223
8,188
6,226
Dividends per common share
$
—
$
—
$
—
$
—
$
—
Book value per common share(3)
$
7.19
$
7.33
$
7.30
$
7.47
$
7.70
(1)
Includes, but is not limited to, shipments of beer to Craft
Brands and beer brewed and shipped under a contract brewing
arrangement for Widmer. The consolidated operating data of
Widmer on page 14 also includes these shipments. These
shipments are eliminated in the combined condensed operating
data on page 16.
(2)
Includes bank debt and capital lease obligations.
(3)
Book value per common share is computed by dividing common
stockholders’ equity by the total number of shares of
common outstanding at the end of the period.
Redhook presents EBITDA, a financial measure that is not defined
by accounting principles generally accepted in the United
States, which we refer to as GAAP, because this information is
relevant to Redhook’s business. Redhook defines EBITDA as
net income before: income taxes; interest expense; and
depreciation and amortization.
Redhook’s management uses EBITDA as an important financial
measure to assess the ability of Redhook’s assets to
generate cash sufficient to pay interest on its indebtedness,
meet capital expenditure and working capital requirements, and
otherwise meet its obligations as they become due.
Redhook’s management believes that the presentation of
EBITDA included in this joint proxy statement/prospectus
provides useful information regarding Redhook’s results of
operations because it assists in analyzing and benchmarking the
performance and value of Redhook’s business.
Although Redhook uses EBITDA as a financial measure to assess
the performance of its business, there are material limitations
to using a measure such as EBITDA, including the difficulty
associated with using it as the sole measure to compare the
results of one company to another and the inability to analyze
significant items that directly affect a company’s net
income or operating income because EBITDA does not include
certain material costs, such as interest and taxes, necessary to
operate its business. In addition, Redhook’s calculation of
EBITDA may not be consistent with similarly titled measures of
other companies.
The following table presents a reconciliation of EBITDA to net
income, its most directly comparable US GAAP financial measure,
on a historical basis, for the periods presented:
Reconciliation
of Unaudited EBITDA to Net Income (Loss)
Since July 2004, Widmer and Redhook have been members of Craft
Brands, the joint venture formed to advertise, market and sell
both companies’ products to wholesale outlets in the
western U.S. Profits of Craft Brands are generally shared
between Widmer and Redhook based on the cash flow percentages of
58% and 42%, respectively. Widmer has assessed its investment in
Craft Brands pursuant to the provisions of Financial Accounting
Standards Board, which we refer to as FASB, Interpretation
No. 46 Revised, Consolidation of Variable Interest
Entities — an Interpretation of ARB No. 51,
which we refer to as FIN 46R, and concluded that its
investment in Craft Brands meets the definition of a variable
interest entity and that it is the primary beneficiary. In
accordance with FIN 46R, Widmer has consolidated the
financial statements of Craft Brands with its financial
statements. Significant intercompany transactions and balances
have been eliminated in the consolidated financial statements.
The following selected consolidated statement of operations and
balance sheet data of Widmer for and as of the end of each of
the fiscal years in the five-year period ended December 31,2007 have been derived from the audited consolidated financial
statements of Widmer. Certain reclassifications have been made
to net sales and income from continuing operations for the years
ended December 31, 2004 and 2003 to conform to the
presentation for the years ended December 31, 2007, 2006
and 2005. The effects of the reclassifications did not affect
net income. The operating data have been derived from unaudited
information maintained by Widmer.
This information is only a summary and should be read in
conjunction with the audited and unaudited consolidated
financial statements of Widmer and the notes thereto and the
“Widmer Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” which are
included elsewhere in this joint proxy statement/prospectus.
Includes, but is not limited to, shipments of Redhook beer to
Craft Brands and beer brewed and shipped under a contract
brewing arrangement by Redhook. The operating data of Redhook on
page 12 also includes these shipments. These shipments are
eliminated in the combined condensed operating data on
page 16.
(2)
Includes notes payable and capital lease obligations.
(3)
Book value per common share is computed by dividing common
stockholders’ equity by the total number of common share
equivalents outstanding at the end of the period.
Non-GAAP Financial
Measures
Calculation
of EBITDA
Widmer presents EBITDA, a financial measure that is not defined
by GAAP, because this information is relevant Widmer’s
business. Widmer defines EBITDA as net income before: income
taxes; interest expense; and depreciation and amortization.
Widmer’s management uses EBITDA as an important financial
measure to assess the ability of Widmer’s assets to
generate cash sufficient to pay interest on its indebtedness,
meet capital expenditure and working capital requirements, and
otherwise meet its obligations as they become due. Widmer’s
management believes that the presentation of EBITDA included in
this joint proxy statement/prospectus provides useful
information regarding Widmer’s results of operations
because it assists in analyzing and benchmarking the performance
and value of Widmer’s business.
Although Widmer uses EBITDA as a financial measure to assess the
performance of its business, there are material limitations to
using a measure such as EBITDA, including the difficulty
associated with using it as the sole measure to compare the
results of one company to another and the inability to analyze
significant items that directly affect a company’s net
income or operating income because EBITDA does not include
certain material costs, such as interest and taxes, necessary to
operate its business. In addition, Widmer’s calculation of
EBITDA may not be consistent with similarly titled measures of
other companies.
The following table presents a reconciliation of EBITDA to net
income, its most directly comparable US GAAP financial measure,
on a historical basis, for the periods presented:
The merger of Widmer with and into Redhook will be accounted for
under the purchase method of accounting, which means the assets
and liabilities of Widmer will be recorded, upon completion of
the merger, at their respective fair values and added to those
of Redhook.
The following selected unaudited pro forma combined condensed
financial data have been derived from and should be read in
conjunction with the unaudited pro forma combined condensed
financial statements and related notes on page 133 through
page 139 of this joint proxy statement/prospectus.
This information is based on the historical balance sheets and
related historical statements of operations of Redhook and
Widmer. The unaudited pro forma combined condensed statement of
operations data for the year ended December 31, 2007 give
effect to the merger as if it occurred on January 1, 2007.
The unaudited pro forma combined balance sheet data with respect
to that year were computed as if the merger had been completed
on December 31, 2007.
The selected unaudited pro forma combined condensed financial
data are based on the estimates and assumptions set forth in the
notes to the unaudited pro forma combined condensed financial
statements, which are preliminary and have been made solely for
the purposes of developing such pro forma information. The
selected unaudited pro forma combined condensed financial data
are presented for illustrative purposes only and are not
necessarily indicative of the combined financial position or
results of operations of future periods or the results that
actually would have been realized had the entities been a single
entity during these periods.
Balance Sheet Data (in thousands, except book value per
common share):
Cash and cash equivalents
$
7,027
Working capital
6,069
Total assets
170,644
Common stockholders’ equity
$
112,757
Common shares outstanding
16,716
Book value per common share(1)
$
6.75
(1)
Book value per common share is computed by dividing common
stockholders’ equity by the total number of common shares
outstanding at the end of the period.
The following table summarizes unaudited per share information
for Redhook and Widmer on a historical basis, a pro forma
combined basis for Redhook, giving effect to the pro forma
effects of the merger, and an equivalent pro forma combined
basis for Widmer.
It has been assumed for purposes of the pro forma financial
information as of and for the year ended December 31, 2007
provided below that the merger was completed on January 1,2007, for income statement purposes, and on December 31,2007, for balance sheet purposes.
The following information should be read in conjunction with the
audited financial statements of Redhook and Widmer as of and for
the fiscal year ended December 31, 2007, which are included
or incorporated by reference into this joint proxy
statement/prospectus, and the unaudited pro forma combined
condensed financial statements as of and for the fiscal year
ended December 31, 2007, beginning on page 133. The
pro forma information below is presented for illustrative
purposes only and is not necessarily indicative of the income
per share and book value per share that would have occurred if
the merger had been completed as of the beginning of the periods
presented, nor is it necessarily indicative of the future
operating results or financial position of the combined company.
The historical book value per share is computed by dividing
total shareholders’ equity by the number of shares of
common stock outstanding at the end of the period. The pro forma
income per share of the combined company is computed by dividing
the pro forma income from operations by the pro forma
weighted-average number of shares outstanding over the period.
The pro forma combined book value per share is computed by
dividing total pro forma shareholders’ equity by the pro
forma number of shares of common stock outstanding at the end of
the period. Widmer equivalent pro forma combined per share
amounts are calculated by multiplying the pro forma combined per
share amounts by the exchange ratio of 2.1551, the number of
shares of Redhook common stock that would be exchanged for each
share of Widmer common and preferred stock in the merger.
Redhook common stock is listed on the Nasdaq Stock Market under
the symbol “HOOK.” The following table presents, for
the periods indicated, the range of high and low per share sales
prices for Redhook common stock as reported on the Nasdaq Stock
Market. Widmer is a private company and its common stock and
preferred stock are not publicly traded.
The high and low sale prices for Redhook common stock on
November 12, 2007, the day prior to the first public
announcement of Redhook’s entry into the merger agreement,
were $6.19 and $6.03, respectively. The high and low sale prices
for Redhook common stock on May 12, 2008 were $3.99 and
$3.89, respectively.
Because the market price of Redhook common stock is subject to
fluctuation, the market value of the shares of Redhook common
stock that Widmer security holders will be entitled to receive
in the merger may increase or decrease.
As of February 29, 2008, Redhook had approximately 673
holders of record of its common stock. As of February 29,2008, Widmer had approximately 30 holders of record of its
common stock and one holder of record of its preferred stock.
For detailed information regarding the beneficial ownership of
certain shareholders of the combined company upon consummation
of the merger, see the section entitled “Principal
Shareholders of the Combined Company” beginning on
page 149 of this joint proxy statement/prospectus.
Dividends
Redhook has not declared or paid any cash dividends since 1994.
Other than in 2005, when Widmer declared and paid a total of
$100,000 in dividends pro rata to all holders of common and
preferred stock, Widmer has not declared or paid any cash
dividends. If the merger is not consummated, the board of
directors of each of Redhook and Widmer presently intends to
continue a policy of retaining all earnings to finance the
expansion of its business. Following the merger, it is expected
that the board of directors of the combined company will
continue the policy of not paying cash dividends in order to
retain any earnings for the operation and expansion of its
business. The payment of dividends, if any, in the future will
be at the discretion of the combined company’s board of
directors and will depend upon, among other things, its
financial condition, operating results, capital requirements,
any applicable contractual restrictions and such other factors
as such board of directors deems relevant.
In addition to the other information included in or
incorporated by reference in this joint proxy
statement/prospectus, you should carefully consider the material
risks described below before deciding how to vote your
shares.
Obtaining
required approvals and satisfying closing conditions may delay
or prevent completion of the proposed transaction.
Completion of the proposed merger is conditioned upon, among
other things, the receipt of all consents and approvals of all
governmental authorities required for consummation of the
proposed transaction. The requirement for these approvals could
delay or prevent the completion of the proposed transaction. For
more information about approvals from regulatory authorities
that are required in order to consummate the merger, see the
section entitled “The Merger — Regulatory
Approvals Required for the Merger” beginning on
page 48 of this joint proxy statement/prospectus. Although
neither Redhook nor Widmer expects regulatory authorities to
raise any significant objections in connection with their review
of the merger, neither Redhook nor Widmer can assure you that
they will obtain all required regulatory approvals or that these
regulatory approvals will not contain terms, conditions or
restrictions that would be detrimental to the combined company
after the completion of the merger.
If the
conditions to the merger are not met or waived, the merger will
not occur.
Even if the issuance of shares of Redhook common stock in
connection with the merger is approved by the Redhook
shareholders and the merger is approved by the Widmer
shareholders, specified conditions must be satisfied or waived
to complete the merger. These conditions are described in detail
in the merger agreement and summarized in this joint proxy
statement/prospectus beginning on page 54 in the section
entitled “The Merger Agreement — Conditions to
the Completion of the Merger.” Neither Redhook nor Widmer
can assure you that all of the conditions will be satisfied. If
the conditions are not satisfied or waived, the merger will not
occur or will be delayed, and Redhook and Widmer each may lose
some or all of the intended benefits of the merger.
Some
of Redhook’s and Widmer’s officers and directors have
conflicts of interest that may influence them to support or
approve the merger without regard to your
interests.
Certain officers and directors of Redhook and Widmer participate
in arrangements that provide them with interests in the merger
that are different from yours, including, among others,
ownership interests in the combined company, continued service
as an officer or director of the combined company, retention
bonuses and severance benefits, additional compensation for
assisting in the successful closing of the merger, and various
affiliations with shareholders of both Redhook and Widmer. These
interests, among others, may influence the officers and
directors of Redhook and Widmer to support or approve the
merger. For more information concerning the interests of
Redhook’s and Widmer’s executive officers and
directors, see the sections entitled “TheMerger — Interests of Redhook’s Directors and
Executive Officers in the Merger” beginning on page 46
of this joint proxy statement/prospectus and “TheMerger — Interests of Widmer’s Directors and
Executive Officers in the Merger” beginning on page 47
of this joint proxy statement/prospectus.
The
number of shares of Redhook common stock to be received by
Widmer shareholders in connection with the merger is not
adjustable based on the market price of Redhook common stock, so
the merger consideration at the closing may have a greater or
lesser value than at the time the merger agreement was
signed.
The merger agreement sets forth the exchange ratio that is used
to determine the number of shares of Redhook common stock to be
received by Widmer’s shareholders in connection with the
merger. Any changes in the market price of the Redhook common
stock will not affect the aggregate number of shares that Widmer
shareholders will be entitled to receive pursuant to the merger.
The merger does not include a price-based termination right.
Therefore, if the market price of the Redhook common stock
declines prior to the closing of the merger from the market
price on the date of the merger agreement, Widmer shareholders
could receive an aggregate merger consideration with
considerably less value than anticipated. Similarly, if the
market price of the Redhook common stock increases prior to the
closing of the merger from the market price on the date of the
merger agreement, Widmer shareholders could receive an aggregate
merger consideration with considerably more value. For each
percentage point that the market value of Redhook common stock
rises or declines, there is a corresponding rise or decline,
respectively, in the value of the total merger consideration
issued to Widmer shareholders. For example, on November 12,2007, the last trading date before the execution of the merger
agreement, the closing price of Redhook common stock, as
reported on the Nasdaq Stock Market, was $6.12 per share.
Assuming that a total of 8,361,529 shares of Redhook common
stock are issued to Widmer shareholders in connection with the
merger at a per share value of $6.12 per share, the aggregate
merger consideration to be issued to Widmer shareholders in the
merger would be approximately $51,173,000. If, however, the
closing price of Redhook common stock on the date of closing of
the merger had declined from $6.12 per share to, for example,
$4.90 per share, a decline of 20%, the aggregate merger
consideration to be issued to Widmer shareholders in the merger
would decrease from approximately $51,173,000 to approximately
$40,938,000, a decline of $10,235,000 or 20%.
Failure to complete the merger could harm Redhook’s
or Widmer’s stock value and future business and financial
results.
If the merger is not completed, Redhook and Widmer are subject
to the following risks:
•
failure to have pursued other beneficial opportunities as a
result of the focus of management on the merger, without
realizing any of the anticipated benefits of completing the
transaction;
•
a decline in the price of Redhook stock;
•
the payment of costs related to the merger, such as legal and
accounting fees which Redhook and Widmer estimate will total
approximately $1.1 million and $2.6 million,
respectively, even if the merger is not completed;
•
sharing of trade secrets; and
•
modifications to existing financial and production systems that
have been implemented in anticipation of the completion of the
merger that may not add value, and may even hinder, the
operations of Redhook and Widmer as separate companies.
In addition, if the merger agreement is terminated and either
Redhook’s or Widmer’s board of directors decides to
pursue another business combination, there can be no assurance
that it will be able to find a partner willing to provide
equivalent or more attractive consideration than the
consideration to be provided in the merger and that A-B will
provide its consent to such a transaction.
The current employees of Redhook and Widmer may experience
uncertainty about their future as employees of the combined
company until strategies with regard to the combined company are
announced or executed. This may adversely affect Redhook’s
and Widmer’s ability to attract and retain key personnel
and may affect their performance during the period of
uncertainty.
In anticipation of the completion of the merger, management of
Redhook and Widmer have begun to hire personnel to fill certain
key roles, to modify existing responsibilities and to
communicate plans as they pertain to employee roles in the
combined company. If the merger is not completed, these
employees may be dissatisfied or unwilling to return to their
former roles, which may adversely affect Redhook’s and
Widmer’s ability to retain key personnel and may affect
their performance.
The
market price of the combined company’s common stock may
decline as a result of the merger.
The market price of the combined company’s common stock may
decline as a result of the merger for a number of reasons
including if:
•
the combined company does not achieve the perceived benefits of
the merger as rapidly or to the extent anticipated by financial
or industry analysts;
•
the effect of the merger on the combined company’s business
and prospects is not consistent with the expectations of
financial or industry analysts; or
•
investors react negatively to the effect of the merger on the
combined company’s business and prospects.
Redhook
and Widmer shareholders may not realize a benefit from the
merger commensurate with the ownership dilution they will
experience in connection with the merger.
If the combined company is unable to realize the strategic and
financial benefits currently anticipated from the merger,
Redhook and Widmer shareholders will have experienced
substantial dilution of their ownership interests in their
respective companies without receiving any commensurate benefit.
For more information on the expected benefits of the merger, see
“The Merger — Reasons for the Merger”
beginning on page 36.
Because
the lack of a public market for the Widmer shares makes it
difficult to evaluate the fairness of the transaction, the
consideration to be paid by Redhook in the merger may
significantly exceed the fair market value of the Widmer
shares.
The outstanding common and preferred stock of Widmer is
privately held and is not traded in any public market. The lack
of a public market makes it extremely difficult to determine the
fair market value of Widmer. Because the percentage of Redhook
equity to be issued to Widmer shareholders was determined based
on negotiations between the parties, it is possible that the
value of the Redhook common stock to be issued in connection
with the merger will be greater than the fair market value of
Widmer.
If the merger is completed, Redhook and Widmer will operate
as a combined company in a market environment that is difficult
to predict and that involves significant risks, many of which
will be beyond the control of the combined company. In
determining whether you should approve the merger or the
issuance of shares of Redhook common stock, as the case may be,
you should carefully read and consider the following risk
factors. A discussion of additional risks and uncertainties
regarding Redhook can be found in the information which is
incorporated by reference in this joint proxy
statement/prospectus and referred to in “Where You Can Find
Additional Information” beginning on page 151 of this
joint proxy statement/prospectus. If any of the events,
contingencies, circumstances or conditions described in the
following risks actually occur, the combined company’s
business, financial condition or results of operations could be
seriously harmed. If that happens, the trading price of the
combined company’s common stock could decline and you may
lose part or all of the value of any shares held by you.
The
combined company will be dependent upon the continuing
relationship with A-B.
Substantially all of the combined company’s products will
be sold and distributed through A-B. If the relationship between
the combined company and A-B deteriorates, distribution of the
products of the combined company will suffer significant
disruption and such event will have a long-term severe negative
impact on the sales and results of operations of the combined
company, as it would be extremely difficult to rebuild a
distribution network. In such an event, the combined company
would be faced with finding another national distribution
partner similar to A-B, and entering into a complex distribution
and investment arrangement with that entity, or negotiating
separate distribution agreements with individual distributors
throughout the U.S. Currently, Redhook distributes its
product through a network of more than 560 independent wholesale
distributors,
most of whom are geographically contiguous and independently
owned and operated, and 13 branches owned and operated by A-B.
If the combined company had to negotiate separate agreements
with individual distributors, such an undertaking would require
a significant amount of time to complete, during which the
combined company’s products would not be distributed. It
would also be extremely difficult for the combined company to
build a distribution network as seamless and contiguous as the
one it currently enjoys through A-B. Additionally, the combined
company would need to raise significant capital to fund the
development of its new distribution network and continue
operations. There can be no guarantee that financing would be
available when needed, or that any such financing would be on
commercially reasonable terms. Given the difficulty that the
combined company would face if it needed to rebuild its
distribution network, if the current distribution arrangement
with A-B were to be terminated, it is unlikely the combined
company would be able to continue as a going concern.
Redhook and Widmer believe that the benefits of the relationship
that both companies have enjoyed with A-B, in particular
distribution and material cost efficiencies, have offset the
costs associated with the relationship. However, there can be no
assurance that these costs will not have a negative impact on
the sales and results of operations of the combined company.
A-B may introduce new products or form relationships with other
companies whose products will compete with those of the combined
company. Introduction of and support by A-B of these competing
products could reduce wholesaler attention and financial
resources committed to the combined company’s products.
There is no assurance that the combined company will be able to
successfully compete in the marketplace against other A-B
supported products. Such an increase in competition could cause
sales and results of operations of the combined company to be
adversely affected.
The
terms of the amended distribution agreement with A-B may not be
favorable.
Since July 1, 2004, Redhook and Widmer sales have consisted
of sales of product to Craft Brands and
A-B. In the
western United States, Redhook and Widmer have sold their
product to Craft Brands; Craft Brands, in turn, has advertised,
marketed and sold the product to wholesale outlets through a
distribution agreement between Craft Brands and A-B. In the
midwest and eastern U.S., Redhook has sold its product and
Widmer Hefeweizen to wholesale outlets through a
distribution agreement with A-B. Because Craft Brands will be
eliminated in connection with the merger, Redhook and Widmer are
in discussions with A-B to amend the existing distribution
agreements so that they will encompass distribution of the
combined company’s products throughout the U.S. The
terms of an amended distribution agreement, if one is
successfully negotiated, may be less favorable than those of the
existing distribution arrangements, which could have a negative
impact on the combined company’s financial position and
results of operations.
Redhook’s agreements with A-B contain limitations on
Redhook’s ability to engage in or reject certain
transactions, including acquisitions and changes of
control.
The exchange and recapitalization agreement between Redhook and
A-B, which is expected to remain in force after the merger, will
require the combined company to obtain the consent of A-B prior
to taking certain actions, or to offer to A-B a right of first
refusal, including the following:
•
issuance of equity securities;
•
acquisition or sale of assets or stock;
•
amendment of the combined company’s articles of
incorporation or bylaws;
•
grant of board representation rights;
•
entering into certain transactions with affiliates;
•
distributing the combined company’s products in the
U.S. other than through A-B, Craft Brands or as provided in
the amended distribution agreement with A-B;
distributing or licensing the production of any malt beverage
product in any country outside of the U.S.; or
•
voluntarily delisting or terminating the combined company’s
listing on the Nasdaq Stock Market.
Additionally, A-B has the right to terminate the distribution
agreement if any competitor of A-B acquires more than 10% of the
outstanding common stock of Redhook.
Further, if the amended distribution agreement with A-B is
terminated, A-B has the right to solicit and negotiate offers
from third parties to purchase all or substantially all of the
assets or securities of the combined company or to enter into a
merger or consolidation transaction with the combined company
and the right to cause the board of directors to consider any
such offer.
The practical effect of the foregoing restrictions is to grant
A-B the ability to veto certain transactions that management may
believe to be in the best interest of Redhook and its
shareholders, including expansion of the combined company
through acquisitions of other craft brewers or new brands,
mergers with other brewing companies or distribution of the
combined company’s products outside the U.S. As a
result, the results of operations and the trading price of the
combined company’s common stock may be adversely affected.
A-B will have significant control and influence over the
combined company.
Following the merger, in addition to its rights under the
exchange and recapitalization agreement and the distribution
agreement, as discussed above, it is anticipated that A-B will
own approximately 36.3% of the outstanding common stock of the
combined company and that two of its designees will serve as
directors of the combined company. As a result, A-B will be able
to exercise significant control and influence over the combined
company and matters requiring approval of its shareholders,
including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of the
combined company or its assets. This could limit the ability of
other shareholders to influence corporate matters and may have
the effect of delaying or preventing a third party from
acquiring control of the combined company. In addition, A-B may
have actual or potential interests that diverge from the rest of
the Redhook shareholders. The securities markets may also react
unfavorably to A-B’s ability to influence certain matters
involving the combined company, which could have a negative
impact on the trading price of the combined company’s
common stock.
The
combined company may be unable to successfully integrate its
operations and realize all of the anticipated benefits of the
merger.
The merger involves the integration of two companies that
previously have operated independently. The integration will be
a complex, costly and time-consuming process. The difficulties
of combining the companies’ operations include, among other
things:
•
implementing operational, financial and management controls,
reporting systems and procedures;
•
coordinating geographically disparate organizations, systems and
facilities;
•
integrating personnel with diverse business backgrounds;
•
integrating distinct corporate cultures;
•
consolidating corporate and administrative functions;
•
consolidating operations;
•
retaining key employees; and
•
preserving Redhook’s and Widmer’s collaboration,
distribution and other important relationships.
The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of the
combined company’s business and the loss of key personnel.
The diversion of management’s attention and any delays or
difficulties encountered in connection with the merger and the
integration of the
two companies’ operations could harm the business, results
of operations, financial condition or prospects of the combined
company after the merger.
Among the factors considered by Redhook and Widmer in connection
with each company’s approval of the merger agreement were
the opportunities for synergies in expanding the breweries and
efficiently utilizing the available production capacity,
implementing a national sales strategy and reducing costs
associated with duplicate functions. There can be no assurance
that these synergies will be realized within the time periods
contemplated or that they will be realized at all. There also
can be no assurance that Redhook’s integration with Widmer
will be successful or will result in the realization of the full
benefits anticipated by the companies.
The
combined company will be dependent upon accounting, finance and
information technology staff that may not possess experience in
a publicly traded corporate environment and may be unfamiliar
with the reporting and compliance requirements of a publicly
traded company in general or of Redhook
specifically.
Integration of the finance, accounting and information
technology functions of Redhook and Widmer will result in such
functions no longer being performed by the Redhook finance,
accounting and information technology departments. The Widmer
finance, accounting and information technology departments will
assume all of these functions for the combined company. The
Widmer staff in these functional areas may not have the
historical perspective with respect to Redhook that may be
necessary to properly analyze the performance of the combined
company and provide critical disclosures to the public. In
addition, some or all of the staff in these functional areas may
not possess experience in a publicly traded corporate
environment and may be unfamiliar with the reporting and
compliance requirements of a publicly traded company in general
or of Redhook specifically. In that event, the combined company
may be unable to fully or timely comply with applicable Exchange
Act reporting requirements. Such noncompliance could trigger,
among other things, an investigation by the Securities and
Exchange Commission, a shareholder lawsuit, a bank loan covenant
violation, a violation of the A-B distribution agreement or an
unfavorable impact on the market price of the combined
company’s stock.
Management of the combined company intends to utilize new
financial, accounting and reporting systems that have had
limited use in supporting public company reporting requirements
and have not yet been reviewed or tested to ensure compliance
with Sarbanes-Oxley Section 404 requirements.
In connection with the integration of the finance, accounting
and information technology functions of Redhook and Widmer,
management of the combined company intends to utilize Sage
Software’s MAS 500 product as the core financial accounting
system and approximately twelve stand-alone, customized
applications that will support the finance, accounting and
operational functions of the combined company. MAS 500 and the
other supporting applications have not yet been reviewed or
tested to ensure that they can support the reporting
requirements of a publicly traded company or that they will be
in compliance with Sarbanes-Oxley Section 404 requirements.
In order to ensure that these systems can support the reporting
and disclosure control requirements of a publicly traded
company, the combined company may be required to incur
significant expense and rely heavily on external consultants,
and there can be no assurance that these attempts will be
successful. If the combined company is unable to meet the
reporting requirements of a publicly traded company or is unable
to become compliant with Sarbanes-Oxley Section 404
requirements prior to the closing of the merger, the closing of
the merger may be delayed or the combined company may be in
violation of Securities and Exchange Commission rules. Such
noncompliance could trigger, among other things, an
investigation by the Securities and Exchange Commission, a
shareholder lawsuit, a bank loan covenant violation, a violation
of the A-B distribution agreement or an unfavorable impact on
the market price of the combined company’s stock.
If the combined company fails to maintain proper and
effective internal controls, its ability to produce accurate
financial statements could be impaired, which could adversely
affect its operating results, its ability to operate its
business and investors’ views of the combined
company.
Ensuring that the combined company has adequate internal
financial and accounting controls and procedures in place to
produce accurate financial statements on a timely basis is a
costly and time-consuming
effort that needs to be re-evaluated frequently. Redhook has
completed the process of documenting, reviewing and, where
appropriate, improving its internal control and procedures in
connection with Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the
effectiveness of its internal controls over financial reporting.
Redhook has documented and tested internal controls in
connection with the Section 404 requirements and, during
that documentation and testing, has not identified any areas
where there is a material weakness. Widmer has begun the process
of documenting, reviewing and, where appropriate, improving its
internal controls and procedures in connection with
Section 404 of the Sarbanes-Oxley Act. Implementing
appropriate changes to the internal controls of the combined
company may take a significant period of time to complete, may
distract directors, officers and employees, and may entail
substantial costs in order to modify existing accounting
systems. Further, the combined company may encounter
difficulties assimilating or integrating the internal controls,
disclosure controls and information technology infrastructure of
Redhook and Widmer. These changes may not, however, be effective
in maintaining the adequacy of internal controls, and any
failure to maintain that adequacy, or consequent inability to
produce accurate financial statements on a timely basis, could
increase the combined company’s operating costs and could
materially impair its ability to operate its business. In
addition, investors’ perceptions that the combined
company’s internal controls are inadequate or that it is
unable to produce accurate financial statements may adversely
affect its stock price.
Changes in financial accounting standards or practices may
cause adverse, unexpected financial reporting fluctuations and
affect reported results of operations.
A change in accounting standards or practices can have a
significant effect on reported results and may even affect the
combined company’s reporting of transactions completed
before the change is effective. New accounting pronouncements
and varying interpretations of accounting pronouncements have
occurred and are likely to occur in the future. Changes to
existing rules or the questioning of current practices may
adversely affect reported financial results or the way the
combined company conducts its business.
The
integration of Widmer and Redhook may result in significant
expenses and accounting charges that adversely affect the
combined company’s operating results.
In accordance with generally accepted accounting principles, the
combined company will account for the merger using the purchase
method of accounting. The financial results of the combined
company may be adversely affected by the resulting accounting
charges incurred in connection with the merger, including income
taxes and restructuring and integration costs. The combined
company also expects to incur additional costs associated with
combining the operations of Redhook and Widmer. Additional costs
may include: relocation and retention of employees, including
salary increases or bonuses; severance payments; reorganization
or closure of facilities; taxes; advisor and professional fees
and termination of contracts that provide redundant or
conflicting services. Some of these costs may have to be
accounted for as expenses that would decrease the combined
company’s net income and earnings per share for the periods
in which those adjustments are made. The costs associated with
the merger that will be expensed in 2008 are estimated at
$3,040,000. This includes severance costs and deal costs
incurred by Widmer. Legal, consulting and meeting costs incurred
by Redhook in connection with merger integration will continue
to be capitalized in accordance with SFAS No. 141,
Business Combinations. The price of the combined
company’s common stock could decline to the extent the
combined company’s financial results are materially
affected by the foregoing charges and costs, or if the foregoing
charges and costs are larger than anticipated. In addition, the
charges and costs described above may not be reflected in the
unaudited pro forma combined condensed financial statements
contained in this joint proxy statement/prospectus and the
unaudited pro forma combined condensed financial statements may
not be indicative of the actual results of the combined company
following the merger.
The
combined company will be capitalized partially with long-term
debt, which will be a use of its cash flow.
At the time of the merger, it is anticipated that the combined
company will have approximately $21.3 million of long-term
debt attributable entirely to debt that is currently owed by
Widmer. The debt will consist of a term loan of approximately
$13.5 million, an equipment loan of approximately
$7.2 million, and
real estate related loans of approximately $0.6 million.
The total monthly payments of principal and interest on this
debt are initially expected to be approximately $220,000.
Additional information regarding this debt is presented in
Note 9 to Widmer’s consolidated financial statements
included elsewhere in this joint proxy statement/prospectus.
The combined company’s access to additional capital to fund
expansion or operating needs will be limited by the amount of
debt outstanding at the time of the merger. A failure to obtain
additional capital could impair the combined company’s
ability to grow sales or respond to working capital needs. Any
inability to raise adequate funds to support its growth plans or
operations will materially adversely affect the combined
company’s business.
The
combined company will be dependent upon the services of its key
personnel.
The combined company will depend on the services of its key
management personnel, including David Mickelson, Terry
Michaelson, Jay Caldwell, Timothy McFall, Sebastian Pastore and
Martin Wall. If the combined company loses the services of any
members of senior management or key personnel for any reason, it
may be unable to replace them with qualified personnel, which
could have a material adverse effect on the company’s
operations. Additionally, the loss of David Mickelson or Terry
Michaelson as the combined company’s co-chief executive
officers, and the failure to find a replacement satisfactory to
A-B, will be a default under the A-B distribution agreement as
it is anticipated to be amended. The combined company may not
carry key person life insurance on any of the executive officers.
The
combined company will be dependent on distributors for the sale
of its products.
Although substantially all of the combined company’s
products will be sold and distributed through A-B, the company
will continue to rely heavily on distributors, most of which are
independent wholesalers, for the sale of the company’s
products to retailers. A disruption of the ability of the
wholesalers, or A-B, or the combined company to distribute
products efficiently due to any significant operational
problems, such as widespread labor union strikes, the loss of a
major wholesaler as a customer, or the termination of the
distribution relationship with A-B, could hinder the combined
company’s ability to get its products to retailers and
could have a material adverse impact on the company’s sales
and results of operations.
Increased
competition could adversely affect sales and results of
operations.
Like Redhook and Widmer, the combined company will compete in
the highly competitive craft brewing market as well as in the
much larger specialty beer market, which encompasses producers
of import beers, major national brewers that produce
fuller-flavored products, and large spirit companies and
national brewers that produce flavored alcohol beverages. Beyond
the beer market, craft brewers have also faced competition from
producers of wines and spirits. Increasing competition could
cause future sales and results of operations of the combined
company to be adversely affected. Redhook and Widmer have
historically operated with little or no backlog and, therefore,
predicting sales for future periods is limited.
Future
price promotions to generate demand for Redhook and Widmer
products may be unsuccessful.
The prices that the combined company may charge in the future
for its products may decrease from historical levels, depending
on competitive factors in various markets. In order to stimulate
demand for Redhook and Widmer products, the two companies have
participated in price promotions with wholesalers and retail
customers in most markets. The number of markets in which the
combined company chooses to participate in price promotions and
the frequency of such promotions may increase in the future.
There can be no assurance, however, that these price promotions
will be successful in increasing demand for company products.
Due
to the concentration of sales in the Pacific Northwest and
California, the results of operations and financial condition of
the combined company may be subject to fluctuations in regional
economic conditions.
A significant portion of Redhook and Widmer sales have been in
the Pacific Northwest and California and, consequently, business
may be adversely affected by changes in economic and business
conditions nationally and, particularly, within the western
region. In 2007, 33% of beer shipped by Redhook and Widmer was
to wholesalers in Oregon and Washington. In addition, shipments
by both companies to wholesalers in California contributed
another 28% of total shipments, resulting in a total
concentration of 62% in these three western states. Redhook and
Widmer also believe this region is one of the most competitive
craft beer markets in the U.S., both in terms of number of
market participants and consumer awareness. The Pacific
Northwest, and Washington state in particular, offer significant
competition to the combined company’s products, not only
from other craft brewers but also from the growing wine market
and from flavored alcohol beverages. This intense competition is
magnified because the Redhook brand is viewed as being
relatively mature.
The
craft beer business is seasonal in nature, and the combined
company is likely to experience fluctuations in results of
operations and financial condition.
Sales of craft beer products are somewhat seasonal, with the
first and fourth quarters historically being the slowest and the
rest of the year generating stronger sales. As well, the
combined company’s sales volume may also be affected by
weather conditions. Therefore, the results for any quarter may
not be indicative of the results that may be achieved for the
full fiscal year. If an adverse event such as a regional
economic downturn or poor weather conditions should occur during
the second and third quarters, the adverse impact to the
combined company’s revenues would likely be greater as a
result of the seasonal business.
The
gross margins of the combined company may fluctuate while
expenses remain constant.
Future gross margins may fluctuate and even decline as a result
of many factors, including disproportionate depreciation and
other fixed and semivariable operating costs, and the level of
production at the breweries in relation to current production
capacity. Fixed and semivariable operating costs are estimated
to be approximately one-third of total production costs and
cause gross margin to be sensitive to relatively small increases
or decreases in sales volume. In addition, other factors beyond
the company’s control that could affect cost of sales
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 federal or state excise taxes.
Operating
breweries at production levels substantially below their current
and maximum designed capacities could negatively impact overall
profit margins.
At December 31, 2007, the combined annual theoretical
production capacity of the Redhook and Widmer breweries totaled
approximately 710,000 barrels. Following completion of the
expansion of Widmer’s Portland brewery in April 2008, the
combined annual theoretical production capacity of the Redhook
and Widmer breweries totaled approximately 900,000 barrels.
Following the anticipated completion of expansion of brewing
capacity at Redhook’s New Hampshire brewery in late 2008,
the combined company’s annual theoretical production
capacity is projected to total approximately
946,000 barrels. Theoretical production capacity, as
defined by Redhook and Widmer, is computed assuming that brewing
occurs under ideal brewing conditions and is negatively impacted
by only a standard level of production loss. Ideal brewing
conditions include, among other factors, production of a single
brand in a single package for
24-hour
shifts, seven days per week, and 52 weeks per year. Because
of many factors, including seasonality, production schedules of
various draft products and bottled products and packages, and
losses attributable to filtering, bottling and keg filling,
actual production capacity will always be less than theoretical
production capacity.
Although there is a significant difference between 2007 combined
company shipments of 552,500 barrels (computed on a
proforma basis) and the anticipated future annual theoretical
production capacity of 900,000 barrels, Redhook and Widmer
believe that capacity utilization of the breweries will
fluctuate
throughout the year. Although Redhook and Widmer expect that the
breweries’ capacity will be efficiently utilized during
periods when the combined company’s sales are strongest,
there likely will be periods when the breweries’ capacity
utilization will be lower. If the combined company is unable to
achieve significant sales growth, the resulting excess capacity
and unabsorbed overhead of the combined company will have an
adverse effect on the combined company’s gross margins,
operating cash flows and overall financial performance.
The combined company will periodically evaluate whether it
expects to recover the costs of its production facilities over
the course of their useful lives. If facts and circumstances
indicate that the carrying value of these long-lived assets may
be impaired, an evaluation of recoverability will be performed
in accordance with FASB Statement of Financial Accounting
Standard, which we refer to as SFAS, No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, by
comparing the carrying value of the assets to projected future
undiscounted cash flows in addition to other quantitative and
qualitative analyses. If management believes that the carrying
value of such assets may not be recoverable, the combined
company will recognize an impairment loss by a charge against
current operations.
Changes
in consumer preferences or public attitudes about the combined
company’s products could reduce demand.
If consumers were unwilling to accept the combined
company’s products or if general consumer trends caused a
decrease in the demand for beer, including craft beer, it would
adversely impact sales and results of operations. If the
flavored alcohol beverage market, the wine market, or the
spirits market continues to grow, this could draw consumers away
from the company’s products and have an adverse effect on
sales and results of operations. Further, the alcoholic beverage
industry has become the subject of considerable societal and
political attention in recent years due to increasing public
concern over alcohol-related social problems, including drunk
driving, underage drinking and health consequences from the
misuse of alcohol. If beer consumption in general were to come
into disfavor among domestic consumers, or if the domestic beer
industry were subjected to significant additional governmental
regulation, the combined company’s operations could be
adversely affected.
The
combined company will be subject to governmental regulations
affecting its breweries and pubs; the costs of complying with
governmental regulations, or the combined company’s failure
to comply with such regulations, could affect its financial
condition and results of operations.
The combined company’s breweries and pubs will be subject
to licensing and regulation by a number of governmental
authorities, including the U.S. Treasury Department,
Alcohol and Tobacco Tax and Trade Bureau, which we refer to as
the TTB, the U.S. Department of Agriculture, the
U.S. Food and Drug Administration, state alcohol regulatory
agencies in the states in which the company sells its products,
and state and local health, sanitation, safety, fire and
environmental agencies. Failure to comply with applicable
federal, state or local regulations could result in limitations
on the combined company’s ability to conduct business. TTB
permits can be revoked for failure to pay taxes, to keep proper
accounts, to pay fees, to bond premises, or to abide by federal
alcoholic beverage production and distribution regulations, or
if holders of 10% or more of the combined company’s equity
securities are found to be of questionable character. TTB
permits are also required in connection with establishing a
commercial brewery, expanding or modifying existing brewing
operations, entering into a contract brewing arrangement, and
entering into an alternating brewery agreement, such as the
arrangement currently in effect between Widmer and Kona Brewery
LLC. Other permits or licenses could be revoked if the combined
company fails to comply with the terms of such permits or
licenses, and additional permits or licenses could be required
in the future for existing or expanded operations. Because the
combined company’s sales objective and growth plans may
rely on any one of these approaches, if licenses, permits or
approvals necessary for the company’s brewery or pub
operations were unavailable or unduly delayed, or if any such
permits or licenses were revoked, the ability of the combined
company to conduct business could be substantially and adversely
affected.
The brewery operations of the combined company will also be
subject to environmental regulations and local permitting
requirements and agreements regarding, among other things, air
emissions, water discharges, and the handling and disposal of
wastes. While neither Redhook nor Widmer has reason to believe
the
operations of its facilities violate any such regulation or
requirement, if such a violation were to occur, or if
environmental regulations were to become more stringent in the
future, the business of the combined company could be adversely
affected.
The combined company will also be subject to “dram
shop” laws, which generally provide a person injured by an
intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the
intoxicated person. The combined company’s pubs have
addressed this concern by establishing early closing hours and
regularly scheduled employee training. However, large uninsured
damage awards against the combined company could adversely
affect its financial condition.
An
increase in excise taxes could adversely affect the combined
company’s financial condition or results of
operations.
The U.S. federal government currently imposes an excise tax
of $18 per barrel on beer sold for consumption in the
U.S. However, any brewer with annual production under two
million barrels instead pays federal excise tax in the amount of
$7 per barrel on sales of the first 60,000 barrels. While
Redhook and Widmer are not aware of any plans by the federal
government to reduce or eliminate this benefit to small brewers,
any such reduction in a material amount could have an adverse
effect on the combined company’s financial condition and
results of operations. In addition, the combined company would
lose the benefit of this rate structure if it exceeded the two
million barrel production threshold. Individual states also
impose excise taxes on alcoholic beverages in varying amounts,
which have also been subject to change. It is possible that
excise taxes will be increased in the future by both federal and
state governments. In addition, increased excise taxes on
alcoholic beverages have in the past been considered in
connection with various governmental budget-balancing or funding
proposals. Any such increases in excise taxes, if enacted, could
adversely affect the company’s financial condition or
results of operations.
Loss
of a small brewer’s excise tax exemption could negatively
impact results of operations.
Redhook and Widmer are required to pay federal excise taxes on
the sale of beer. Because Redhook and Widmer each produce less
than two million barrels annually, each of Redhook and Widmer
are currently eligible for a small brewer’s federal excise
tax exemption which provides that each pays federal excise taxes
at a reduced rate of $7 per barrel, rather than the $18 per
barrel, on the first 60,000 barrels sold each year. Both
Redhook and Widmer are required to pay $18 per barrel on all
shipments above 60,000 barrels per year. Upon merging,
though, the combined company will be eligible for a single
60,000 barrel small brewer’s exemption, effectively
resulting in the loss of one 60,000 barrel exemption, or
$660,000, and an overall increase in the weighted average
federal excise tax rate paid by the combined company.
Changes
in state laws regarding distribution arrangements may adversely
impact operations of the combined company.
In 2006, the Washington state legislature passed a bill removing
the long-standing requirement that small producers of wine and
beer distribute their products through wholesale distributors,
thus permitting these small producers to distribute their
products directly to retailers. The law further provides that
any in-state or out-of-state brewery that produces more than
2,500 barrels annually may distribute its products directly
to retailers if it does so from a facility located in the state
that is physically separate and distinct from its production
facilities. The legislation stipulates that prices charged by a
brewery must be uniform to all distributors and retailers, but
does not restrict prices retailers may charge consumers. In
2007, Redhook and Widmer shipments to Washington wholesalers
totaled approximately 18% of total shipments on a pro forma
basis. Although not all of these shipments were attributable to
beer produced in Washington state, the combined company’s
operations will continue to be substantially impacted by the
Washington state regulatory environment. While it is difficult
to predict what impact, if any, this law will have on the
combined company’s operations, the beer and wine market may
experience an increase in competition that could cause future
sales and results of operations to be adversely affected. This
law may also impact the financial stability of Washington state
wholesalers on which the combined company will rely.
The
combined company may experience material losses in excess of
insurance coverage.
The combined company intends to maintain insurance coverage that
is customary for businesses of its size and type. There are,
however, certain types of catastrophic losses that are not
generally insured because it is not economically feasible to
insure against such losses. Should an uninsured loss or a loss
in excess of insured limits occur, such loss could have an
adverse effect on the combined company’s results of
operations and financial condition.
Loss
of income tax benefits could negatively impact results of
operations.
As of December 31, 2007, Redhook’s deferred tax assets
were primarily comprised of federal net operating losses, which
we refer to as NOLs, of $24.7 million, or $8.4 million
tax-effected; federal and state alternative minimum tax credit
carryforwards of $185,000; and state NOL carryforwards of
$196,000 tax-effected. 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. To the extent that the combined
company is unable to generate adequate taxable income in future
periods, it will be unable to utilize the NOLs and may also be
unable to recognize additional tax benefits. In addition, the
combined company may be required to record a greater valuation
allowance covering potentially expiring NOLs. Redhook and Widmer
have reviewed Section 382 of the Code, which can limit the
use of NOLs in instances where there has been a change in
ownership of greater than 50% of the stock owned by one or more
shareholders holding five percent or more of the outstanding
stock, and do not believe that this Code section will impact the
combined company’s ability to utilize the NOLs in the
future. While Redhook and Widmer are not aware of any plans by
the federal or state governments to amend the rules regarding
utilization of NOLs, any such modification could have an adverse
effect on the combined company’s financial condition and
results of operations.
The
combined company may experience a shortage in kegs necessary to
distribute draft beer.
The combined company will continue to distribute its draft beer
in kegs that are owned by the company as well as leased from A-B
and a third-party vendor. During periods when the combined
company experiences stronger sales, the company may need to rely
on kegs leased from A-B and the third-party vendor to address
the additional demand. If shipments of draft beer increase, the
combined company may experience a shortage of available kegs to
fill sales orders. If the combined company cannot meet its keg
requirements through either lease or purchase, the company may
be required to delay some draft shipments. Such delays could
have an adverse impact on sales and relationships with
wholesalers and A-B. As well, the combined company may decide to
pursue other alternatives for leasing or purchasing kegs. There
is no assurance, though, that the combined company will be
successful in securing additional kegs.
The combined company’s key raw materials may become
significantly more costly and adequate supplies may be difficult
to secure.
According to industry and media sources, the cost of barley,
wheat and hops, all primary ingredients in Redhook and Widmer
products, has increased significantly in recent months. Media
sources explain that the cost of barley increased 48% from
August 2006 through June 2007, largely driven by a lower supply
of barley as farmers shift their focus to growing corn, a key
component of biofuels. The beer industry appears to also be
experiencing a decline in the supply of hops, driven by a number
of factors: excess supply in the 1990s led some growers to
switch to more lucrative crops, resulting in an estimated 40%
decrease in worldwide hop-growing acreage; poor weather in
eastern Europe and Germany caused substantial hops crop losses
in 2007; hops crop production in England has declined
approximately 85% since the mid-1970s; and 2007 U.S.,
New Zealand, and Australia hops crop yields were only
average. And wheat exports have increased by 30% because of the
weak U.S. dollar and poor worldwide harvests, leading to
U.S. supplies of wheat that are at the lowest levels in
60 years.
While Redhook and Widmer have historically utilized fixed price
contracts to secure adequate supplies of key raw materials,
including barley, wheat and hops, recent fixed price contracts
reflect current market pricing that is significantly higher than
historical pricing. On average, Redhook has experienced cost
increases of
approximately 27%, 1%, and 8% for 2008 purchases of malted
barley, hops and wheat, respectively. On average, Widmer has
experienced cost increases of approximately 48%, 20%, and 41%
for 2008 purchases of malted barley, hops and wheat,
respectively. Redhook and Widmer estimate that these higher raw
material and packaging costs will result in an increase in 2008
cost of sales of approximately $3.75 per barrel. If 2008 Redhook
and Widmer production levels remained unchanged from 2007
levels, cost of sales for the combined company will likely
increase by approximately $1,900,000 for the full year. If the
combined company experiences difficulty in securing its key raw
materials or continues to experience increases in the cost of
these materials, it will have a material adverse impact on the
combined company’s gross margins and results of operations.
The
combined company will be subject to the risks of
litigation.
At any given time, the combined company will be subject to
claims and actions incidental to the operation of its business.
The outcome of these proceedings cannot be predicted. If a
plaintiff were successful in a claim against the combined
company, it could be faced with the payment of a material sum of
money. If this were to occur, it could have an adverse effect on
the company’s financial condition.
The
combined company’s stock price may be volatile following
the merger.
If the merger occurs, the market price of the combined
company’s common stock could be subject to significant
fluctuations. Some of the factors that may cause the market
price of the combined company’s common stock to fluctuate
include:
•
the entry into, or termination of, key agreements;
•
the loss of key employees;
•
the introduction of new products by competitors of the combined
company;
•
changes in estimates or recommendations by securities analysts,
if any, who cover the combined company’s common stock;
•
future sales of the combined company’s common
stock; and
•
period-to-period fluctuations in the combined company’s
financial results.
Moreover, the stock markets in general have experienced
substantial volatility that has often been unrelated to the
operating performance of individual companies. These broad
market fluctuations may also adversely affect the trading price
of the combined company’s common stock.
In the past, following periods of volatility in the market price
of a company’s securities, shareholders have often
instituted class action securities litigation against that
company. Such litigation against the combined company, if
instituted, could result in substantial costs and diversion of
management attention and resources, which could significantly
harm the combined company’s profitability and reputation.
The expiration of
lock-up
agreements entered into with certain Widmer shareholders in
connection with the merger could cause the market price of the
combined company’s common stock to decline.
As a condition to the closing of the merger, certain
shareholders of Widmer must execute
lock-up
agreements pursuant to which these holders will generally agree
that, from the closing date of the merger to the first
anniversary of the closing, they will not directly or indirectly
sell or otherwise transfer any shares of Redhook common stock
then held or thereafter acquired without the consent of the
board of directors of Redhook. It is expected that these Widmer
shareholders will receive 3,911,627 shares of Redhook
common stock pursuant to the merger, which will represent
approximately 23.4% of the outstanding shares of the combined
company immediately following the merger (this percentage
assumes that no security holder of Widmer exercises statutory
dissenters’ rights in connection with the merger and that
currently outstanding options held by Redhook employees,
officers, directors, and former directors to acquire
689,140 shares of Redhook common stock are not exercised
prior to consummation of the merger). Upon the expiration of the
lock-up
agreements, all of these shares will be available for sale in
the public market, subject (in the case of
shares held by any of these shareholders who are affiliates of
the combined company) to volume, manner of sale and other
limitations under Rule 144. Such sales in the public market
after the
lock-up
agreements expire, or the perception that such sales could
occur, could cause the market price of the combined
company’s common stock to decline.
The combined company does not anticipate paying cash
dividends and, accordingly, shareholders must rely on stock
appreciation for any return on their investment in the combined
company.
The combined company anticipates that it will retain its
earnings, if any, for future growth and therefore does not
anticipate paying cash dividends in the future. As a result,
only appreciation of the price of the combined company’s
common stock will provide a return to shareholders. Investors
seeking cash dividends should not invest in the combined
company’s common stock.
The combined company may require additional capital in the
future to finance construction or expansion of production
facilities, and financing may not be available on acceptable
terms, if at all.
The combined company may have to raise additional capital in
order to construct or expand production capacity. Additional
financing may not be available on terms that are favorable to
the combined company, or at all. A failure to obtain additional
financing could impair the combined company’s ability to
grow sales. Any inability to raise adequate funds to support its
growth plans will materially adversely affect the combined
company’s business.
This joint proxy statement/prospectus contains
“forward-looking statements” of Redhook within the
meaning of the Private Securities Litigation Reform Act of 1995,
which is applicable to Redhook because Redhook is a public
company subject to the reporting requirements of the Exchange
Act, but is not applicable to Widmer because Widmer is not a
public company and is not currently subject to the reporting
requirements of the Exchange Act. These forward-looking
statements include, but are not limited to, statements about the
benefits of the merger, including future financial and operating
results and performance; statements about Redhook’s plans,
objectives, expectations and intentions with respect to future
operations, products and services; and other statements
identified by words such as “anticipates,”“believes,”“forecast,”“potential,”“contemplates,”“expects,”“intends,”“plans,”“believes,”“seeks,”“estimates,”“could,”“would,”“will,”“may,”“can” or words of similar meaning.
The following factors, among others, could cause actual results
to differ materially from the anticipated results or other
expectations expressed in the forward-looking statements:
•
those discussed and identified in public filings with the
Securities and Exchange Commission made by Redhook;
•
the vote of Redhook shareholders on the issuance of Redhook
common stock pursuant to the merger agreement at the Redhook
annual meeting;
•
the vote of Widmer shareholders on the on the merger at the
Widmer special meeting;
•
the timing of the completion of the merger;
•
the combined company’s ability to integrate both businesses
and to achieve expected synergies, operating efficiencies and
other benefits; and
•
the expenses and other liabilities incurred or accrued between
the signing of the merger agreement and the closing of the
merger.
These forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results
contemplated by the forward-looking statements, including those
discussed in the section entitled “Risk Factors”
beginning on page 19 of this joint proxy
statement/prospectus.
Many of the important factors that will determine these results
and values are beyond Redhook’s and Widmer’s ability
to control or predict. You are cautioned not to put undue
reliance on any forward-looking statements. Except as otherwise
required by law, Redhook and Widmer do not assume any obligation
to update any forward-looking statements.
This section and the section entitled “The Merger
Agreement” in this joint proxy statement/prospectus
describe the material aspects of the merger, including the
merger agreement. While Redhook and Widmer believe that this
description covers the material terms of the merger and the
merger agreement, it may not contain all of the information that
is important to you. You should read carefully this entire joint
proxy statement/prospectus for a more complete understanding of
the merger and the merger agreement, including the merger
agreement, attached as Annex A, and the other documents to
which you are referred or that are incorporated by reference
herein.
Widmer and Redhook have had contractual relationships since 2003
when Widmer and Redhook entered into a licensing agreement for
Redhook to brew and sell Widmer Hefeweizen in the midwest
and eastern U.S. On July 1, 2004, Redhook and Widmer
entered into agreements to form and operate Craft Brands as a
joint venture of the two companies. Craft Brands purchases
products from Redhook and Widmer, and markets, advertises, sells
and distributes these products in the Western Territory (the
states of Alaska, Arizona, California, Colorado, Hawaii, Idaho,
Montana, New Mexico, Nevada, Oregon, Utah, Washington and
Wyoming) pursuant to a distribution agreement with A-B. Widmer
and Redhook are each a 50% member of Craft Brands, and each has
the right to designate two directors to its six-member board;
A-B is entitled to designate the remaining two directors. The
restated operating agreement of Craft Brands governs the
operations of Craft Brands and the obligations of its members,
including capital contributions, loans and allocations of
profits and losses.
This close working relationship through Craft Brands and the
licensing agreement for the midwest and eastern
U.S. markets led to the discussions which resulted in the
merger agreement. Because A-B not only held significant equity
positions in both Redhook and Widmer but also played a critical
role in the distribution of their products, a combination of the
two companies was the natural next step in the evolution of
their relationship. Any alternative transaction would likely
require termination of the distribution relationship with A-B.
Redhook and Widmer both believe that any such termination would
have such negative ramifications that this was not an outcome
that either company ever felt was practical or desirable. As a
result, neither company entertained possible alternative
transactions to the merger between them.
On October 13, 2005, Kurt Widmer and Robert Widmer of
Widmer and Terry Michaelson of Craft Brands met with Paul
Shipman and David Mickelson of Redhook in Centralia, Washington,
to discuss the relationship between Redhook and Widmer. During
this meeting, Mr. Michaelson advised Mr. Shipman and
Mr. Mickelson that Widmer was in discussions with investors
who were interested in acquiring a substantial stake in Widmer
and funding a proposal to acquire Redhook. Mr. Michaelson
stated that a written proposal would follow later in the year if
the discussions with the investors produced an agreement between
Widmer and the investors.
On November 3, 2005, the Widmer board of directors met and
authorized continued negotiations with Redhook regarding a
business combination transaction between the two companies. The
A-B representatives on the Widmer board abstained from voting.
At meetings of the board of Craft Brands over the next twelve
months, Mr. Michaelson advised the Redhook directors on the
Craft Brands board that there had been no progress in the
negotiations with the prospective investors in Widmer but that
discussions were continuing. Following such a discussion on
August 3, 2006, Mr. Shipman and Mr. Mickelson
came to Portland to meet on August 11, 2006 with
Mr. Michaelson. At that meeting, Mr. Michaelson
advised that the discussions with an outside investor had not
progressed, but that Widmer still hoped to present a proposal
for combining the two companies, and that the proposal was
expected to involve the purchase of Widmer stock from some of
the Widmer shareholders as well as acquisition of the stock of
Redhook.
At a meeting between Mr. Michaelson and Mr. Mickelson
on October 11, 2006, the parties discussed setting an
outside date for Widmer to make its offer. Mr. Michaelson
explained to Mr. Mickelson that
Widmer’s strong preference was to have a date in place to
complete discussions, but that any date might have to be
extended. The parties agreed to exchange additional information
and, on October 13, 2006, Mr. Mickelson provided
Mr. Michaelson with information about the future capital
expenditures that might be needed if capacity of the Redhook
breweries was to be expanded to handle Widmer product.
In November and December 2006, the attorneys for the two
companies prepared and negotiated reciprocal confidentiality and
nondisclosure agreements so the companies could exchange
information for the discussions of a combination between the two
companies.
On December 13, 2006, Widmer management reported to the
Widmer board of directors regarding the status of negotiations
regarding a potential business combination and the possibility
that the resulting entity would continue to be publicly traded.
On December 19, 2006, the Frank Clement, David Lord,
Michael Loughran and John Rogers, whom we refer to as the
Redhook independent directors, and management met in Seattle to
discuss how a transaction might happen and how to encourage
Widmer either to advance negotiations or to confirm that there
would be no combination so that Redhook could develop a new
strategic plan for itself.
On January 3, 2007, Redhook and Widmer executed reciprocal
confidentiality and nondisclosure agreements and Redhook issued
a press release announcing that the two companies were entering
into preliminary discussions regarding a possible combination.
This press release was also disclosed in a current report on
Form 8-K
filed with the Securities and Exchange Commission by Redhook on
January 5, 2007 and an amended Schedule 13D that A-B
filed with the Securities and Exchange Commission on
January 3, 2007.
This was followed by a meeting on January 9, 2007 between
Mr. Michaelson and Mr. Shipman to discuss how to carry
the discussions forward. On January 10, 2007, the Redhook
independent directors formed a Corporate Strategy Committee,
which we refer to as the CSC, to assess proposals from Widmer
and to participate with management in the negotiations. The CSC
requested Anthony Short and John Glick of A-B, who were serving
on the boards of Redhook and Widmer, to act as facilitators to
help advance discussions on ways the companies could be combined.
On February 15, 2007, an electronic document room was
established as a location for the parties to deposit and
exchange information about the two companies.
On March 21, 2007, Mr. Short and Mr. Glick met in
Seattle with Kurt Widmer, Robert Widmer and Mr. Michaelson,
and then following that meeting with the Redhook board to
discuss concepts for merging the two entities. This was followed
by a meeting, held on March 29 at the offices of Riddell
Williams, between David Mickelson and Jay Caldwell of Redhook,
the Redhook independent directors, Terry Michaelson and Rich
Shawen of Widmer, Ulrich Pilz, a financial consultant to Widmer,
and John Glick and David West of
A-B. The
attendees discussed how the operations could be combined in
light of the terms being discussed for the potential transaction.
Meetings were held on April 14, 2007 in Portland attended
by Mr. Shipman, Mr. Mickelson, Kurt Widmer, Robert
Widmer and Mr. Michaelson to discuss the details of the
proposed transaction.
On April 27, 2007, Mr. Shipman, Mr. Mickelson and
Mr. Caldwell met with the CSC to formulate a proposal to
present to Widmer for merging the two companies, which
contemplated issuing a number of shares of Redhook common stock
to be determined at a later date plus $5,000,000 in cash in
exchange for all of the issued and outstanding stock of Widmer.
Later on April 27, 2007, Messrs. Shipman, Mickelson,
Caldwell, Clement, Loughran, Michaelson and Shawen discussed at
a meeting held at the offices of Riddell Williams in Seattle the
possible scenarios in regards to the capital, organization and
board structure of the merged company. The two parties agreed to
proceed with negotiating an agreement for merger on this basis.
On May 4, 2007, Mr. Shipman, Mr. Mickelson and
Mr. Caldwell met with the CSC to review the proposal to
present to Widmer for merging the two companies, and agreed to
present a proposal to issue 6,000,000 shares of Redhook
common stock plus $25,000,000 in cash in exchange for all of the
issued and
outstanding stock of Widmer to meet Widmer’s requirements
for immediate liquidity. This proposal was then discussed by the
two parties in telephone conferences and they agreed to proceed
with negotiating an agreement for merger on this basis.
Mr. Mickelson and Mr. Michaelson had a telephone call
on June 5, 2007, on which they discussed the proposed
transaction. This was followed by meetings in Sunriver, Oregon,
on June
13-15, 2007
among Mr. Shipman, Mr. Mickelson, Mr. Michaelson
and Sebastian Pastore of Widmer, and a telephone conference on
June 26, 2007 among Mr. Mickelson, Mr. Pastore
and Mr. Caldwell of Redhook to discuss integration planning
and financial issues related to the merger. During the period
from July through September of 2007, draft merger agreements
were exchanged by the parties’ attorneys and open issues
were discussed weekly at the attorney level.
On July 23, 2007, Mr. Shipman and Michael Loughran,
Chair of the CSC, met with James Hoffmeister, retired A-B
executive, to discuss the issues presenting the most difficulty
in the negotiations, including the concern about the financing
required for the $25,000,000 cash portion of the merger
consideration and the financing required for the Widmer brewery
expansion in Portland. These issues were discussed further by
Mr. Michaelson and Mr. Mickelson on a telephone
conference on August 7, 2007 and were the subject of
meetings by the CSC for Redhook on August 21, 2007 and the
Widmer board on August 27, 2007. A commitment for debt
financing was obtained on September 4, 2007 from a money
center bank on favorable terms.
At a meeting held on September 27, 2007, the Widmer board
concluded that the proposed structure involved too much debt and
directed management to develop an alternative structure.
Widmer’s management then developed a proposal for a
stock-for-stock merger transaction which was discussed and, with
Messrs. Glick, Goeler and Short abstaining, approved at a
Widmer board meeting held on September 28. Kevin Kelly of
the Widmer board then met with the Redhook CSC in Seattle on
October 4, and presented the revised terms for the
transaction. The Redhook board met later that day and agreed,
with Messrs. Glick and Short abstaining, with the proposal
presented by the Widmer Board During the period from
October 4, 2007 through October 18, 2007, the
attorneys and parties revised the draft merger documents to
reflect the new terms.
The revised merger documents were approved, with
Messrs. Glick and Short abstaining, by the Redhook board at
a board meeting on October 18, 2007, and Redhook management
was authorized to proceed on the basis of the revised merger
agreements, subject to the completion of due diligence by the
time of the November 13, 2007 Redhook board meeting. The
revised merger documents were approved by the Widmer board on
October 19, 2007.
On November 13, 2007, at the regular quarterly board
meeting of the Redhook board, management advised the board that
the due diligence issues had been resolved. The merger agreement
was then signed by both parties and announced publicly. The
merger transaction was disclosed in a
Form 8-K
filed with the Securities and Exchange Commission on
November 13, as well as a press release issued on the same
day.
The following discussion of the parties’ reasons for the
merger contains a number of forward-looking statements that
reflect the current views of Redhook or Widmer with respect to
future events that may have an effect on future financial
performance. Forward-looking statements are subject to risks and
uncertainties. Actual results and outcomes may differ materially
from the results and outcomes discussed in the forward-looking
statements. Cautionary statements that identify important
factors that could cause or contribute to differences in results
and outcomes include those discussed in the sections entitled
“Risk Factors” and “Forward Looking
Statements” in this joint proxy statement/prospectus.
The combined company will have an annual volume that will make
it one of the largest independent craft brewing companies in the
United States. Redhook and Widmer believe that the combined
company will have the following potential advantages:
•
The merger of Redhook and Widmer is a natural extension of an
existing working relationship. In 2003, Redhook licensed the
right to produce, market and sell Widmer Hefeweizen in 27
midwest and eastern states. In 2004, the Craft Brands joint
venture was created to market and sell the products of both
companies in the western United States. The merger will permit
the combined company to extend these combined sales and
marketing efforts nationwide for all of their products. The
parties believe that this focused marketing will improve
visibility with wholesalers and will permit the wholesalers to
compete more effectively for on-premises retail exposure and
retail shelf placement for off-premises distribution.
•
While some economies of scale have been achieved through the
existing contractual relationships, the companies believe
additional efficiencies will be realized as a result of
utilization of all three breweries, the combined nationwide
sales force, and reduction of duplicate functions.
•
The nationwide sales force will enhance existing sales
relationships with Widmer’s partners, Kona Brewery LLC,
which brews Kona malt beverage products, and Fulton Street
Brewery, LLC, which brews Goose Island malt beverage products.
•
The combined company will have greater access to capital markets.
•
Acceleration of the utilization of Redhook’s tax NOL
carryforwards and other tax credits will improve cash flow.
The two companies considered a number of negative factors,
including the challenges of integrating their accounting and
information technology functions, and the higher federal and
state excise taxes that will be payable by the combined company
inasmuch as it will be entitled to only one small brewer’s
excise tax exemption while each of Redhook and Widmer is
currently entitled to one such exemption.
Redhook’s
Reasons for the Merger and Recommendation of the Redhook Board
of Directors
At a special meeting held on October 18, 2007, the Redhook
board of directors, with A-B designees Messrs. Glick and
Short abstaining, unanimously determined that the merger with
Widmer is in the best interests of Redhook and its shareholders,
adopted the merger agreement and recommended that Redhook
shareholders vote “FOR” the issuance of Redhook common
stock pursuant to the merger agreement. On November 13,2007, Redhook entered into the merger agreement with Widmer.
In reaching its decision to adopt the merger agreement and
recommend that Redhook shareholders vote to approve the issuance
of Redhook common stock pursuant to the merger agreement, the
Redhook board of directors considered a number of factors,
including the following:
•
The merger should enhance the market’s perception of the
combined company’s stock. The larger market capitalization
and anticipated greater average trading volume of the combined
company might help meet the threshold for better analyst
coverage. Elimination of the contractual relationships with
Widmer will make the stock easier for analysts and investors to
understand.
•
The combined company will have Redhook’s significant tax
NOL carryforwards and will quickly achieve a larger size, both
of which items could enhance the value of the stock.
•
The board was concerned that, if the companies did not combine
and the contractual relationships with Widmer ended, Redhook
would be faced with over-capacity in its Woodinville,
Washington, and Portsmouth, New Hampshire breweries.
The foregoing discussion is not intended to be exhaustive, but
Redhook believes it addresses the material information and
factors considered by the Redhook board of directors in its
consideration of the merger,
including factors that may support the merger as well as factors
that may weigh against it. In view of the variety of factors and
the amount of information considered, the Redhook board of
directors did not find it practicable to, and did not make
specific assessments of, quantify or otherwise assign relative
weights to, the specific factors considered in reaching its
determination. In addition, the Redhook board of directors did
not undertake to make any specific determination as to whether
any particular factor, or any aspect of any particular factor,
was favorable or unfavorable to its ultimate determination, and
individual members of Redhook’s board of directors may have
given different weights to different factors.
In considering the recommendation of the Redhook board of
directors to approve the merger agreement, Redhook shareholders
should be aware that certain executive officers and directors of
Redhook have certain interests in the merger that may be
different from, or in addition to, the interests of Redhook
shareholders generally. The Redhook board of directors was aware
of these interests and considered them when adopting the merger
agreement and recommending that Redhook shareholders vote to
approve the issuance of Redhook common stock pursuant to the
merger agreement. The interests of the Redhook directors and
executive officers are discussed in greater detail in the
section entitled “The Merger — Interests of
Redhook’s Directors and Executive Officers in the
Merger.”
Widmer’s
Reasons for the Merger and Recommendation of the Widmer Board of
Directors
At a special meeting held on October 19, 2007, the Widmer
board of directors, with A-B designees Messrs. Glick and
Goeler abstaining (Mr. Short was absent from the meeting),
unanimously determined that the merger with Redhook was in the
best interests of Widmer and its shareholders, adopted the
merger agreement and recommended that Widmer shareholders vote
“FOR” approval of the merger agreement. On
November 13, 2007, Widmer entered into the merger agreement
with Redhook.
In reaching its decision to adopt the merger agreement and
recommend that Widmer shareholders vote to approve the merger
agreement, the Widmer board of directors considered a number of
factors, including the following:
•
The merger will facilitate implementation of the national sales
strategy developed by Widmer management in consultation with
Redhook and Craft Brands, giving the combined organization the
resources to address expanded market opportunities for the broad
portfolio of beer styles and brands offered by the two
companies, with the prospect for achieving associated revenue
growth.
•
Widmer brands will have access to expanded brewing capacity
through Redhook’s Washington state and New Hampshire
production facilities and to Redhook’s sales force in the
east and midwest, offering an avenue to achieving national brand
status more quickly through efficient, less expensive access to
eastern markets, as well as eliminating the need for cumbersome
contract brewing arrangements between Widmer and Redhook.
•
The receipt by Widmer shareholders of shares in a publicly
traded company in exchange for their Widmer shares will offer
the potential for liquidity not available to shareholders in a
privately-held company.
•
The merger transaction implicitly treats the two companies as
approximately equal in value.
•
Widmer’s shareholders will have the opportunity to
participate any future growth and appreciation in market value
of the combined company.
•
Several members of current management at Widmer and Craft Brands
will have significant roles in management of the combined
organization.
•
The integration of the two companies may present substantial
difficulties in bringing together different organizational
cultures and styles.
•
Significant expenditures may be required to integrate the
financial reporting and information technology functions of the
two companies and to enable the combined entity to achieve
continued full and timely compliance with Exchange Act reporting
requirements.
The merger transaction will entail severance and other
restructuring costs estimated to total approximately
$5.7 million in 2008.
•
The merger agreement imposes restrictions on the operation of
Widmer’s business pending completion of the merger without
the prior consent of Redhook.
The foregoing discussion is not intended to be exhaustive, but
Widmer believes it addresses the material information and
factors considered by the Widmer board of directors in its
consideration of the merger, including factors that may support
the merger as well as factors that may weigh against it. In view
of the variety of factors and the amount of information
considered, the Widmer board of directors did not find it
practicable to, and did not make specific assessments of,
quantify or otherwise assign relative weights to, the specific
factors considered in reaching its determination. In addition,
the Widmer board of directors did not undertake to make any
specific determination as to whether any particular factor, or
any aspect of any particular factor, was favorable or
unfavorable to its ultimate determination, and individual
members of Widmer’s board of directors may have given
different weights to different factors.
In considering the recommendation of the Widmer board of
directors to approve the merger agreement, Widmer shareholders
should be aware that certain executive officers and directors of
Widmer have certain interests in the merger that may be
different from, or in addition to, the interests of Widmer
shareholders generally. The Widmer board of directors was aware
of these interests and considered them when adopting the merger
agreement and recommending that Widmer shareholders vote to
approve the merger agreement. The interests of the Widmer board
of directors and executive officers are discussed in greater
detail in the section entitled “The Merger —
Interests of Widmer’s Directors and Executive Officers in
the Merger.”
On November 13, 2007, at a meeting of Redhook’s board
of directors held to evaluate the proposed merger, Houlihan
Smith delivered to Redhook’s board of directors a written
opinion dated November 13, 2007, to the effect that, as of
that date and based on and subject to various assumptions,
procedures followed, matters considered and limitations
described in its opinion, the aggregate consideration to be paid
by Redhook in the merger and the other terms of the merger are
fair, from a financial point of view, to the shareholders of
Redhook. Houlihan Smith’s opinion does not address the
fairness of the merger to Widmer shareholders.
Redhook has paid Houlihan Smith a non-contingent fee of $99,000
for its services in providing the fairness opinion. Redhook has
also agreed to indemnify Houlihan Smith with respect to its
services relating to the fairness opinion. Houlihan Smith has
had no prior investment banking relationships with Redhook or
Widmer.
The aggregate merger consideration was determined through
negotiation between Redhook and Widmer and Redhook’s
decision to enter into the merger was solely that of its board
of directors. Houlihan Smith’s opinion and financial
analyses were only one of many factors considered by
Redhook’s board of directors in its evaluation of the
merger and should not be viewed as determinative of the views of
Redhook’s board of directors or management with respect to
the merger or the aggregate merger consideration.
The full text of Houlihan Smith’s opinion describes the
assumptions made, procedures followed, matters considered and
limitations on the review undertaken by Houlihan Smith. This
opinion is attached as Annex B and is incorporated into
this joint proxy statement/prospectus by reference. Houlihan
Smith’s opinion is directed only to the fairness, from a
financial point of view, to the shareholders of Redhook of the
aggregate consideration to be paid by Redhook in the merger and
the other terms of the merger. The opinion does not address the
relative merits of the merger as compared to other business
strategies or transactions that might be available to Redhook,
or Redhook’s underlying business decision to effect the
merger. The opinion does not constitute a recommendation to any
shareholder as to how such shareholder should vote or act with
respect to the merger. Holders of Redhook common stock are
encouraged to read this opinion carefully in its entirety.
The summary of Houlihan Smith’s opinion described below
is qualified in its entirety by reference to the full text of
its opinion.
reviewed the financial terms and conditions of the merger
agreement;
•
reviewed financial and other information with regard to Widmer,
including Widmer’s audited consolidated financial
statements for the fiscal years ended December 31, 2001
through December 31, 2006, Widmer’s unaudited
consolidated financial statements for the six month periods
ended June 30, 2005 and 2006, the audited financial
statements for Craft Brands for the fiscal years ended
December 31, 2005 and 2006, and other financial information
and projections prepared by Widmer;
•
reviewed publicly available financial information and other data
with respect to Redhook, including its Annual Report on
Form 10-K
for the year ended December 31, 2006, its Quarterly Reports
on
Form 10-Q
for the quarters ended March 31, 2007 and June 30,2007, and other such publicly available financial information;
•
conducted an
on-site
visit and held discussions with the senior management of Widmer
regarding, among other items, the historic performance, current
situation, and future prospects for Widmer;
•
conducted an
on-site
visit and held discussions with the senior management of Redhook
regarding the selection process conducted with regard to the
acquisition, Redhook’s decision to form a business
combination with Widmer, and Redhook’s outlook for the
future prospects of Widmer;
•
reviewed an appraisal of Widmer prepared by an independent third
party appraiser as of May 4, 2007;
•
reviewed a proposal dated as of August 15, 2007 from a
potential lender to provide credit facilities to Redhook to
finance the potential acquisition of Widmer and to complete a
facility expansion ;
•
reviewed financial and operating information with respect to
certain publicly-traded companies in the brewery industry which
Houlihan Smith believed to be generally comparable to the
business of Redhook;
•
reviewed the financial terms of certain recent business
combinations in the brewery industry specifically and in other
industries generally; and
•
performed other financial studies, analyses and investigations,
and considered such other information, as it deemed necessary or
appropriate.
In connection with its review, Houlihan Smith relied upon and
assumed, without independent verification, the accuracy,
completeness and reasonableness of the financial, legal, tax,
and other information discussed with or reviewed by it and
assumed such accuracy and completeness for purposes of rendering
its fairness opinion. In addition, Houlihan Smith did not make
any independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Widmer. Houlihan Smith
further relied upon the assurances from senior management of
both Redhook and Widmer that they were unaware of any facts that
would make the information provided to it to be incomplete or
misleading for the purposes of its fairness opinion. Houlihan
Smith has not assumed responsibility for any independent
verification of this information nor has it assumed any
obligation to verify this information.
In connection with its fairness opinion, Houlihan Smith
performed valuation analyses of Widmer on a fair market basis,
using the following methods:
•
A market valuation approach, using the guideline public company
and comparable transactions methods; and
•
An income valuation approach, applying the discounted cash flow
method.
Houlihan Smith then compared the merger consideration range
offered in the merger to Houlihan Smith’s concluded fair
market value range for Widmer in arriving at its conclusion
that, as of the date of their opinion, the merger consideration
was fair, from a financial point of view, to the shareholders of
Redhook.
Market valuation analysis — Guideline public
company. In performing its market valuation using
the guideline public company method, Houlihan Smith applied the
trading multiples of certain publicly traded
companies to Widmer to derive an indication of value. Houlihan
Smith searched the universe of publicly traded companies on
public exchanges and found five companies that met its criteria
for comparability: Houlihan Smith based this criterion on
industry similarity, focusing mainly on breweries; market
capitalization below $1 billion; historic revenue growth of
less than 20%; leverage ratio below 50%; and annual
profitability in terms of EBITDA ranging from $1 million to
$50 million. Houlihan Smith also looked for companies that
had operating structures and customers as similar to Widmer as
possible. Based on these criteria, Houlihan Smith selected the
following five publicly traded companies in the brewing
industry, which we refer to as the guideline companies: Redhook,
Pyramid Breweries, Inc. (PMID), Big Rock Brewery Income Trust
(BR.UN), Boston Beer Co. Inc. (SAM), and Mendocino Brewing Co.
Inc. (MENB). A quantitative comparison of these guideline
companies to Widmer based on revenue, growth and leverage, as of
the twelve months ended September 30, 2007, is set forth
below:
Historical Growth Rates
Revenue
EBITDA
Assets
Revenue
EBITDA
Net Income
Widmer Brothers Brewing Company
$
86,021
$
5,349
$
63,628
22.9
%
(14.5
)%
(38.5
)%
Pyramid Breweries, Inc.
48,933
1,066
34,577
(2.2
)%
(51.3
)%
NM
Big Rock Brewery Income Trust
38,646
10,146
40,769
(4.9
)%
(3.5
)%
(6.7
)%
Boston Beer Co. Inc.
314,526
41,385
175,868
19.1
%
43.1
%
28.8
%
Redhook Ale Brewery, Incorporated
38,423
772
75,323
14.7
%
77.4
%
NM
Mendocino Brewing Co. Inc.
34,397
1,388
23,841
9.6
%
NM
NM
Debt/
Debt/
Debt/
EBITDA/
Equity (%)
Total Cap%
EBITDA
Interest
Widmer Brothers Brewing Company
76.3
%
30.3
%
3
.6x
16
.8x
Pyramid Breweries, Inc.
43.5
%
30.3
%
7
.79x
1
.65x
Big Rock Brewery Income Trust
0.0
%
0.0
%
0
.00x
3,229
.14x
Boston Beer Co. Inc.
0.0
%
0.0
%
0
.00x
0
.00x
Redhook Ale Brewery, Incorporated
7.4
%
6.9
%
5
.89x
2
.24x
Mendocino Brewing Co. Inc.
3.47
%
77.7
%
9
.03x
1
.30x
Houlihan Smith believes that the population of companies
examined was of a sufficient size to provide adequate data for
comparison; therefore, Houlihan Smith does not believe it was
limited by sample size used. Houlihan Smith examined the
criteria in the tables above and Widmer’s position among
the comparables. Through this examination, Houlihan Smith found
Widmer to be toward the midpoint in the majority of these
metrics. As such, Houlihan Smith utilized a median multiple in
arriving at its value indications. Houlihan Smith found no
multiple adjustments necessary.
Houlihan Smith determined that valuations derived from multiples
of EBITDA, or earnings before interest, taxes depreciation and
amortization, and EBIT, or earnings before interest and taxes,
of the guideline companies would provide the most meaningful
indications of value. Utilizing publicly available information,
Houlihan Smith calculated twelve month median multiples of
EBITDA and EBIT for the guideline public companies as of
September 28, 2007 of 12.8 and 33.8, respectively. After
multiplying Widmer’s twelve month EBITDA and EBIT for the
period ending June 30, 2007 by these selected median
multiples, Houlihan Smith concluded an enterprise value range of
$68.4 million to $106.3 million for Widmer.
Market valuation analysis — Comparable
transactions. The comparable transactions method
is a market approach which analyzes transactions involving
companies operating in similar industries. While it is known
that no two companies are exactly alike, nor are any two
transactions structured exactly the same, consideration is given
to the similarity in capital structure, operations, size and
profitability, as well as other operating characteristics of the
target companies. Houlihan Smith searched the universe of
publicly traded companies on public exchanges and found five
relatively recent transactions within the brewery industry for
comparison. Houlihan Smith limited its selection criteria by
Standard Industrial Classification, or SIC code, specifying
breweries and brewers as the target industry, a minimum
transaction size of at least $25 million, and transactions
for which a control position was obtained. Houlihan Smith
believes that the population of
companies examined was of a sufficient size to provide adequate
data for comparison; therefore, Houlihan Smith does not believe
it was limited by sample size used. However, given Widmer’s
unique operating structure and target niche market as a craft
brewer, there was a lack of reasonable and justifiable
similarity, and therefore Houlihan Smith placed less weight on
this approach when performing its analysis than the guideline
public company method. The five comparable transactions selected
by Houlihan Smith and the transaction values are set forth in
the table below.
Implied Enterprise
Total Transaction
Value/
Implied Enterprise
Close Date
Target
Buyers
Value ($mm)
EBITDA
Value/EBIT
3/29/2007
Lakeport Brewing
Labbatt Brewing
Company
$
163.5
9.2
10.8
2/09/2005
Molson Inc.
Molson Coors
Brewing Co
$
4,994.1
11.7
13.5
10/17/2006
Sleeman Breweries
Sapporo Breweries
Limited
$
344.6
12.4
16.9
4/20/2006
Unibroue
Sleeman Breweries
$
28.1
7.9
14.7
4/11/2006
Buergerliches
Brauhaus
Ingolstadt AG
VIB Vermoegen AG
(DB:VIH)
$
25.1
26.1
102.6
In order to arrive at an enterprise value range for Widmer,
Houlihan Smith first determined the median EBITDA and EBIT
multiples of the comparable transactions, which were 11.7 and
14.7, respectively, and then compared those multiples to
Widmer’s EBITDA and EBIT for the period ending
June 30, 2007. This analysis resulted in an enterprise
value range of $46.2 million to $62.8 million for
Widmer.
Discounted cash flow analysis. Houlihan Smith
also performed a discounted cash flow analysis of Widmer, and
concluded a range of enterprise values of $71.8 million to
$91.2 million. In performing this analysis, Houlihan Smith
developed five-year projections for Widmer and performed
reasonableness tests upon these projections based on discussions
with both Redhook and Widmer management, an examination of
industry trends and growth, an analysis of economic growth
trends in general, and a review of the guideline public
companies’ historical growth rates. Houlihan Smith assumed
a discount rate of 15%, and terminal growth rate of 6%. Houlihan
Smith’s detailed financial projections for Widmer and the
fair market enterprise value of Widmer after conducting the
discounted cash flow analysis, are included in this joint proxy
statement/prospectus as an attachment to Annex B, and are
incorporated herein by reference.
Redhook believes that the projections used by Houlihan Smith for
its discounted cash flow analysis of Widmer were prepared in
good faith and on bases believed to be reasonable. However, the
projections (and the assumptions and information upon which they
are based) are forward-looking statements that are inherently
subjective, imprecise and subject to considerable uncertainties
and risks. In particular, most of the assumptions and
information upon which the projections are based relate to
future events, conditions and circumstances which cannot be
reliably predicted and over which Redhook may have little or no
control. Redhook cannot predict whether the assumptions and
other future variables upon which the projections are based will
ultimately prove to be accurate.
The projections were prepared and the underlying assumptions
were made on the basis of the information existing and available
at the time of such preparation. The projections have not been
updated, and Redhook does not intend to update the projections
or the underlying assumptions to reflect any subsequent or
future developments or otherwise. Redhook specifically disclaims
any duty to update the projections or the underlying assumptions
unless required to do so by applicable law.
The projections were not prepared in compliance with any
regulations or guidelines promulgated by the Securities and
Exchange Commission or the American Institute of Certified
Public Accountants relating to the presentation of prospective
financial information, nor were they prepared in accordance with
GAAP. Neither Redhook’s auditors nor any other independent
accountants have compiled, examined or performed any procedures
with respect to the information contained in the projections. In
addition, neither Redhook’s auditors
nor any other independent accountants have expressed any opinion
or any other form of assurance with respect to such information,
the projections or their achievability.
The inclusion of the projections should not be regarded as an
indication that Redhook, Widmer, Houlihan Smith or any other
person who received the projections considered, or now
considers, such information to be a reliable prediction of
future events, and such information should not be relied on as
such. Neither Redhook, Widmer nor Houlihan Smith has made any
representations or warranties, or provided any other assurances,
with respect to the projections or the underlying assumptions.
Each of the analyses conducted by Houlihan Smith was carried out
to provide a particular perspective of the merger. Houlihan
Smith did not form a conclusion as to whether any individual
analysis, when considered in isolation, supported or failed to
support its opinion as to the fairness to the shareholders of
Redhook of the aggregate consideration to be paid in the merger.
Houlihan Smith did not place any specific reliance or weight on
any individual analysis, but instead, concluded that its
analyses taken as a whole supported its conclusion and fairness
opinion. Accordingly, Houlihan Smith believes that its analyses
must be considered in their entirety and that selecting portions
of its analyses or the factors it considered, without
considering all analyses and factors collectively, could create
an incomplete view of the processes underlying the analyses
performed by it in connection with the preparation of the
fairness opinion.
In connection with its written opinion, Houlihan Smith reviewed
a written valuation report of Widmer as of March 31, 2007
prepared for Redhook by Corporate Advisory Associates, which we
refer to as CAA. CAA, and its principal T.S. Tony Leung, has
provided business valuation services to its clients in
connection with mergers and acquisitions, corporate
reorganizations, estate and gift tax reporting and business
litigation since 1978.
In March, 2007, the corporate strategy committee of the Redhook
board of directors, which we refer to as the CSC, retained CAA
to assist the board in determining the range of market values as
of March 31, 2007 for a 100 percent equity interest in
Widmer. Redhook agreed to pay CAA a non-contingent fee of
$25,000 for its services in providing the valuation report.
Redhook has also agreed to indemnify CAA with respect to its
services relating to the valuation report. CAA has had no prior
material relationships with Widmer or Redhook.
In connection with its report, CAA:
•
visited Widmer’s facilities in Portland, Oregon and met
with its management to discuss the business operations of Widmer
and Craft Brands Alliance LLC;
•
reviewed various financial reports prepared by Widmer
management, including Widmer’s audited financial statements
from 2002 through 2005, and draft audited statements for 2006,
unaudited financial statements for Widmer for the two months
ending February 28, 2007, financial reports for Craft
Brands for the fiscal years ended December 31, 2004 through
2006, and other financial information and projections prepared
by Widmer;
•
reviewed Widmer’s Articles of Incorporation, with
amendments, Widmer’s restated Bylaws, and the Operating
Agreement of Craft Brands;
•
reviewed material agreements of Widmer and Craft Brands,
including the Master Distributor Agreement between Widmer
Brothers Brewing Company and Anheuser-Busch, Incorporated; dated
July 1, 2004; and the Supply, Distribution, and Licensing
Agreement by and between Craft Brands Alliance LLC and Widmer
Brothers Brewing Company, dated July 1, 2004;
•
reviewed certain minutes of the Widmer board of directors;
reviewed certain property appraisals relating to Widmer property;
•
researched and reviewed certain market pricing
information; and
•
performed such other analyses and review as CAA deemed
appropriate.
In connection with its report, CAA did not independently verify
the information discussed with or reviewed by it and assumed its
accuracy and completeness of such information in all material
respects in rendering its report.
In connection with providing its report on the range of market
values as of March 31, 2007 for a 100 percent equity
interest in Widmer, CAA used the following methods of analysis:
•
a precedent transaction analysis, which looked at other
transactions of domestic craft brewing companies where control
ownership changed hands;
•
a comparable public company analysis, which involved review of
the stock price, financial information, and implied valuation
ratios of certain publicly-traded companies operating in the
domestic craft brewing industry;
•
a future projection analysis of Widmer’s projected
financial results for 2007 and 2008;
•
a valuation of Widmer on a going-concern basis; and
•
a valuation of Widmer on a net asset value basis.
Based upon its analysis, CAA concluded that the range of market
value for a 100 percent equity interest in Widmer could be
reasonably stated at $60,000,000 to $77,000,000. This range of
value considered the impact of Widmer’s brewery expansion
project and the associated debt. It also recognized the risk of
the operation before and after expansion, including the risk
that the capacity addition may not be fully utilized.
The full text of CAA’s valuation report describes the
assumptions made, procedures followed, matters considered and
limitations on the review undertaken by CAA. This report dated
May 4, 2007 is attached to this joint proxy
statement/prospectus as Annex C and is incorporated herein
by reference. CAA’s report is a summary of the material
financial analyses undertaken by CAA on behalf of the CSC. It
does not purport to be a complete description of analyses
performed by CAA. Analysis and conclusion of a range of market
value for a business ownership interest is a complex process
involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. CAA made
no attempt to assign specific weights to particular analyses or
factors considered, but rather made qualitative judgments as to
the significance and relevance of all the analyses and factors
considered. Accordingly, CAA believes that its analyses must be
considered as a whole, and that selecting portions of the
analysis or the report without considering the analyses as a
whole, could create an incomplete view of the process underlying
CAA’s report.
The merger agreement provides that at the effective time, Widmer
will be merged with and into Redhook. Upon the consummation of
the merger, Redhook will continue as the surviving corporation
and will be renamed Craft Brewers Alliance, Inc.
Merger
Consideration
Exchange
Ratio
At the effective time of the merger, each holder of shares of
common or preferred stock of Widmer will be entitled to receive,
in exchange for each share held, 2.1551 shares of Redhook
common stock. The shares of Redhook common stock that Widmer
security holders will be entitled to receive pursuant to the
merger are expected to represent approximately 50% of the
outstanding shares of the combined company immediately following
the consummation of the merger. This percentage assumes that no
security holder of Widmer exercises statutory dissenters’
rights in connection with the merger and that currently
outstanding options held
by Redhook employees, officers, directors, and former directors
to acquire 689,140 shares of Redhook common stock are not
exercised prior to consummation of the merger.
There will be no adjustment to the total number of shares of
Redhook common stock Widmer security holders will be entitled to
receive for changes in the market price of Redhook common stock.
The merger agreement does not include a price-based termination
right.
Fractional
Shares
No fractional shares of Redhook common stock will be issued in
connection with the merger. Instead, each Widmer shareholder who
would otherwise be entitled to receive a fraction of a share of
Redhook common stock, after aggregating all fractional shares of
Redhook common stock issuable to such shareholder, will be
entitled to receive in cash the dollar amount, rounded to the
nearest cent, determined by multiplying such fraction by the
closing price of Redhook common stock reported on the Nasdaq
Stock Market on the last trading day before the closing date of
the merger.
Exchange
of Certificates
Prior to the effective time of the merger, Redhook will appoint
a bank or trust company, which we refer to as the exchange
agent, to assist in the exchange of Widmer stock certificates
for certificates representing the Redhook common stock that will
be issued in the merger. The merger agreement provides that, as
soon as reasonably practicable after the closing of the merger,
Redhook will cause the exchange agent to send, to each record
holder of Widmer capital stock immediately prior to the
effective time of the merger, a letter of transmittal and
instructions for surrendering and exchanging the record
holder’s Widmer stock certificates. Upon surrender of a
Widmer stock certificate for exchange to the exchange agent,
together with a duly signed letter of transmittal and such other
documents as the exchange agent may reasonably require, the
holder of the Widmer stock certificate will be entitled to
receive the following:
•
a certificate representing the number of whole shares of Redhook
common stock that such holder has the right to receive pursuant
to the provisions of the merger agreement; and
•
cash in lieu of any fractional share of Redhook common stock.
The Widmer stock certificates surrendered will be cancelled.
At the effective time of the merger, all holders of certificates
representing shares of Widmer capital stock that were
outstanding immediately prior to the effective time of the
merger will cease to have any rights as shareholders of Widmer.
In addition, no transfer of Widmer capital stock after the
effective time of the merger will be registered on the stock
transfer books of Widmer.
If any Widmer stock certificate has been lost, stolen or
destroyed, the exchange agent may, in its discretion, and as a
condition to the delivery of a certificate representing the
shares of Redhook common stock issuable pursuant to the merger
with respect to the lost, stolen or destroyed certificate,
require the owner of such lost, stolen or destroyed certificate
to deliver an affidavit claiming such certificate has been lost,
stolen or destroyed, to post a bond indemnifying Redhook and the
exchange agent against any claim suffered related to the lost,
stolen or destroyed certificate, and to pay a handling or other
fee in an amount determined by the exchange agent in its
discretion.
From and after the effective time of the merger, until it is
surrendered, each certificate that previously evidenced Widmer
capital stock will be deemed to represent only the right to
receive shares of Redhook common stock and cash in lieu of any
fractional share of Redhook common stock. Redhook will not pay
dividends or other distributions on any shares of Redhook common
stock to be issued in exchange for any unsurrendered Widmer
stock certificate until the Widmer stock certificate is
surrendered as provided in the merger agreement.
The merger agreement requires Redhook and Widmer, unless they
agree to another time, to complete the merger no later than
three business days after all of the conditions to the merger,
as specified in the merger agreement, are satisfied or waived,
including the adoption of the merger agreement by the
shareholders of Widmer and the approval by the Redhook
shareholders of the issuance of Redhook common stock pursuant to
the merger. The merger will become effective upon the filing of
articles of merger with the Secretary of State of the State of
Washington and the Secretary of State of the State of Oregon or
at such later time as is agreed by Redhook and Widmer and
specified in the articles of merger. Redhook and Widmer
anticipate that the consummation of the merger will occur early
in the third quarter of 2008. However, because the merger is
subject to a number of conditions, neither Redhook nor Widmer
can predict exactly when the closing will occur or if it will
occur at all.
In considering the recommendation of the Redhook board of
directors with respect to issuing shares of Redhook common stock
as contemplated by the merger agreement, Redhook’s
shareholders should be aware that certain members of the board
of directors and executive officers of Redhook have interests in
the merger that may be different from, or in addition to, the
interests of Redhook’s shareholders. Redhook’s board
of directors was aware of these potential conflicts of interest
and considered them, among other matters, in reaching its
decision to approve the merger agreement and recommend that
Redhook’s shareholders approve the issuance of shares of
Redhook common stock as contemplated by the merger agreement at
the Redhook annual meeting.
John Glick and Anthony Short, who serve on Redhook’s board
of directors as designees of A-B, also serve as directors of
Widmer. Mr. Short will serve as a director of the combined
company following the merger. As of February 29, 2008,
Busch Investment Corporation, an affiliate of A-B, held of
record 2,761,713 shares of Redhook common stock, which
represented approximately 33.1% of the total number of shares of
Redhook common stock outstanding on that date. In addition,
Busch Investment Corporation held on that date
1,534,655 shares of Widmer common stock, which comprised
approximately 40.5% of the total number of shares of Widmer
common stock outstanding on that date. If the merger is
consummated and A-B does not exercise statutory dissenters’
rights, A-B will be entitled to receive 3,307,334 shares of
Redhook common stock in exchange for its Widmer shares. When
combined with existing shares of Redhook common stock held by
A-B, A-B’s aggregate holdings of Redhook common stock will
total 6,069,047 shares, or approximately 36.3% of the total
number of shares of Redhook common stock outstanding following
the merger. This percentage assumes that no security holder of
Widmer exercises statutory dissenters’ rights in connection
with the merger and that currently outstanding options to
acquire 689,140 shares of Redhook common stock are not
exercised prior to consummation of the merger.
During the course of the merger discussions between Redhook and
Widmer, A-B representatives communicated to Redhook management
that A-B concurred that a business combination between the two
companies could be beneficial to the shareholders of Redhook. In
addition, at the request of Redhook, Messrs. Glick and
Short, who also were serving as designees of A-B on the board of
Widmer, acted as facilitators to help advance discussions
regarding the parameters of integrating the business operations
and management of the two companies, both of whose products were
distributed by A-B. David West, a representative of A-B, also
participated in a portion of these discussions. However, neither
Mr. Glick, Mr. Short or Mr. West nor any other
representative of A-B participated in negotiations regarding the
economic or other terms of the merger. In addition,
Messrs. Glick and Short each abstained during Redhook board
meetings from voting and deliberations concerning the merger.
As of February 29, 2008, the directors and executive
officers of Redhook beneficially owned a total of 12.2% of the
outstanding shares of Redhook common stock.
If the merger is consummated, Paul Shipman, Redhook’s
Chairman of the Board and Chief Executive Officer, will cease to
be a director but will serve as Chairman Emeritus and provide
services as a consultant to Redhook’s board of directors
for a term of approximately one year. Upon expiration of that
term, Mr. Shipman
will receive certain severance benefits from Redhook. These
arrangements are discussed below in greater detail in the
section entitled “Agreements Related to the
Merger — Employment and Consulting
Agreements — Employment Agreement with Paul
Shipman.”
It is anticipated that, following the closing of the merger, the
combined company accounting and information systems functions
will be relocated to Portland, Oregon and a new Chief Financial
Officer will be appointed. Redhook has entered into a letter of
agreement with Jay T. Caldwell, its current Chief Financial
Officer and Treasurer, under which he will be paid a base salary
of $15,000 per month, which will increase to $20,000 if his
services are required after June 30, 2008. Redhook has
subsequently notified Mr. Caldwell that it expects to
require his services until August 15, 2008. Under the
agreement, Mr. Caldwell is also eligible for a specified
bonus and is entitled to one year of severance, based on a
salary of $15,000 per month, and certain other benefits if his
employment is terminated by Redhook without cause. This
agreement is discussed below in greater detail in the section
entitled “Agreements Related to the Merger —
Employment and Consulting Agreements — Other
Employment and Consulting Agreements.”
One of the conditions to closing under the merger agreement is
that Redhook enter into employment agreements with certain of
the other individuals who will serve as executive officers of
the combined company following the merger. Redhook anticipates
entering into a letter agreement with David Mickelson that will
provide for at-will employment at a specified base salary and
with a specified bonus opportunity and severance entitlement.
Two individuals resigned as executive officers of Redhook in
February 2008. However, each has agreed to remain as a
non-executive employee of Redhook for a period of time. At the
end of the respective period for each individual, he will
receive severance equal to a specified number of months of his
base salary, together with certain other benefits, provided that
he executes a release and agrees not to compete with the
combined company for a period of one year thereafter. These
arrangements are discussed below in greater detail in the
section entitled “Agreements Related to the
Merger — Employment and Consulting
Agreements — Other Employment and Consulting
Agreements.”
In considering the recommendation of the Widmer board of
directors with respect to approval of the merger agreement by
Widmer’s shareholders at the Widmer special meeting,
Widmer’s shareholders should be aware that certain members
of the board of directors and executive officers of Widmer have
interests in the merger that may be different from, or in
addition to, the interests of Widmer’s shareholders.
Widmer’s board of directors was aware of these potential
conflicts of interest and considered them, among other matters,
in reaching its decision to approve the merger agreement and the
merger and to recommend that Widmer’s shareholders approve
the merger agreement at the Widmer special meeting.
John Glick, Andrew Goeler and Anthony Short serve on
Widmer’s board of directors as designees of
A-B.
Messrs. Glick and Short also serve as directors of Redhook.
Messrs. Goeler and Short will serve as directors of the
combined company following the merger. Busch Investment
Corporation, an affiliate of A-B, is a significant shareholder
of Widmer and also a significant shareholder of Redhook, as
discussed above in greater detail in the section entitled
“The Merger — Interests of Redhook’s
Directors and Executive Officers in the Merger.”
During the course of the merger discussions between Redhook and
Widmer, A-B representatives communicated to Widmer management
that A-B concurred that a business combination between the two
companies could be beneficial to the shareholders of Widmer. In
addition, Messrs. Glick and Short, who also were serving as
designees of A-B on the board of Redhook, acted as facilitators
to help advance discussions regarding the parameters of
integrating the business operations and management of the two
companies, both of whose products were distributed by A-B. David
West, a representative of A-B, also participated in a portion of
these discussions. However, neither Mr. Glick,
Mr. Goeler, Mr. Short or Mr. West nor any other
representative of A-B participated in negotiations regarding the
economic or other terms of the merger. In addition,
Messrs. Glick, Goeler and Short each abstained during
Widmer board meetings from voting and deliberations concerning
the merger.
Terry Michaelson, who is currently the President of Craft Brands
and will be Co-Chief Executive Officer of the combined company,
is a party to agreements under which he will receive certain
compensation if the merger is completed. Under a stock transfer
agreement, Kurt and Robert Widmer have agreed to transfer to
Mr. Michaelson before the closing of the merger a total of
13,600 of their shares of Widmer common stock. In addition,
pursuant to a second amended and restated consulting agreement
dated as of January 31, 2008, Widmer has agreed that
immediately prior to completion of the merger it will pay
Mr. Michaelson $288,000 in cash and issue to him
8,120 shares of Widmer common stock. For a period of one
year following the merger, Mr. Michaelson will be
prohibited from selling or otherwise transferring the shares of
Redhook common stock he receives in the merger in exchange for
these 8,120 shares of Widmer common stock.
As of February 29, 2008, directors and executive officers
of Widmer beneficially owned a total of 43.4% of the outstanding
shares of Widmer common stock. Also as of that date, A-B
beneficially owned 40.5% and the sister of Kurt and Robert
Widmer beneficially owned 5.9% of the outstanding shares of
Widmer common stock. Beneficial ownership percentages include
Widmer common stock that will be transferred and issued to Terry
Michaelson prior to the closing of the merger, as described
above.
One of the conditions to closing under the merger agreement is
that Redhook enter into employment agreements with certain
employees of Widmer and Craft Brands who will serve as employees
of the combined company following the merger. Redhook
anticipates entering into agreements with Kurt Widmer, Robert
Widmer, Terry Michaelson, Timothy McFall, Sebastian Pastore and
Martin Wall that, effective as of the closing of the merger,
will provide for employment of each of these individuals at
specified base salaries with specified bonus opportunities and
severance entitlements. The agreements with Kurt Widmer and
Robert Widmer will have a term of approximately two years, and
the agreements with the other individuals will provide for
at-will employment.
Redhook and Widmer have each agreed to use commercially
reasonable efforts in order to obtain all regulatory approvals
required in order to consummate the merger. These approvals
include consents and authorizations relating to the regulation
of alcoholic beverages that must be obtained from various
federal and state agencies.
In the United States, Redhook must comply with applicable
federal and state securities laws and the rules and regulations
of the Nasdaq Stock Market in connection with the issuance of
shares of Redhook common stock and the filing of this joint
proxy statement/prospectus with the Securities and Exchange
Commission. As of the date hereof, the registration statement of
which this joint proxy statement/prospectus is a part has not
become effective.
Although neither Redhook nor Widmer expects regulatory
authorities to raise any significant objections in connection
with their review of the merger, neither Redhook nor Widmer can
assure you that they will obtain all required regulatory
approvals or that these regulatory approvals will not contain
terms, conditions or restrictions that would be detrimental to
the combined company after the completion of the merger.
The following discussion summarizes the material
U.S. federal income tax considerations of the merger that
are expected to apply generally to Widmer shareholders upon an
exchange of their Widmer common or preferred stock for Redhook
common stock in the merger. This summary is based upon current
provisions of the Code, existing Treasury Regulations, and
current administrative rulings and court decisions, all of which
are subject to change and to differing interpretations, possibly
with retroactive effect. Any change could alter the tax
consequences to Redhook, Widmer, or the shareholders of Widmer,
as described in this summary. This
summary is not binding on the Internal Revenue Service, which we
refer to as the IRS, and there can be no assurance that the IRS
(or a court, in the event of an IRS challenge) will agree with
the conclusions stated herein.
This summary applies only to a Widmer shareholder that is a
“U.S. person,” defined to include:
•
a citizen or resident of the United States;
•
a corporation created or organized in or under the laws of the
United States, or any political subdivision thereof (including
the District of Columbia);
•
an estate the income of which is subject to U.S. federal
income taxation regardless of its source;
•
a trust if either a court within the United States is able to
exercise primary supervision over the administration of such
trust and one or more U.S. persons have the authority to
control all substantial decisions of such trust, or the trust
has a valid election in effect to be treated as a
U.S. person for U.S. federal income tax
purposes; and
•
any other person or entity that is treated for U.S. federal
income tax purposes as if it were one of the foregoing.
For purposes of this discussion, any Widmer shareholder that is
neither a “U.S. person” as defined above nor an
entity that is treated as a partnership or disregarded entity
for U.S. federal income tax purposes is, , a
“non-U.S. person.”
No attempt has been made to comment on all U.S. federal
income tax consequences of the merger that may be relevant to
particular holders of Widmer common or preferred stock that are
subject to special treatment under U.S. federal income tax
laws, including, without limitation:
•
dealers, brokers, and traders in securities;
•
non-U.S. persons;
•
tax-exempt entities;
•
financial institutions, regulated investment companies, real
estate investment trusts, or insurance companies;
•
partnerships, limited liability companies that are not treated
as corporations for U.S. federal income tax purposes,
subchapter S corporations, and other pass-through entities
and investors in such entities;
•
holders who are subject to the alternative minimum tax
provisions of the Code;
•
holders who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory
transactions;
•
holders who hold shares that constitute small business stock
within the meaning of Section 1202 of the Code;
•
holders with a functional currency other than the
U.S. dollar;
•
holders who hold their shares as part of an integrated
investment such as a hedge or as part of a hedging, straddle, or
other risk reduction strategy; or
•
holders who do not hold their shares as capital assets within
the meaning of Section 1221 of the Code (generally,
property held for investment will be a capital asset).
If an entity treated as a partnership for U.S. federal
income tax purposes holds Widmer common or preferred stock, the
tax treatment of a person holding interests in that entity
generally will depend upon the status of that person and the
activities of that entity. Such entities and persons holding
interests in such entities should consult a tax advisor
regarding the tax consequences of the merger.
the tax consequences of the merger under U.S. federal
non-income tax laws or under state, local, or foreign tax laws;
•
the tax consequences of transactions effectuated before, after,
or at the same time as the merger, whether or not they are in
connection with the merger, including, without limitation,
transactions in which Widmer shares are acquired or Redhook
shares are disposed of;
•
the tax consequences of the receipt of Redhook shares other than
in exchange for Widmer shares;
•
the tax consequences of the ownership or disposition of Redhook
shares acquired in the merger; or
•
the tax implications of a failure of the merger to qualify as a
reorganization within the meaning of Section 368(a) of the
Code.
Accordingly, holders of Widmer common and preferred stock are
advised and expected to consult their own tax advisors regarding
the U.S. federal income tax consequences of the merger in
light of their personal circumstances and the consequences of
the merger under U.S. federal non-income tax laws and
state, local, and foreign tax laws.
The opinion of Riddell Williams P.S., corporate counsel for
Redhook, regarding the U.S. federal income tax consequences
of the merger to holders of Widmer common and preferred stock is
attached as Exhibit 8.1 to the registration statement of
which this joint proxy statement/prospectus is a part. The
opinion concludes, subject to the limitations, qualifications,
assumptions and caveats set forth therein, that the merger will
be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code. No ruling
has been or will be requested from the IRS in connection with
the merger.
Assuming that the merger will be treated for U.S. federal
income tax purposes as a reorganization within the meaning of
Section 368a of the Code, the following material
U.S. federal income tax consequences will result:
•
Redhook, Widmer and the Redhook shareholders will not recognize
any gain or loss solely as a result of the merger.
•
Shareholders of Widmer will not recognize any gain or loss upon
the receipt of solely Redhook common stock for their Widmer
common or preferred stock, other than with respect to cash
received in lieu of fractional shares of Redhook common stock.
•
The aggregate tax basis of the shares of Redhook common stock
received by a Widmer shareholder in the merger (including any
fractional share deemed received, as described below) will be
equal to the aggregate tax basis of the shares of Widmer common
and preferred stock surrendered in exchange therefor.
•
The holding period of the shares of Redhook common stock
received by a Widmer shareholder in the merger will include the
holding period of the shares of Widmer common and preferred
stock surrendered in exchange therefor.
•
Generally, cash payments received by Widmer shareholders in lieu
of fractional shares of Redhook common stock will be treated as
if such fractional shares were issued in the merger and then
sold. A shareholder of Widmer who receives a cash payment in
lieu of a fractional share will recognize gain or loss equal to
the difference, if any, between the shareholder’s basis in
the fractional share and the amount of cash received. The gain
or loss will be a capital gain or loss and will be long term
capital gain or loss if the Widmer common or preferred stock is
held by the shareholder as a capital asset at the effective time
of the merger and the shareholder’s holding period for his,
her, or its Widmer common or preferred stock is more than one
year.
Each Widmer shareholder that owned at least one percent (by vote
or value) of the total outstanding stock of Widmer is required
to attach a statement to the shareholder’s federal income
tax return for the year in which the merger occurs that contains
the information listed in Treasury Regulations
Section 1.368-3(b).Such
statement must include the shareholder’s tax basis in the
shareholder’s Widmer common and preferred stock and the
fair market value of such stock.
For purposes of the above discussion of the bases and holding
periods for shares of Widmer common or preferred stock and
Redhook common stock, shareholders who acquired different blocks
of Widmer common or preferred stock at different times for
different prices must calculate their gains and losses and
holding periods separately for each identifiable block of such
stock exchanged, converted, cancelled, or received in the merger.
The above discussion does not apply to Widmer shareholders who
properly perfect dissenters’ rights. Generally, a Widmer
shareholder who perfects dissenters’ rights with respect to
such shareholder’s shares of Widmer common or preferred
stock will recognize capital gain or loss equal to the
difference between such shareholder’s tax basis in those
shares and the amount of cash received in exchange for those
shares.
Certain noncorporate Widmer shareholders may be subject to
backup withholding, at a rate of 28% for 2008, on cash received
pursuant to the merger. Backup withholding will not apply,
however, to a Widmer shareholder who (1) furnishes a
correct taxpayer identification number and certifies that the
Widmer shareholder is not subject to backup withholding on IRS
Form W-9
or a substantially similar form, (2) provides a
certification of foreign status on an appropriate
Form W-8
or successor form, or (3) is otherwise exempt from backup
withholding. If a Widmer shareholder does not provide a correct
taxpayer identification number on IRS
Form W-9
or a substantially similar form, the Widmer shareholder may be
subject to penalties imposed by the IRS. Amounts withheld, if
any, are generally not an additional tax and may be refunded or
credited against the Widmer shareholder’s U.S. federal
income tax liability, provided that the Widmer shareholder
timely furnishes the required information to the IRS.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR DISCUSSION OF
ALL OF THE MERGER’S POTENTIAL TAX EFFECTS. WIDMER
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
TAX RETURN REPORTING REQUIREMENTS, AND THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX
LAWS.
Under Oregon law, holders of Widmer common stock are entitled to
dissenters’ rights in connection with the merger. Holders
of Redhook common stock and Widmer preferred stock do not have
dissenters’ rights. The dissenters’ rights of holders
of Widmer common stock are governed by the provisions of
Section 60.551 to Section 60.594 of the OBCA, a copy
of which is attached to this joint proxy statement/prospectus as
Annex D. Under these provisions of the OBCA, holders of
Widmer common stock who comply with the applicable statutory
procedures are entitled to receive a judicial appraisal of the
fair value of their shares (excluding any appreciation or
depreciation in anticipation of the merger, unless exclusion
would be inequitable) and to receive payment of such fair value
in cash, together with accrued interest. Any such judicial
determination of the fair value of the shares could be based
upon factors other than, or in addition to, the consideration to
be paid in the merger. The value so determined could be more or
less than the value of the consideration payable in the merger.
Failure to follow the steps required by the OBCA for perfecting
dissenters’ rights may result in the loss of such rights.
To perfect dissenters’ rights, a shareholder must send or
deliver a written notice of dissent to Widmer prior to the vote
on the merger at the special meeting and must not vote in favor
of the merger. If the shareholder does not provide written
notice of dissent before the meeting, the shareholder is not
entitled to payment for the shareholder’s shares.
If the merger agreement is approved, Widmer will deliver a
written dissenters’ notice to all shareholders who have
satisfied the requirements described above. The notice will be
sent no later than 10 days after the special
shareholders’ meeting. The notice will, among other things,
state where the payment demand must be sent and where and when
stock certificates, if any, must be deposited, and will include
a form for demanding payment. The form will include the date of
the first announcement of the terms of the merger and will
require certification as to whether or not the dissenter
acquired beneficial ownership before that date. The
dissenters’
notice will also set a date by which Widmer must receive the
payment demand. The date will not be fewer than 30 nor more than
60 days following the date Widmer delivers the written
dissenters’ notice as described above. The notice will also
include a copy of applicable provisions of the OBCA.
A shareholder receiving a dissenters’ notice must demand
payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth
in the dissenters’ notice, and deposit stock certificates,
if any, in accordance with the terms of the notice. A
shareholder who does not properly and timely satisfy these
requirements will not be entitled to payment for his or her
shares under the dissenters’ rights statutes and will
instead receive the merger consideration.
Upon its receipt of a proper and timely payment demand, Widmer
will pay each dissenter the amount that Widmer estimates to be
the fair value of such dissenter’s shares, plus accrued
interest. The payment will be accompanied by, among other
things, a copy of Widmer’s balance sheet and income
statement, a statement of the estimate of the fair value of the
shares, an explanation of how interest was calculated, and a
copy of the applicable provisions of the OBCA.
Within 30 days of Widmer’s offer, a dissenter may
notify Widmer in writing of the dissenter’s own estimate of
the fair value of the shares and the amount of interest due. The
dissenter may then reject Widmer’s offer and demand payment
of the dissenter’s estimate under the following limited
conditions: (i) if the dissenter believes that
Widmer’s offer is less than the fair value of the
dissenter’s shares or that Widmer has incorrectly
calculated the interest, (ii) if Widmer fails to make
payment within 60 days of the date set for demanding
payment, or (iii) if Widmer does not act on the merger and
fails to return the deposited certificates within 60 days
after the date set for demanding payment.
If a demand for payment remains unsettled, Widmer will commence
a proceeding within 60 days after receiving the
dissenter’s payment demand and petition the court to
determine the fair market value of the shares and accrued
interest.
The foregoing summary of the rights of dissenting shareholders
under the OBCA does not purport to be complete and is qualified
in its entirety by reference to the OBCA. The preservation and
exercise of dissenters’ rights, if any, require strict
adherence to the applicable provisions of the OBCA.
Any failure to follow the steps required by the OBCA for
perfecting dissenters’ rights may result in the loss of
such rights.
The following is a summary of the material terms of the
merger agreement. A copy of the merger agreement is attached as
Annex A to this joint proxy statement/prospectus and is
incorporated by reference into this joint proxy
statement/prospectus. The merger agreement has been attached to
this joint proxy statement/prospectus to provide you with
information regarding its terms. It is not intended to provide
any other factual information about Redhook or Widmer. The
following description does not purport to be complete and is
qualified in its entirety by reference to the merger agreement.
You should refer to the full text of the merger agreement for
details of the merger and the terms and conditions of the merger
agreement.
The merger agreement contains representations and warranties
that Redhook and Widmer have made to one another as of specific
dates. The assertions embodied in the representations and
warranties are qualified by information in confidential
disclosure schedules exchanged by the parties in connection with
signing the merger agreement. While Redhook and Widmer do not
believe that these disclosure schedules contain information
required to be publicly disclosed under applicable securities
laws, other than information that has already been so disclosed,
the disclosure schedules do contain information that qualifies
and creates exceptions to the representations and warranties set
forth in the attached merger agreement. Accordingly, you should
not rely on the representations and warranties as current
characterizations of factual information about Redhook or Widmer
because they were made as of specific dates, may be intended
merely as a risk allocation mechanism between Redhook and Widmer
and are modified by the disclosure schedules.
Widmer will merge with and into Redhook, with Redhook continuing
as the surviving corporation under the new name Craft Brewers
Alliance, Inc., which we refer to as CBAI.
The merger will close on a date agreed upon by Redhook and
Widmer not more than three business days after the date on which
the last of the conditions provided in the merger agreement is
satisfied or waived.
The effective time of the merger will be the date and time
mutually agreed upon by Redhook and Widmer and specified in the
articles of merger filed with the Secretary of State of the
State of Washington and the Secretary of State of the State of
Oregon.
Merger
Consideration
At the effective time of the merger, Widmer security holders
will be entitled to receive the number of shares of Redhook
common stock calculated by multiplying 2.1551 times the number
of Widmer shares that are then outstanding, excluding any
dissenting Widmer shares (i.e., those for which dissenters’
rights have been exercised under the OBCA). The shares of
Redhook common stock will be allocated among the holders of
Widmer common stock and the holders of Widmer Series D
preferred stock as follows:
•
Each outstanding share of Widmer common stock that has not
exercised dissenters’ rights will be canceled and converted
into, and represent the right to receive, 2.1551 shares of
Redhook common stock.
•
Each outstanding share of Widmer Series D preferred stock
will be canceled and converted into, and represent the right to
receive, 2.1551 shares of Redhook common stock.
•
Each share of Widmer common stock that has exercised
dissenters’ rights will be converted into the right to
receive payment from CBAI in accordance with the OBCA.
No fractional shares of Redhook common stock will be issued by
virtue of the merger. Instead, each Widmer security holder
otherwise entitled to receive a fractional share of Redhook
common stock will receive a cash payment, rounded to the nearest
cent, equal to such fraction multiplied by the closing price of
Redhook common stock on the Nasdaq Stock Market on the last
trading day before the closing date of the merger.
The shares of Redhook common stock to be issued in the merger
will be equal to approximately 50% of the outstanding shares of
the combined company immediately following the consummation of
the merger. This percentage assumes that no security holder of
Widmer exercises dissenters’ rights in connection with the
merger and that currently outstanding options held by Redhook
employees, officers, directors and former directors to acquire
689,140 shares of Redhook common stock are not exercised
prior to consummation of the merger.
At the effective time of the merger, the Redhook articles of
incorporation will be amended to change the name of the
corporation to Craft Brewers Alliance, Inc. The Redhook bylaws
in effect immediately prior to the effective time of the merger
will be the bylaws of the combined company.
Effective as of the closing of the merger, the combined
company’s board of directors will consist of a total of two
current Redhook independent directors, two directors designated
by A-B and three directors designated by Widmer. The Widmer
designees who will join the combined company’s board of
directors are: Kurt Widmer, who will serve as Chairman of the
Board, Timothy Boyle and Kevin Kelly. The other four directors
will be David Lord and John Rogers, Jr. and A-B designated
directors Andrew Goeler and Anthony Short. Messrs. Lord,
Rogers and Short currently serve as Redhook directors.
Mr. Goeler has been designated by A-B to replace John
Glick, who currently serves as one of the A-B designated Redhook
directors. Paul Shipman, Redhook’s Chairman of the Board
and Chief Executive Officer, will cease to be a director but
will serve as Chairman Emeritus for a period of approximately
one year. Frank Clement, John Glick and Michael Loughran, who
currently serve as Redhook directors, also will not continue as
directors following the merger.
Effective as of the closing of the merger, the officers of the
combined company will be as follows:
Co-Chief Executive Officer
Terry E. Michaelson
Co-Chief Executive Officer
David J. Mickelson
Chief Financial Officer and Treasurer
Jay T. Caldwell
Chief Accounting Officer
Mark D. Moreland
Vice President of Marketing
Timothy G. McFall
Vice President of Brewing Operations and Technology
V. Sebastian Pastore
Vice President of Sales
Martin J. Wall, IV
Vice President of Corporate Quality Assurance and
Industry Relations and Assistant Secretary
Each party’s obligation to complete the merger is subject
to the satisfaction or waiver by each of the parties, at or
prior to the merger, of various conditions, which include the
following:
•
The registration statement on
Form S-4,
of which this joint proxy statement/prospectus is a part, must
have become effective in accordance with the Securities Act and
must not be subject to any stop order or proceeding, or any
proceeding threatened by the Securities and Exchange Commission,
seeking a stop order.
•
The issuance of shares of Redhook common stock in connection
with the merger must have been duly approved by the affirmative
vote of a majority of the total votes cast on the proposal.
•
The shares of Redhook common stock to be issued in connection
with the merger must have been approved for listing on the
Nasdaq Stock Market.
No statute, rule, or regulation enacted or promulgated, nor any
action, suit, or proceeding pending or threatened before any
court or quasi judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree,
stipulation, ruling, or charge would: (A) prevent
consummation of the merger, or any other transaction or
agreement contemplated by the merger agreement; or
(B) cause the merger, or any other transaction or agreement
contemplated by the merger agreement, to be rescinded following
consummation (and no such judgment, order, decree, stipulation,
injunction, ruling or charge shall be in effect).
•
Employment agreements between Redhook and the following
individuals must have been duly executed and delivered by the
parties thereto: Kurt Widmer, Robert Widmer, Terry Michaelson,
David Mickelson, Timothy McFall, Martin Wall, and Sebastian
Pastore.
•
Widmer’s shareholders must have duly approved the merger.
In addition, each party’s obligation to complete the merger
is further subject to the satisfaction or waiver by that party
of the following additional conditions:
•
All representations and warranties of the other party in the
merger agreement must be true and correct in all material
respects as of the closing date of the merger with the same
force and effect as if made on that date, except to the extent
such representations and warranties are expressly made only as
of an earlier date, in which case as of such earlier date.
•
The other party to the merger agreement must have given all
notices, made all filings and obtained all authorizations,
consents, and approvals required by the merger agreement.
•
The other party must have given all notices, made all filings,
and obtained all authorizations, consents, and approvals that
relate to the regulation of alcoholic beverages and that are
required by any governmental authority to be given, made, or
obtained by that other party in order to consummate the merger.
•
The other party’s board of directors must have duly
approved the merger.
•
The other party must have delivered a certificate executed by
its Chief Executive Officer and Secretary on behalf of that
party stating that certain conditions specified in the merger
agreement have been satisfied in all respects.
•
The other party must have performed and complied in all material
respects with its covenants and obligations under the merger
agreement.
In addition, the obligation of Redhook to complete the merger is
subject to the satisfaction or waiver by Redhook, at or prior to
the closing, of each of the following conditions:
•
The total number of Widmer shares held by Widmer shareholders
who have exercised dissenters’ rights must be less than 5%
of the outstanding Widmer shares.
•
Widmer must have provided Redhook with certified copies of
resolutions of Widmer’s board of directors and shareholders
authorizing the execution and delivery of the merger agreement
and the consummation of the merger.
•
There must not have been any statute, rule, or regulation
enacted or promulgated, nor any action, suit, or proceeding
pending or threatened before any court or quasi judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, stipulation, ruling, or
charge would adversely affect Redhook’s right to own its
assets and to operate its businesses (and no such injunction,
judgment, order, decree, stipulation, ruling, or charge must be
in effect).
•
Redhook must have received confirmation that any title policies
for Widmer real property that Redhook has requested will be
issued.
Non-competition and non-solicitation agreements between Redhook
and Kurt Widmer and Robert Widmer must have been duly executed
and delivered to Redhook. The terms of these non-competition and
non-solicitation agreements are summarized under
“Agreements Related to the Merger” below.
•
Shareholder
lock-up
agreements between Redhook and each of the following Widmer
security holders must have been duly executed and delivered to
Redhook: Kurt Widmer, Robert Widmer, Ann Widmer, Barbara Widmer,
Timothy Boyle and Kristen Maier-Lenz. The terms of these
shareholder
lock-up
agreements are summarized under “Agreements Related to the
Merger” below.
•
Redhook must have received satisfactory evidence from A-B of
A-B’s waiver of its rights under the two Master Distributor
Agreements between A-B and Widmer dated June 6, 2006, and
July 1, 2004, respectively, to terminate those agreements
as a result of consummation of the merger.
•
Widmer must have entered into long-term leases for certain
parcels of real property.
•
Redhook must have received satisfactory evidence from Widmer
that Goose Holdings, Inc., and Fulton Street Brewery, LLC, have
each consented to the merger and have agreed to enter into an
amended operating agreement for Fulton Street Brewery, LLC after
the closing date of the merger.
•
Redhook must have received an opinion letter dated as of the
closing date from Miller Nash LLP, corporate counsel for Widmer,
regarding certain corporate and other matters in connection with
the merger.
•
Widmer must have delivered to Redhook: (i) a certificate of
existence of Widmer issued by the Oregon Secretary of State;
(ii) a certified copy of Widmer’s articles of
incorporation and bylaws; and (iii) a tax certification in
form and substance reasonably satisfactory to Redhook.
•
All actions to be taken by Widmer in connection with
consummation of the merger and all certificates, opinions,
instruments, and other documents required to effect the merger
must be reasonably satisfactory in form and substance to Redhook.
In addition, the obligation of Widmer to complete the merger is
further subject to the satisfaction or waiver by Widmer, at or
prior to the closing, of each of the following conditions:
•
Redhook and Paul Shipman must have entered into a consulting
agreement. The terms of this consulting agreement are summarized
under “Agreements Related to the Merger” below.
•
Paul Shipman must have tendered his resignation from all officer
positions with Redhook as of the effective date of the merger.
•
Paul Shipman and two of Redhook’s independent directors
must have tendered their resignations as directors of Redhook as
of the effective date of the merger.
•
Widmer must have received an opinion letter from Riddell
Williams P.S., corporate counsel for Redhook, regarding certain
corporate and other matters in connection with the merger.
•
Redhook must have delivered to Widmer a certificate of existence
of Redhook issued by the Washington Secretary of State.
•
All actions to be taken by Redhook in connection with
consummation of the merger and all certificates, opinions,
instruments, and other documents required to effect the merger
must be reasonably satisfactory in form and substance to Widmer.
Redhook and Widmer have each agreed to use commercially
reasonable efforts to take all actions and to do all things
necessary, proper, or advisable in order to consummate the
merger in accordance with the terms of the merger agreement.
Each of Redhook and Widmer has agreed to give the notices to
third parties and governmental authorities, and to use
commercially reasonable efforts to obtain or make the filings,
authorizations, consents, and approvals for which it is
responsible under the merger agreement. Each party has also
agreed that it will not make any agreements or understandings
adversely affecting it or its business or assets in any material
way as a condition to obtaining any such authorizations,
consents, or approvals, except with the prior written consent of
the other party.
Regulatory
Matters and Approvals
Redhook has agreed to prepare a registration statement and joint
proxy statement/prospectus on
Form S-4
and file it with the Securities and Exchange Commission in
connection with the issuance of Redhook common stock in the
merger. In connection with the registration statement and the
joint proxy statement/prospectus, Widmer has agreed to prepare
and furnish all information concerning itself as may be required
or reasonably requested by Redhook, including information
relating to it and its directors, officers, and shareholders.
Widmer and its counsel must cooperate with and assist Redhook
and its counsel in the preparation of these documents. Widmer
must also cooperate with Redhook and Redhook’s counsel,
financial advisor, and accountants in requesting and obtaining
appropriate opinions, consents, and letters from its independent
registered public accounting firm.
Redhook has agreed to use all reasonable efforts to cause the
registration statement to be declared effective under the
Securities Act as promptly as reasonably practicable after its
filing. The parties have agreed that after the registration
statement is declared effective under the Securities Act, each
will, at its own expense, promptly mail the joint proxy
statement/prospectus to its shareholders.
Redhook and Widmer have each agreed to give all notices, make
all filings, and obtain all authorizations, consents, and
approvals that relate to the regulation of alcoholic beverages
and that are required by any governmental authority to be given,
made, or obtained by that particular party in order to
consummate the merger.
Operation
of Business
Each party has agreed that, except as expressly agreed to in
writing, after the date of the merger agreement it will conduct
its business in the same manner as before, and only in the
ordinary course consistent with past practice. Each party has
agreed to use its commercially reasonable efforts to preserve
its business organization and keep available the services of its
current officers and employees, to the end that its goodwill and
ongoing business will not be impaired at the closing date in any
material respect. During such time, each party has agreed that,
unless expressly agreed to in writing, it will not:
•
institute any new methods of operation, purchase, sale, lease,
management, or accounting (except as may be required under
GAAP), or engage in any transaction or activity other than in
the ordinary course of business consistent with past practice;
purchase, issue, sell, transfer, pledge, dispose of, grant any
option in or encumber any shares of its capital stock or other
securities;
•
declare, set aside or pay any dividend or other distribution
payable in cash, stock or property with respect to any shares of
its capital stock or other securities;
•
split, combine or reclassify any shares of its capital stock or
other securities;
•
redeem, purchase or otherwise acquire directly or indirectly any
shares of its capital stock or other securities;
•
purchase or otherwise invest in any securities issued by any
entity;
organize any subsidiary or acquire any capital stock or other
equity securities, or equity or ownership interest in the
business of any other entity;
•
modify, amend or terminate any of its material contracts, waive,
release or assign any material rights or claims thereunder, or
fail to continue to perform its obligations thereunder;
•
other than in the ordinary course of business consistent with
past practice:
•
incur or assume any indebtedness;
•
modify the terms of any indebtedness or other liability;
•
assume, guarantee, endorse or otherwise become liable or
responsible for the obligations of any other person or entity;
•
make any loans, advances, or capital contributions to, or
investments in, any other person or entity;
dispose of any material intellectual property or fail to perform
any acts which permit to lapse any rights to any material
intellectual property;
•
dispose of any assets (other than inventory) with a value in
excess of $100,000;
•
incur or create any encumbrance on any assets which,
collectively, have a value in excess of $100,000 in the
aggregate;
•
fail to maintain its assets in good working order in the
ordinary course of business;
•
purchase or lease assets other than in the ordinary course of
business consistent with past practice and for fair
consideration;
•
adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization;
•
take any action:
•
that would or is reasonably likely to result in any of the
conditions to the closing (summarized above) not being satisfied;
•
that would make any representation or warranty of the party
inaccurate in any material respect at the closing date;
•
that would result in a breach of the merger agreement in any
material respect;
•
or that would materially impair the party’s ability to
consummate the merger or materially delay such consummation;
•
adopt or amend any employee benefit plan, or enter into or make
any change in the compensation payable or to become payable to
any of its officers or directors, or any other employees of the
party, except in the ordinary course of business consistent with
past practice or as required by applicable law;
•
enter into or amend any contract with any of its officers or
directors;
•
enter into or make any loans to any of its officers, directors,
employees, affiliates, agents or consultants or make any change
in its existing borrowing or lending arrangements for or on
behalf of any of such persons;
•
enter into any settlement, conciliation, or similar agreement,
the performance of which will involve payment or receipt of
consideration in excess of $25,000 or place restrictions on the
conduct of its business;
•
fail to maintain or permit to lapse or expire any professional
license or registration required for the conduct of its business
or its performance of any material contract;
enter into any agreement, contract, or arrangement to do any act
referred to above, or authorize, recommend, propose, or announce
an intention to do any of those acts.
The parties have agreed that the following changes will not
constitute a breach of this covenant:
•
changes resulting from developments or occurrences relating to
or affecting the United States economy in general or the craft
brewing industry in general; and
•
changes resulting from actions taken by the parties prior to the
closing that are in furtherance of the merger but that have an
effect on the business of a party, including any disruptions to
the business of a party as a result of the execution of the
merger agreement, the announcement by the parties of the
proposed merger, or the consummation of the merger.
Shareholder
Approval
Redhook has agreed to take, in accordance with applicable law
and Redhook’s articles of incorporation and bylaws, all
action necessary to convene as soon as practicable a meeting of
its shareholders to consider and vote upon the approval of the
issuance of Redhook common stock pursuant to the merger, and any
other matters required to be approved by Redhook’s
shareholders for consummation of the merger.
Widmer has agreed to take, in accordance with applicable law and
Widmer’s articles of incorporation and bylaws, all action
necessary to convene as soon as practicable a meeting of its
shareholders to consider and vote upon the approval of the
merger agreement and any other matters required to be approved
by Widmer’s shareholders for consummation of the merger.
Subject to fiduciary obligations under applicable law, each
party has agreed that its board of directors will, at all times
prior to and during such meetings, recommend approval of the
merger, and that each party will take all reasonable lawful
action to solicit such approval by its shareholders.
Other
Covenants
Each party has agreed to permit representatives of the other
party to have full access, at all reasonable times and in a
manner so as not to unreasonably interfere with normal business
operations, to all premises, properties, books, records,
contracts, and documents of or pertaining to the disclosing
party, including access to the party’s independent
accountants. Each party will also authorize its accountants to
release all information reasonably requested by the other party
in connection with its review of that party. But, neither party
is permitted to contact the other party’s customers,
employees, or suppliers in relation to the merger agreement,
except by prior approval of the other party.
Each party will provide the other party with copies of its
monthly financial statements beginning with the month of October
2007 within 30 days following the end of each month through
the closing date. The disclosing party is not required to
provide access to or to disclose information where such access
or disclosure would violate or prejudice the rights of that
party’s customers, jeopardize the attorney-client privilege
or contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior
to the date of the merger agreement. But, the disclosing party
will use all commercially reasonable efforts to obtain any
necessary authorizations or consents from its customers to
provide the other party full access to such information. Subject
to the terms and conditions of nondisclosure agreements signed
by both parties, the party receiving such information will treat
and hold it as confidential.
Each party has agreed to give prompt written notice to the other
of any material breach of any of its covenants contained in the
merger agreement or in other agreements contemplated by the
merger.
Redhook has agreed, to the extent it deems necessary, to obtain
title insurance commitments, policies, endorsements, and riders
with respect to any of Widmer’s owned and leased real
property.
Redhook has agreed to use its reasonable best efforts to list
the shares of Redhook common stock to be issued to the Widmer
shareholders on the Nasdaq Stock Market prior to the effective
date of the merger.
Both parties have agreed to cooperate to select and engage a new
Chief Financial Officer with substantial public company
experience in accounting and finance.
Redhook has agreed to maintain, for a period of three years
after the closing, director and officer insurance coverage
insuring the directors and officers of Widmer currently insured
by Widmer’s existing director and officer policies, with
the same scope of coverage and subject to the same deductibles
and limits.
Redhook has agreed that each employee of Widmer or Craft Brands
who is retained in the service of Redhook after the closing will
be eligible to participate in all of the benefit plans of
Redhook that are generally available to similarly situated
employees of Redhook in accordance with and subject to the terms
of such plans. Redhook has agreed that, for purposes of
participation in Redhook’s benefit plans, current
employees’ prior service with Widmer or Craft Brands will
constitute prior service with Redhook for purposes of
determining eligibility and vesting (including vacation time).
Termination
Either party may terminate the merger agreement at any time
before closing as follows.
•
The parties may terminate the merger agreement by mutual written
consent.
•
Either party may terminate the merger agreement by giving
written notice to the other party if any of the following are
true:
•
The other party has breached a covenant contained in the merger
agreement in any material respect, the terminating party has
notified the other party of the breach, and the breach has
continued without cure for a period of 10 days after the
notice of breach.
•
There is an applicable law that makes consummation of any
transaction contemplated by the merger illegal or otherwise
prohibited, or any final judgment, injunction, order, or decree
permanently enjoining any of the parties from consummating such
transaction is entered.
•
The closing has not occurred on or before August 1, 2008,
and the terminating party is not in default of any of its
obligations under the merger agreement.
•
Either party may terminate the agreement if it is notified by
A-B that A-B will not consent to the merger.
If either party properly terminates the merger agreement, all
rights and obligations of the parties thereunder terminate
without any liability of either party to the other party (except
for any liability of any party then in breach). The
confidentiality provisions contained in the merger agreement and
the nondisclosure agreements, and the fee and expense provisions
summarized below, survive termination. If the merger agreement
is terminated by a party because of a breach of the merger
agreement by the other party, the terminating party’s right
to pursue all legal remedies also survives such termination
unimpaired.
Each party is solely responsible for paying its own costs and
expenses (including its respective advisors, accountants and
attorneys’ fees and expenses) incurred in connection with
the merger agreement, whether or not the closing occurs. If the
merger agreement is terminated prior to closing, the costs
associated with obtaining any title policies will be shared
equally by Redhook and Widmer.
Amendments to the merger agreement must be evidenced by a
written instrument duly executed and delivered by Redhook and
Widmer. Any further amendment made after shareholder approval is
subject to the restrictions contained in the WBCA and the OBCA.
As a condition under the merger agreement to the obligation of
Redhook to consummate the merger, each of Kurt Widmer, Robert
Widmer, Ann Widmer, Barbara Widmer, Timothy Boyle and Kristen
Maier-Lenz must execute
lock-up
agreements with Redhook, pursuant to which such holders will
agree not to, directly or indirectly, sell, offer, contract to
sell, sell any option to contract to purchase (including any
short sale), purchase any option or contract to sell, pledge,
transfer, grant any option, right, or warrant for the sale of,
establish or increase an open “put equivalent
position,” liquidate or decrease a call equivalent
position, or otherwise dispose of any of the shares of Redhook
common stock received by each such holder following the closing
of the merger, subject to certain permitted exceptions, during
the period starting on the date of the
lock-up
agreement and ending on the first anniversary of the effective
date of the merger. This restriction has been designed to
preclude these Widmer shareholders from engaging in any hedging
or other transaction that is designed to or reasonably expected
to lead to or result in a disposition of Redhook common stock
during the
lock-up
period, even if such common stock would be disposed of by
someone other than such holder.
As of April 30, 2008, the shareholders of Widmer who will
enter into
lock-up
agreements as required by the merger agreement collectively
owned 1,815,057 shares of common stock of Widmer. The
shares of Redhook common stock that these Widmer shareholders
will be entitled to receive pursuant to the merger are expected
to represent approximately 46.8% of the total number of shares
of Redhook common stock issued pursuant to the merger. This
percentage assumes that no security holder of Widmer exercises
dissenters’ rights in connection with the merger.
On November 19, 2007, Redhook and Paul S. Shipman, Chief
Executive Officer and Chairman of the Board of Redhook, entered
into a letter agreement, which was substantially amended and
restated on February 13, 2008. We refer to this letter
agreement as the Shipman agreement. The Shipman agreement is the
“consulting agreement” referred to in the merger
agreement and its execution is a condition to the obligation of
Widmer to consummate the merger. The term of the Shipman
agreement commences on the effective date of the merger and ends
on the last day of the month in which the first anniversary of
the effective date occurs. The terms of Mr. Shipman’s
current letter of agreement regarding employment, dated
June 23, 2005, will remain in effect until the effective
date of the Shipman agreement.
The Shipman agreement provides that Mr. Shipman will cease
to serve as Chief Executive Officer on the effective date, at
which time he will receive all bonuses due under the current
letter of agreement, prorated through the effective date of the
Shipman agreement, as well as payments for accrued but unused
vacation and sick leave. During the term of the Shipman
agreement, Mr. Shipman will be employed as a consultant to
the combined company’s board with the title Chairman
Emeritus, and will render consulting services as directed by the
board of directors of the combined company. Mr. Shipman
will receive a minimum base salary of $90,000 per year for his
services during the term. For any services rendered by
Mr. Shipman in excess of 180 days, Redhook will
compensate Mr. Shipman at a rate of $500 per day. The
combined company will also provide Mr. Shipman with four
weeks of vacation, retirement, and other fringe benefits
provided to other similarly situated executive employees.
After the term of the Shipman agreement ends, or in the event
the Shipman agreement is terminated early. Mr. Shipman will
be paid severance of $267,800 per year for two years in
accordance with Redhook’s standard payroll policies.
Mr. Shipman will also be paid for any vacation and sick
leave that accrues during the term but is not used. For two
years following the termination date of the Shipman agreement,
the combined company will also pay the monthly premium for
continuation of coverage under the combined company’s
health care plans (COBRA). Redhook estimates that the total
value of the severance payments payable to Mr. Shipman in
connection with his termination will be approximately $567,000.
For three years following the termination date of the Shipman
agreement, Mr. Shipman will make himself available for
consultation at $500
per day, during which period, and for an additional 90 days
thereafter, certain of the unexercised stock options held by
Mr. Shipman will not expire in accordance with his option
agreements.
The Shipman agreement also addresses the conditions under which
Mr. Shipman would be paid if the Shipman agreement were
terminated early. The Shipman agreement also includes a
non-compete covenant, which continues for a period of three
years following the termination of the Shipman agreement.
Other
Employment and Consulting Agreements
In November 2007, in anticipation of the merger, Redhook entered
into a letter of agreement with Jay T. Caldwell, its Chief
Financial Officer and Treasurer, under which he is paid a base
salary of $15,000 per month, which will increase to $20,000 if
his services are required after June 30, 2008 (Redhook
subsequently notified Mr. Caldwell that it expects to
require his services until August 15, 2008). Under the
agreement, Mr. Caldwell is also eligible for an annual
bonus equal to 20% of his base salary, subject to approval by
Redhook’s board of directors upon recommendation of its
compensation committee. Upon termination of his employment
without cause, Mr. Caldwell will be entitled to a lump-sum
severance payment equal to twelve months base salary, based on a
salary of $15,000 per month, plus accrued vacation and sick pay,
and reimbursement of COBRA premiums for twelve months or until
he finds new employment with comparable health care coverage.
Payment of severance is subject to Mr. Caldwell signing a
release in a form satisfactory to Redhook. The release will
include a six-month non-competition component for employment in
the craft beer brewing business.
Gerald Prial, who had served as Redhook’s Vice President,
Sales and Eastern Operations, resigned that position effective
February 8, 2008. Redhook and Mr. Prial have agreed
that Mr. Prial will remain as a non-executive employee of
Redhook and receive a monthly base salary of $14,333 until
August 31, 2008 or his earlier termination by Redhook. Upon
termination, Mr. Prial will be entitled to a lump-sum
severance payment equal to sixteen months base salary, plus
accrued vacation and sick pay, and reimbursement of COBRA
premiums for sixteen months or until he finds new employment
with comparable health care coverage. Payment of severance is
subject to Mr. Prial signing a release in a form
satisfactory to the company. The release will include a
twelve-month non-competition component for employment in the
craft beer brewing business.
Allen Triplett, who had served as Redhook’s Vice President
of Brewing, resigned that position on February 12, 2008,
effective as of March 1, 2008. Redhook and
Mr. Triplett have agreed that Mr. Triplett will remain
as a non-executive employee of Redhook and receive a monthly
base salary of $14,333 until June 30 2008 or his earlier
termination by Redhook. Upon termination, Mr. Triplett will
be entitled to a lump-sum severance payment equal to
twenty-three months base salary, plus accrued vacation and sick
pay, and reimbursement of COBRA premiums for eighteen months or
until he finds new employment with comparable health care
coverage. Payment of severance is subject to Mr. Triplett
signing a release in a form satisfactory to the company. The
release will include a twelve-month non-competition component
for employment in the craft beer brewing business.
Terry Michaelson, who is currently the President of Craft Brands
and will be Co-Chief Executive Officer of the combined company,
is a party to agreements under which he will receive certain
compensation if the merger is completed. Under one of these
agreements, Kurt and Robert Widmer have agreed to transfer to
Mr. Michaelson before the closing of the merger a total of
13,600 of their shares of Widmer common stock. In addition,
pursuant to a second amended and restated consulting agreement
dated as of January 31, 2008, Widmer has agreed that
immediately prior to completion of the merger it will pay
Mr. Michaelson $288,000 in cash and issue to him
8,120 shares of Widmer common stock. For a period of one
year following the merger, Mr. Michaelson will be
prohibited from selling or otherwise transferring the shares of
Redhook common stock he receives in the merger in exchange for
these 8,120 shares of Widmer common stock.
One of the conditions to closing under the merger agreement is
that Redhook enter into employment agreements with certain other
individuals who will serve as employees of the combined company
following the merger. Redhook anticipates entering into
agreements with Kurt Widmer, Robert Widmer, David Mickelson,
Terry Michaelson, Timothy McFall, Sebastian Pastore and Martin
Wall that will provide for
employment of each of these individuals at fixed base salaries
with specified bonus opportunities and severance entitlements.
The agreements with Kurt Widmer and Robert Widmer will have a
term of approximately two years and the agreements with the
other individuals will provide for at-will employment.
Under the terms of the merger agreement, the two Widmer
founders, Kurt Widmer and Robert Widmer, will become employees
of the combined company. As a condition under the merger
agreement to the obligation of Redhook to consummate the merger,
each founder must execute a non-competition and non-solicitation
agreement with the combined company, pursuant to which each
founder must not, during the period ending on the third
anniversary of the date of termination of the founder’s
employment by the combined company:
•
directly or indirectly engage in the manufacturing, advertising,
marketing, sale or distribution, whether for himself or for
others, of any malt beverage, soda beverage, or alcoholic
beverage product, in North America;
•
directly or indirectly (except on behalf of the combined
company), solicit or encourage any employees of the combined
company to leave employment with the combined company or enter
into an employment or service arrangement with a competitive
business;
•
hire or enter into any service arrangement with any combined
company employees; or
•
solicit or encourage any customer or potential customer of the
combined company to limit, restrict, or cease use of the
combined company’s services or products related to malt
beverages, soda beverages, or alcoholic beverage products
Redhook, Widmer, and A-B are currently negotiating changes to
the documents governing the parties’ relationship which, if
embodied in a document executed and delivered by all parties in
a form consistent with Widmer’s and Redhook’s current
expectations based on discussions with A-B will result in the
following:
•
A-B will consent to the consummation of the transactions
contemplated by the merger agreement.
•
A-B will agree that the execution of the merger agreement and
the consummation of the transactions contemplated by the merger
agreement will not constitute an event of default under the
Redhook, Widmer or Craft Brands distribution agreements or the
Redhook exchange and recapitalization agreement.
•
The following documents will be terminated upon consummation of
the merger:
•
the Exchange and Recapitalization Agreement, dated June 30,2004, between Widmer and A-B;
•
the Master Distributor Agreement, dated July 1, 2004,
between Widmer and A-B;
The Exchange and Recapitalization Agreement dated June 30,2004, between Redhook and A-B will be amended to, among other
things:
•
change the threshold amounts triggering restrictions on
Redhook’s ability, without A-B’s consent, to acquire
or invest in assets or businesses related to the production or
distribution of malt beverage products or to dispose of all or a
portion of its assets other than as part of a sale-leaseback
transaction; and
•
prohibit Redhook from taking any action that would cause A-B to
own 50 percent or more of Redhook’s outstanding common
stock.
The annual meeting of Redhook shareholders will be held on
June 24, 2008, at Redhook’s principal executive
offices located at 14300 NE 145th Street, Suite 210,
Woodinville, Washington
98072-6950
commencing at 2:00 p.m. local time. Redhook is sending this
joint proxy statement/prospectus to its shareholders in
connection with the solicitation of proxies by the Redhook board
of directors for use at the Redhook annual meeting and any
adjournments or postponements of the annual meeting. This joint
proxy statement/prospectus is first being furnished on or about
May 13, 2008 to all shareholders of record as of the close
of business on May 5, 2008.
1. To elect seven directors to serve until the 2009 Annual
Meeting of Shareholders or until their earlier retirement,
resignation or removal;
2. To consider and vote upon a proposal approving the
issuance of Redhook common stock pursuant to the merger
agreement;
3. To ratify the appointment of Moss Adams LLP as
Redhook’s independent registered public accounting firm for
the fiscal year ending December 31, 2008; and
4. To transact such other business as may properly come
before the Redhook annual meeting or any adjournment or
postponement thereof.
The Redhook board of directors has determined and believes that
it is advisable to, and in the best interests of Redhook and its
shareholders that each named nominee serve as a member of
Redhook’s board of directors until the 2009 Annual Meeting
of Shareholders or until their earlier retirement, resignation
or removal. The Redhook board of directors unanimously
recommends that Redhook shareholders vote “FOR” each
named nominee.
•
The Redhook board of directors has determined and believes that
the issuance of shares of Redhook common stock pursuant to the
merger is advisable to, and in the best interests of, Redhook
and its shareholders. The Redhook board of directors has
approved the merger agreement and recommends that Redhook
shareholders vote “FOR” approval of the issuance of
shares of Redhook common stock pursuant to the merger.
•
The Redhook board of directors has determined and believes that
it is advisable to, and in the best interests of Redhook and its
shareholders, to ratify the appointment of Moss Adams LLP as
Redhook’s independent registered public accounting firm for
the fiscal year ending December 31, 2008. The Redhook board
of directors unanimously recommends that Redhook shareholders
vote “FOR” the ratification of the appointment of Moss
Adams LLP.
Only holders of record of Redhook common stock at the close of
business on the record date, May 5, 2008, are entitled to
notice of, and to vote at, the Redhook annual meeting. At the
close of business on the record date, 8,380,239 shares of
Redhook common stock were issued and outstanding. There were
approximately 671 holders of record of Redhook common stock
at the close of business on the record date. Because many of
such shares are held by brokers and other institutions on behalf
of others, Redhook is unable to estimate the total number of
beneficial owners represented by these record holders.
In deciding all matters at the meeting, other than Redhook
Proposal No. 1 to elect seven directors, each
shareholder is entitled to one vote for each share of Redhook
common stock held on the record date. For Redhook
Proposal No. 1, the election of directors, cumulative
voting applies, so the number of votes each shareholder will
have will be equal to the number of shares held on the record
date multiplied by seven, the number of directors to be elected.
Each shareholder may cast all such votes for a single nominee,
distribute them among the seven nominees for directors equally,
or distribute them among the seven nominees in any other way the
shareholder deems fit. If a shareholder voting by proxy wishes
to distribute votes among the nominees for director, he or she
may do so on the enclosed proxy card in the space provided. If
votes are not distributed on the proxy card, the persons named
as proxies will use their discretion to distribute such votes
FOR each of the seven individuals nominated to serve as director.
See the section entitled “Principal Shareholders of
Redhook” beginning on page 145 of this joint proxy
statement/prospectus for information regarding persons known to
the management of Redhook to be the beneficial owners of more
than 5% of the outstanding shares of Redhook common stock.
The proxy accompanying this joint proxy statement/prospectus is
solicited on behalf of the board of directors of Redhook for use
at the Redhook annual meeting.
If you are a shareholder of record of Redhook as of the record
date referred to above, you may vote in person at the Redhook
annual meeting or vote by proxy using the enclosed proxy card.
Whether or not you plan to attend the Redhook annual meeting,
Redhook urges you to vote by proxy to ensure that your vote is
counted. You may still attend the Redhook annual meeting and
vote in person even if you have already voted by proxy.
•
To vote in person, come to the Redhook annual meeting and
Redhook will give you a ballot when you arrive.
•
To vote using the proxy card, simply mark, sign and date your
proxy card and return it promptly in the postage-paid envelope
provided. If you return your signed proxy card to Redhook before
the Redhook annual meeting, Redhook will vote your shares as you
direct.
If your Redhook shares are held by your broker as your nominee
(that is, in street name), you will need to obtain a proxy card
from the institution that holds your shares and follow the
instructions included on that proxy card regarding how to
instruct your broker to vote your Redhook shares. If you do not
give instructions to your broker, your broker can vote your
Redhook shares with respect to a “discretionary” item
but not with respect to a “non-discretionary” item. A
discretionary item is a proposal considered routine under the
rules of the New York Stock Exchange on which a broker may vote
shares held in street name in the absence of voting
instructions. A non-discretionary item is a proposal which is
not considered routine under the rules of the New York
Stock Exchange and on which a broker may not vote shares held in
street name in the absence of voting instructions. On a
non-discretionary item for which you do not give your broker
instructions, the Redhook shares will be treated as broker
non-votes. In the absence of timely directions, brokerage firms
and other intermediaries generally will have discretion to vote
their customers’ shares in the election of directors and on
the proposal to ratify the appointment of Moss Adams LLP, but it
is anticipated that the proposal to approve the issuance of
Redhook common stock pursuant to the merger agreement will be a
non-discretionary item.
All properly executed proxies that are not revoked will be voted
at the Redhook annual meeting and at any adjournments or
postponements of the Redhook annual meeting in accordance with
the instructions contained in the proxy. If a holder of Redhook
common stock executes and returns a proxy and does not specify
otherwise, the shares represented by that proxy will be voted
“FOR” Redhook Proposal No. 1 for the
election of all nominees for director; “FOR” Redhook
Proposal No. 2 to approve the issuance of Redhook
common stock pursuant to the merger agreement; and
“FOR” Redhook Proposal No. 3 to ratify the
appointment of Moss Adams LLP as Redhook’s independent
registered public accountants for the fiscal year ending
December 31, 2008.
Redhook shareholders of record may change their vote at any time
before their proxy is voted at the Redhook annual meeting in one
of three ways. First, a shareholder of record of Redhook can
send a written notice to the Secretary of Redhook stating that
the shareholder would like to revoke the proxy. Second, a
shareholder of record of Redhook can submit new proxy
instructions on a new proxy card. Third, a shareholder of record
of Redhook can attend the Redhook annual meeting and vote in
person. Attendance alone will not revoke a proxy. If your shares
of Redhook stock are held in “street name” and you
have instructed a bank, broker or other nominee to vote your
shares of Redhook common stock, you must follow directions
received from your broker to change those instructions.
The presence, in person or represented by proxy, at the Redhook
annual meeting of the holders of a majority of the shares of
Redhook common stock outstanding and entitled to vote at the
Redhook annual meeting is necessary to constitute a quorum at
the meeting. Abstentions and broker non-votes will be counted
towards a quorum.
If a quorum exists at the meeting, the seven nominees for
director who receive the greatest number of votes cast in the
election of directors will be elected (Redhook
Proposal No. 1). Redhook Proposal No. 2 to
approve the issuance of Redhook common stock pursuant to the
merger agreement and Redhook Proposal No. 3 to ratify
the appointment of auditors will be approved if the number of
votes cast in favor of the proposal exceed the number of votes
cast against it. Votes will be counted by the inspector of
election appointed for the meeting, who will separately count
“For” and “Against” votes, abstentions and
broker non-votes. If a brokerage firm or other intermediary
votes its customers’ shares on some but not all proposals,
the effect of the non-vote will vary depending on the proposal.
A non-vote for a nominee for director will make it less likely
that the nominee will be one of the seven nominees for director
who receive the greatest number of votes cast. A non-vote on the
proposal to ratify the appointment of Moss Adams LLP or approve
the issuance of Redhook common stock pursuant to the merger
agreement will have no effect, since approval of those proposals
is based solely on the number of votes actually cast.
At the record date for the Redhook annual meeting, the directors
and executive officers of Redhook owned approximately 5.8% of
the outstanding shares of Redhook common stock entitled to vote
at the Redhook annual meeting. In addition, A-B owned at the
record date approximately 33% of the outstanding shares of
Redhook common stock entitled to vote at the Redhook annual
meeting.
Redhook will bear the expense of preparing, printing and
distributing proxy materials to its shareholders. In addition to
solicitation by mail, the directors, officers, employees and
agents of Redhook may solicit proxies from Redhook’s
shareholders by personal interview, telephone, telegram or
otherwise. Redhook will pay the costs of the solicitation of
proxies by Redhook from Redhook’s shareholders.
Arrangements will also be made with brokerage firms and other
custodians, nominees and fiduciaries who are record holders of
Redhook common stock for the forwarding of solicitation
materials to the beneficial owners of Redhook common stock.
Redhook will reimburse these brokers, custodians, nominees and
fiduciaries for the reasonable
out-of-pocket
expenses they incur in connection with the forwarding of
solicitation materials.
As of the date of this joint proxy statement/prospectus, the
Redhook board of directors does not know of any business to be
presented at the Redhook annual meeting other than as set forth
in the notice accompanying this joint proxy
statement/prospectus. If any other matters should properly come
before the Redhook annual meeting, it is intended that the
shares represented by proxies will be voted with respect to such
matters in accordance with the judgment of the persons voting
the proxies.
Seven directors are to be elected at the Redhook annual meeting
to serve until the next Redhook annual meeting of shareholders,
or until their earlier retirement, resignation or removal. Frank
Clement, John Glick, David Lord, Michael Loughran, John
Rogers, Jr., Paul Shipman and Anthony Short have been
nominated by the Redhook board of directors for election or
re-election at the annual meeting. All of the nominees are
currently directors of Redhook. The accompanying Redhook proxy
will be voted for these nominees, except where authority to so
vote is withheld. Should any nominee be unable to serve, the
persons named in the proxy may vote for any substitute
designated by the Redhook board of directors.
If the merger is consummated, effective as of the closing date
of the merger and in accordance with the merger agreement,
Messrs. Shipman, Clement, Glick and Loughran will resign as
directors of Redhook and the combined company’s board of
directors will consist of John Rogers and David Lord, two of the
Redhook independent directors (as defined by Nasdaq Marketplace
Rule 4200(a)(15)) elected at the annual meeting, Anthony
Short and Andrew Goeler, the two A-B designated directors, and
three directors designated by Widmer. The Widmer designees who
will join the combined company’s board of directors are:
Kurt Widmer, who will serve as Chairman of the Board, Timothy
Boyle, and Kevin Kelly. Mr. Goeler has been designated by
A-B to replace John Glick on the combined company’s board
of directors. Following the merger, a majority of the board of
directors of the combined company will be composed of
independent directors (as defined by Nasdaq Marketplace
Rule 4200(a)(15)).
THE REDHOOK BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
REDHOOK’S SHAREHOLDERS VOTE “FOR” EACH OF THE
NAMED DIRECTOR NOMINEES.
Information
Regarding the Redhook Board of Directors and Corporate
Governance
The business of Redhook is currently managed under the direction
of the Redhook board of directors, which consists of the
following seven directors: Paul Shipman, Frank Clement, John
Glick, David Lord, Michael Loughran, John Rogers, Jr. and
Anthony Short.
The full Redhook board of directors met five times during
Redhook’s fiscal year ended December 31, 2007. No
incumbent member attended fewer than 75% of the total number of
meetings of the Redhook board of directors and of any board
committees of which he was a member during that fiscal year.
Redhook directors are encouraged to attend the Redhook annual
meeting of shareholders. At the 2007 annual meeting, five
Redhook directors and nominees for director were in attendance.
Director
Independence
In November 2003, the National Association of Securities
Dealers, which we refer to as the NASD, amended Nasdaq
Marketplace Rule 4350(c) to require a majority of the board
of directors of a listed company to be comprised of independent
directors, as defined in NASDAQ Rule 4200(a)(15). Current
nominees Messrs. Clement, Lord, Loughran and Rogers are
non-executive directors of Redhook, do not have any relationship
described in Nasdaq Marketplace Rule 4200(a)(15) that would
disqualify them as independent directors and, in the opinion of
the Redhook board of directors, do not have any other
relationship that would interfere with their exercise of
independent judgment in carrying out their responsibilities as
directors. Therefore, the Redhook board of directors believes
that Messrs. Clement, Lord, Loughran and Rogers are
“independent directors” as defined by Nasdaq
Marketplace Rule 4200(a)(15). The Redhook board of
directors believes that Messrs. Glick and Short, who are
non-executive directors, have a relationship as A-B designees to
the Redhook board of directors that makes them non-independent
under the standards of Nasdaq Marketplace Rule 4200(a)(15).
All independent Redhook directors meet in executive session, at
which only independent Redhook directors are present, at least
twice a year, in conjunction with a regularly scheduled board
meeting.
Seven directors are to be elected at the Redhook annual meeting
to serve until the next Redhook annual meeting of shareholders,
or his retirement, resignation or removal. Frank Clement, John
Glick, David Lord, Michael Loughran, John Rogers, Jr., Paul
Shipman and Anthony Short have been nominated by the Redhook
board of directors for election or re-election at the annual
meeting. All of the nominees are currently directors of Redhook.
The accompanying Redhook proxy will be voted for these nominees,
except where authority to so vote is withheld. Should any
nominee be unable to serve, the persons named in the proxy may
vote for any substitute designated by the Redhook board of
directors.
Frank H. Clement (66). Mr. Clement has
served as a director of Redhook since March 1989. He is a
retired Vice President of Investments at UBS Financial Services
(formerly UBS Paine Webber), a registered broker dealer, in
Seattle, Washington, where he was employed from 1975 to March
2002. From 1995 through 1999, he served on the Advisory Board of
the Institute of Brewing Studies in Boulder, Colorado.
Mr. Clement serves on the Dean’s Advisory Board for
the School of Management and on the National Alumni Association
Board, both for S.U.N.Y. at Buffalo, Buffalo, New York. Since
July 2004, Mr. Clement has served as a director of Craft
Brands Alliance LLC.
If the merger with Widmer is consummated, Mr. Clement will
resign as a director effective as of the effective time of the
merger. See “Directors Following the Merger” below.
John W. Glick (44). Mr. Glick has served
as a director of Redhook since September 2005. Mr. Glick
has worked with the Business and Wholesaler Development group at
A-B since April 2000, serving as Senior Director, Business
Development since December 1, 2006 and Senior Manager of
Business Development since September 2005. He has also held
positions in the Business Planning and Brewery Operations groups
at A-B. Prior to joining A-B’s Executive Development
Program in 1992, Mr. Glick held multiple engineering and
manufacturing operations positions at General Motors. He
received a Master’s degree in Business Administration from
Indiana University and a Bachelor of Science from GMI
Engineering & Management Institute in Flint, Michigan.
Mr. Glick has served as a director of Widmer and as a
director for Kirin Brewery of America since April 2004.
Mr. Glick is one of two directors on Redhook’s board
of directors designated by A-B; see “Certain Transactions
of Redhook” below.
If the merger with Widmer is consummated, Mr. Glick will
resign as director, and Andrew Goeler, who has been designated
by A-B, will replace Mr. Glick as one of the A-B designated
Redhook directors. See “Directors Following the
Merger” below.
Michael Loughran (50). Mr. Loughran has
served as a director of Redhook since May 2005.
Mr. Loughran is the President of Kiket Bay Group, LLC, a
financial consulting and independent equity research firm formed
by him in November 2003. From March 2005 to March 2006,
Mr. Loughran served as Senior Vice President and equity
analyst for First Washington Corporation, a registered broker
dealer in Seattle, Washington. From August 2002 to March 2005,
Mr. Loughran was employed by Crown Point Group and its
affiliate, the Robins Group, a registered broker dealer in
Portland, Oregon, serving most recently as Vice President and
equity analyst for the Robins Group. From November 2001 to
August 2002, Mr. Loughran served as a financial consultant.
Mr. Loughran received a Bachelor’s degree in Economics
from Princeton University in 1980 and a Master’s degree in
Business Administration from the University of Pennsylvania,
Wharton School, in 1986.
If the merger with Widmer is consummated, Mr. Loughran will
resign as a director effective as of the effective time of the
merger. See “Directors Following the Merger” below.
David R. Lord (59). Mr. Lord has served
as a director of Redhook since May 2003. He has been the
President of Pioneer Newspapers, Inc., headquartered in Seattle,
Washington, since 1991. Pioneer Newspapers owns seven daily
newspapers and nine weekly, semi-weekly and monthly publications
in the western United States. Prior to joining Pioneer
Newspapers, Mr. Lord practiced law at Ferguson and Burdell,
a Seattle firm specializing in business litigation, and was a
criminal deputy prosecuting attorney for King County,
Washington. Mr. Lord is president elect of the
PAGE Co-op
board of directors, a director on the Associated Press board of
directors, the Job Network LLC board of directors, the Newspaper
Association of America
board of directors, American Press Institute board of directors,
and a former chairman of the Inland Press Association.
John D.
Rogers, Jr. (64). Mr. Rogers has
served as a director of Redhook since May 2004. He currently
serves as Managing Partner of J4 Ranch LLC. Mr. Rogers
served as President, Chief Executive Officer and director of
Door to Door Storage, Inc. in Kent, Washington from June 2004 to
June 2007. Mr. Rogers was a director of NW Parks Foundation
from November 2003 to December 2006. From 1996 to 2002, he was
President and Chief Operating Officer of AWC, Inc. From 1993 to
1996, he was General Manager of British Steel Alloys and from
1986 to 1992, he was President of Clough Industries. Previous
positions held by Mr. Rogers include President and Chief
Executive Officer of Saab Systems Inc., NA, and National
Industry Manager for Martin Marietta Aluminum of Bethesda,
Maryland, following an appointment as a Sloan Fellow to M.I.T.
Graduate School of Business where he graduated with a Masters of
Science in Business Administration. Mr. Rogers earned a
Master’s degree in Business Administration from Southern
Methodist University and a Bachelor’s degree from the
University of Washington.
Paul S. Shipman (55). Mr. Shipman is one
of Redhook’s founders and has served as its Chairman of the
Board since November 1992, and as its Chief Executive Officer
since June 1993. From September 1981 to November 2005,
Mr. Shipman served as Redhook’s President. Prior to
founding Redhook, Mr. Shipman was a marketing analyst for
the Chateau Ste. Michelle Winery from 1978 to 1981.
Mr. Shipman received his Bachelor’s degree in English
from Bucknell University in 1975 and his Master’s degree in
Business Administration from the Darden Business School,
University of Virginia, in 1978. Since July 2004,
Mr. Shipman has served as a director of Craft Brands
Alliance LLC.
If the merger with Widmer is consummated, Mr. Shipman will
resign as Chairman of the Board effective as of the effective
time of the merger, but will serve as Chairman Emeritus and be
available to provide services as a consultant to Redhook’s
board of directors for one year. See “Directors Following
the Merger” below.
Anthony J. Short (48). Mr. Short has
served as a director of Redhook since May 2000. Mr. Short
has been Vice President, Business and Wholesaler Development at
A-B since September 2002. In this capacity, he is responsible
for domestic business development and various initiatives
involving A-B’s sales and distribution system. From March
2000 to September 2002, Mr. Short was Director of Business
and Wholesaler Development. Previously, Mr. Short was
Director of Wholesaler System Development. He began his career
at A-B in 1986 in the Corporate Auditing Department. Prior to
joining A-B, Mr. Short held positions at
Schowalter & Jabouri, a regional firm of Certified
Public Accountants. Mr. Short has served as a director of
Widmer since October 1997 and as a director of Craft Brands
Alliance LLC since July 2004. Mr. Short is one of two
directors on Redhook’s board of directors designated by
A-B; see “Certain Transactions of Redhook” below.
Directors
Following the Merger
Effective as of the closing date of the merger and in accordance
with the merger agreement, Messrs. Shipman, Clement,
Clement and Loughran will resign as directors and the combined
company’s board of directors will consist of:
•
David Lord and John Rogers, Jr., two of Redhook’s
independent directors elected at the annual meeting;
•
Anthony Short and Andrew Goeler, two A-B designated
directors; and
•
Three new directors designated by Widmer.
The Widmer designees who will join the combined company’s
board of directors are: Kurt Widmer, who will serve as Chairman
of the Board, Timothy Boyle, and Kevin Kelly. Mr. Goeler
has been designated by
A-B to
replace John Glick as A-B’s designee on the Redhook board.
Committees
of the Redhook Board
The Board has standing audit, compensation, nominating and
governance and marketing practices committees. In March 2007,
the board formed a corporate strategy committee, consisting
solely of Redhook’s
four independent directors, in connection with the proposed
transaction between Redhook and Widmer. Each of these committees
is responsible to the full Redhook board of directors and its
activities are therefore subject to board approval. Pursuant to
an exchange and recapitalization agreement between Redhook and
A-B, A-B has the right to designate one of its board designees
to sit on each committee of the Redhook board or to join each
committee of the board in an advisory capacity, as described
more fully in Redhook’s Annual Report on
Form 10-K
for the year ended December 31, 2007, Part I.,
Item 1. Business — Relationship with
Anheuser-Busch, Incorporated.
The activities of each of these committees are summarized below:
Redhook Audit Committee. The Redhook audit
committee is responsible for the engagement of and approval of
the services provided by Redhook’s independent registered
public accountants. The audit committee assists Redhook’s
board of directors in fulfilling its oversight responsibilities
by reviewing (i) the financial reports and other pertinent
financial information provided by Redhook to the public and the
Securities and Exchange Commission, (ii) Redhook’s
systems of internal controls established by management and the
Board, and (iii) Redhook’s auditing, accounting and
financial reporting processes generally.
The Redhook audit committee is currently composed of
Messrs. Clement, Loughran (Chairman), and Rogers, all of
whom are independent directors as defined by Nasdaq Marketplace
Rule 4200(a)(15) and 4350(d)(2). The Board has also
determined that Mr. Loughran, an independent director,
qualifies as an “audit committee financial expert” as
defined by the Securities and Exchange Commission.
Mr. Anthony J. Short is currently A-B’s designee to
the audit committee and participates in an advisory capacity
only. The audit committee met five times during 2007. The board
of directors has adopted a written charter for the audit
committee. A copy of the audit committee charter is available on
Redhook’s website at www.redhook.com (select About
Redhook — Investor Relations —
Governance — Highlights).
Compensation Committee. The Redhook
compensation committee is responsible for establishing and
administering the overall compensation policies applicable to
Redhook’s senior management, which includes Redhook’s
Chief Executive Officer, President and Chief Operating Officer,
Vice Presidents, and Chief Financial Officer. The compensation
committee is also responsible for establishing the general
policies applicable to the granting, vesting and other terms of
stock options and stock awards granted to employees under
Redhook’s stock option and stock incentive plans, and for
determining the size and terms of stock and option grants made
to Redhook’s executive officers, among others.
With respect to the compensation of Redhook’s Chief
Executive Officer and its President, during the first calendar
quarter of each year, the compensation committee reviews and
approves company and individual performance goals for the
current year, evaluates the officers’ performance in light
of the goals established for the prior year, considers
competitive market data and establishes annual compensation
based on this evaluation. The compensation committee determines
compensation for the other executive officers based on the
recommendations from the CEO and President and Chief Operating
Officer, as well as by reviewing competitive market data. In
2004, and again in 2007, the Committee retained MBL Group, LLC
to advise it on executive compensation matters, including advice
on base salary levels and incentive programs. MBL looked at a
variety of sources to determine the competitive compensation
range for Redhook’s CEO and other executive officers. These
included formal executive salary surveys, data from several
Redhook competitors, and data from selected MBL manufacturing
clients who produce and sell retail products. MBL focused on
manufacturing companies that were similar in size to Redhook
and, where appropriate, located in the western half of the
U.S. Their analysis included both publicly traded and
privately held companies.
The compensation committee has no authority to delegate any of
the functions described above to any other persons. Additional
information on the compensation committee’s roles, policies
and procedures is described in “Executive
Compensation — Compensation Discussion and
Analysis” set forth in this joint proxy
statement/prospectus.
The Redhook compensation committee is currently composed of
Messrs. Clement, Lord (Chairman) and Rogers, each an
independent director, as defined by Nasdaq Marketplace
Rule 4200(a)(15). Mr. Glick is A-B’s designee to
the compensation committee and participates in an advisory
capacity only. The compensation
committee met five times during 2007. The Redhook board has
adopted a written charter for the compensation committee. A copy
of the charter is available on Redhook’s website at
www.redhook.com (select About Redhook — Investor
Relations — Governance — Highlights).
Corporate Strategy Committee. The Redhook
corporate strategy committee currently is comprised of
Messrs. Clement, Lord, Loughran (Chairman), and Rogers. The
corporate strategy committee is tasked with evaluating and
recommending to the Redhook board and Redhook’s
shareholders actions relating to the potential merger or other
transaction involving Redhook and Widmer. The corporate strategy
committee met fourteen times during 2007. No A-B designated
director participated in the activities of the corporate
strategy committee.
Marketing Practices Committee. The Redhook
marketing practices committee, currently composed of
Messrs. Clement (Chairman) and Glick, is responsible for
reviewing Redhook’s marketing practices, insuring those
practices comply with applicable laws and making recommendations
to the board of directors as to such matters. The Marketing
Practices Committee did not meet in 2007.
Nominating and Governance Committee. The
Redhook nominating and governance committee recommends to the
Redhook board nominees for vacant board positions; reviews and
reports to the board on the nominees, including any suggested by
shareholders, to be included in the slate of directors for
election at the annual meeting of shareholders; recommends
directors for each board committee; develops a plan of
succession to be used in the event of the President and Chief
Operating Officer or Chief Executive Officer’s resignation,
disability, removal or death; develops and recommends to the
board a set of corporate governance principles applicable to
Redhook; and oversees the evaluation of the board and management.
The Redhook nominating and governance committee is currently
composed of Messrs. Clement, Lord and Rogers (Chairman),
all of whom are independent directors as defined by Nasdaq
Marketplace Rule 4200(a)(15). Mr. Short is A-B’s
designee to the nominating and governance committee and
participates in an advisory capacity. The nominating and
governance committee did not meet in 2007. The board of
directors has adopted a written charter for the nominating and
governance committee. The charter is reviewed annually and
revised as appropriate. A copy of the charter is available on
Redhook’s website at www.redhook.com (select About
Redhook — Investor Relations —
Governance — Highlights).
Criteria
for Director Nominees
The specific, minimum qualifications that the nominating and
governance committee believes must be met by a nominee for a
position on Redhook’s board of directors are:
•
The nominee must be of the highest ethical character;
•
The nominee must be able to read and understand financial
statements;
•
The nominee must be over 21 years of age;
•
The nominee must not have any significant and material conflict,
whether personal, financial or otherwise, presented by being a
member of the Redhook board;
•
The nominee must be able to meet regulatory approval; and
•
The nominee must have the time to be available to devote to
board activities.
The specific qualities or skills that the Redhook nominating and
governance committee believes are necessary for one or more of
Redhook’s directors to possess are:
•
Nominees should have relevant expertise and experience, and be
able to offer advice and guidance to Redhook’s President
and Chief Operating Officer based on that expertise and
experience;
•
Nominees should possess any necessary independence or financial
expertise;
Nominees should complement the skills, experience and background
of other directors; in making determinations regarding
nominations of directors, the committee may take into account
the benefits of diverse viewpoints; and
•
Nominees must be likely to have a constructive working
relationship with other directors.
It is also Redhook’s policy that directors retire from the
board effective at the annual meeting of shareholders following
their seventy-third birthday.
Shareholder
Recommendations for Nominations to the Board of
Directors
The Redhook nominating and governance committee will consider
candidates for director recommended by any shareholder of
Redhook who is entitled to vote at the meeting. The committee
will evaluate such recommendations in accordance with its
charter, the bylaws of Redhook and the nominee criteria
described above. This process is designed to ensure that the
board includes members with diverse backgrounds, skills and
experience, including appropriate financial and other expertise
relevant to the business of Redhook. Eligible shareholders
wishing to recommend a candidate for nomination should follow
the procedures set forth in Redhook’s amended and restated
bylaws, as further described below. In connection with its
evaluation of a director nominee, the Redhook nominating and
governance committee may request additional information from the
candidate or the recommending shareholder and may request an
interview with the candidate. The committee has discretion to
decide which individuals to recommend for nomination as
directors. Shareholders should submit any recommendations for
director nominees to Redhook by January 13, 2009.
A shareholder of record can nominate a candidate for election to
the Redhook board by complying with the procedures in
Article II, Section 2.3.2 of Redhook’s amended
and restated bylaws. Any eligible shareholder who wishes to
submit a nomination should review the requirements in the bylaws
on nominations by shareholders, which are included in the
excerpt from the amended and restated bylaws attached as
Annex E to this joint proxy statement/prospectus.
Any nomination should be sent in writing to the Secretary,
Redhook Ale Brewery, Incorporated, 14300 N.E. 145th Street,
Suite 210, Woodinville, WA98072. Notice must be received
by Redhook by January 13, 2009.
Redhook
Director Compensation
Non-employee directors of Redhook are currently entitled to
receive both stock-based and cash compensation for their service
on the Redhook board:
Stock-based
Compensation:
•
Each non-employee Redhook director, other than A-B designated
directors, is entitled to receive a grant of 3,500 shares
of Redhook common stock upon
his/her
election to the board of directors at the annual meeting of
shareholders. In lieu of receiving 3,500 shares of Redhook
common stock, directors may elect to receive a lesser number of
shares plus a cash payment equal to the taxes to be paid on
his/her
stock grant.
Cash
Compensation:
•
Each non-employee Redhook director is entitled to receive annual
compensation of $10,000, which will be paid quarterly.
•
The chairs of each of the Redhook nominating and governance,
audit, marketing and compensation committees are entitled to
receive additional annual compensation of $4,000, which will be
paid following the Redhook annual meeting of shareholders.
•
Redhook audit committee members are each entitled to receive an
additional annual payment of $1,000, which will be paid
following the Redhook annual meeting of shareholders.
Members of the Redhook corporate strategy committee are entitled
to receive, for service through March 31, 2008,
compensation of $7,500 per quarter. The chair of the corporate
strategy committee is also entitled to receive an additional
quarterly payment of $2,500 for service through March 31,2008.
Redhook’s Chief Executive Officer, Mr. Shipman, does
not receive any additional compensation for his service as a
director.
The following table sets forth certain information regarding the
compensation earned by or awarded to each non-employee director
who served on Redhook’s board of directors in 2007.
Fees Earned
Stock
Option
Name
or Paid in Cash
Awards(1)
Awards
Total
Frank H. Clement
$
53,400
$
16,100
$
—
$
69,500
John W. Glick
$
10,000
$
—
$
—
$
10,000
David R. Lord
$
52,400
$
16,100
$
—
$
68,500
Michael Loughran
$
63,400
$
16,100
$
—
$
79,500
John D. Rogers, Jr.
$
53,400
$
16,100
$
—
$
69,500
Anthony J. Short
$
10,000
$
—
$
—
$
10,000
(1)
On May 22, 2007, Messrs. Clement, Lord, Loughran and
Rogers were each granted 2,300 shares of fully-vested
Redhook common stock and a cash payment of $8,400. The fair
value of each stock grant was computed in accordance with FASB
SFAS No. 123R, Share-Based Payment.
Report of
the Redhook Audit Committee
The Redhook audit committee has reviewed and discussed with
management and the independent auditors the audited financial
statements of Redhook. The committee reviewed with the
independent auditors the matters required to be discussed by
Statement on Auditing Standards No. 61, Communication
with Audit Committees, as amended, regarding their judgments
as to the quality, not just the acceptability, of the accounting
principles of Redhook and such other matters as the committee
and the auditors are required to discuss under auditing
standards generally accepted in the United States. Additionally,
the committee discussed with the auditors their independence
from Redhook and its management, including the matters in the
written disclosures and the letter provided by the independent
auditors to the audit committee as required by Independence
Standards Board Standard No. 1, Independence Discussions
with Audit Committees, and considered the compatibility of
nonaudit services with the auditors’ independence.
Based on the foregoing reviews and discussions, the committee
recommended to the Redhook board of directors that the audited
consolidated financial statements of Redhook be included in the
Annual Report of Redhook on
Form 10-K
for the year ended December 31, 2007 for filing with the
Securities and Exchange Commission.
Michael Loughran (Chairman)
Frank H. Clement
John D. Rogers, Jr. Audit Committee Members
Shareholder
Communications with Redhook Board of Directors
Shareholders wishing to communicate with the board of directors,
the non-management directors, or with an individual Board member
concerning Redhook may do so by writing to the Board, to the
non-management directors, or to the particular Board member, and
mailing the correspondence to:
c/o David
J. Mickelson, Redhook Ale Brewery, Incorporated, 14300 N.E.
145th Street
Suite 210, Woodinville, Washington98072. The envelope
should indicate that it contains a shareholder communication.
All such shareholder communications will be forwarded to the
director or directors to whom the communications are addressed.
An eligible shareholder who desires to have a qualified proposal
considered for inclusion in the proxy statement prepared in
connection with Redhook’s 2009 annual meeting of
shareholders must deliver a copy of the proposal to the
Secretary of Redhook, at Redhook’s principal executive
offices, no later than January 13, 2009.
Proposals of shareholder that are not eligible for inclusion in
the proxy statement and proxy for Redhook’s 2009 annual
meeting of shareholders, or that concern one or more nominations
for directors at the meeting, must comply with the procedures,
including minimum notice provisions, contained in Redhook’s
amended and restated bylaws. Notice must be received by the
Secretary of Redhook by January 13, 2009. A copy of the
pertinent provisions of the restated bylaws is available upon
request to David J. Mickelson, Redhook Ale Brewery,
Incorporated, 14300 N.E. 145th Street Suite 210,
Woodinville, Washington98072.
Section 16(a) of the Exchange Act requires that
Redhook’s officers and directors, and persons who own more
than ten percent of a registered class of Redhook’s equity
securities file reports of ownership and changes of ownership
with the Securities and Exchange Commission. Officers, directors
and greater than ten percent shareholders are required by the
Securities and Exchange Commission regulations to furnish
Redhook with copies of all such reports they file.
Based solely on its review of the copies of such reports
received by Redhook, and on written representations by
Redhook’s officers and directors regarding their compliance
with the applicable reporting requirements under
Section 16(a) of the Exchange Act, Redhook believes that,
with respect to its fiscal year ended December 31, 2007,
all filing requirements applicable to its officers and
directors, and all of the persons known to Redhook to own more
than ten percent of its common stock were complied with by such
persons.
At the Redhook annual meeting, Redhook shareholders will be
asked to approve the issuance of Redhook common stock pursuant
to the merger agreement. Under the merger agreement, Widmer will
merge with and into Redhook, and each holder of shares of common
or preferred stock of Widmer will be entitled to receive, in
exchange for each share held, 2.1551 shares of Redhook
common stock. The number of shares of Redhook common stock that
Widmer security holders will be entitled to receive pursuant to
the merger is expected to represent approximately 50% of the
outstanding shares of the combined company immediately following
the consummation of the merger. This percentage assumes that no
security holder of Widmer exercises statutory dissenters’
rights in connection with the merger and that currently
outstanding options held by Redhook employees, officers,
directors, and former directors to acquire 689,140 shares
of Redhook common stock are not exercised prior to consummation
of the merger.
The terms of, reasons for and other aspects of the merger
agreement, the merger and the issuance of Redhook common stock
pursuant to the merger agreement are described in detail in the
other sections in this joint proxy statement/prospectus.
Proposal No. 2 will be approved if a majority of the
votes cast on the proposal are “FOR” the proposal.
THE REDHOOK BOARD OF DIRECTORS RECOMMENDS THAT REDHOOK’S
SHAREHOLDERS VOTE “FOR” REDHOOK
PROPOSAL NO. 2 TO APPROVE THE ISSUANCE OF REDHOOK
COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
The audit committee of the Redhook board of directors has
appointed the firm of Moss Adams LLP, which we refer to as Moss
Adams, independent registered public accountants, to audit
Redhook’s financial statements for the fiscal year ending
December 31, 2008.
At the Redhook annual meeting, the Redhook shareholders are
being asked to ratify the appointment of Moss Adams as
Redhook’s independent registered public accounting firm for
the fiscal year 2008. Representatives of Moss Adams will be
present at the Redhook annual meeting and will be available to
respond to appropriate questions from Redhook shareholders and
to make a statement if they so desire.
Fees
Paid to the Independent Registered Public Accounting
Firm
The following table presents aggregate fees billed to Redhook by
Moss Adams for professional services rendered with respect to
fiscal years ended December 31, 2007 and 2006. All of these
services were approved by the Redhook audit committee:
2007
2006
Audit Fees
$
176,574
$
113,891
Audit Related Fees
2,000
—
Tax Fees
—
2,650
All Other Fees
—
—
Total Fees
$
178,574
$
116,541
Audit fees include the audit of Redhook’s annual financial
statements, review of the financial statements included in
Redhook’s quarterly reports on
Form 10-Q
for such years, services rendered in conjunction with
registration statements, and services rendered in connection
with the joint proxy statement/prospectus.
Audit related fees in 2007 were due for services rendered in
connection with Redhook’s assessment and report on the
effectiveness of Redhook’s internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of
2002.
The 2006 tax fees relate to professional services rendered by
Moss Adams to review Redhook’s 2005 tax return and stock
option treatment for tax purposes.
Redhook anticipates that 2008 audit fees and audit related fees
will exceed 2007 fees, primarily as a result of fees associated
with the merger with Widmer.
Auditor
Independence
In 2007, there were no other professional services provided by
Moss Adams for Redhook that would have required the audit
committee of the Redhook board of directors to consider their
compatibility with maintaining the independence of Moss Adams.
Pre-Approval
Policies and Procedures
The Redhook audit committee is responsible for appointing and
overseeing the work of Redhook’s independent registered
public accounting firm. The Redhook audit committee has
established the following procedures for the pre-approval of all
audit and permissible non-audit services provided by the
independent registered public accounting firm:
Before engagement of the independent registered public
accounting firm for the next year’s audit, the independent
registered public accounting firm will submit a detailed
description of services expected to be rendered during that year
for each of the following categories of services to the audit
committee for approval:
•
Audit services. Audit services include work
performed for the audit of Redhook’s financial statements
and the review of financial statements included in
Redhook’s quarterly reports on
Form 10-Q,
as well
as work that is normally provided by the independent registered
public accounting firm in connection with statutory and
regulatory filings.
•
Audit related services. Audit related services
are for assurance and related services that are traditionally
performed by the independent registered public accounting firm
and reasonably related to the performance of the audit or review
of Redhook’s financial statements.
•
Tax services. Tax services include all
services performed by the independent registered public
accounting firm’s tax personnel for tax compliance, tax
advice and tax planning.
•
Other services. Other services are those
services not captured in the other categories.
Before engagement, the Redhook audit committee pre-approves
these services by category of service. The fees are budgeted and
the Redhook audit committee requires the independent registered
public accounting firm to report actual fees versus budgeted
fees periodically throughout the year by category of service.
During the year, circumstances may arise when it may become
necessary to engage the independent registered public accounting
firm for additional services not contemplated in the original
pre-approval. In those instances, the Redhook audit committee
requires specific pre-approval before engaging the independent
registered public accounting firm.
If this proposal does not receive the affirmative approval of a
majority of the votes cast on the proposal, the board of
directors will reconsider the appointment.
THE REDHOOK BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
REDHOOK SHAREHOLDERS VOTE “FOR” REDHOOK
PROPOSAL NO. 3 TO RATIFY MOSS ADAMS LLP AS
REDHOOK’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
ITS FISCAL YEAR ENDING DECEMBER 31, 2008.
Redhook knows of no other matters that are likely to be brought
before the meeting. If, however, other matters that are not now
known or determined come before the meeting, the persons named
in the enclosed proxy or their substitutes will vote such proxy
in accordance with their discretion.
The Redhook compensation committee of the board of directors,
which we refer to as the Committee, is responsible for
establishing and administering the overall compensation policies
applicable to Redhook’s senior management, which includes
Redhook’s Chief Executive Officer, President and Chief
Operating Officer, Vice Presidents, and Chief Financial Officer.
The Committee is also responsible for establishing the general
policies applicable to the granting, vesting and other terms of
stock options and stock grants granted to employees under
Redhook’s stock option and stock incentive plans, and for
determining the size and terms of stock and option grants made
to Redhook’s executive officers, among others.
The Committee is composed entirely of independent directors.
Mr. Glick, A-B’s designee to the compensation
committee, participates on the committee in an advisory capacity
only. The compensation committee oversees Redhook’s
executive compensation programs pursuant to a written charter, a
copy of which is available on Redhook’s website at
www.redhook.com (select About Redhook —
Investor Relations — Governance —
Highlights — Compensation Committee).
Compensation
Objectives
The Committee’s responsibility is to insure that
Redhook’s compensation programs are structured and
implemented in a manner that attracts and retains the caliber of
executives and other key employees required for Redhook to
compete in a highly competitive and rapidly evolving business
sector, while also recognizing and emphasizing the importance
and value of achieving targeted performance objectives and
enhancing long-term shareholder value.
Redhook’s executive compensation programs include five
primary components:
•
Base salary. Base salary is the guaranteed
element of an executive’s annual cash compensation. The
level of base salary reflects the employee’s long-term
performance, skill set and the market value of that skill set.
•
Bonuses. Discretionary bonus payments are
intended to reward executives for achieving specific financial
and operational goals.
•
Long-term incentive payments. Long term
incentives, such as stock options, restricted stock and
performance units, are intended to focus the executives on
taking steps that they believe are necessary to ensure
Redhook’s long-term success, as reflected in increases to
Redhook’s stock price over a period of several years and
growth in its earnings per share.
•
Severance and Change of Control
payments. Severance and change of control
payments are competitive measures intended to recruit and retain
top quality executives, by offering executives compensation in
the event their employment is involuntarily terminated without
defined cause or as a result of a merger or other change in
control transaction.
These primary components and their amounts for each of the
Redhook executives are intended to be fair in relation to
compensation received by other executives at similarly sized
public and private companies and to reward Redhook’s
executives for performance.
Role of
the Redhook Compensation Committee, Management and External
Compensation Consultants
The Committee has the ultimate authority to determine matters of
compensation for Redhook’s senior management, and is
responsible for establishing annual compensation for
Redhook’s senior management, setting Redhook’s
policies with respect to stock options and stock grants granted
to employees under Redhook’s incentive plans, and for
determining the size and terms of grants made to Redhook’s
executive officers and employees. In setting compensation
amounts, the Committee relies upon recommendations from
Redhook’s Chief Executive Officer and President and Chief
Operating Officer with respect to compensation involving other
executive officers and with respect to stock options and other
stock grants to employees. Additionally, the Committee takes
into account reports from the Chief Executive Officer regarding
whether payment targets for incentive awards were met. However,
no executive officer participates directly in establishing the
amount of any component of his own compensation package.
In addition, the Committee has solicited input from the
Committee’s independent executive compensation consultant,
MBL Group, LLC, which we refer to as MBL. The Committee
recognizes that executive compensation consultants can play an
important and valuable role in the executive compensation
process. Therefore, in 2004, and again in 2007, the Committee
retained MBL to advise it on executive compensation matters,
including advice on base salary levels and incentive programs.
MBL looked at a variety of sources to determine the competitive
compensation range for Redhook’s CEO and other executive
officers. These included formal executive salary surveys, data
from several Redhook competitors, and data from selected MBL
manufacturing clients who produce and sell retail products. MBL
focused on manufacturing companies that were similar in size to
Redhook and, where appropriate, located in the western half of
the U.S. Their analysis included both publicly traded and
privately held companies. The Committee believes that the MBL
reports are an important point of reference for the Committee in
measuring and setting executive compensation. The Committee
relies on the reports from MBL as a benchmark to ensure that
Redhook’s compensation levels are comparable to
compensation levels at other publicly traded companies in
comparable industries. For the fiscal year ended
December 31, 2007, the Committee used market survey
information provided by MBL which included data from
(a) Cascade Employers Association National Executive
Compensation Survey of approximately 1550 companies;
(b) Milliman & Robertson Executive Compensation
Survey of approximately 300 companies; and (c) Dolan
Technologies Compensation Data Survey of Northwest companies.
The MBL survey contained data regarding position, survey
examined and salary information, but did not identify specific
companies or individuals.
Compensation
Analysis
In determining executive compensation, the committee analyzes
the following factors:
•
Redhook’s performance relative to goals set forth by the
Board of Directors at the beginning of the year and in
comparison to past years;
•
MBL reports from 2004 and 2007 setting out data points for
executive compensation, which included comparisons to
similarly-situated executives at peer companies;
•
individual performance by each executive officer; and
•
historical compensation for each executive officer.
Determining
the Amount and Mix of Compensation
In determining the amount of compensation, the Committee, after
reviewing reports from MBL, compared each executive’s pay
to the market data provided for that named executive’s
position and set compensation levels for salary, bonus and
long-term compensation at levels around the 50th percentile
of such market data for each position. Additionally, the
Committee believes that incentive pay should be significant
enough to properly reward the executives if the company met
certain financial and operational objectives, therefore, it is
the policy of the Committee that approximately 10% to 30% of the
total compensation package should be at risk in order to
motivate the executives to achieve financial and operational
objectives set by the board. The Committee does not have a
pre-established policy for allocating between either cash and
non-cash or short-term or long-term compensation. However, as
discussed below, since 2003, the Committee has not awarded stock
options to its executive officers, and only added back a
long-term incentive component to its executive compensation
structure in 2007. Future awards of stock based compensation may
be limited by the amount of shares available for grant under
Redhook’s stock incentive plans.
Redhook’s compensation program is designed to balance the
need to provide Redhook executives with incentives to achieve
short-and long-term performance goals with the need to pay
competitive base salaries.
The Committee considers the amount of prior salary increases,
performance of the executive, and the financial goals of the
company in determining the mix of base salary and performance
based compensation. For 2007, the allocation of compensation
between base salary, estimated target performance bonus,
estimated discretionary bonus and estimated long-term
compensation for Redhook’s named executives was as follows:
Paul S.
David J.
Jay T.
Gerard C.
Allen L.
Shipman
Mickelson
Caldwell
Prial(1)
Triplett(1)
Base Salary
59
%
68
%
83
%
87
%
87
%
Est. Performance Bonus
22
%
17
%
0
%
0
%
0
%
Est. Discretionary Bonus
4
%
3
%
17
%
13
%
13
%
Est. Long-Term Incentive
15
%
12
%
0
%
0
%
0
%
(1)
Mr. Prial and Mr. Triplett resigned as executive
officers of Redhook in February 2008.
Base Salaries. Base salaries for all
executives, including the Chief Executive Officer, are set by
the Committee using the MBL reports as a guideline and after a
review of job responsibilities and individual contributions over
the past year. The principal factors considered in decisions to
adjust base salary are Redhook’s recent and projected
financial performance, individual performance measured against
pre-established goals and objectives and changes in compensation
in Redhook’s general industry. The ultimate split between
base salary and performance incentives in 2007 reflected the
desire of the Committee to improve the cash flow of the company,
as well as achieve certain strategic goals.
For 2007, base salary for Mr. Shipman, Chief Executive
Officer, increased by 4%, compared to his base salary in 2006.
Aggregate base salaries for Messrs. Mickelson, Prial and
Triplett increased by 4% in 2007 as compared to 2006. The modest
increases approved by the Committee for 2007 were cost-of-living
increases. In 2007, Mr. Caldwell’s base salary was
increased from $110,000 to $125,000 in connection with his
appointment to serve as the Chief Financial Officer and
Treasurer.
Base salaries are reviewed by the Committee during the first
quarter of each year and increases typically take effect in
April or May of the same year. Base salaries are also reviewed
at the time of a promotion or other changes in responsibilities.
Mr. Caldwell’s base salary was increased to $180,000
effective October 1, 2007 to recognize the crucial role
Mr. Caldwell would play in the closing of the proposed
merger with Widmer, and for his continuing efforts in bringing
together the accounting and finance functions of the two
companies.
Performance Based Incentive Payments and
Bonuses. Incentive payments and bonuses are based
on the accomplishments of the executive team, Redhook’s
results relative to financial and operational objectives set at
the beginning of the year, and other relevant and significant
accomplishments of the company as a whole. Target bonus amounts
have been established for each executive officer per the terms
of such officers’ agreement regarding employment and
include both a discretionary bonus and nondiscretionary
component. In determining what these performance based incentive
payments and bonus payments should be, the Committee examined
the historical relationship between salary and incentive pay for
the Redhook executives to gain some perspective. The incentive
pay had to be significant enough to properly reward the
executives if the company met certain financial and operational
objectives. It was agreed by the Committee that approximately
10% to 30% of the total compensation package should be at risk
in order to motivate the executives to achieve these financial
and operational objectives.
The incentive pay awards are divided into discretionary and
nondiscretionary portions.
Bonus (Discretionary) Awards: Discretionary
incentives reward specific financial and operational goals
achieved. Some examples of specific goals tied to a
discretionary incentive award might be an increase in focus on
brand management or the development of new business. In setting
and awarding these discretionary bonuses, the Committee focuses
on more long-term, strategic objectives in order to obtain new
sources of revenue and to manage brands in different ways. The
Committee has discretion to increase or decrease the award,
regardless of whether financial and operational goals are
achieved.
For 2007, the Committee established the operational goals of
(i) developing new business, (ii) managing brands to
maturity and (iii) maximizing shareholder value. The target
(maximum) bonus amounts for 2007 for which each executive was
eligible were as follows: Mr. Shipman, $20,000,
Mr. Mickelson, $10,000, Mr. Caldwell, $27,750,
Mr. Prial, $25,000 and Mr. Triplett, $25,000.
Performance Based (Nondiscretionary)
Awards: The nondiscretionary incentive component
is paid to the executive if the company achieves certain
performance targets set forth by the Committee. The Committee
sets the incentive targets for the executive officers at the
beginning of each fiscal year. Incentive targets usually relate
to increasing revenues and cash flows in the short-term in order
to lay a stronger foundation for long-term growth.
Nondiscretionary awards have historically been limited to the
CEO and the President.
The incentive targets for 2007 were as follows:
•
Earnings before interest, taxes and depreciation and
amortization (EBITDA) greater than or equal to budgeted EBITDA
of $4,252,000 (weighted at 50% of the total nondiscretionary
award),
•
Sales growth of 4% or greater for the Washington Brewery and
Forecasters Public House over the prior year (weighted at 25% of
the total nondiscretionary award), and
•
EBITDA growth of 4% or greater for the New Hampshire Brewery and
Cataqua Public House over the prior year (weighted at 25% of the
total nondiscretionary award).
The target (maximum) amounts to be awarded for achieving these
performance targets for 2007 were: Mr. Shipman, $100,000,
Mr. Mickelson, $50,000.
2007 Awards. In 2007, Mr. Shipman and
Mr. Mickelson were awarded nondiscretionary performance
bonuses of $25,000 and $12,500, respectively, as a result of
achieving sales growth of greater than 4% at the Washington
Brewery. The Committee believes it would have been relatively
difficult for these executives to earn the target bonuses
established for 2007, which were four times as much as the
bonuses actually paid. The Committee also awarded discretionary
bonuses of $10,000 and $5,000 bonus to Mr. Shipman and
Mr. Mickelson, respectively, for their success in meeting
the brand management targets established for Redhook ESB and
Long Hammer IPA. Upon the recommendation of the CEO and the
President, the Committee awarded Mr. Caldwell a
discretionary bonus of $27,000 in consideration for his extra
efforts associated with the planned merger with Widmer and in
bringing together the finance and accounting functions at the
two companies. Mr. Prial was awarded a discretionary bonus
of $20,000 in consideration for his assistance with the
transition to a new sales force on the east coast in
anticipation of the merger.
A summary of the incentive payments awarded to Redhook’s
executive officers for 2007 performance is set forth below:
The Committee has set the following performance incentive
targets for its executive officers for 2008:
Incentive Target
Amount
Paul S. Shipman, Chief Executive Officer
Delivering the Company in good financial condition at closing of
merger with Widmer
Up to 10% of base salary paid to date of merger
Closing of merger with Widmer
Up to 10% of base salary paid to date of merger
David J Mickelson, President and
Chief Operating Officer
Delivering the Company in good financial condition at closing of
merger with Widmer
Up to 10% of base salary paid to date of merger
Closing of merger with Widmer
Up to 10% of base salary paid to date of merger
EBITDA greater than or equal to budgeted EBITDA
10% of base salary
Demonstrating leadership during the first half of 2008 during
the merger negotiations with Widmer
10% of base salary
Successfully directing the search and hiring of a controller and
a CFO for the combined company
$20,000
Jay T. Caldwell, Chief Financial Officer and Treasurer
Delivering the Company in good financial condition at closing of
merger with Widmer
Up to 10% of base salary paid to date of merger
Closing of merger with Widmer
Up to 10% of base salary paid to date of merger
All of the above listed incentive awards are discretionary.
Achievement of these performance goals is dependent on the
closing of the merger with Widmer. The Committee felt that for
2008 it was important to incentivize its executive team to keep
Redhook in good financial condition while at the same time
focusing the team on the successful closing of the merger with
Widmer. While there can be no assurance that the proposed merger
with Widmer will occur, the Committee believes that the
likelihood that these incentive payments will be made in 2008 is
high.
Long-Term Incentives. Prior to 2003, Redhook
provided long-term incentives to executives through the grant of
stock options. The options generally vested over five years and
had an exercise price equal to the fair market value of
Redhook’s stock at the time of the grant, with the number
of options awarded based on the executive’s position. Since
fair market value stock options can only produce value to an
executive if the price of Redhook’s stock increases above
the exercise price, these option grants provided a direct link
between executive compensation and Redhook’s stock price
performance. The Committee believed that stock options directly
motivated an executive to maximize long-term shareholder value.
The options were also utilized, through the option’s
vesting terms, to encourage key executives to continue in the
employment of the company. Options were granted under
Redhook’s 1992 Stock Incentive Plan and 2002 Stock Option
Plan. In 2003, the Committee decided to stop awarding option
grants to its executive officers. The Committee determined that
the level of total pay, and the split between base salary and
incentive payments, was sufficient to compensate its executives
as compared with the compensation paid to executives of
comparably sized and similarly situated craft beer companies and
other similarly sized public companies. The Committee further
felt that the number of vested stock options already held by
executive officers and their direct ownership of company stock
was sufficient to foster the long-term perspective necessary to
ensure that the executive team stays properly focused on
shareholder value. In addition, the Committee’s decision to
stop the option program was based on a recommendation by
management to the Committee that the granting of new stock
options
should be discontinued because the legal and accounting cost
related to any new option grants was not deemed to be worth the
investment.
In 2007, the Committee determined that adding back a long-term
incentive component to Redhook’s executive compensation
plan was appropriate. The Committee believes that granting
long-term incentives, such as restricted stock and performance
units, will focus its executives on taking steps that they
believe are necessary to ensure the long-term success of the
company, as reflected in increases to Redhook’s stock
prices over a period of several years, growth in its earnings
per share and other elements. The Committee determines actual
award levels based on its review of individual performance, the
amount of past rewards granted to an executive, and any change
in responsibility.
In March 2007, the Committee granted a bonus of
10,000 shares of common stock to Mr. Shipman, and
5,000 shares of common stock to Mr. Mickelson under
Redhook’s 2007 Stock Incentive Plan. The grant was made to
reward the executives for achievement of their performance goal
of increasing EBITDA at least 32% year over year, and to provide
an incentive for continued focus on revenue growth and growth in
Redhook’s earnings per share.
No stock awards were granted to Redhook’s executive
officers in 2008 for 2007 performance. The Committee felt, given
the proposed merger with Widmer and the changes in
Redhook’s executive team that will result from the merger,
long-term incentive payments were not necessary at this time.
The Committee anticipates that the executive compensation
packages offered to the new executive officers of the combined
company will include an appropriate long-term incentive
component.
The Committee has no policy, plan or practice regarding timing
long-term incentive grants to executives, and does not time its
grants or its release of material non-public information for the
purpose of affecting the value of executive compensation.
Severance and Change of Control
Arrangements. The current employment agreements
with Redhook’s executive officers contain provisions for
severance payments in the event an officer’s employment is
involuntarily terminated without defined cause. The terms of
each employment agreement was set through the course of
arms-length negotiations with each of the named executive
officers, and each employment agreement (other than
Mr. Mickelson’s employment agreement) was negotiated
or re-negotiated in anticipation of the proposed merger with
Widmer. In entering into these agreements, the Committee wished
to ensure that Redhook would have the continued dedication of
its executive team and the availability of their advice and
counsel, notwithstanding the uncertainty which would surround
such executive’s employment when faced with the possibility
of the merger transaction. The Committee believes their
severance arrangements are comparable with severance
arrangements offered to executives at similarly-situated
companies.
Generally, in the event of termination of employment, each
officer is entitled to severance equal to one month of base
salary for each year of the officer’s service with the
company, capped at a severance payment equal to 24 months
of base salary. The officer is additionally entitled to be
reimbursed for COBRA premiums to maintain the same health
benefits provided to the officer for the term of the severance
period paid by the company, not to exceed 18 months. The
specific terms of these arrangements, including an estimate of
compensation that would have been payable if they had been
triggered at December 31, 2007 are described in detail
under “Employment Arrangements; Severance and Change of
Control Arrangements” below.
Other
Policies and Considerations:
Benefits. Redhook offers employee benefits
coverage in order to provide employees with a reasonable level
of financial support in the event of illness or injury, and to
enhance productivity and job satisfaction through programs that
focus on work/life balance. The benefits available are the same
for all employees and executive officers and include medical and
dental coverage, disability insurance, and life insurance. In
addition, the company has a 401(k) plan, which includes a
company match, as described further in “Other
Compensation” below. All employees who meet certain plan
eligibility requirements, including executive officers, are
eligible to participate in these plans. The cost of employee
benefits is partially borne by the employee, including each
executive officer.
Perquisites. Redhook does not provide
significant perquisites or personal benefits to executive
officers. Executive officers are entitled to receive a car
allowance of $850 per month. Additionally, all employees of
Redhook, including executive officers, are entitled to receive a
substantial discount on purchases made at any of Redhook’s
pub operations.
Other Compensation. Redhook’s 401(k) plan
currently provides for the company to match eligible
participants’ contributions dollar-for-dollar up to 4% of
the employee’s gross earnings. Redhook’s match is
discretionary and determined annually. In order to be eligible
for a matching contribution in any particular year, a
participant must be an employee on the last day of that year and
must have worked at least 1,000 hours during that year. All
company matching contributions vest as follows: (i) 20%
after one Year of Service (a “Year of Service” is
one in which the employee worked at least 1,000 hours) and
(ii) an additional 20% vests for each additional Year of
Service completed. Executive officers are permitted to
participate in Redhook’s matching program.
Redhook made the following matching contributions to executive
officers under its 401(k) plan for 2007 service:
Mr. Shipman, $9,000; Mr. Mickelson, $9,000;
Mr. Triplett, $7,869; Mr. Prial, $7,869 and
Mr. Caldwell, $5,758.
The compensation committee, comprised of independent directors,
has reviewed and discussed the above Compensation Discussion and
Analysis, which we refer to as the CD&A, with
Redhook’s management. Based on the review and discussions,
the compensation committee recommended to Redhook’s board
of directors that the CD&A be included in this joint proxy
statement/prospectus.
David R. Lord (Chairman)
Frank H. Clement
John D. Rogers, Jr. Compensation Committee Members
The following table sets forth information regarding
compensation earned during Redhook’s fiscal years ended
December 31, 2007, 2006 and 2005 (a) by the Chief
Executive Officer, (b) by the Chief Financial Officer and
(c) by the three other most highly compensated executive
officers for the fiscal year ended December 31, 2007. The
individuals included in the table will be collectively referred
to as the “named executive officers.”
Change in
Pension Value
and Nonqualified
Non-Equity
Deferred
Stock
Option
Incentive Plan
Compensation
All Other
Name of Executive Officer
Year
Salary
Bonus(1)
Awards(2)
Awards
Compensation(3)
Earnings
Compensation(4)
Total
Paul S. Shipman
2007
$
267,800
$
10,000
$
70,000
$
—
$
25,000
$
—
$
56,892
$
429,692
Chief Executive Officer
2006
257,500
8,000
—
—
100,000
—
19,000
384,500
and Chairman of the Board
David J. Mickelson
2007
$
199,243
$
5,000
$
35,000
$
—
$
12,500
$
—
$
38,046
$
289,789
President and
2006
191,580
4,000
—
—
50,000
—
18,404
263,984
Chief Operating Officer
Jay T. Caldwell(5)
2007
$
138,750
$
27,000
$
—
$
—
$
—
$
—
$
15,958
$
181,708
Chief Financial Officer
2006
53,778
10,000
—
—
—
—
—
63,778
and Treasurer
Gerard C. Prial(6)
2007
$
171,990
$
20,000
$
—
$
—
$
—
$
—
$
18,069
$
210,059
Vice President, Sales
2006
165,375
25,000
—
—
—
—
17,215
207,590
and Eastern Operations
Allen L. Triplett(6)
2007
$
171,990
$
—
$
—
$
—
$
—
$
—
$
18,069
$
190,059
Vice President, Brewing
2006
165,375
25,000
—
—
—
—
17,215
207,590
(1)
Represents bonuses awarded at the discretion of the Compensation
Committee.
Represents compensation expense recognized in 2007 for financial
reporting purposes under Statement of Financial Accounting
Standards No. 123(R). Stock awards for 2007 were granted
upon shareholder approval of the Redhook 2007 Stock Incentive
Plan at the 2007 Annual Meeting of Shareholders, and represent
awards for 2006 performance. No stock awards were granted in
2007 or 2008 for 2007 performance.
(3)
Represents performance based incentive awards. Performance based
incentive awards earned in a fiscal year are paid in the
following fiscal year, after confirmation that performance goals
were met.
(4)
Amounts shown for 2007 represent a car allowance of $10,200 and
401(k) employer matching contributions for each officer. Also
includes cash compensation of $37,692 and $18,846 paid to
Messrs. Shipman and Mickelson, respectively, to approximate
the federal income tax obligation resulting from the stock award.
(5)
Mr. Caldwell joined Redhook as Controller in July 2006 and
was appointed Chief Financial Officer and Treasurer in March
2007.
(6)
Mr. Prial and Mr. Triplett resigned as executive
officers of Redhook in February 2008.
The Compensation Committee of the Board of Directors sets target
payouts for Redhook’s Chief Executive Officer and President
and COO at the beginning of the fiscal year. For 2007, the
Committee chose three specific performance criteria, for which
fixed amounts were payable if the specific performance criteria
were achieved by the executive officer. Payment for the
achievement of one performance criteria was not dependent on the
success of the executive in meeting the other criteria.
Therefore, the threshold number in the table above represents
the minimum amount the executive officer could receive if only
one specific performance criteria was met.
(2)
The Target and Maximum column above represent total payout if
all three specific performance criteria are met. Actual award
payments are reflected in the “Non-Equity Incentive Plan
Compensation” column of the Summary Compensation Table.
(3)
Represents stock grants awarded under Redhook’s 2007 Stock
Incentive Plan. The shares were fully vested upon grant. Cash
compensation paid to Messrs. Shipman and Mickelson to
approximate the federal income tax obligation resulting on the
stock award is reflected in the “All Other
Compensation” column of the Summary Compensation Table.
The following table shows information concerning the number and
value of unexercised options held by the named executive
officers on December 31, 2007.
Option Exercises and Stock Vested. No stock
options were exercised by the named executive officers during
Redhook’s fiscal year ended December 31, 2007. On
November 29, 2005 the board of directors of Redhook
approved an acceleration of vesting of all of Redhook’s
unvested stock options, including those held by executive
officers, which we refer to as the acceleration. The
acceleration was effective for stock options outstanding as of
December 30, 2005. These options were granted under
Redhook’s 1992 Stock Incentive Plan and 2002 Stock Option
Plan. As a result of the acceleration, options to acquire
approximately 136,000 shares of Redhook’s common
stock, or 17% of total outstanding options, became exercisable
on December 31, 2005. Of the options that were subject to
the acceleration, options to acquire approximately
106,200 shares of Redhook’s common stock were held by
executive officers, as follows:
Each of Messrs. Shipman, Mickelson, Caldwell, Prial and
Triplett has executed a letter of agreement with Redhook
regarding employment. Under their letter of agreement, each
executive officer is provided with an
annual compensation plan under which they receive a specified
minimum base compensation plus the opportunity to earn bonus
amounts depending on attainment of various performance goals.
In June 2005, Redhook executed a letter of agreement with
Mr. Shipman regarding employment. The agreement became
effective on August 1, 2005 following the July 2005
expiration of the previous employment agreement. The letter of
agreement provided for a minimum base salary of $250,000,
subject to annual review by the compensation committee, and
stipulates that Mr. Shipman is an “at-will”
employee. Mr. Shipman’s current base salary under this
agreement is $267,800 per year. Under the agreement,
Mr. Shipman is eligible for a yearly bonus, of which 50% is
discretionary and 50% is to be paid upon achieving certain
targets per terms set forth by, and as approved by, the
Compensation Committee or the Board. Mr. Shipman’s
target bonus for 2007 was $100,000 and the Compensation
Committee awarded Mr. Shipman a bonus of $35,000, $10,000
of which was discretionary. Mr. Shipman is also entitled to
severance payments under the agreement in the event his
employment is terminated by Redhook for any reason, other than
“for cause,” including upon termination of his
employment in connection with the merger. For additional
information about severance, see “— Severance and
change of control arrangements” and the table entitled
“Table of Severance Payments and Benefits” below.
In June 2005, Redhook executed a letter of agreement with
Mr. Mickelson regarding employment. The agreement became
effective on August 1, 2005 following the July 2005
expiration of the previous employment agreement. The letter of
agreement provided for a minimum base salary of $186,000,
subject to annual review by the compensation committee, and
stipulates that Mr. Mickelson is an “at-will”
employee. Mr. Mickelson’s current base salary under
this agreement is $199,243 per year. Under the agreement,
Mr. Mickelson is eligible for a yearly bonus, of which 50%
is discretionary and 50% is to be paid upon achieving certain
targets per terms set forth by, and as approved by, the
Compensation Committee or the Board. Mr. Mickelson’s
target bonus for 2007 was $50,000 and the Compensation Committee
awarded Mr. Mickelson a bonus of $17,500, $5,000 of which
was discretionary. Mr. Mickelson is also entitled to
severance payments under the agreement in the event his
employment is terminated by Redhook for any reason, other than
“for cause,” including upon termination of his
employment in connection with the merger. For additional
information about severance, see “— Severance and
change of control arrangements” and the table entitled
“Table of Severance Payments and Benefits” below.
On December 7, 2007, Redhook executed a letter of agreement
with Mr. Caldwell regarding employment. The letter of
agreement provided for a minimum base salary of $180,000,
retroactive to October 1, 2007, subject to annual review by
the compensation committee. Under the agreement,
Mr. Caldwell will be eligible for a yearly bonus equal to
20% of base salary, to be paid in the discretion of the
compensation committee or the board. Mr. Caldwell’s
target bonus for 2007 was $27,750 and the compensation committee
awarded Mr. Caldwell a bonus of $27,000, all of which was
discretionary. The letter of agreement also anticipated that
Mr. Caldwell would remain in the employ of the Company to
assist with the proposed merger though June 30, 2008, and
later extended this date by mutual agreement to August 15,2008. In the event that Redhook requires assistance past
June 30, 2008, Redhook will pay Mr. Caldwell
$20,000.00 per month for his service. Mr. Caldwell is also
entitled to severance payments under the agreement in the event
his employment is terminated by Redhook for any reason, other
than “for cause,” including upon termination of his
employment in connection with the merger. For additional
information about severance, see “— Severance and
change of control arrangements” and the table entitled
“Table of Severance Payments and Benefits” below.
The Company also executed letters of agreement regarding
employment with Messrs. Prial and Triplett that were in
effect for the fiscal year ended December 31, 2007. The
letters of agreement provide the officers with the following
minimum base salaries: Mr. Prial $171,990; and
Mr. Triplett $171,990. Messrs. Prial and Triplett were
also eligible for a yearly bonus, all of which was to be paid in
the discretion of the compensation committee or the board. The
2007 target bonuses established for each of Messrs. Prial
and Triplett were $25,000 and the Compensation Committee awarded
Mr. Prial $20,000 and Mr. Triplett $0.
On February 12, 2008 Redhook executed a revised letter of
agreement with Mr. Prial regarding employment, in
connection with Mr. Prial’s resignation as Vice
President, Sales and Eastern Operations of the Company. The
letter of agreement provided for the continuation of
Mr. Prial’s annual base salary of $171,990,
subject to annual review by the compensation committee. Under
the agreement, Mr. Prial is eligible for a yearly bonus
equal to 20% of base salary, to be paid in the discretion of the
compensation committee or the board. The letter of agreement
anticipated that Mr. Prial would remain as an employee of
Redhook to assist with the proposed merger through
August 31, 2008. Mr. Prial is also entitled to
severance payments under the agreement in the event his
employment is terminated by Redhook for any reason, other than
“for cause,” including upon termination of his
employment in connection with the merger. For additional
information about severance, see “— Severance and
change of control arrangements” and the table entitled
“Table of Severance Payments and Benefits” below.
On February 25, 2008, Redhook executed a revised letter of
agreement with Mr. Triplett regarding employment, in
connection with Mr. Triplett’s resignation as Vice
President, Brewing of the Company. The letter of agreement
provided for the continuation of Mr. Triplett’s annual
base salary of $171,990, subject to annual review by the
compensation committee. The letter of agreement anticipated that
Mr. Triplett would remain as an employee of Redhook to
assist with the proposed merger through June 30, 2008.
Mr. Triplett is also entitled to severance payments under
the agreement in the event his employment is terminated by
Redhook for any reason, other than “for cause,”
including upon termination of his employment in connection with
the merger. For additional information about severance, see
“— Severance and change of control
arrangements” and the table entitled “Table of
Severance Payments and Benefits” below.
Severance
and change of control arrangements
Each of Messrs. Shipman, Mickelson, Caldwell, Prial and
Triplett’s letter of agreement with Redhook regarding
employment provides for certain payments if the officer is
terminated by Redhook for any reason, other than “for
cause,” including termination that results from the
proposed merger with Widmer. In general, in the event that an
officer’s employment is terminated by Redhook other than
“for cause,” the officer is entitled to severance
equal to one month of base salary for each year of such
officer’s service, plus accrued vacation and sick pay,
capped at a severance payment equal to 24 months of base
salary. Severance is to be paid in accordance with
Redhook’s standard payroll policies then in effect.
Additionally, the officer is entitled to be reimbursed for COBRA
premiums to maintain the same health benefits provided to the
officer, then in place, for the term of the severance period
paid by the company or until the officer finds new employment
with comparable health care coverage, not to exceed
18 months.
Mr. Mickelson’s letter of agreement regarding
employment provides for severance equal to twenty-one months
base salary, plus accrued vacation and sick pay, and
reimbursement of COBRA premiums for eighteen months or until
Mr. Mickelson finds new employment with comparable health
care coverage. This severance policy is subject to revision at
any time by the Board of Directors upon six months written
notice.
Mr. Caldwell’s letter of agreement regarding
employment provides for a lump-sum severance payment equal to
twelve months base salary, plus accrued vacation and sick pay,
and reimbursement of COBRA premiums for twelve months or until
Mr. Caldwell finds new employment with comparable health
care coverage. Payment of severance is subject to
Mr. Caldwell signing a release in a form satisfactory to
the company. The release will also include a non-competition
component for employment in the craft beer brewing business for
six months post employment. Redhook expects to pay the severance
amounts to Mr. Caldwell on or before August 15, 2008
in connection with the merger with Widmer.
Mr. Prial’s letter of agreement regarding employment
provides for a lump-sum severance payment equal to sixteen
months base salary, plus accrued vacation and sick pay, and
reimbursement of COBRA premiums for sixteen months or until
Mr. Prial finds new employment with comparable health care
coverage. Payment of severance is subject to Mr. Prial
signing a separation and release agreement in a form
satisfactory to the company. The release will also include a
non-competition component for employment in the craft beer
brewing business for twelve months post employment. Redhook
expects to pay the severance amounts to Mr. Prial on or
before August 31, 2008 in connection with the merger with
Widmer.
Mr. Triplett’s letter of agreement regarding
employment provides for a lump-sum severance payment equal to
twenty-three months base salary, plus accrued vacation and sick
pay, and reimbursement of COBRA premiums for eighteen months or
until Mr. Triplett finds new employment with comparable
health care
coverage. Payment of severance is subject to Mr. Triplett
signing a separation and release agreement in a form
satisfactory to the company. The release will also include a
non-competition component for employment in the craft beer
brewing business for twelve months post employment. Redhook
expects to pay the severance amounts to Mr. Triplett on or
before June 30, 2008 in connection with the merger with
Widmer.
Mr. Shipman has executed an amended and restated employment
agreement dated February 13, 2008, which is effective as of
the effective date of the merger with Widmer. Under this
employment agreement, Mr. Shipman’s employment as
Chief Executive Officer of Redhook will terminate as of the
effective date of the merger, and on such date Mr. Shipman
will be entitled to receive all salary and bonuses due under his
current letter of agreement with Redhook. On the one year
anniversary of the effective date of the merger with Widmer,
Mr. Shipman will be entitled to receive a severance payment
equal to two additional years of his current base salary, which
is $267,800, plus any accrued vacation and sick leave. The
severance payment shall be paid in accordance with
Redhook’s standard payroll policies then in effect. In
addition, Mr. Shipman will be entitled to be reimbursed for
COBRA premiums to maintain the same health benefits under
Redhook’s health care plans for a period of 18 months,
or until Mr. Shipman finds new employment with comparable
health care coverage. The agreement requires execution of a
general release of claims against the company as a condition to
payment of severance, and, unless the company materially
breaches the agreement or is declared bankrupt or insolvent,
also prohibits Mr. Shipman from participating in any other
business which brews, packages, markets or distributes craft
alcoholic malt beverages in the continental U.S. or any
foreign country where Redhook brews, packages, markets or
distributes its products. The non-compete does not apply to
providing consulting services in the Canadian market to Canadian
business entities.
For purposes of Redhook’s severance arrangements, “for
cause” is generally defined as: (i) conduct which, if
the officer were to remain employed by Redhook, would
substantially and adversely impair the interests of Redhook,
(ii) fraud, dishonesty or self-dealing relating to or
arising out of his employment with Redhook, (iii) the
violation of any criminal law relating to his employment or to
Redhook, (iv) material failure to perform required duties,
or the repeated refusal to obey lawful directions of
Redhook’s Board of Directors, or (v) a material breach
of the officer’s employment agreement.
The following table describes the potential payments and
benefits under Redhook’s compensation and benefit plans and
arrangements to which the named executive officers would have
been entitled upon termination of employment other than
“for cause,” assuming the termination had taken place
as of December 31, 2007. The actual amounts to be paid out
can only be determined at the time of such executive’s
separation from the company, and such amounts may be subject to
re-negotiation at the time of actual termination. The
information presented in this table assumes that the current
terms of the employment agreements with Messrs. Shipman,
Caldwell, Prial and Triplett were in effect as of the end of
Redhook’s fiscal year ended December 31, 2007.
However, with the exception of severance payable to
Mr. Caldwell, the amount of severance payable to
Redhook’s executive officers under their original letters
of agreement are the same as the amounts shown below.
Table of
Severance Payments and Benefits
Continuation
Monthly
of Medical/
Pro-rata
Value of
Total
Years of
Base
Cash
Welfare
Bonus
Unexercised
Potential
Named Executive
Service
Salary
Severance(6)
Benefits
Payments(7)
Stock Options(8)
Payments
Paul S. Shipman
26
(1)
$
22,317
$
605,784
$
17,008
$
53,560
$
637,022
$
1,313,374
David J. Mickelson
21
(2)
16,604
393,393
17,008
99,697
572,495
1,082,593
Jay T. Caldwell
2
(3)
15,000
194,693
8,310
36,000
—
239,003
Gerard C. Prial
16
(4)
14,333
263,622
15,118
34,398
546,355
859,493
Allen L. Triplett
23
(5)
14,333
349,395
5,941
34,398
546,355
936,089
(1)
Mr. Shipman’s employment agreement provides for
severance of $267,800 per year for two years, plus
Mr. Shipman will also be paid for any vacation and sick
leave that accrues during the term but is not used, plus
reimbursement of COBRA premiums for up to eighteen months.
(2)
Mr. Mickelson’s letter of employment provides for
severance equal to one month of base salary for each year of
service with the company, capped at a severance payment equal to
twenty-four months of base
salary, plus reimbursement of COBRA premiums for the term of the
severance period, not to exceed eighteen months.
(3)
Mr. Caldwell’s letter of employment provides for
severance equal to twelve months base salary, plus reimbursement
of COBRA premiums for the severance period. Prior to the
execution of his letter of employment in December 2007,
Mr. Caldwell served without an employment agreement.
Therefore, if his employment had terminated prior to that date,
he would not have been entitled to severance.
(4)
Mr. Prial’s letter of employment provides for
severance equal to sixteen months base salary, plus
reimbursement of COBRA premiums for the severance period.
(5)
Mr. Triplett’s letter of employment provides for
severance equal to twenty-three months base salary, plus
reimbursement of COBRA premiums for up to eighteen months.
(6)
Includes value of accrued but unpaid vacation and sick leave as
of December 31, 2007.
(7)
Assumes performance targets for the executive set forth by the
Compensation Committee were met.
(8)
Represents the number of unexercised stock options held by the
executive, multiplied by $6.65, the closing price of the
Company’s common stock on December 31, 2007, less the
aggregate exercise price of the stock options. All outstanding
stock options held by the Company’s executive officers are
fully vested and exercisable.
Redhook has adopted a policy of not engaging in business
transactions with its officers, directors, nominees for
director, beneficial owners of more than 5% of its common stock
and immediate family members or affiliates of the foregoing,
each of which we refer to as a related party, except upon terms
that are deemed to be fair and reasonable by Redhook’s
audit committee. Nevertheless, Redhook recognizes that there may
be situations where such transactions with a related party may
be in, or may not be inconsistent with, the best interests of
Redhook and its shareholders. Therefore, Redhook has adopted a
statement of policy with respect to such related party
transactions that guides the review and approval or ratification
of these related party transactions by Redhook.
Under the statement of policy, a “related party
transaction” is a transaction between Redhook and any
related party (including any transactions requiring disclosure
under Item 404 of
Regulation S-K
under the Exchange Act), other than transactions available to
all employees generally and transactions involving less than
$10,000 when aggregated with all similar transactions. The
Redhook audit committee has been tasked with the review and
approval of all related party transactions. The audit committee
considers all relevant facts and circumstances available in
making its determination as to a related party transaction,
including (if applicable) but not limited to: the benefits to
Redhook; the impact on a director’s independence in the
event the related party is a director, an immediate family
member of a director or an entity which is owned or controlled
in substantial part by a director; the availability of other
sources for comparable products or services; the terms of the
transaction; and the terms available to unrelated third parties
or to employees generally. The audit committee will approve only
those related party transactions that are in, or are not
inconsistent with, the best interests of Redhook and its
shareholders, as the committee determines in good faith. A copy
of Redhook’s statement of policy with respect to related
party transactions is available on Redhook’s website at
www.redhook.com (select About Redhook — Investor
Relations — Governance — Highlights).
Transactions with A-B. Since October 1994,
Redhook has been party to an exchange and recapitalization
agreement with A-B, as well as a master distributor agreement
pursuant to which Redhook distributes its products in
substantially all of its markets through A-B’s wholesale
distribution network.
On July 1, 2004, Redhook completed a restructuring of its
relationship with A-B and entered into an exchange and
recapitalization agreement and a new distribution agreement. The
terms of the exchange and recapitalization agreement provided
that Redhook issue 1,808,243 shares of common stock to A-B
in exchange for 1,289,872 shares of Series B Preferred
Stock held by A-B. The Series B Preferred Stock, reflected
on Redhook’s balance sheet at approximately
$16.3 million, was cancelled. In connection with the
exchange, Redhook also paid $2.0 million to A-B in November
2004.
Board representation. The exchange and
recapitalization agreement provides that A-B is entitled to
designate two members of the board of directors of Redhook. A-B
also generally has the contractual right to have one of its
designees sit on each committee of the board of directors of
Redhook. Messrs. Glick and Short are the A-B designated
nominees and are both currently employees of A-B.
Restrictive covenants. The exchange and
recapitalization agreement also contains certain covenants
restricting the ability of Redhook to enter into certain
transactions. Without the prior consent of A-B, Redhook has
agreed that it will not:
•
issue equity securities exceeding 20% of its outstanding common
stock as of January 1, 2008 (other than securities issued
to employees or directors for compensatory purposes) or with
more than one vote per share or with a class vote on any matter;
•
issue any stock to any person engaged in the malt beverage or
alcoholic beverage business;
•
acquire any assets related to the production or distribution of
malt beverages which exceed 50% of the book value of its assets
as of the date of such acquisition, or acquire any assets
unrelated to the production or distribution of malt beverages
which exceed 10% of the book value of its assets as of the date
of such acquisition;
•
sell any assets which have a book value in excess of 30% of the
aggregate book value of its assets;
enter into certain transactions with affiliates, except upon
fair and reasonable terms that are no less favorable to Redhook
than would be obtained in a comparable arm’s-length
transaction with a non-affiliate and that has been approved by a
majority of the independent directors of the Board of Directors;
•
distribute its products in the United States other than through
A-B, Craft Brands or as provided in the A-B distribution
agreement,
•
voluntarily delist or terminate its listing on the NASDAQ Stock
Market.
Additionally, A-B has the right to terminate the distribution
agreement in the event any competitor of A-B acquires more than
10% of the outstanding common stock of Redhook.
The practical effect of these restrictions is to grant to A-B
the ability to veto certain transactions that management may
believe to be in the best interest of Redhook and its
shareholders, including expansion of the combined company
through acquisitions of other craft brewers or new brands,
merger with other brewing companies or distribution of
Redhook’s products outside the U.S. As a result, the
results of operations and the trading price of Redhook’s
common stock may be adversely effected.
Master
Distributor Agreement
Under the master distributor agreement with A-B, which we refer
to as the A-B distribution agreement, Redhook is required to
sell its product in the midwest and eastern United States
through sales to A-B. Redhook has also granted A-B the first
right to distribute Redhook products, including future new
products, in
the midwest and eastern territory. Redhook is responsible for
marketing its products to A-B’s distributors in the midwest
and eastern territory, as well as to retailers and consumers.
A-B distributors then place orders with Redhook, through A-B,
for Redhook products. Redhook separately packages and ships the
orders in refrigerated trucks to the A-B distribution center
nearest to the distributor or, under certain circumstances,
directly to the distributor.
For the year ended December 31, 2007, sales to A-B through
the A-B distribution agreement represented 41% of total sales
during the same period, or $18,879,000.
Termination. The A-B distribution
agreement has a term that expires on December 31, 2014,
subject to automatic renewal for an additional ten-year period
unless A-B provides written notice of non-renewal to Redhook on
or prior to June 30, 2014. The A-B distribution agreement
is also subject to early termination, by either party, upon the
occurrence of certain events. The A-B distribution agreement may
be terminated immediately, by either party, upon the occurrence
of any one or more of the following events:
1) a material default by the other party in the performance
of any of the provisions of the A-B distribution agreement or
any other agreement between the parties, which default is either:
i) curable within 30 days, but is not cured within
30 days following written notice of default; or
ii) not curable within 30 days and either:
(1) the defaulting party fails to take reasonable steps to
cure as soon as reasonably possible following written notice of
such default; or
(2) such default is not cured within 90 days following
written notice of such default;
2) default by the other party in the performance of any of
the provisions of the A-B distribution agreement or any other
agreement between the parties, which default is not described in
(1) above and which is not cured within 180 days
following written notice of such default;
3) the making by the other party of an assignment for the
benefit of creditors; or the commencement by the other party of
a voluntary case or proceeding or the other party’s consent
to or acquiescence in the entry of an order for relief against
such other party in an involuntary case or proceeding under any
bankruptcy, reorganization, insolvency or similar law;
4) the appointment of a trustee or receiver or similar
officer of any court for the other party or for a substantial
part of the property of the other party, whether with or without
the consent of the other party, which is not terminated within
60 days from the date of appointment thereof;
5) the institution of bankruptcy, reorganization,
insolvency or liquidation proceedings by or against the other
party without such proceedings being dismissed within
90 days from the date of the institution thereof;
6) any representation or warranty made by the other party
under or in the course of performance of the A-B distribution
agreement that is false in material respects; or
7) the distribution agreement between Craft Brands and A-B
is terminated or the distribution thereunder of the products of
Redhook is terminated pursuant to its terms.
Additionally, the A-B distribution agreement may be terminated
by A-B, upon six months prior written notice to Redhook, in the
event:
1) Redhook engages in certain “incompatible
conduct” which is not curable or is not cured to A-B’s
satisfaction (in A-B’s sole opinion) within 30 days.
“Incompatible conduct” is defined as any act or
omission of Redhook that, in A-B’s determination, damages
the reputation or image of A-B or the brewing industry;
2) any A-B competitor or affiliate thereof acquires 10% or
more of Redhook’s outstanding equity securities of Redhook,
and one or more designees of such person becomes a member of
Redhook’s board of directors;
3) Redhook’s current chief executive officer ceases to
function as chief executive officer and within six months of
such cessation a successor satisfactory in the sole, good faith
discretion of A-B is not appointed;
4) Redhook is merged or consolidated into or with any other
person or any other person merges or consolidates into or with
Redhook; or
5) A-B or its corporate affiliates incur any liability or
expense as a result of any claim asserted against them by or in
the name of Redhook or any shareholder of Redhook as a result of
the equity ownership of A-B or its affiliates in Redhook, or any
equity transaction or exchange between A-B or its affiliates and
Redhook, and Redhook does not reimburse and indemnify A-B and
its corporate affiliates on demand for the entire amount of such
liability and expense.
In the agreement Redhook and Widmer are currently negotiating
with A-B, which is described in more detail under
“Agreements Related to the Merger — Agreements
with Anheuser-Busch,” A-B will consent to the consummation
of the transactions contemplated by the merger agreement and
thereby waive its right to terminate the A-B distribution
agreement upon the merger of Redhook and Widmer and the
termination of the Craft Brands distribution agreement.
Redhook believes that the benefits of the distribution
arrangement with A-B, particularly the increased sales volume
and efficiencies in delivery, state reporting and licensing,
billing and collections, are significant to Redhook’s
business and in the best interests of its shareholders. Redhook
and Widmer believe that the benefits of the relationship that
both companies have enjoyed with A-B, in particular distribution
and material cost efficiencies, have offset the costs associated
with the relationship. However, there can be no assurance that
these costs will not have a negative impact on the sales and
results of operations of the combined company.
Additionally, if the relationship between Redhook and A-B were
to deteriorate, distribution of Redhook’s products would
suffer significant disruption and such event will have a
long-term severe negative impact on sales and results of
operations, as it would be extremely difficult for Redhook to
rebuild a distribution network. In such an event, Redhook would
be faced with finding another national distribution partner
similar to A-B, and entering into a complex distribution and
investment arrangement with that entity, or with negotiating
separate distribution agreements with individual distributors
throughout the U.S. Currently, Redhook distributes its
product through a network of more than 560 independent wholesale
distributors, most of whom are geographically contiguous and
independently owned and operated, and 13 branches owned and
operated by A-B. If Redhook had to negotiate separate agreements
with individual distributors, such an undertaking would
necessarily take a significant amount of time to complete,
during which Redhook’s products would not be distributed.
It would also be extremely difficult for Redhook to build a
seamless and contiguous distribution network as the one it
currently enjoys through A-B. Additionally, Redhook would need
to raise significant capital to fund the development of its new
distribution network and continue operations. There can be no
guarantee that financing would be available when needed, either
from Redhook’s current lender or from the capital markets,
or that any such financing would be on commercially reasonable
terms. Given the difficulty that Redhook would face if it needed
to rebuild its distribution network, if the current distribution
arrangement with AB were to be terminated, it is unlikely
Redhook would be able to continue as a going concern.
Fees
and costs
The A-B distribution agreement provides that A-B is entitled to
collect a margin fee on all payments to Redhook for sales
through A-B as well as an additional amount, which we refer to
as the additional margin, on shipments that exceed shipments for
the same territory during fiscal 2003. During the year ended
December 31, 2007, the margin was paid to A-B on shipments
totaling 107,900 barrels to 532 A-B distribution points.
Because 2007 shipments in the midwest and eastern United States
exceeded 2003 shipments in the same territory, Redhook paid A-B
the additional margin on 30,000 barrels. For the year ended
December 31, 2007, Redhook paid a total of $1,024,000
related to the margin and additional margin. The margin and
additional margin are reflected as a reduction of sales in
Redhook’s statements of operations.
In connection with all sales through the A-B distribution
agreement, Redhook also paid additional fees related to A-B
administration and handling. Invoicing costs, staging costs,
cooperage handling charges and inventory manager fees
collectively totaled approximately $150,000 for the year ended
December 31, 2007.
In certain instances, Redhook may ship its product to A-B
wholesaler support centers rather than directly to the
wholesaler. Wholesaler support centers assist Redhook by
consolidating small wholesaler orders with orders of other A-B
products prior to shipping to the wholesaler. A wholesaler
support center fee of $171,000 is reflected in Redhook’s
statement of operations for the year ended December 31,2007.
Fees paid to A-B related to the distribution of the
Company’s products, including the margin, additional
margin, invoicing cost, staging cost, cooperage handling charge,
inventory manager fee and wholesaler support center fee, totaled
$1,345,000, for the year ended December 31, 2007.
Other
agreements
Pursuant to a purchasing agreement dated November 21, 2002,
Redhook purchased certain materials through A-B totaling
$9,608,000 in 2007.
In December 2003, Redhook entered into a purchase and sale
agreement with A-B for the purchase of the Pacific Ridge
brand, trademark and related intellectual property. In
consideration, Redhook agreed to pay A-B a fee for 20 years
based upon the shipments of the brand by Redhook. A fee of
$71,000 is reflected in Redhook’s statement of operations
for the year ended December 31, 2007.
Redhook periodically leases kegs from A-B pursuant to an October
2001 letter of agreement. A lease and handling fee of $88,000 is
reflected in Redhook’s statement of operations for the year
ended December 31, 2007.
In connection with the shipment of its draft products to
wholesalers through the A-B distribution agreement, Redhook
collects refundable deposits on its kegs. Because wholesalers
generally hold an inventory of Redhook’s kegs at their
warehouse and in retail establishments, A-B assists in
monitoring the inventory of kegs to insure that the wholesaler
can account for all kegs shipped. When a wholesaler cannot
account for some of Redhook’s kegs for which it is
responsible, the wholesaler pays Redhook, for each keg
determined to be lost, a fixed fee and also forfeits the
deposit. For the year ended December 31, 2007, Redhook
reduced its brewery equipment by $716,000, comprised of lost keg
fees and forfeited deposits.
Excluding the purchase of materials and lost keg reimbursements,
Redhook paid to A-B fees in connection with services provided
under these other arrangements totaling $159,000 for the year
ended December 31, 2007.
Transactions with Widmer Brothers Brewing
Company. On July 1, 2004, Redhook also
entered into agreements with Widmer with respect to the
operation of Craft Brands. Pursuant to these agreements, Redhook
manufactures and sells its product to Craft Brands at a price
substantially below wholesale pricing levels; Craft Brands, in
turn, advertises, markets, sells and distributes the product to
wholesale outlets in the western United States pursuant to
a distribution agreement between Craft Brands and A-B. Widmer
and Redhook are each 50% members of Craft Brands and A-B is also
a major investor in Widmer.
For the year ended December 31, 2007, shipments of
Redhook’s products to Craft Brands represented 38% of total
Redhook shipments, or 121,900 barrels.
Messrs. Shipman and Clement have been designated by Redhook
to serve on the board of directors of Craft Brands. A-B and
Widmer each have the right to designate two directors to serve
on the board of directors of Craft Brands.
Pursuant to a supply, distribution and licensing agreement with
Craft Brands, if shipments of Redhook’s products in the
Craft Brands territory decrease as compared to the previous
year’s shipments, Redhook has the right to brew Widmer
products in an amount equal to the lower of
(i) Redhook’s product shipment decrease or
(ii) the Widmer product shipment increase, which we refer
to as the contractual obligation. In addition, Redhook may,
pursuant to a manufacturing and licensing agreement with Widmer,
brew more beer for Widmer
than the contractual obligation. This manufacturing and
licensing agreement with Widmer expires December 31, 2008.
Under these contractual brewing arrangements, Redhook brewed and
shipped 81,900 barrels of Widmer beer during the year
ended December 31, 2007. Of these shipments, approximately
96% barrels were in excess of the contractual obligation.
In 2003, Redhook entered into a licensing agreement with Widmer
to produce and sell the Widmer Hefeweizen brand in
midwest and eastern United States markets. Redhook shipped
28,800 barrels of Widmer Hefeweizen in 2007 and a
licensing fee of $432,000 is reflected in Redhook’s
statement of operations for the year ended December 31,2007.
In 2007, Redhook leased company-owned kegs to Widmer.
Approximately $16,000 is reflected in Redhook’s statement
of operations for the year ended December 31, 2007.
Widmer is furnishing this joint proxy statement/prospectus to
Widmer shareholders as of the Widmer record date as part of the
solicitation of proxies by the Widmer board of directors for use
at the Widmer special meeting.
The Widmer special meeting of shareholders will be held on
Thursday, June 26, 2008, at 4:00 p.m., local time, at
Widmer’s offices at 929 North Russell Street, Portland,
Oregon97227.
At the Widmer special meeting, Widmer shareholders will be asked
to consider and vote upon a proposal to approve the merger
agreement, pursuant to which Widmer will merge with and into
Redhook, and each holder of shares of common or preferred stock
of Widmer will receive, in exchange for each share held,
2.1551 shares of Redhook common stock.
With A-B designees Messrs. Glick, Goeler and Short
abstaining, the Widmer board of directors has unanimously
determined that the merger is in the best interests of Widmer
and its shareholders, has adopted the merger agreement and
recommends that Widmer shareholders vote “FOR”
approval of the merger agreement.
Only holders of record of Widmer common stock at the close of
business on May 13, 2008, the record date for the Widmer
special meeting, are entitled to notice of, and to vote at, the
Widmer special meeting and any adjournment or postponement of
the meeting. On that record date, 3,793,604.5 shares of
Widmer common stock were issued and outstanding and held by
approximately 30 holders of record and 78,155 shares of
Widmer preferred stock were issued and outstanding and held by
one holder of record.
A quorum is present at the Widmer special meeting if a majority
of all the shares of Widmer common stock issued and outstanding
on the Widmer record date and entitled to vote at the Widmer
special meeting are represented at the Widmer special meeting in
person or by a properly executed proxy. Abstentions will be
treated as present at the Widmer special meeting for purposes of
determining the presence or absence of a quorum for the
transaction of all business. Holders of record of Widmer common
stock on the Widmer record date are entitled to one vote per
share on each matter submitted to a vote at the Widmer special
meeting.
The approval of the merger agreement requires the affirmative
vote of the holders of a majority of the shares of Widmer common
stock outstanding on the record date and entitled to vote at the
Widmer special meeting. Holders of Widmer preferred stock are
not entitled to vote on approval of the merger agreement.
At the close of business on the record date for the Widmer
special meeting, directors and executive officers of Widmer
beneficially owned and are entitled to vote a total of
1,641,892.5 shares of Widmer’s common stock, which
represented approximately 43.4% of shares of Widmer common stock
outstanding on that date. In addition, A-B beneficially owned on
the record date and is entitled to vote 1,534,655 shares,
or approximately 40.5%, of Widmer’s common stock
outstanding on the record date of the Widmer special meeting.
Shareholders of record may vote their shares by attending the
Widmer special meeting and voting their shares in person at the
meeting, or by completing the enclosed proxy card, signing and
dating it and mailing it in the enclosed postage pre-paid
envelope. If a proxy card is signed by a shareholder of record
and returned without specific voting instructions, the shares
represented by the proxy will be voted “FOR” the
merger.
Widmer does not expect that any matter other than the proposal
to approve the merger agreement will be brought before the
Widmer special meeting. If, however, other matters are properly
brought before the Widmer special meeting, or any adjourned
meeting, the persons named as proxies will vote in accordance
with their judgment.
Shareholders of record may revoke their proxy at any time prior
to the time it is voted at the meeting. Shareholders of record
may revoke their proxy by:
•
executing a later-dated proxy card relating to the same shares
and delivering it to Widmer’s Secretary before the taking
of the vote at the Widmer special meeting;
•
filing with Widmer’s Secretary before the taking of the
vote at the Widmer special meeting a written notice of
revocation bearing a later date than the proxy card; or
•
attending the Widmer special meeting and voting in person
(although attendance at the Widmer special meeting will not, in
and of itself, revoke a proxy).
Any written revocation or subsequent proxy card should be
delivered to Widmer Brothers Brewing Company, 929 North Russell
Street, Portland, Oregon97227, Attention: Secretary, or hand
delivered to Widmer’s Secretary or his representative
before the taking of the vote at the Widmer special meeting.
Widmer is soliciting proxies for the Widmer special meeting and
will bear all expenses in connection with solicitation of
proxies, except those expenses incurred in connection with the
printing and mailing of this joint proxy statement/prospectus,
which will be paid for by Redhook.
Widmer expects to solicit proxies primarily by mail, but
directors, officers and other employees of Widmer may also
solicit proxies in person or by telephone. No additional
compensation will be paid to directors, officers or other
employees of Widmer in connection with this solicitation.
WIDMER SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXIES. A TRANSMITTAL FORM WITH
INSTRUCTIONS FOR THE SURRENDER OF WIDMER STOCK CERTIFICATES
WILL BE MAILED TO WIDMER SHAREHOLDERS SHORTLY AFTER COMPLETION
OF THE MERGER.
At the Widmer special meeting, Widmer shareholders will be asked
to consider and vote upon a proposal to approve the merger
agreement. The merger agreement provides that, at the effective
time of the merger, Widmer will be merged with and into Redhook.
The terms of, reasons for and other aspects of the merger
agreement are described in detail in the other sections of this
joint proxy statement/prospectus.
Required
Vote
Widmer cannot complete the merger unless the merger agreement is
approved by the affirmative vote of the holders of majority of
the shares of Widmer common stock outstanding on the record date
and entitled to vote at the Widmer special meeting. Holders of
Widmer preferred stock are not entitled to vote on approval of
the merger agreement.
WITH A-B DESIGNEEES MESSRS. GLICK, GOELER AND SHORT
ABSTAINING, WIDMER’S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE “FOR” THE ADOPTION OF THE MERGER
AGREEMENT.
The following discussion describes the compensation earned
during 2007 by individuals employed by Widmer or Craft Brands
who will be executive officers of the combined company following
the merger. The compensation committee for Widmer is composed of
three members of the Widmer board of directors, Kurt Widmer,
Anthony Short and Ray Rudy. Mr. Rudy is an independent
director as defined in Nasdaq Marketplace Rule 4200(a)(15).
Messrs. Widmer and Short are also members of the
compensation committee for Craft Brands, along with Paul
Shipman. No Craft Brands compensation committee members are
independent as defined in Nasdaq Marketplace
Rule 4200(a)(15). Unless the context otherwise requires,
references in the discussion to Widmer include Craft Brands.
Overview
The principal objectives of Widmer’s executive compensation
program are to attract, retain and promote talented executive
level employees and to motivate them to achieve challenging
performance objectives deemed critical to Widmer’s success.
The compensation committee is responsible for establishing and
administering the overall compensation policies for Widmer and
has the ultimate authority to determine matters of compensation
for senior management. The compensation committee receives
recommendations from Kurt Widmer, Widmer’s Chief Executive
Officer, regarding compensation of executive officers of Widmer,
and from Terry Michaelson, President of Craft Brands, regarding
compensation of executive officers of Craft Brands. Quarterly
incentive bonuses are awarded in the discretion of
Messrs. Widmer or Michaelson, as applicable.
Elements
of Compensation
Widmer’s executive compensation programs include four
primary components: base salary, short-term and long-term
performance-based incentive payments, quarterly discretionary
bonuses, and severance payments upon termination of employment.
Performance for purposes of short-term and long-term incentive
payments is measured by the attainment of financial, operational
and/or
strategic goals set by the compensation committee and approved
by the board of directors. The compensation programs were
established in connection with employment agreements executed
with several executive officers in 2004, amended and restated in
2005, and extended annually thereafter. Kurt and Robert Widmer
do not have employment agreements in place with Widmer.
Base Salaries. Base salary is the primary
means Widmer uses to provide regularly paid compensation to its
executive officers. The level of base salary reflects the
employee’s long-term performance, skill set and the market
value of that skill set. Base salaries for all executives are
determined by reviewing job responsibilities and individual
contributions within the framework of the existing executive
salary structure. Base salary levels for individuals who will be
executive officers of the combined company were increased in
April 2007 (other than Kurt Widmer) by 3% for cost-of-living and
further adjusted, for Messrs. Pastore, McFall and Wall, in
September 2007 based on market factors. The September 2007 base
salary levels and percentage increases over levels in place at
December 31, 2006, are shown in the table below:
2007
Base Salary
Percentage
Executive Officer
Level
Increase
Kurt R. Widmer
$
225,000
0
%
V. Sebastian Pastore
170,000
28
%
Terry E. Michaelson
179,529
3
%
Timothy G. McFall
170,000
19
%
Martin J. Wall, IV
162,000
18
%
Incentive Payments. Short- and long-term
incentive payments, both performance-based and discretionary,
are based on the attainment of certain critical business
objectives identified as a part of Widmer’s annual
strategic planning process.
Short-term performance bonuses are calculated based on
achievement of forecasted objectives established prior to the
beginning of the year. The short-term bonus potential for
Mr. Pastore for each of 2006 and 2007 was based on the
percentage, if any, by which actual EBITDA exceeded the EBITDA
budgeted at the beginning of the year. EBITDA is defined as
earnings before interest, taxes, depreciation and amortization.
For 2007, the EBITDA achieved by Widmer was more than 20% below
budgeted EBITDA, so no short-term bonuses were earned by Widmer
executive officers.
The short-term bonus potential for Messrs. McFall,
Michaelson and Wall for each of 2006 and 2007 was based on a
target bonus amount established by the compensation committee at
the beginning of the year. The target bonus amounts for 2007 are
shown below under the heading “Grants of Plan-Based Awards
for Fiscal Year 2007.” Following yearend, the target
amounts are multiplied by a percentage obtained by dividing
(x) Craft Brands’ actual operating profit for the year
by (y) the target operating profit set forth in Craft
Brands’ budget and business plan for the year. We refer to
this percentage as operating profit attained. Actual operating
profit is defined as Craft Brands’ gross sales minus the
sum of (a) cost of goods sold and (b) sales, marketing
and administrative costs for the year. No bonus is payable if
operating profit attained is not greater than 80%. For 2007,
Craft Brands’ actual operating profit was $7.2 million
and its target operating profit was $8.0 million, yielding
an operating profit attained of 90%. The resulting amount is
then adjusted by a bonus multiplier ranging from 0.80 to 1.25
based on the number of brands for which annual sales volume
exceeded specified levels ranging from 80% to 100% of target
volume and whether operating profit attained exceeded 80% or
100%. For 2007, the budgeted target sales volume levels for the
Widmer, Redhook and Kona brands were approximately 253,200,
126,000 and 29,400 barrels, respectively, which represented
an increase over 2006 actual sales volume levels of 6.2%, 2.6%
and 43.1%, respectively. All of the brands achieved their sales
targets at a level in excess of 95% which, combined with an
operating profit attained for 2007 at the 90% level, yielded a
bonus multiplier, as determined by the compensation committee,
of 0.90.
Long-term performance bonuses vest over three years as of
December 31st of each year. The long-term bonus is
then paid out over three years beginning March 1st of
the year following vesting of the first installment. The
performance-based long-term bonus potential for Mr. Pastore
for each of 2006 and 2007 was based on the increase in
Widmer’s enterprise value for the year compared to the
prior year, multiplied by a factor referred to as the applicable
bonus rate. Enterprise value is defined as eight times EBITDA
minus the amount of long-term debt at year end. The applicable
bonus rate ranges from 0.25% to 1.00% based on the increase in
enterprise value. Widmer’s enterprise value did not
increase for 2007 as compared to 2006, so no long-term bonuses
were earned by Widmer executive officers for 2007.
The long-term bonus potential for Messrs. McFall,
Michaelson and Wall for each of 2006 and 2007 was based on the
increase in net profit of Craft Brands for the year. Under the
terms of each officer’s employment agreement, if the net
profit contribution for the year exceeds the net profit
contribution for the prior year or for 2004, whichever is
higher, a long-term bonus pool equal to 15% of the increase is
established. Mr. Michaelson is entitled to 50% of the
long-term bonus pool, if any, and Messrs. McFall and Wall
are each entitled to 25%. Net profit contribution is calculated
by subtracting from Craft Brands’ net sales for the year
the sum of (a) a predetermined factor representing
manufacturing costs plus (b) Craft Brands’ actual
sales, marketing, and administrative expenses, shipping
expenses, excise taxes and other operating expenses. Craft
Brands’ net profit contribution for 2006 and 2007 was
$13,647,946 and $15,308,262, respectively. The 2007 increase of
approximately $1,660,000 would have yielded a bonus pool of
$249,000. The compensation committee determined, in accordance
with its authority under the provisions governing the bonus
program for Craft Brands, that a downward adjustment in the 2007
long-term bonus pool was appropriate due to a substantial change
in business conditions and structure. Accordingly, the amount of
the long-term bonus pool for 2007 was set at $191,777, which
equals 15% of Craft Brands’ actual increase in net income
in 2007 as compared to 2006.
Discretionary quarterly incentives reward specific financial and
operational goals established for individual executive officers.
These goals are established prior to the beginning of each
quarter between the executive and the Chief Executive Officer or
President, as applicable. The goals relate to such issues as
brand promotions, market roll-out programs and critical project
completion. The discretionary quarterly bonuses to be paid to an
individual during a given year are designed to be roughly equal
to 25% of the performance-based short-term bonus potential for
the year.
In 2007, individuals who will be executive officers of the
combined company after the merger earned the following incentive
payments for their services to Widmer or Craft Brands:
Short-Term
Long-Term
Performance
Performance
Discretionary
Total
Executive Officer
Bonus
Bonus(1)
Bonus
Bonuses
Kurt R. Widmer
$
—
$
—
$
—
$
—
V. Sebastian Pastore
—
—
12,000
12,000
Terry E. Michaelson
36,165
95,889
15,000
147,054
Timothy G. McFall
20,896
47,944
9,000
77,840
Martin J. Wall, IV
24,111
47,944
10,000
82,055
(1)
Long-term bonuses vest in three equal annual installments
beginning on the December 31 of the calendar year for which the
bonus is earned. Vested amounts are payable 50% by March 1 of
the year following the year in which the installment vests and
50% by the following March 1.
The table under the heading “Grants of Plan-Based Awards
for Fiscal Year 2007” on page 102 below shows the
target performance-based short-term bonus awards for the above
individuals for 2007.
Benefits. Widmer offers its employees medical,
dental and vision coverage, disability insurance, and life
insurance on an equal basis. In addition, Widmer has a 401(k)
plan as described further in “Other Compensation”
below. All employees who meet certain plan eligibility
requirements, including executive officers, are eligible to
participate in these plans. The cost of employee benefits is
partially borne by the employee, including each executive
officer.
Perquisites. The value of perquisites or
personal benefits provided to executive officers is less than
$10,000 per individual annually. Among other benefits, all
Widmer and Craft Brands employees, including executive officers,
are entitled to receive a discount on purchases made at
Widmer’s restaurant or retail operation.
Severance and Change of Control
Arrangements. The employment agreements entered
into with Messrs. McFall, Michaelson, Pastore, and Wall
contain provisions for severance payments in the event their
employment is involuntarily terminated without cause. The
severance provisions are described in more detail below under
“Potential Payments upon Termination or Change of
Control.”
In addition, Widmer has adopted a severance plan that provides
for the payment of severance benefits to all full-time
employees, other than executive officers, in the event an
employee’s employment is terminated as a result of a merger
or other business combination with Redhook. The plan provides
for the payment of severance equal to six months of base pay in
effect at the time of notice of termination if the employee
executes a full release of claims in a form acceptable to
Widmer. The compensation committee approved the severance plan
in order to retain employees who might otherwise leave in the
absence of such a plan given the uncertainty of the
employees’ future.
Other Compensation. Under the 401(k) plan for
Widmer and Craft Brands, the company currently matches eligible
participants’ contributions 50 cents for every dollar up to
6% of the employee’s gross earnings. The matching
contribution is discretionary and determined annually. In order
to be eligible for a matching contribution in any particular
year, a participant must be an employee during the year and make
salary deferrals under the 401(k) plan. All matching
contributions vest as follows: (i) 20% after one Year of
Service and (ii) an additional 20% for each additional Year
of Service completed. A “Year of Service” is one in
which the employee worked at least 1,000 hours. Executive
officers are eligible to participate in the 401(k) plan.
The following table sets forth information regarding
compensation earned during the years ended December 31,2007 and 2006 by each individual currently employed by Widmer or
Craft Brands who will be an executive officer of the combined
company following the merger, collectively referred to as the
named executive officers in this table:
Non-Equity
Incentive Plan
All Other
Executive Officer
Year
Salary
Bonus(1)
Compensation(2)
Compensation(3)
Total
Kurt R. Widmer
2007
$
225,000
$
—
$
—
$
10,250
$
235,250
Chief Executive Officer,
2006
225,000
—
57,044
5,563
287,607
President and Chairman of the Board
V. Sebastian Pastore
2007
$
147,391
$
12,000
$
—
$
7,750
$
167,141
Vice President of
2006
133,142
12,000
14,241
4,313
163,696
Operations of Widmer
Terry E. Michaelson
2007
$
178,121
$
15,000
$
132,054
$
10,250
$
335,425
President of Craft Brands
2006
174,300
15,000
86,470
10,000
285,770
Timothy G. McFall
2007
$
152,770
$
9,000
$
68,840
$
7,750
$
238,360
Vice President of
2006
142,500
9,000
48,193
7,360
207,053
Marketing of Craft
Martin J. Wall, IV
2007
$
146,572
$
10,000
$
72,055
$
7,750
$
236,377
Vice President of Sales
2006
137,200
10,000
53,858
7,500
208,558
of Craft Brands
(1)
Represents discretionary quarterly bonuses.
(2)
Represents performance-based short-term and long-term incentive
bonuses earned for the year.
(3)
Represents matching employer contributions to 401(k) plan.
The table below provides information regarding grants of
performance-based short-term bonus awards to the named executive
officers during 2007. The bonus grants were made under the terms
of employment agreements with certain executive officers. The
methodology for calculating performance-based short-term
Represents target amounts for short-term performance bonuses
that are established by the Widmer compensation committee at the
beginning of the fiscal year. Actual amounts awarded are
included in the Non-Equity Incentive Plan Compensation column of
the Summary Compensation Table and described in detail above
under “Widmer Executive Compensation —
Compensation Discussion and Analysis — Incentive
Payments.
(2)
Amounts payable as long-term performance bonuses are not
included in the table since there are no thresholds, targets or
maximum amounts payable. Actual long-term bonus awards are
included in the Summary Compensation Table under the column
“Non-Equity Incentive Plan Compensation”, and
described in detail above under “Widmer Executive
Compensation — Compensation Discussion and
Analysis — Incentive Payments.”
Each of the named executive officers other than Kurt Widmer has
entered into an employment agreement with Widmer or Craft Brands
that, as amended and restated in 2005, is currently in effect. A
description of payments and benefits to be provided to the named
executive officers under various circumstances involving
termination of employment under the agreements follows.
Definition of Certain Terms. Brief summaries
of the definitions of certain terms used in the agreements are
set forth below.
“Cause”means one of the following actions
which is not cured within 30 days of receipt of written
notice of the actions or circumstances constituting cause:
•
A material breach of the employment agreement by the executive;
•
The executive’s refusal or failure to comply with the
company’s policies or to perform any significant job duties;
•
Any act of fraud or dishonesty involving the company or its
business; or
•
The executive’s conviction of or a plea of no contest to a
felony.
“Good Reason”for purposes of an
executive’s termination of his employment means:
•
A substantial adverse change in the nature or status of the
executive’s title, position, duties, or reporting
responsibilities;
•
Failure by the company to comply with any material term of the
agreement;
•
Relocation of the executive to an office more than
200 miles from the present location;
•
A reduction in base salary below the level specified in the
agreement; or
•
Failure to provide the executive with benefits comparable to
those made available by the company to its executives generally.
Payments and Benefits on Termination for Cause or Without
Good Reason. If an executive’s employment is
terminated by the company for cause or by the executive without
good reason, the executive will be entitled to receive accrued
salary through the date of termination, any benefits for which
he is qualified at the date of termination, and the amount of
long-term performance bonuses that had previously been vested
but unpaid. If the named executive officers had been terminated
under these provisions on December 31, 2007, they would
have been entitled to receive, in addition to accrued and unpaid
salary and benefits, the following amounts as vested but unpaid
long-term bonuses: Mr. Widmer, $0; Mr. McFall,
$124,392; Mr. Michaelson, $237,143; Mr. Pastore,
$43,266; and Mr. Wall, $120,892.
Payments and Benefits on Termination Without Cause or for
Good Reason. If an executive’s employment is
terminated by the company without cause or by the executive for
good reason, the executive will be entitled to receive accrued
salary through the date of termination, any earned but unpaid
quarterly discretionary bonus, a portion of the short-term and
long-term performance bonuses for the year as calculated at the
end of the year and pro-rated based on the number of days the
executive worked during the year, and any other benefits to
which the executive is entitled under the terms of the
company’s benefit plans. He is also entitled to receive all
amounts of long-term bonuses that have been earned and not yet
paid, whether or not previously vested.
In addition, Messrs. McFall, Michaelson, Pastore and Wall
are each entitled to a “noncompete option” pursuant to
which they may elect, by notice delivered to the company within
30 days following termination, to receive monthly
noncompete payments for the period specified in their agreements
in exchange for their agreement not to engage in specified
activities relating to a business engaged in the manufacturing,
advertising, promotion or distribution of malt beverages. The
monthly noncompete payment is equal to one month’s base
salary plus (a) one-twelfth of the short-term bonus paid in
the previous calendar year and (b) an amount equal to the
monthly premiums for continued health insurance coverage at the
same level provided prior to termination. The monthly noncompete
payments will cease if the executive engages in one or more of
the specified activities. The executive must also execute a
release of all claims against the company related to the
executive’s employment as a condition to receiving the
monthly noncompete payments.
The following table shows potential pay-outs assuming that the
employment of a named executive officer was terminated on
December 31, 2007, either by the company for reasons other
than cause, death or disability, or by the executive with good
reason, and that the employee elects to exercise his noncompete
option, if any, for the maximum term.
Kurt R.
V. Sebastian
Terry E.
Timothy G.
Martin J.
Widmer
Pastore
Michaelson
McFall
Wall, IV
Cash severance(1)
$
—
$
182,000
$
323,540
$
190,896
$
186,111
Current short-term bonus(2)
—
—
36,165
20,896
24,111
Current long-term bonus(2)
—
—
95,889
47,944
47,944
Accrued long-term bonus(3)
—
43,266
141,254
76,448
72,948
Health insurance premiums
—
—
20,550
13,700
13,700
Accrued vacation
10,581
21,382
32,037
4,232
15,603
Total
$
10,581
$
246,648
$
649,435
$
354,116
$
360,417
(1)
Represents the maximum total amount payable if the executive
exercises his “noncompete option.” The maximum number
of monthly noncompete payments is as follows: Mr. McFall,
12; Mr. Michaelson, 18; Mr. Pastore, 12; and
Mr. Wall, 12.
(2)
These amounts were earned for calendar 2007, as shown on
page 101 above.
(3)
These amounts were earned for years prior to 2007, but were
unpaid at December 31, 2007. All bonuses vest immediately
upon termination without cause or for good reason.
The amounts shown above, excluding cash severance, would have
been payable upon termination of employment by reason of death
or disability on December 31, 2007.
As a privately-held company, Widmer does not have a formal
policy related to the approval of transactions with related
persons. Widmer’s decisions to enter into such transactions
are made by the board of directors pursuant to the proposed
terms of each such transaction.
Widmer leases a storage facility, parking lots and certain
equipment from Widmer Brothers LLC, which members include Kurt
Widmer and Robert Widmer. Lease fees totaled $54,000, $53,000,
and $49,000 for the years ended December 31, 2007, 2006,
and 2005, respectively. In October 2007, the parties entered
into a restated
triple-net
commercial lease with a
10-year term
expiring in 2017, and two consecutive five-year renewal options
at the election of the lessee upon written notice. The initial
monthly rent of $3,678 is subject to annual increase based on
changes in the Consumer Price Index. Rent for a renewal term, if
any, will be equal to the greater of the rent during the
preceding term or a reasonable fair market rental based on
rental values of comparable properties in the vicinity.
In December 2007, Widmer entered into a five year line of credit
facility with a bank. The facility is secured by Widmer’s
assets as well as by certain real property owned by
Smithson & McKay LLC. The limited liability company
has granted a deed of trust as collateral and is a party to the
debt agreement as a grantor. The property is used by Widmer in
normal operating activities.
Transactions with A-B. For the year ended
December 31, 2007, sales to A-B through the A-B
distribution agreement represented 77% of total sales, or
$59,437,000. For the year ended December 31, 2006, sales to
A-B through the A-B distribution agreement represented 82% of
total sales or $51,972,000. For the year ended December 31,2005, sales to A-B through the A-B distribution agreement
represented 81% of total sales, or $44,207,000. A-B is
considered to be Widmer’s major customer.
As part of the A-B distribution agreement, Widmer paid a margin
fee to A-B based on per barrel shipped through the A-B
distribution network. The margin fee does not apply to sales in
Widmer’s retail operations or to dock sales. The
distribution agreement also provides that Widmer will pay an
additional fee on shipments that exceed the volume of shipments
in the same geographical areas as in 2003, the base year. This
fee is an additional or incremental margin fee. For the years
ended December 31, 2007, 2006 and 2005, the margin fee was
paid to A-B on shipments totaling 435,000, 404,000, and
360,000 barrels to 207, 188, and 151 distribution points,
respectively. As shipments of product have increased from the
2003 volumes, Widmer also paid an incremental margin fee on
114,000, 81,000, and 38,000 barrels in the three years
ended December 31, 2007, 2006 and 2005, respectively. For
the years ended December 31, 2007, 2006 and 2005, Widmer
paid a total of $4,080,000, $3,498,000, and $2,868,000,
respectively, related to the margin and incremental margin. The
margin and additional margin are reflected as a reduction of
sales in Widmer’s statements of operations.
In connection with all sales through the A-B distribution
agreement, Widmer also paid fees to A-B related to
administration and handling, invoicing costs, staging costs, and
inventory manager fees which are reflected in cost of sales in
Widmer’s statements of operations. These fees collectively
totaled $155,000, $161,000 and $118,000 for the three years
ended December 31, 2007, 2006 and 2005, respectively.
In certain instances, Widmer may ship its product to A-B
wholesaler support centers rather than directly to the
wholesaler. Wholesaler support centers assist Widmer by
consolidating small wholesaler orders with orders of other A-B
products prior to shipping to the wholesaler. A wholesaler
support center fee of $165,000, $126,000 and $0 is reflected in
Widmer’s statements of operations for the years ended
December 31, 2007, 2006, 2005, respectively
Widmer purchased certain materials through A-B totaling
$6,915,000, $6,516,000 and $4,727,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Widmer entered into an agreement with A-B during 2007 in
connection with a contract brewing arrangement. During 2007,
Widmer paid A-B $651,000 for services and $241,000 for equipment
related to this arrangement.
Fees paid to A-B in connection with the distribution of
Widmer’s products, including the margin, incremental
margin, invoicing cost, staging cost, cooperage handling charge,
inventory manager fee and wholesaler support center fee, totaled
$4,400,000, $3,785,000 and $2,986,000 during the years ended
December 31, 2007, 2006 and 2005, respectively. In
connection with services provided under other arrangements with
A-B, Widmer paid to A-B fees totaling $651,000 during the year
ended December 31, 2007. There were no fees paid to A-B in
connection with other arrangements during the years ended
December 31, 2006 and 2005, respectively. The net amount
due to A-B was $4,138,000 and $2,692,000 as of December 31, 2007
and 2006.
Following the merger, the relationship between the surviving
corporation and A-B will be governed by the agreements between
Redhook and A-B, as modified by amendments currently being
negotiated. See “Agreements related to the
Merger — Agreements with Anheuser-Busch” and
“Certain Transactions of Redhook.”
Transactions with Redhook. In 2003,
Widmer entered into a licensing agreement with Redhook to
produce and sell the Widmer Hefeweizen brand in states
east of the Mississippi River. In March 2005, the Widmer
Hefeweizen distribution territory was expanded to include
all of the midwest and eastern markets. Brewing of this product
is conducted at Redhook’s New Hampshire Brewery under the
supervision and assistance of Widmer’s brewing staff to
insure brand quality and matching taste profile. The term of
this agreement originally expired February 1, 2008 with an
additional one-year automatic renewal unless either party
notifies the other of its desire to have the term expire at the
end of the then existing term at least 150 days prior to
such expiration. The agreement was automatically renewed for a
one year term in February 2008. The agreement may be terminated
by either party at any time without cause pursuant to
150 days notice or for cause by either party under certain
conditions. Additionally, Widmer entered into an agreement with
Redhook providing that if Widmer terminates the licensing
agreement or causes it to expire before December 31, 2009,
Widmer will be required to pay Redhook a lump sum payment to
partially compensate Redhook for capital equipment expenditures
made at the New Hampshire Brewery to support Widmer’s
growth. During the term of these agreements, Redhook will not
brew, advertise, market, or distribute any product that is
labeled or advertised as a “Hefeweizen” or any similar
product in the agreed upon midwest and eastern territory.
Brewing and selling of Redhook’s Hefe-weizen was
discontinued in conjunction with this agreement. Under the terms
of the agreement, Widmer recognized licensing fee income of
$432,000, $436,000 and $376,000 for the three years ended
December 31, 2007, 2006 and 2005, respectively. The
licensing fees are included in Widmer’s statements of
operations as royalty income.
In connection with a contract brewing arrangement between Widmer
and Redhook, Redhook produced 81,900, 43,000 and
8,900 barrels of Widmer beer during the years ended
December 31, 2007, 2006 and 2005, respectively. Pursuant to
Redhook’s agreement with Craft Brands, if shipments of
Redhook’s products in the western United States decrease,
as compared to the previous year’s shipments, Redhook will
have the right to brew Widmer’s products in an amount equal
to the lower of (i) the Redhook product shipment decrease
or (ii) Widmer product shipment increase. The contract
brewing arrangement with Redhook expired December 31, 2007.
A new 2008 agreement with Redhook to continue contract brewing
was executed in February 2008.
Pursuant to Widmer’s distribution agreement with Redhook
through its subsidiary, Craft Brands, Widmer purchases product
from Redhook for distribution. During each of the three years
ended December 31, 2007, 2006 and 2005, Widmer purchased
product totaling $7,615,000, $7,748,000, and $8,085,000,
respectively.
Pursuant to Widmer’s distribution agreement with Redhook
through its subsidiary, Craft Brands, Widmer receives a fee from
Redhook equal to the margin on Redhook’s product sales in
the state of Washington. The amounts received from Redhook under
this agreement totaled $4,380,000, $3,915,000 and $3,715,000 for
the years ended December 31, 2007, 2006, and 2005,
respectively.
Following the merger, Widmer and Craft Brands will no longer be
separate legal entities and all agreements among Redhook, Widmer
and Craft Brands will be of no further force and effect.
Change
in Status of Redhook’s Current Chief Executive Officer and
Certain Directors
Paul Shipman, Redhook’s Chairman of the Board and Chief
Executive Officer, has entered into a letter agreement with
Redhook that will become effective upon closing of the merger.
Under this agreement, Mr. Shipman will cease to serve as
the Chief Executive Officer and will be employed for a term of
approximately one year following the merger as a consultant to
the board of directors with the title of Chairman Emeritus and
Consultant to the Board. Frank Clement, John Glick, Michael
Loughran and Paul Shipman, who currently serve as Redhook
directors, will not continue as directors following the merger.
Executive
Officers and Directors of the Combined Company Following the
Merger
The combined company’s board of directors will consist of a
total of two current Redhook independent directors, two
directors designated by A-B and three directors designated by
Widmer. The Widmer designees who will join the combined
company’s board of directors are: Kurt Widmer, who will
serve as Chairman of the Board, Timothy Boyle and Kevin Kelly.
The other four directors will be David Lord and John
Rogers, Jr. and A-B designated directors Andrew Goeler and
Anthony Short. Messrs. Lord, Rogers and Short currently
serve as Redhook directors. Mr. Goeler has been designated
by A-B to replace John Glick, who currently serves as one of the
A-B designated Redhook directors. Following the merger, a
majority of the board of directors of the combined company will
be composed of independent directors (as defined by Nasdaq
Marketplace Rule 4200(a)(15)). The directors will stand for
election annually.
The following table lists the names and ages as of
December 31, 2007 and positions of the individuals who are
expected to serve as executive officers and directors of the
combined company upon completion of the merger:
Name
Age
Position
Executive Officers and Directors
Terry E. Michaelson
54
Co-Chief Executive Officer
David J. Mickelson
48
Co-Chief Executive Officer
Jay T. Caldwell
55
Chief Financial Officer and Treasurer
Mark D. Moreland
43
Chief Accounting Officer
Martin J. Wall, IV
36
Vice President, Sales
Timothy G. McFall
42
Vice President, Marketing
V. Sebastian Pastore
41
Vice President, Brewing Operations and Technology
Kurt R. Widmer
56
Chairman of the Board
Timothy P. Boyle
58
Director
Andrew R. Goeler
51
Director
Kevin R. Kelly
58
Director
David R. Lord
59
Director
John D. Rogers, Jr.
64
Director
Anthony J. Short
48
Director
Directors
Timothy P. Boyle. Mr. Boyle has served as
a director of Widmer since May 1999. Since 1989, Mr. Boyle
has served as President and Chief Executive Officer of Columbia
Sportswear Company, an active outdoor apparel and footwear
company headquartered in Portland, Oregon. He began working with
Columbia
Sportswear Company in 1970. Mr. Boyle is a member of the
boards of directors of Columbia Sportswear Company, Northwest
Natural Gas Company, the University of Oregon Foundation and
Oregon Trout. He is a trustee of Reed College, the Youth Outdoor
Legacy Fund and a past member of the Young Presidents’
Organization. He earned a Bachelor of Science degree in
Journalism from the University of Oregon.
Andrew R. Goeler. Mr. Goeler has served
as a director of Widmer since August 2005 and been employed by
A-B since 1980. Since 1995, Mr. Goeler has held various
positions in the Marketing Division at A-B, including heading up
the Bud Light and Budweiser brands. He currently serves as Vice
President, Import, Craft and Specialty Group. Prior to 1995,
Mr. Goeler held various field sales positions, including
Geographical Marketing and Executive Assistant to the Vice
President of Sales, and served in the Wholesale Operations
Division. Mr. Goeler earned a Master’s Degree in
Marketing from Fairleigh Dickinson University and a
Master’s Degree in International Business from Webster
University.
Kevin R. Kelly. Mr. Kelly has been a
director of Widmer since September 1995. He has been the Chief
Executive Officer and owner of McCall Heating and Cooling, an
oil sales and heating/cooling contractor since 1994. He was
elected President and Chief Executive Officer of
U.S. Bancorp in 1993 after holding the position of
President and Chief Executive Officer of U.S. Bank of
Oregon since 1987. He began his 16 year career at
US Bancorp with principal assignments in corporate
planning, business development, and as head of the investment
group. He is an alumnus of Portland, Oregon’s Jesuit High
School, and graduated with a bachelor’s degree from
Santa Clara University which he attended on a basketball
scholarship. He graduated from the University of Oregon with a
Masters degree (1973) and a Ph.D. (1974) in Economics
with subsequent teaching engagements at the University of
Oregon, Reed College, and Lewis and Clark College. He
participates as a director of Northwest Bank and The Sisters of
Providence Pension Trustees. His current charitable interests
also include children at risk (St. Mary’s Home for
Boys, Thomas Edison High School, and De La Salle High
School, the arts (Portland Center Stage), religion (Legatus and
Mt. Angel Foundation) and community development (Portland Oregon
Sports Authority).
Kurt R. Widmer. Mr. Widmer co-founded
Widmer Bros. Brothers Brewing Company with his brother, Robert
Widmer, in 1984 and has served as President, Chief Executive
Officer and Chairman of the Board since that time.
Mr. Widmer earned a Bachelor’s Degree in Psychology
from the University of Oregon. He is a member of the board of
directors and past president of the Oregon Brewers Guild.
For biographical information regarding Messrs. Lord, Rogers
and Short, see “Matters Being Submitted to a Vote of
Redhook Shareholders — Redhook
Proposal No. 1” beginning on page 69.
Executive
Officers
Timothy McFall. Mr. McFall has served as
Vice President of Marketing of Craft Brands since July 2004.
From May 1995 to June 2004, he served as Vice President of
Marketing of Widmer. From September 1990 to April 1995,
Mr. McFall was Senior Product Manager at G. Heilman Brewing
Company and from May 1986 to September 1988, he worked in sales
and merchandising at Coast Distributing Co., a beer distributing
company. Mr. McFall earned a Bachelor’s Degree in
Psychology from Willamette University in 1987 and a
Master’s Degree in Marketing from the Atkinson School at
Willamette University in 1990.
Terry E. Michaelson. Mr. Michaelson has
served as President of Craft Brands since July 2004. From March
1995 to June 2004, he served as Chief Operating Officer and
Executive Vice President of Widmer, and from August 1993 to June
2004, Mr. Michaelson served as a director of Widmer. From
January 1994 to February 1995, he served as Director of
Operations of Widmer. From December 1984 to December 1993,
Mr. Michaelson held various positions at Etcetera Inc., a
fashion accessory retailer, including President and Chief
Operating Officer. Mr. Michaelson earned a Bachelor’s
Degree in Liberal Studies from Oregon State University and a
Master’s Degree in Education from Lewis & Clark
College.
Mark D. Moreland. Mr. Moreland has served
as Chief Financial Officer of Widmer since April 1, 2008.
From July 2006 to November 2007, he was Executive Vice President
and Chief Financial Officer of Knowledge Learning Corporation
(KLC), the $1.7 billion parent company of the KinderCare
early childhood
education business. From July 2005 to June 2006, he held Interim
CFO and Senior Vice President - Finance and Treasurer roles with
Movie Gallery, Inc., which operates the Movie Gallery and
Hollywood Entertainment video rental chains. From August 2002 to
July 2005, he was Senior Vice President, Finance and Treasurer
of Hollywood Entertainment Corporation, which was acquired by
Movie Gallery in April 2005. Movie Gallery and each of its U.S.
affiliates, including Hollywood Entertainment, filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code on
October 16, 2007. Their plan of reorganization was
confirmed by the Bankruptcy Court on April 10, 2008.
Mr. Moreland also previously worked with Kmart Corporation,
Deloitte Consulting, Blue Shield of California and the
U.S. General Accounting Office. Mr. Moreland earned an
MBA from the University of Michigan and a B.S. in Economics from
the University of Texas at Arlington.
V. Sebastian Pastore. Mr. Pastore
has served as Vice President of Brewing of Widmer since March
2001. From June 2000 to March 2001, he worked for The
Coca-Cola
Company. From December 1994 to June 2000, Mr. Pastore
worked at Widmer serving as the Director of Brewing and from
January 1990 to November 1994, he served as the Assistant
Brewmaster. Mr. Pastore earned a Bachelor’s Degree in
Psychology from Reed College and an MBA from George Fox
University in 2007.
Martin J. Wall, IV. Mr. Wall has served
as Vice President of Sales of Craft Brands since July 2004. From
September 2000 to June 2004, he served as Vice President of
Sales of Widmer. Prior to September 2000, Mr. Wall held
various positions at Widmer, including Market Manager and
Brewery Representative. Prior to his career at Widmer, he worked
as a bartender and played professional basketball in Europe.
Mr. Wall graduated from Gonzaga University with a Bachelor
of Science degree in Finance.
For biographical information regarding Messrs. Caldwell and
Mickelson, see Item 4A, “Executive Officers of the
Company” in Redhook’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, which
accompanies this joint proxy statement/prospectus.
Please see Redhook’s Annual Report on
Form 10-K,
as amended, for the fiscal year ended December 31, 2007 as
filed with the Securities and Exchange Commission and as
accompanying this joint prospectus/proxy statement, for
information about Redhook’s business and management’s
discussion and analysis of Redhook’s financial condition
and results of operations as of and for each of the three years
in the period ended December 31, 2007.
Widmer was incorporated in Oregon in 1984 and is headquartered
in Portland, Oregon. Widmer was founded by brothers Kurt and
Robert Widmer, who established the company with a mission to
create high-quality American interpretations of authentic
European beer styles. Widmer is a leading brewer of craft beers,
including its signature product Widmer Hefeweizen —
America’s Original
Hefeweizen®,
which has grown in popularity over the past decade. Other
year-round offerings include Drop Top Amber
Ale®
and Broken Halo
IPA®.
In addition, Widmer periodically introduces seasonal beers to
the market — such as its Snowplow Milk Stout,
its annual Oktoberfest offerings, and its
“W” Brewmasters’ Release Series.
Widmer produces its specialty bottled and draft products at its
company-owned brewery in Portland, Oregon, and through contract
brewing arrangements with Redhook. Widmer also owns and operates
the Widmer Brothers Gasthaus Pub adjacent to its brewery.
In July 2004, Widmer and Redhook formed their joint venture
limited liability company, Craft Brands Alliance, LLC, which we
refer to as Craft Brands. Under the terms of the joint venture,
Widmer and Redhook established Craft Brands as a joint sales and
marketing organization that serves both companies’
operations in twelve western states. See the discussion under
the subheading “Craft Brands” in this section below.
Widmer distributes substantially all of its products, either
directly or through Craft Brands, through the A-B wholesaler
distribution network. Pursuant to a licensing agreement with
Widmer, Redhook produces Widmer Hefeweizen, which it
sells in the midwest and eastern U.S. through the A-B
network. As of December 31, 2007, A-B owned 40.5% of
Widmer’s outstanding common stock. See the subheading
“Relationship with A-B” below.
Widmer has contractual relationships with Kona Brewery LLC of
Hawaii, which we refer to as Kona, pursuant to which Kona’s
products are distributed through Widmer, Craft Brands, and the
A-B wholesaler distribution network. Widmer owns 20% of Kona,
while Kona owns 2% of Widmer in the form of nonvoting
Series D Preferred Stock. Kona beers are produced at its
Hawaii brewery and at Widmer’s Portland brewery, pursuant
to an alternating proprietorship agreement between Widmer and
Kona.
In September 2006, Widmer purchased a 42% equity interest in
Fulton Street Brewery, LLC. Fulton Street Brewery owns all
brewing facilities and operations (other than brewpubs) for
Goose Island beers. Goose Island beers are distributed through
Widmer and the A-B wholesaler distribution network.
Industry
Background
Widmer is what is known as a craft brewer. Craft brewing is a
relatively small segment of the brewing industry in the U.S.,
which itself represents only a portion of the U.S. overall
alcoholic beverages industry. The domestic beer market is
comprised of lagers and ales produced by large domestic brewers,
international brewers and craft brewers. The three largest
domestic brewers account for more than 76% of total beer shipped
in the U.S., including imports. Craft beer is a growing segment,
but its share remains small at less than 5% of the domestic beer
market. Nonetheless, the number of craft brewers in the
U.S. has grown dramatically, increasing from approximately
625 at the end of 1994 to an estimated 1,400 today.
Annual per capita domestic beer consumption has declined from
highs experienced in the early 1980s as a result of various
factors, including changing tastes, health and safety issues,
and competition from other
products. At the same time, a sizable number of beer consumers
have migrated away from the major domestic products toward
higher end offerings, such as craft or microbrews and imports,
mirroring similar trends in other beverage and cuisine
categories. Regional specialty brewers, microbreweries, and
brewpubs have proliferated to meet the changing demands of
consumers.
Brewing
Operations
Beer is made primarily from four natural ingredients: malted
grain, hops, yeast and water. The grain most commonly used in
brewing is barley, owing to its distinctive germination
characteristics that make it easy to ferment. A wide variety of
hops may be used to add seasoning. Nearly all the yeasts used to
induce or augment fermentation of beer are of the species
Saccharomyces cerevisiae.
Widmer currently purchases a significant portion of its malted
barley from a single supplier, its wheat from another supplier
and its premium-quality select hops, grown in the Pacific
Northwest, Germany and Czech Republic, are purchased from a
number of competitive sources. In order to ensure the supply of
the hop varieties used in its products. Widmer sometimes enters
into long-term supply contracts. Widmer believes that comparable
quality malted barley and hops are available from alternate
sources at competitive prices. Widmer currently cultivates its
own Saccharomyces cerevisiae yeast supply and maintains a
separate, secure supply in house.
Widmer packages its craft beers in both bottles and kegs. Widmer
has access to multiple competitive sources for packing
materials, such as bottles, labels, six-pack carriers, crowns
and shipping cases. Widmer purchases many of its packaging
supplies and raw materials from A-B or A-B’s vendors at
significant savings to Widmer.
As of April 2008, Widmer had completed a significant portion of
a $24.5 million expansion of its Portland brewery. The
expansion has consolidated keg racking and shipping functions
and increased space for warehouse, cold storage, docking and
quality assurance laboratory operations. The expansion also has
added six new fermentation tanks to the brewery. Assuming
continued manufacture of product lines substantially similar to
current production, the estimated theoretical production
capacity of the expanded Portland brewery is approximately
420,000 barrels. Additional production capacity can be
added until the brewery reaches its maximum designed capacity of
550,000 barrels. Widmer anticipates that the remaining
aspects of the expansion project that do not directly affect
production capacity will be completed by mid-June 2008.
Product
Distribution
Widmer’s products are available for sale directly to
consumers in draft and bottles at restaurants, bars and liquor
stores, as well as, depending on the market, in bottles at
supermarkets, club stores, and convenience and drug stores. Beer
is generally delivered to retail outlets through a network of
local distributors whose principal business is the distribution
of beer and, in some cases, other alcoholic beverages, and who
traditionally have distribution relationships with one or more
national beer brands. Widmer and Craft Brands distribute Widmer
products through the A-B wholesaler distribution network. See
the discussion under the subheading “Relationship with
A-B” below. Widmer also offers its products directly to
consumers at its retail establishment located at its Portland
brewery and through the adjacent Widmer Brothers Gausthaus Pub.
Widmer sells its product in the state of Washington directly to
independent A-B wholesalers.
Craft
Brands
Craft Brands is a joint venture between Widmer and Redhook that
purchases products from Widmer and Redhook and markets,
advertises, sells and distributes those products in the
following twelve western states: Alaska, Arizona, California,
Colorado, Hawaii, Idaho, Montana, New Mexico, Nevada, Oregon,
Utah, and Wyoming. Widmer and Redhook are each a 50% member of
the Craft Brands limited liability company, and they each have
the right to designate two directors to its six member board.
A-B is entitled to designate the remaining two directors.
Widmer’s sales in the state of Washington are deemed to
have been made through Craft Brands for purposes of calculating
Craft Brands’ expenses and revenues.
The operation of Craft Brands is governed by its operating
agreement, which requires Widmer and Redhook to make capital
contributions and loans to Craft Brands to support its
operations, depending on financial performance and the capital
needs of Craft Brands. Craft Brands profits and losses are
presently allocated 58% to Widmer and 42% to Redhook.
Under Widmer’s supply and distribution agreement with Craft
Brands, Widmer manufactures and sells its products directly to
Craft Brands, which, in turn, advertises, markets, and
distributes the products through
A-B’s
wholesaler distribution network. Widmer has granted Craft Brands
a license to use its intellectual property in connection with
these efforts. Craft Brands may discontinue distribution of a
Widmer product if sales volumes do not reach certain targets.
The financial results of Craft Brands are consolidated with
those of Widmer in Widmer’s consolidated financial
statements. See “Widmer Management’s Discussion and
Analysis of Financial Condition and Results of
Operation — Summary of Critical Accounting Policies
and Estimates — Investment in Craft Brands” for a
discussion of Widmer’s accounting for Craft Brands.
Relationship
with A-B
A-B owns 40.5% of Widmer’s common stock and is a party to
distribution agreements with each of Widmer and Craft Brands.
A-B may terminate the distribution agreements upon the
occurrence of several events of default, including, without
limitation, a material default by Widmer or Craft Brands that is
not cured within 30 days or conduct by Widmer or Craft
Brands that damages the reputation or image of A-B or the beer
industry.
Widmer and Craft Brands pay various fees to A-B in connection
with the sale of Widmer products, including margin fees, an
invoicing cost fee, and certain staging and inventory management
fees. Widmer pays the margin fee to A-B on all sales through the
A-B distribution network. This fee is not paid on retail
operations or dock sales. Widmer pays an additional margin fee
on shipments that exceed shipments for the same territory during
fiscal 2003.
A-B and Widmer are party to an exchange and recapitalization
agreement and a registration rights agreement that provide A-B
with contractual rights, including, without limitation, the
right to designate two members of Widmer’s board of
directors and the right to have a designee sit on each committee
of Widmer’s board of directors. These agreements also limit
Widmer’s ability to issue equity securities or acquire or
sell assets or stock, amend its articles of incorporation or
bylaws, grant board representation rights, enter into
transactions with affiliates, distribute its products in the
U.S. other than through A-B or Craft Brands, or dispose of
any of its interest in Craft Brands, in each case without the
prior consent of A-B. Under a related letter agreement, Kurt and
Robert Widmer on the one hand, and A-B on the other hand, each
have the right, in connection with a proposal by either of them
to sell all or a portion of their shares of Widmer common stock
to a third party, to purchase (or, in the case of Kurt and
Robert Widmer, to cause Widmer to purchase) the shares proposed
to be sold to the third party. Alternatively, they may elect to
sell their shares to the third party on a proportionate basis.
In addition, if A-B determines to enter into an agreement with a
third party to purchase both its shares of Widmer common stock
and those held by Kurt and Robert Widmer, A-B shall cause the
third party to offer to purchase all shares of Widmer common
stock held by each other Widmer shareholder on the same terms.
The exchange and recapitalization agreement, registration rights
agreement and letter agreement are expected to be terminated
upon the closing of the merger of Widmer into Redhook.
Widmer believes that the benefits of distribution agreements
between A-B and each of Widmer and Craft Brands are significant
to its business, particularly the increased sales volume and
efficiencies in delivery, state reporting and licensing, billing
and collections. If the A-B distribution agreements were
terminated, it would be extremely difficult for Widmer to
rebuild its distribution network without a severe negative
impact on sales, operating results and financial condition. The
termination of the A-B distribution agreements would also
constitute an event of default under Widmer’s bank credit
agreement, see the discussion of the credit agreement under
“Widmer Management’s Discussion and Analysis of
Financial Condition and Results of Operation — Credit
Agreement” below, and would be grounds for either Widmer or
Redhook to terminate the operating agreement for Craft Brands.
Widmer competes in the highly competitive craft brewing market
as well as in the much larger specialty beer market, which
encompasses producers of import beers, major national brewers,
and large spirits companies and national brewers that produce
flavored alcohol beverages. Most of these brewers and other
producers have significantly greater financial resources than
Widmer. In response to the growth of the craft beer segment,
major domestic brewers have introduced fuller-flavored beers in
addition to their traditional products. Beyond the beer market,
Widmer also faces competition from producers of wines and
spirits.
The craft beer segment is highly competitive due to the
proliferation of small craft brewers, the large number of
products offered by such brewers, and the expanded distribution
of many once regional or local producers. Such competition
varies by regional market. Depending on local market preferences
and distribution, Widmer competes with various microbreweries,
including Sierra Nevada Brewing Company, Deschutes Brewery,
Pyramid Breweries and New Belgium Brewing Company, as well as
with contract brewers such as Boston Beer Company, the maker of
Samuel
Adamstm.
A significant portion of Widmer’s sales continue to be in
the Pacific Northwest region, which is one of the most
competitive craft beer markets in the U.S., both in terms of the
number of participants and consumer awareness. Widmer faces
extreme competitive pressure in both Oregon and Washington
state, which constitute Widmer’s largest and oldest
markets, and any failure to compete effectively in these markets
would have a material adverse effect on Widmer’s results of
operations.
Regulation
Widmer’s business is highly regulated at federal, state and
local levels. Various permits, licenses and approvals are
necessary for brewery and pub operations and the sale of
alcoholic beverages. In addition, the beer industry is subject
to substantial federal and state excise taxes. Widmer believes
that it has all licenses, permits and approvals necessary for
its current operations. However, existing licenses, permits or
approvals could be revoked if Widmer fails to comply with their
terms. Additional permits or licenses could also be required for
existing or expanded operations.
Widmer’s brewery and pub are subject to licensing and
regulation by a number of governmental authorities, including
the Alcohol and Tobacco Tax and Trade Bureau, which requires the
filing of a “Brewer’s Notice” or an amendment
thereto upon the establishment or material changes in a
commercial brewing operation, or changes in its location,
management or ownership. Operations are subject to audit and
inspection by the Alcohol and Tobacco Tax and Trade Bureau at
any time.
Widmer’s brewery is also subject to various regulations
concerning retail sales, pub operations, deliveries and selling
practices in states in which it sells products. Failure to
comply with applicable federal or state regulations could result
in limitations on Widmer’s ability to conduct its business.
Federal permits can be revoked for failure to pay taxes, to keep
proper accounts, to pay fees, to bond premises, to abide by
federal alcoholic beverage production and distribution
regulations, or if holders of 10% or more of Widmer’s
equity securities are found to be of questionable character.
Permits from state regulatory agencies can be revoked for many
of the same reasons.
Taxation
The U.S. government currently imposes an excise tax of $18
per barrel on beer sold for consumption in the United States.
However, any brewer with annual production under two million
barrels instead pays federal excise tax in the amount of $7 per
barrel on sales of the first 60,000 barrels. Widmer is not
aware of any plans by the federal government to reduce or
eliminate this benefit to small brewers, but any material
reduction could have an adverse effect on the results of
operations. Individual states also impose excise taxes on
alcoholic beverages in varying amounts, which are subject to
change. It is possible that excise taxes will be increased in
the future by both the federal government and several states,
which could negatively effect Widmer’s operations and sales.
Widmer operates one brewery in Portland, Oregon. This facility
is located on approximately 1.07 acres in Northeast
Portland and, including the facility expansion that was largely
complete in April 2008, is comprised of a three contiguous
buildings totaling approximately 116,650 square feet of
floor space. The buildings house a
250-barrel
brewhouse, fermentation cellars, grain storage silos, a bottling
line, a keg filling line, dry storage, two coolers and six
loading docks. Widmer’s Portland campus includes two
additional structures on a lot across from the main brewing
facility; one 40,000 square foot building containing three
floors of office space, a retail merchandise outlet, and the
Widmer Brothers Gasthaus Pub, a family-oriented pub that seats
approximately 125, with an upstairs banquet facility that seats
95. An adjacent 15,000 square foot addition houses
filtration and beer storage cellars. Widmer owns the bottling
plant and warehouse located at 924 North Russell Street and
2511 N. Mississippi Avenue, and leases all other real
estate used in its operations, including, without limitation, a
microbrewery located at the Rose Quarter arena in Portland,
Oregon.
Employees
At December 31, 2007, Widmer had 120 employees,
including 50 in production, 52 in the Gasthaus Pub, and 18 in
administration. Of its total employees, 43 are part time. Craft
Brands employs 61 people, none of whom are part time.
Widmer and Craft Brands each believe their relations with
employees are good.
The following discussion of Widmer’s financial condition
and results of operations should be read in conjunction with
Widmer’s consolidated financial statements and the notes to
those statements included elsewhere in this joint proxy
statement/prospectus. The following discussion contains
forward-looking statements. Actual results may differ
significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ
materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in
“Risk Factors — Risks Related to the Merger”
and “Risk Factors — Risks Related to the Combined
Company” and elsewhere in this joint proxy
statement/prospectus. See also “Forward-Looking
Statements.”
Overview
Widmer Brothers Brewing Company and its consolidated 50% joint
venture, Craft Brands, are collectively referred to herein as
Widmer.
Pursuant to the guidelines of FIN 46R discussed below in
Critical Accounting Policies, the financial results of Craft
Brands are consolidated with those of Widmer Brothers Brewing
Company and included herein as a consolidated entity in this
joint proxy statement/prospectus. Profits and losses of Craft
Brands are defined under an operating agreement and are
allocated 58% to Widmer and 42% to Redhook. The 42% distribution
to Redhook is reflected as a minority interest in Widmer’s
accompanying financial statements.
For the year ended December 31, 2007, Widmer had gross
sales and a net income of $77,734,000 and $1,000, respectively,
compared to gross sales and net income of $63,599,000 and
$2,900,000 for the year ended December 31, 2006.
Widmer Brothers Brewing Company was incorporated in Oregon in
1984 and produces malt beverages in bottled and draft products
at its production facilities in Portland, Oregon. Over the past
several years, Widmer has also utilized third party production
facilities under contract brewing arrangements. In 1995, Widmer
opened the Widmer Brothers Gasthaus Pub restaurant adjacent to
the production facilities in Portland.
Substantially all of Widmer’s products are sold and
distributed in 14 western states through Craft Brands and the
A-B wholesaler distribution network. Due to state liquor
regulations, Widmer Brothers and Redhook each sell its products
in Washington State directly to third party distributors and
return a portion of the revenue to Craft Brands based on a
contractually determined formula. Due to the consolidation of
Craft Brands, the fees paid by Widmer Brothers Brewing Company
are eliminated in the consolidated results of Widmer.
In addition to the ownership and operation of Craft Brands,
Widmer and Redhook are also party to two other agreements: the
contract brewing arrangements and the licensing agreement.
The contract brewing arrangements are outlined in two
agreements: the Supply, Distribution and Licensing Agreement
with Craft Brands and the Manufacturing and Licensing Agreement
with Redhook. Pursuant to the Supply, Distribution and Licensing
Agreement with Craft Brands, if shipments of Redhook products in
the western U.S. decrease as compared to the previous
year’s shipments, Redhook has the right to brew Widmer
products in an amount equal to the lower of
(i) Redhook’s product shipment decrease or
(ii) the Widmer product shipment increase. In addition,
Redhook may, pursuant to a Manufacturing and Licensing Agreement
with Widmer, brew more beer for Widmer than the amount obligated
by the Supply, Distribution and Licensing Agreement with Craft
Brands. The Manufacturing and Licensing Agreement, as amended,
has an expiration date of December 31, 2008. In connection
with these contract brewing arrangements, Redhook brewed and
shipped 81,900, 43,000 and 8,900 barrels of Widmer draft
and bottled product during the years ended December 31,2007, 2006 and 2005, respectively. Widmer’s payments under
these contract brewing arrangements totaled $7,363,000,
$3,264,000, and $781,000 during the years ended
December 31, 2007, 2006 and 2005, respectively.
In 2003, Widmer entered into a licensing agreement with Redhook
whereby Redhook produces and sells the Widmer Hefeweizen
brand in states east of the Mississippi River. In March
2005, the Widmer Hefeweizen distribution territory was
expanded to include all of the Redhook’s midwest and
eastern markets. Brewing of this product is conducted at
Redhook’s New Hampshire Brewery under the supervision and
assistance of
Widmer’s brewing staff to insure the brand’s quality
and matching taste profile. The term of this agreement
automatically renewed on February 1, 2008 for an additional
one-year term expiring on February 1, 2009. The agreement
term provides for additional one-year automatic renewals unless
either party notifies the other of its desire to have the term
expire at the end of the then existing term at least
150 days prior to such expiration. The agreement may be
terminated by either party at any time without cause pursuant to
150 days notice or for cause by either party under certain
conditions. Additionally, Redhook and Widmer have entered into a
secondary agreement providing that if Widmer terminates the
licensing agreement or causes it to expire before
December 31, 2009, Widmer will pay Redhook a lump sum
payment to partially compensate Redhook for capital equipment
expenditures made at Redhook’s New Hampshire Brewery to
support Widmer’s growth. During the term of this agreement,
Redhook will not brew, advertise, market, or distribute any
product that is labeled or advertised as a
“Hefeweizen” or any similar product in the agreed upon
midwest and eastern territory. Brewing and selling of
Redhook’s Hefe-weizen was discontinued in conjunction with
this agreement. Redhook shipped 28,800, 30,600 and
25,600 barrels of Widmer Hefeweizen during the years
ended December 31, 2007, 2006 and 2005, respectively. A
licensing fee of $432,000, $436,000 and $376,000 is reflected as
sales in Widmer’s statement of operations for the years
ended December 31, 2007, 2006 and 2005, respectively.
In 2003, Widmer acquired a 20% equity ownership in Kona Brewery
LLC. Kona was founded in 1995 to produce and distribute
specialty craft beers. Kona is located in Kailua-Kona, Hawaii,
and reported total assets of $4,160,000 as of December 31,2007. In addition to its equity participation in Kona’s
operating results, Widmer has executed several operating
agreements with Kona whereby (i) Kona produces a portion of
its malt beverages at the Widmer production facility in
Portland, Oregon, and (ii) Widmer purchases product
from Kona and in turn sells and distributes the Kona
products. Widmer pays a royalty fee to Kona based on sales in
the continental United States.
In 2006, Widmer purchased a 42% equity ownership in Fulton
Street Brewery, LLC. FSB was founded in 2006 and produces and
distributes craft beers under the brand label Goose Island. FSB
is located in Chicago, Illinois, and reported total revenues and
total assets of $15,419,000 and $7,865,000, respectively, for
the year ended December 31, 2007. Pursuant to operating
agreements with FSB, Goose Island products are promoted by both
FSB and by Widmer and Goose Island products are distributed
through Widmer and the A-B wholesaler distribution network.
Widmer has accounted for its investment in Kona and FSB under
the equity method, as outlined by APB No. 18, The Equity
Method of Accounting for Investments in Common Stock.
Widmer sales of draft and bottled malt beverages accounted for
86% and 91% of total revenues in 2007 and 2006, respectively.
The products are sold to distributors in 14 states with
sales of 67% and 74% occurring in Oregon, California and
Washington for the years ended December 31, 2007 and 2006,
respectively.
Widmer derives additional revenues from direct retail sales of
its craft beer, sales of beer, food and promotional merchandise
in the Widmer Brothers Gasthaus Pub, equity investment
participation with FSB and Kona, and operational relationships
with Redhook and Kona discussed below.
See the discussion under the heading “Widmer’s
Business” above for additional detail.
Summary
of Significant Events Affecting Results
Widmer’s financial results for the years ended 2007, 2006
and 2005 which are presented in the financial statements
included with this joint proxy statement/prospectus were
affected by key transactions that occurred during the years
presented, including:
•
In November 2006, Widmer commenced a significant brewery
expansion and renovation. A significant portion of the
$24.5 million project was completed in April 2008. During
the construction period, Widmer has relied on contract brewing
arrangements for a significant amount of its production.
Contract brewing fees are typically higher than internal
production costs.
•
Production and distribution of Kona products that are promoted
by, and distributed through Widmer and the A-B wholesaler
distribution network have experienced significant growth in 2007
from levels in 2006 and 2005.
•
Widmer has incurred professional fees and other costs related to
the proposed merger with Redhook.
The following table sets forth, for the years indicated, certain
items from Widmer’s Statements of Operations expressed as a
percentage of net sales:
Year Ended December 31
2007
2006
Restated
Sales
103.3
%
105.3
%
Less excise taxes
3.3
5.3
Net sales
100.0
100.0
Cost of sales
68.9
64.1
Gross profit
31.1
35.9
Selling, general and administrative expenses
24.2
24.3
Merger costs
2.1
—
Gain (loss) on sale of equipment
—
(0.5
)
Income from operations
4.8
11.1
Interest expense, net
(0.9
)
(0.3
)
Other income (expense), net
(0.1
)
—
Income from equity method investments
0.5
0.5
Total other income (expense)
(0.5
)
0.2
Income (loss) before provision for income taxes and minority
interest
4.3
11.3
Provision for income taxes
0.5
2.1
Income before minority interest
3.8
9.2
Minority interest
3.8
4.4
Net income
—
%
4.8
%
Sales
Total sales increased $14,135,000 or 22.2% in 2007, to
$77,734,000 compared to $63,599,000 in 2006. The increase is
primarily attributable to the following factors:
•
Sales of Widmer and Redhook products, excluding Kona products,
and sales to the Texas market grew $2,840,000 year over
year. This increase was driven by both a price increase and
increase in volume.
•
Sales of Kona products through the A-B distribution network
increased $3,088,000 in 2007 when compared to 2006.
•
Increased production volume of Kona products at the Portland
Oregon brewery under an alternating proprietorship agreement
resulted in increased fees paid to Widmer of $2,851,000 in 2007
or a 75% increase over fees earned in 2006.
•
Sales in Texas during 2007 were $1,876,000, an increase of
$1,552,000 over 2006. Widmer introduced products in the Texas
market in August 2006 and, therefore, 2007 represented the
first full year of shipments in this market.
During 2007, Widmer and Redhook product sales, as well as sales
of the Kona product through distribution and licensing
agreements, experienced growth from those levels experienced in
2006 as evidenced by a total sales increase of 22.2% in 2007.
Widmer has increased revenues by (i) an increase in
shipments of product, (ii) expanded product sales under a
licensing agreement with Kona and (iii) increased
production of the Kona product for which Widmer is paid a fee.
Total shipments increased 7.7% in 2007 to 439,900 barrels.
Total shipments includes shipments of Widmer, Redhook and Kona
product, as well as shipments of Widmer product from Redhook
facilities under the contract brewing arrangements with Redhook.
Shipments from Widmer’s Portland brewing facility to
wholesale distribution points in the western United States
decreased 8% to 217,200 barrels in 2007 from
235,600 barrels in 2006. The decline in shipments from this
location is attributed to a change in product mix whereby
products with longer fermentation cycles were being produced at
the Portland facility.
Total shipments of 217,200 barrels from the Portland
brewery include shipments of Kona products, sold by Widmer under
a licensing agreement. The production of Kona products at
Widmer’s Portland brewery is governed by an alternating
proprietorship agreement and the subsequent distribution and
sales of Kona products are administered by distribution and
licensing agreements between Kona and Widmer.
Pursuant to Widmer’s distribution agreement with Kona,
Widmer purchases product from Kona for distribution within the
A-B network and has also been granted the right to represent the
Kona brand in the continental United States pursuant to a
licensing agreement. These products experienced significant
growth in 2007, or a 66% increase over 2006. Widmer purchased
for sale an additional 14,200 barrels, for a total of
35,700 barrels, in 2007, up from 21,500 barrels in 2006
Shipments of Redhook products by the Craft Brands totaled
121,900 barrels during the year ended December 31,2007 and 122,600 barrels during the year ended
December 31, 2006.
Widmer products have also been shipped directly by Redhook
pursuant to Widmer’s contract brewing arrangement with
Redhook executed in November 2006 to provide supplemental
capacity for the production of Widmer Hefeweizen during
the expansion of its Portland brewery facility. Under the 2006
agreement, Redhook brewed and shipped for the benefit of Widmer
81,900 barrels and 43,000 barrels of Widmer products
in 2007 and 2006, respectively. This agreement with Redhook
initially expired December 31, 2007 with an automatic one
year extension. The agreement has been extended through
December 31, 2008. In conjunction with the 2008 renewal,
Widmer’s Broken Halo IPA was added to the contract
production list, in addition to the existing Widmer
Hefeweizen product. The pricing for the contract brewing
services was updated for 2008. Additionally, pursuant to
Redhook’s agreement with Craft Brands, if shipments of its
products in the western United States decrease, as compared to
the previous year’s shipments, Redhook will have the right
to brew Widmer products in an amount equal to the lower of
(i) the Redhook product shipment decrease or
(ii) Widmer product shipment increase. In addition to the
contract brewing arrangement with Redhook, Widmer entered into a
contract brewing agreement with A-B during 2007. During 2007,
10,700 barrels of Widmer product was produced and shipped
by A-B. Widmer expects the volume of contract brewing to
decrease in future periods after the 2008 completion of the
Portland brewery expansion.
Widmer and Kona are parties to an alternating proprietorship
agreement. This brewing arrangement, initially established in
2003 and updated in 2007, allows Kona to manufacture Kona
products at Widmer’s brewery for which Kona pays a fee.
Kona produced 53,100 and 36,500 barrels of product during
the years ended December 31, 2007 and 2006, respectively.
The fees paid by Kona under this agreement increased 75%
in 2007 from 2006 or $6,642,000 and $3,791,000 for the years
ended December 31, 2007 and 2006, respectively. The
revenues earned by Widmer under the alternating proprietorship
agreement are recorded as sales revenues. This agreement expires
in December 2014 and provides for automatic renewals as well as
termination rights for each party.
The significant volume growth of product sales year over year
occurred in the states of Texas, New Mexico and California,
which increased 370%, 23% and 8%, respectively.
The significant volume growth of Widmer’s sales of the Kona
product year over year occurred in the states of Oregon,
Washington and California which increased 142%, 84% and 54%,
respectively.
Sales of the Redhook product by the Craft Brands in the western
United Sates increased 5.5% or totaled $15,985,000 for the year
ended December 31, 2007 as compared to $15,158,000 in sales
during the year ended December 31, 2006.
Additional Shipments of Widmer Product Reflected as
Sales. In 2003, Widmer entered into the 2003
licensing agreement with Redhook to produce and sell the
Widmer Hefeweizen brand in states east of the Mississippi
River. In March 2005, the Widmer Hefeweizen distribution
territory was expanded to include all of the midwest and eastern
markets. Brewing of this product is conducted at Redhook’s
New Hampshire Brewery under the supervision and assistance of
Widmer’s brewing staff to insure brand quality and matching
taste profile. The term of this agreement originally expired
February 1, 2008 with an additional one-year renewal. The
agreement automatically renewed for a one year term in February
2008. Under this agreement, 28,800 barrels were shipped in
2007, compared to 30,500 barrels in 2006. Fees earned by
Widmer under this agreement totaled $432,000 and $436,000 during
the years ended December 31, 2007 and 2006, respectively.
While the fees earned under this licensing agreement are
reflected as sales in the statements of operations, the
shipments are not reflected in the shipments table above because
they were produced, marketed and sold by Redhook.
Pricing and Fees. The average wholesale
revenue per barrel for draft and bottle products, net of
discounts, increased 3.8% and 4.0%, respectively, during the
years ended December 31, 2007 and 2006. This increase in
pricing accounted for an increase of $871,000 in total draft
sales and $1,127,000 in total bottle sales over the prior year.
Pricing changes implemented by Widmer may follow pricing changes
initiated by large domestic or import brewing companies. Widmer
may experience a decline in sales in certain regions following a
price increase depending on market conditions.
Under the A-B distribution agreement, Widmer pays a margin fee
to A-B on all sales through the A-B distribution network. The
fee does not apply to Widmer’s retail operations and dock
sales. The agreement also provides for an additional or
incremental fee on shipments that exceed shipments (within the
same territory) from volumes experienced in 2003. For the year
ended December 31, 2007, margin fees to A-B were incurred
on 435,100 barrels, while margin fees were incurred on
404,000 barrels for the year ended December 31, 2006.
Incremental margin fees were paid to A-B on 114,000 and
80,700 barrels for the years ended December 31, 2007
and 2006, respectively. For the years ended December 31,2007 and 2006, Widmer paid a total of $4,080,000 and $3,498,000,
respectively, related to the margin and incremental margin;
these fees are reflected as a reduction of sales in
Widmer’s consolidated statements of operations.
Retail Operations and Other
Sales. Sales from retail operations increased
$140,000 or 5% to $2,991,000 during the year ended
December 31, 2007 from $2,851,000 during the year ended
December 31, 2006.
Excise
Taxes
Excise taxes decreased $717,000 to $2,507,000 during the year
ended December 31, 2007 compared to $3,224,000 during the
year ended December 31, 2006. The current year decrease in
federal excise tax is due to the higher volume of contract
brewing, as discussed in “Cost of Sales”,
resulting in a reduction of $893,000, partially offset by a
slight increase due to higher sales volume.
Cost of sales was $51,868,000 in 2007, as compared to
$38,686,000 in 2006. The increase of $13,182,000, or 34.1%, is
primarily attributed to increased shipments in 2007 as compared
with 2006. Cost of sales as a percentage of net sales also
increased to 66.7% in 2007 from 60.8% in 2006.
The significant factors that contributed to the 2007 higher cost
of sales, as well as the trend over the last three years, is the
increased volume of contract brewing discussed in
“Shipments”above when compared to the volume
of contract brewing in 2006. Contract brewing services increased
115%, or 92,600 barrels, in 2007 compared to
43,000 barrels of Widmer product in 2006. This reliance on
outside facilities in 2007 was due to the growth in product
demand and the fact that the Portland brewery facility expansion
project had not yet been completed. Cost of product purchased
under contract brewing arrangements are typically greater than
costs incurred with in-house production. Under the contract
brewing agreements, Widmer’s cost of sales increased
approximately $4,750,000 in 2007 when compared to 2006. Widmer
believes that 2007 increases in cost of sales would have been
less had Widmer been able to produce more products at its own
facilities. Widmer anticipates that its reliance on contract
brewing will decline during the later half of 2008 when its
Portland brewery expansion is complete. The increase in the
overall volume of products shipped in 2007 also contributed to a
higher cost of sales during 2007 when compared to 2006.
The increase in contract brewing also increased 2007 cost of
sales by shifting the excise tax cost element to cost of sales.
In a contract brewing agreement, excise tax is the
responsibility of the brewer, in which case the excise tax is
paid by the brewer, rather than Widmer. Accordingly, this cost
element is included in cost of inventory. As contract brewing
increases, excise taxes included in inventory and ultimately
cost of sales, increases. Based on the 115% increase of product
purchased under contract brewing services, the increase in cost
of sales due to excise taxes paid in the contract brewing
arrangements is approximately $893,000 in 2007 compared to 2006.
Widmer has also experienced modest price increases in raw
materials during 2007, particularly with regards to pale malt
and wheat. Widmer’s average freight cost per barrel
increased in 2007 over 2006. Shipping costs increased 16%,
primarily due to increased fuel costs. The increase in third
party freight costs were partially mitigated by improved
shipping schedules and greater efficiencies. On average, Widmer
has experienced cost increases of approximately 48%, 20%, and
41% for 2008 purchases of malted barley, hops and wheat,
respectively. Widmer estimates that these higher raw material
and packaging costs will result in an increase in 2008 cost of
sales of approximately $4.69 per barrel. If Widmer experiences
difficulty in securing its key raw materials or continues to
experience increases in the cost of these materials, it will
have a material adverse impact on its gross margins and results
of operations.
A component of the operating agreements with Kona provides
Widmer the right to represent the Kona brand products on the
United States mainland. In return, the agreement requires a
royalty payment to be paid to Kona. Widmer incurred $478,000 in
royalty expense during the year ended December 31, 2007 and
$354,000 during the year ended December 31, 2006. This
royalty expense increased $124,000, or 35%, over the prior year
due to the continued growth of Kona brand sales, particularly in
California, Oregon and Washington. The royalty fees paid under
this agreement are reflected as cost of sales in Widmer’s
statements of operations.
Selling,
General and Administrative Expenses
Widmer’s selling, general and administrative expenses
totaled $18,186,000 in 2007, as compared to $14,651,000 in 2006.
The $3,535,000 increase in expense is attributable to (i) a
23% increase in staffing and employee related costs as
management invested in efforts to expand brand name growth for
the Widmer, Kona and Redhook brands, (ii) an increase of
$1,191,000 in media, promotional events and sponsorship
expenditures during 2007 and (iii) a 2007 charge to
operations of $687,000 in order to reduce the carrying value of
promotional inventory held for sale to lower of cost or market.
Other
Income Statement Items
Widmer has accounted for its investment in Kona, a 20% equity
ownership, and FSB, a 42% equity ownership, under the equity
method, as outlined by APB No. 18, The Equity Method of
Accounting for
Investments in Common Stock. Pursuant to APB No. 18,
Widmer has recorded its share of the net income of these
companies in its statements of operations as income from equity
method investments. During the year ended December 31,2007, Widmer recorded $382,000 in income attributable to Kona
and FSB, as compared to $295,000 from these equity investments
during the year ended December 31, 2006. Widmer purchased
its equity ownership in FSB in October 2006 and accordingly, the
2007 operating results include twelve months of income
participation compared to only three months in the comparative
2006 year.
Widmer expensed $1,554,000 during the year ended
December 31, 2007 for expenditures of merger related costs.
During 2006 Widmer had incurred $851,000 in merger costs but
these expenditures were recorded in the financial statements as
a deferred charge. As of December 31, 2006, management
believed that Widmer would be the accounting acquirer. Due to
the change in the proposed merger structure as of
December 31, 2007, all merger costs were expensed and are
reflected as an operating expense in Widmer’s statements of
operations.
Widmer recognized a loss of $161,000 during 2007 as a result of
the measurement of fair value of an interest rate swap as of
December 31, 2007. No such expense was incurred in 2006.
Derivative financial instruments are utilized by Widmer to
reduce interest rate risk by hedging its exposure to variability
in expected future cash flows resulting from the interest rate
risk related to a portion of its bank debt. See Note 10 in
the Widmer consolidated financial statements and discussion
under “Liquidity and Capital Resources” below.
Interest expense was $707,000 and $178,000 during the years
ended December 31, 2007 and 2006, respectively or an
increase of $529,000. The increase in interest expense is due to
new borrowings from a bank of $13,667,000 during the year ended
December 31, 2007. The bank borrowings have been required
to fund the Portland brewery and office expansion and renovation
project. During the years ended December 31, 2007 and 2006,
Widmer capitalized interest costs of $326,000 and $108,000,
respectively, related to interest paid under bank borrowings
that were used to fund the Portland brewery expansion project.
Upon completion of the project, which is estimated to be in the
second quarter of 2008, all interest costs will be expensed,
likely resulting in a significant increase in interest expense
in future periods.
Income
Taxes
Widmer’s effective income tax rate was 12% for 2007 and 19%
for 2006. Both years include a provision for state income taxes.
The primary difference between the statutory rate and the
effective rate is the impact of minority interest. The net
income of Craft Brands is allocated to Redhook based on
Redhook’s 42% interest in the earnings. Craft Brands is an
LLC and the income that flows through to Redhook is taxed at the
Redhook level. Accordingly, net income for each of Craft Brands
and Widmer Brothers Brewing Company, relative to consolidated
net income, determine tax expense that is reflected in
Widmer’s consolidated financial statements. During 2007,
net income of Craft Brands exceeded that of Widmer Brothers
Brewing Company. During 2007, Widmer also incurred
merger-related transaction costs that were capitalized for
federal income tax purposes. During the year ended
December 31, 2006, Widmer utilized the remaining balance of
previously earned AMT credits, which accounted for a 2.9%
decrease in the effective tax rate in that year. No further tax
credits were available to Widmer after 2006.
The following table sets forth, for the years indicated, certain
items from Widmer’s Statements of Operations expressed as a
percentage of net sales:
Year Ended December 31
2006
2005
Restated
Restated
Sales
105.3
%
106.2
%
Less excise taxes
5.3
6.2
Net sales
100.0
100.0
Cost of sales
64.1
57.5
Gross profit
35.9
42.5
Selling, general and administrative expenses
24.3
27.3
Merger costs
—
—
Gain (loss) on sale of equipment
(0.5
)
—
Income from operations
11.1
15.2
Interest expense, net
(0.3
)
(0.8
)
Other income (expense), net
—
—
Income from equity method investments
0.5
(0.1
)
Total other income (expense)
0.2
(0.9
)
Income (loss) before provision for income taxes and minority
interest
11.3
14.4
Provision for income taxes
2.1
3.1
Income before minority interest
9.2
11.3
Minority interest
4.4
4.6
Net income
4.8
%
6.7
%
Sales
Total sales in 2006 were $63,599,000 which represented an
increase of $8,582,000, or a 15.6% increase from the $55,017,000
of sales revenues achieved in 2005. This increase during the
year ended December 31, 2006 was primarily due to the
following:
•
Increased shipments of Widmer and Redhook products into Arizona,
California, Oregon and Washington resulted in revenue growth of
$5,281,000 in 2006 from 2005.
•
An increase in Kona brand sales pursuant to the distribution and
licensing agreements of $1,848,000.
•
Increase in retail sales at the Widmer Brothers Gasthaus Pub.
Shipments. The following table sets
forth a comparison of shipments (in barrels) for the years
indicated:
Increased shipments in the western United States during 2006
were primarily driven by an increase in Widmer and Kona brands
of 18% and 31%, respectively. Significant volume increases in
2006 occurred in the markets of Arizona, California, Oregon, and
Hawaii, which grew 22%, 16%, 14% and 16%, respectively. In
addition, an increase of 10,600 barrels was produced at
Widmer’s Portland brewery in 2006 under the alternating
proprietorship agreement with Kona for which Kona paid a fee to
Widmer. Shipments of packaged products increased 13% in 2006
over 2005, while shipments of draft products increased 11%.
Under a contract brewing arrangement with Redhook, Redhook
brewed and shipped for the benefit of Widmer,
43,000 barrels and 8,900 barrels of Widmer products in
2006 and 2005, respectively.
Additional Shipments of Widmer
Products. Widmer generates royalty income
under its 2003 licensing agreement with Redhook related to
Redhook’s production of Widmer Hefeweizen and
subsequent sales of the product in states east of the
Mississippi River. Widmer recognized licensing fee or royalty
income of $436,000 and $376,000 during the years ended
December 31, 2006 and 2005, respectively. The increase of
16% is attributable to higher sales volumes and market
expansion. While the fees earned under this licensing agreement
are reflected as sales in the statements of operations, the
shipments are not reflected in the shipments table above because
they were produced, marketed and sold by Redhook.
Pricing and Fees. Average wholesale
revenue per barrel for all draft and bottled products sold by
Widmer, net of discounts, increased 3.1% and 0.0%, respectively,
during 2006 as compared to 2005. An increase in pricing
accounted for an increase of approximately $614,000 in total
sales during the year ended December 31, 1006.
Under the A-B distribution agreement, Widmer pays a margin fee
to A-B on all sales through the A-B distribution network. The
fee does not apply to Widmer’s retail operations and dock
sales. The agreement also provides for an additional or
incremental fee on shipments that exceed shipments (within the
same territory) from volumes experienced in 2003. For the year
ended December 31, 2006, margin fees to A-B were incurred
on 404,000 barrels, while margin fees were incurred on
360,500 barrels for the year ended December 31, 2005.
Incremental margin fees were paid to A-B on 80,700 barrels
and 38,000 barrels for the years ended December 31,2006 and 2005, respectively. For the years ended
December 31, 2006 and 2005, Widmer paid a total of
$3,498,000, and $2,868,000, respectively, related to the margin
and incremental margin; these fees are reflected as a reduction
of sales in Widmer’s statements of operations.
Retail Operations and Other
Sales. Revenues attributable to Widmer’s
retail operations and other sales increased $322,000 or 13% to
$2,851,000 during 2006 from $2,529,000 during 2005. Increases in
2006 were primarily due to an increase in both restaurant sales
and keg sales to the public.
Excise
Taxes
Excise taxes increased $30,000 to $3,224,000 in 2006 compared to
$3,194,000 in 2005. The increase was due to increased sales and
production volume.
Cost of
Sales
Cost of sales totaled $38,686,000 during the year ended
December 31, 2006 and $29,793,000 during the year ended
December 31, 2005. Cost of sales increased $8,893,000 in
2006, or 29.8%, over 2005 year. Cost of sales as a
percentage to sales also increased to 60.8% in 2006 from 54.2%
in 2005. On a per barrel basis, cost of sales increased
substantially in 2006 over 2005 due to the relatively higher
volume of contract brewing in 2006 from levels in 2005. During
2006, Widmer purchased 43,000 barrels under a contract
brewing arrangement compared to 8,900 barrels, or an
increase of 380%, in 2005. Other cost increases during 2006 were
attributed to keg rental fees for the one-sixth barrel unit that
Widmer does not own. Freight costs per barrel remained
relatively constant despite increasing fuel costs, as increased
shipping efficiencies offset the higher fuel costs.
A component of the operating agreements with Kona provides
Widmer the right to represent Kona brand products in the
continental United States. In return, the agreement requires a
royalty payment to be paid to Kona. Widmer incurred $354,000 in
royalty expense during the year ended December 31, 2006 and
$272,000
during the year ended December 31, 2005. This royalty
expense increased $82,000 or 30% over the prior year due to the
continued growth of Kona brand sales, particularly in California
and Oregon. This cost is reflected as cost of sales in
Widmer’s statements of operations.
Selling,
General and Administrative Expenses
Widmer’s selling, general and administrative expenses
totaled $14,651,000 for the year ended December 31, 2006,
as compared to $14,130,000 for the year ended December 31,2005. These expenditures represent advertising, marketing and
promotional efforts for the Widmer, Kona and Redhook brands. The
$521,000 increase or 4% growth in expenditures during 2006 from
those levels during 2005 is due to the expansion of Craft Brands
marketing and promotional activities.
Gain on
Sale of Equipment
Widmer recognized a $354,000 loss on the disposition and sale of
equipment in 2006. There was no significant disposition or
retirement of assets in 2005.
Other
Income Statement Items
Widmer has accounted for its investment in Kona, a 20% equity
ownership, and FSB, a 42% equity ownership, under the equity
method, as outlined by APB No. 18, The Equity Method of
Accounting for Investments in Common Stock. Pursuant to APB
No. 18, Widmer has recorded its share of the net income of
these companies in its statements of operations as income from
equity method investments. During the year ended
December 31, 2006, Widmer recorded $295,000 in income
attributable to Kona and FSB, as compared to $0 from the Kona
equity investment during the year ended December 31, 2005.
Widmer purchased its equity ownership in FSB in October 2006.
Interest expense was $178,000 for the year ended
December 31, 2006, representing a decrease of $255,000 from
the $433,000 recorded during the year ended December 31,2005. The 2006 decrease in interest expense was due to the
reduced debt balance during the year when compared to
outstanding debt balances during 2005. However, funds were
borrowed under a bank loan in the fourth quarter of 2006 to fund
the purchase of the 42% equity investment in FSB and initial
construction obligations related to the Portland brewery
expansion project. During the years ended December 31,2006, Widmer capitalized interest costs of $108,000, related to
interest paid under bank borrowings that were used to fund the
Portland brewery expansion project. Upon completion of the
project, which is estimated to be in the second quarter of 2008,
all interest costs will be expensed, likely resulting in a
significant increase in interest expense in future periods.
Widmer did not capitalize interest costs during the year ended
December 31, 2005.
Income
Taxes
Widmer’s effective income tax rate was 19% for the year
ended December 31, 2006 and 21% for the year ended
December 31, 2005. Both years include a provision for state
income taxes. The primary difference between the statutory rate
and the effective rate is the impact of minority interest. The
net income of Craft Brands is allocated to Redhook based on
Redhook’s 42% interest in the earnings. Craft Brands is an
LLC and the income that flows through to Redhook is taxed at the
Redhook level. Accordingly, net income for each of Craft Brands
and Widmer Brothers Brewing Company, relative to consolidated
net income, determine tax expense reflected in Widmer’s
consolidated financial statements. During 2006 and 2005, net
income of Craft Brands was comparable to that of Widmer Brothers
Brewing Company. In 2006, Widmer utilized the remaining balance
of its AMT credits which accounted for a 2.9% tax rate decrease
during 2006. In 2005, Widmer utilized available tax credits that
reduced the effective tax rate in 2005 by 12.3% from that in
2006.
Widmer has required capital principally for the construction and
development of its production facilities and for certain
strategic transactions. Historically, Widmer has financed its
capital requirements through cash flow from operations, bank
borrowings and equity proceeds. Widmer expects to meet its
future financing needs for working capital and capital
expenditure requirements through cash on hand, operating cash
flow and bank borrowings.
Widmer had $1,421,000 and $300,000 of cash and cash equivalents
at December 31, 2007 and December 31, 2006,
respectively. At December 31, 2007 and 2006, Widmer had
working capital of $656,000 and $1,056,000. Widmer’s
long-term debt as a percentage of total capitalization
(long-term debt and common stockholders’ equity) was 88% as
of December 31, 2007 and 27% as of December 31, 2006,
respectively. The debt to capitalization percentage increase in
2007 is due to the increase in bank borrowings required for the
brewery expansion project. Cash provided by operating activities
increased to $6,543,000 during the year ended December 31,2007 from $4,471,000 during the year ended December 31,2006, primarily due to an increase in inventories and prepaid
expenses, offset by a decrease in overall profitability. Widmer
has exhausted all previous NOLs and tax credits as of
December 31, 2006.
Capital
Expenditures
During 2007, Widmer’s capital expenditures totaled
$17,708,000. This amount included $14,781,000 for the Portland
brewery expansion, $1,153,000 for new kegs, and $950,000 for
expanded facilities at the Gasthaus Pub. In 2006, Widmer’s
capital expenditures totaled $4,026,000. This amount included
$2,480,000 for the Portland brewery expansion, $645,000 for new
kegs and $260,000 for a new POS website and software. Capital
expenditures in 2007 and 2006 were funded with cash generated
from operations and bank debt. Effective October 1, 2006,
Widmer purchased a 42% equity interest in FSB for $3,600,000.
This investment was funded primarily with new borrowings from a
bank.
Credit
Agreements
Widmer entered into a credit facility with a bank in December
2007, pursuant to which the bank extended up to $21,000,000
borrowing capacity to Widmer. The credit facility includes a
$7,500,000 revolving line of credit for working capital
purposes, which also includes a $2,500,000 letter of credit
subfacility, and a $13,500,000 term loan to finance a portion of
the expansion and remodeling of the Portland brewery and
corporate office. The revolving line of credit expires on
January 1, 2013. The term loan provides for advances prior
to August 1, 2008, and is to be repaid by Widmer in monthly
payments of principal and interest of $97,500 beginning on
September 1, 2008 and continuing through August 1,2018. Payments of interest only are required January 1,2008 through August 1, 2008. The term loan matures August
2018. As of December 31, 2007, all amounts available under
the term loan had been advanced and $753,333 was outstanding
under the line of credit. Widmer incurred $35,000 in
professional fees related to the new debt. The bank has
consented to the merger.
The new loan agreements replace a pre-existing bank term loan
that provided up to $15,000,000 in borrowing capacity and had a
maturity date of September 2009. In connection with the
refinancing of this debt and the new debt agreements, all
amounts outstanding under the prior agreement were repaid in
full.
Advances under the new credit facility bear interest at one of
three different rates offered to Widmer: (i) prime rate,
(ii) an adjusted rate determined by the bank’s Grand
Cayman Banking Center, or IBOR and (iii) an adjusted LIBOR
rate. Depending on the ratio of Widmer’s funded debt to
EBITDA (as defined in the loan agreements), the prime rate is
adjusted downward by up to a maximum of 75 basis points,
and the LIBOR and IBOR rates are adjusted upward by a minimum of
100 basis points up to a maximum of 150 basis points.
As of December 31, 2007 all outstanding debt was at LIBOR
rates plus applicable margins that resulted in interest rates
ranging from 5.94% to 6.51%.
Widmer entered into a three-year interest rate swap agreement in
November 2007 to hedge against interest rate fluctuations.
Pursuant to the agreement, Widmer “swapped” a
component of its variable rate debt for a fixed interest rate of
4.6% per annum. The notional amount of the interest rate swap is
$7,000,000. Widmer evaluated the interest rate swap agreement
under guidelines prescribed by SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and determined the derivative contract did not
meet all criteria required to apply hedge accounting. As of
December 31, 2007 the contract was in a loss position of
$161,000. Accordingly, the fair value of the derivative
instrument is reflected in long term liabilities as of
December 31, 2007 and the measurement of the change in fair
value was recorded as other expense in Widmer’s statements
of operations.
Pursuant to the credit agreements with its lender, Widmer made
(and renews at the time of each subsequent advance) customary
representations to the bank and is subject to customary
affirmative covenants, negative covenants, and events of
default. Widmer’s affirmative covenants include financial
reporting requirements, maintenance of a minimum funded debt to
EBITDA ratio (currently 5.0 to 1.0, through September 30,2008 and reducing to 4.25 to 1.0 at December 31, 2008),
maintenance of a minimum fixed charge coverage ratio of at least
1.25 to 1.0, and a maximum annual capital expenditure allowance
of $4,000,000 (exclusive of capital expenditures related to the
Portland brewery expansion). The agreements provide for certain
restrictions on dividends and stock repurchases. Also, the
bank’s consent is required prior to the consummation of the
proposed merger with Redhook. The following table summarizes the
financial covenants required by the agreements with the bank and
Widmer’s current level of compliance with these covenants:
Quarter Ended
Required by Bank
December 31,
Agreements
2007
Leverage ratio
Less than: 4.50:1
4.48:1
Fixed charge coverage ratio
Greater than: 1.25:1
2.47:1
Widmer’s repayment obligation for both facilities is
secured by all personal and real property of Widmer. The line of
credit is further secured by a deed of trust covering real
property leased by Widmer from a related party that is a LLC of
which certain stockholders are also members. The LCC is a party
to the line of credit bank agreement as a grantor.
Other
Indebtedness
In June 2007, Widmer executed an equipment loan with a bank for
up to $15,000,000 to provide funding for the construction of the
brewery expansion project. Advances under the agreement may be
made through May 31, 2008, which has an effective interest
rate of 6.56%. As of December 31, 2007, Widmer had drawn
$8,000,000. Widmer’s obligations under the loan covenant
are secured by brewery equipment. This equipment loan has a
seven-year term and requires monthly payments of $119,020.
Amounts under the agreement may be prepaid without penalty after
the fourth year of payments.
In connection with the acquisition of commercial real estate,
Widmer executed three separate $200,000 promissory notes in July
2005 for a total of $600,000, payable to three unrelated sellers
of those properties. Each note bears interest at a fixed rate of
24% per annum, subject to a one-time adjustment to the interest
rate on July 1, 2010 to reflect the change in the consumer
price index between July 1, 2005 and July 1, 2010.
Each note matures on the earlier of the payee’s death and
July 1, 2015. If the payee dies before July 1, 2010,
the payee will be deemed to have died on July 1, 2010 for
purposes of calculating accrued interest. Widmer may not prepay
the notes other than in connection with acceleration upon a
payee’s death.
Contractual
Obligations and Off-Balance Sheet Arrangements
Widmer has certain commitments, contingencies and uncertainties
relating to its normal operations. As of December 31, 2007,
contractual commitments associated with Widmer’s long-term
debt, operating leases and raw material purchase commitments are
as follows (in thousands):
Represents annual principal payments required on Widmer’s
bank debt. Interest accrues at LIBOR plus 1.5% Monthly interest
payments on the bank debt agreements are not reflected above.
(2)
Represents minimum aggregate future lease payments under
noncancelable operating leases.
(3)
Represents purchase commitments to ensure supply of wheat,
malted barley and specialty hops to meet future production
requirements. Payments for malted barley are made as deliveries
are received. Hop contracts generally provide for payment upon
delivery of the product with the balance due on any unshipped
product during the year following the harvest year.
Summary
of Critical Accounting Policies and Estimates
Widmer’s financial statements are based upon the selection
and application of significant accounting policies that require
management to make significant estimates and assumptions.
Management believes that the following are some of the more
critical judgment areas in the application of its accounting
policies that currently affect its financial condition and
results of operations. Judgments and uncertainties affecting the
application of these policies may result in materially different
amounts being reported under different conditions or using
different assumptions.
Principles of consolidation and basis of
presentation. The accompanying consolidated
financial statements include the accounts of Widmer Brothers
Brewing Company and its 50% joint venture, Craft Brands. All
significant intercompany amounts have been eliminated in these
consolidated financial statements. In December 2003, FASB issued
FIN 46R, Consolidation of Variable Interest
Entities, a revision to Interpretation No. 46.
FIN 46R clarifies the application of consolidation
accounting for certain entities that do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or
in which equity investors do not have the characteristics of a
controlling financial interest; these entities are referred to
as “variable interest entities.” Variable interest
entities within the scope of FIN 46R are required to be
consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entity’s expected
losses, receives a majority of its expected returns, or both.
FIN 46R also requires disclosure of significant variable
interests in variable interest entities for which a company is
not the primary beneficiary. Widmer has assessed Craft Brands
under the provisions of FIN 46R and has concluded that it
meets the definition of a variable interest entity and that
Widmer is the primary beneficiary. Accordingly, Widmer has
consolidated the financial statements of Craft Brands.
Long-Lived Assets. Widmer evaluates potential
impairment of long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144
establishes procedures for review of recoverability and
measurement of impairment, if necessary, of long-lived assets,
goodwill and certain identifiable intangibles. When facts and
circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is
performed by comparing the carrying value of the assets to
projected future undiscounted cash flows in addition to other
quantitative and qualitative analyses. Upon indication that the
carrying value of such assets may not be recoverable, Widmer
will recognize an impairment loss by a charge against current
operations. Fixed assets are grouped at the lowest
level for which there are identifiable cash flows when assessing
impairment. Widmer’s estimates indicated that such carrying
values were expected to be recovered. Nonetheless, it is
possible that estimates may change in the future, resulting in
the need to write down those assets to their fair value.
Equity Investments in FSB and Kona. Widmer has
accounted for its investment in Kona and FSB under the equity
method, as outlined by APB No. 18, The Equity Method of
Accounting for Investments in Common Stock. The equity
method requires that Widmer recognize its share of the net
earnings of these companies by increasing its investment
carrying value on the balance sheet and recognizing income from
equity investment in the statement of operations. Widmer’s
share of the earnings of FSB and Kona has not constituted a
significant portion of income to Widmer’s results of
operations. The difference between the carrying value of the
equity investment on the balance sheet and Widmer’s amount
of underlying equity in the net assets of the investee is
considered equity method goodwill and is not amortized but
rather reviewed for impairment.
Inventories. Inventories are stated at the
lower of cost or market. Finished goods are stated at standard
cost, which approximates the
first-in,
first-out method, except for certain supplies and merchandise
held for sale, which are based on the average cost method and
are stated at the lower of cost or market. Widmer periodically
evaluates the future utility of inventory items and, if
required, reduces the carrying value of the inventory for
obsolete items and lower of cost or market by recording a charge
to operations.
Derivative instruments and hedging
activities. Widmer has adopted the provisions of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which requires that all derivatives
be recognized at fair value in the consolidated balance sheet,
and that the corresponding gains or losses be reported either in
the consolidated statement of income or as a component of
comprehensive income, depending on whether the instrument meets
the criteria to apply hedge accounting.
Derivative financial instruments are utilized by Widmer to
reduce interest rate risk. The counterparties to derivative
transactions are major financial institutions, which Widmer
believes to be of low credit risk. Widmer does not hold or issue
derivative financial instruments for trading purposes.
Revenue recognition. Widmer recognizes revenue
from product sales, net of excise taxes, discounts and certain
fees Widmer must pay related to such sales, when the products
are shipped to customers. Although title and risk of loss do not
transfer until delivery of Widmer’s products to A-B, or the
A-B distributor, Widmer recognizes revenue upon shipment rather
than when title passes because the time between shipment and
delivery is short and product damage claims and returns are
immaterial. Widmer recognizes revenue on retail sales at the
time of sale.
Income taxes. Widmer records federal and state
income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby deferred taxes are
provided for the temporary differences between the financial
reporting basis and the tax basis of Widmer’s assets and
liabilities as well as for tax net operating loss and credit
carry forwards. These deferred tax assets and liabilities are
measured under the provisions of the currently enacted tax laws.
Widmer will establish a valuation allowance if it is more likely
than not that these items will either expire before Widmer is
able to realize their benefits or that future deductibility is
uncertain.
The principal market risks that may adversely affect
Widmer’s results of operations and financial position to
which Widmer is exposed include changes in interest rates and
commodity prices. Widmer seeks to minimize or manage these
market risks through normal operating and financing activities
and through the use of derivative instruments, where
practicable. Widmer does not trade or use instruments with the
objective of earning financial gains on the market fluctuations,
nor does Widmer use instruments where there are underlying
exposures.
Interest
Rate Risk
Widmer has assessed its vulnerability to interest rate risk
associated with financial instruments included in cash and cash
equivalents and long-term debt. Due to the nature of these
investments and Widmer’s investment policies, Widmer
believes that the risk associated with interest rate
fluctuations related to these financial instruments does not
pose a material risk.
On November 2, 2007, Widmer executed an interest rate swap
agreement with a bank. The derivative contract provides for a
$7,000,000 notional amount for a period of three years. The
contract requires Widmer to pay interest at a fixed rate of
4.60% and receive interest at a floating rate equal to the
one-month LIBOR. Cash settlement dates with the bank have been
set at one month intervals.
Competitor
Price Risk
The current trend of premium pricing associated with craft beer
products has afforded Widmer some flexibility in increasing
prices to consumers, and price increases have also been driven
by higher product and transportation costs. If this pricing
trend were reversed by a competitor or group of competitors, it
would severely erode the margin Widmer currently generates.
There is no indication of a decline in the pricing trend at this
time.
Commodity
Price Risk
The major raw materials that Widmer purchases for production are
wheat, hops, barley and kegs. The price and availability of
these raw materials are subject to market conditions affecting
supply and demand. In particular, the price of these goods can
be impacted by fluctuations in agricultural and stainless steel
prices. Additionally, Widmer’s distribution costs can be
impacted by fluctuations in fuel prices. Widmer currently does
not have a hedging program in place to manage fluctuations in
keg and fuel prices. However, fixed-price purchase commitments
have been executed to manage fluctuations in selected hops,
wheat and malt prices through September 2012. As of
February 29, 2008 purchase commitments by year are:
Pro Forma
Combined Condensed Consolidated Financial Statements
The unaudited pro forma combined condensed financial statements
present the pro forma financial position and results of
operations of the combined company and are derived from the
separate historical financial statements of Redhook and Widmer
included in or incorporated by reference in this joint proxy
statement/prospectus. In accordance with FIN 46R,
Consolidation of Variable Interest Entities — an
Interpretation of ARB No. 51, the financial statements
of Craft Brands are consolidated with the financial statements
of Widmer.
The unaudited pro forma combined condensed statement of
operations for the year ended December 31, 2007 gives
effect to the merger as if it had occurred on January 1,2007. The unaudited pro forma combined condensed balance sheet
as of December 31, 2007 gives effect to the merger as if it
had occurred on December 31, 2007.
This information should be read in conjunction with the
historical financial statements and related notes of Redhook and
Widmer included in or incorporated by reference into this joint
proxy statement/prospectus, and in conjunction with the
accompanying notes to these unaudited pro forma combined
condensed financial statements.
Reclassifications
Certain reclassifications have been made to Widmer’s and
Craft Brands’ historical reported results in the unaudited
pro forma combined financial condensed statements. The
reclassifications are as follows:
•
To reclassify certain short-term liabilities to be consistent
with the classifications used by Redhook.
Pro Forma
Adjustments
The unaudited pro forma combined condensed financial statements
are based on the estimates and assumptions set forth in the
notes to such statements, which are preliminary and have been
made solely for the purposes of developing such pro forma
information. The unaudited pro forma combined condensed
financial statements are not necessarily indicative of the
operating results or financial position that would have been
achieved had the merger been consummated as of the dates
indicated, or that may be achieved in the future.
Pro forma adjustments are necessary to reflect:
•
the estimated purchase price;
•
Widmer’s net tangible and intangible assets at their
estimated fair values, along with the amortization expense
related to the estimated identifiable intangible assets;
•
changes in depreciation and amortization expense resulting from
the estimated fair value adjustments to net tangible assets;
•
the income tax effect related to the pro forma
adjustments; and
•
elimination of intercompany balances.
The historical consolidated financial information has been
adjusted to give effect to pro forma events that are
(1) directly attributable to the acquisitions,
(2) factually supportable, and (3) with respect to the
statement of operations, expected to have a continuing impact on
the combined results.
The unaudited pro forma combined condensed financial statements
reflect pro forma adjustments based upon an estimate of the
value of the tangible and intangible assets of Widmer. These
adjustments are subject to further revision upon the closing of
the merger. These financial statements do not give effect to any
cost savings, revenue synergies or restructuring costs which may
result from the integration of Widmer’s operations. All
intercompany transactions and balances have been eliminated in
consolidation.
The unaudited pro forma combined condensed financial statements
were prepared using the purchase method of accounting. Based
upon the terms of the merger and other factors, Redhook is
treated as the acquirer of Widmer for both legal and accounting
purposes. Accordingly, consideration paid by Redhook related to
the acquisition of Widmer will be allocated to Widmer’s
assets and liabilities, based on their
estimated values as of the date of completion of the
acquisition. The allocation is dependent upon certain valuations
and other studies by financial advisors that have not been
finalized. A final determination of the fair value of
Widmer’s assets and liabilities, which cannot be made prior
to closing of the acquisition, will be based on the actual net
tangible and intangible assets of Widmer that exist as of the
date of completion of the acquisition. Accordingly, the pro
forma purchase price adjustments are preliminary and subject to
further adjustment as additional information becomes available
upon completion of the merger. Increases or decreases in the
fair value of relevant balance sheet amounts, including property
and equipment, refundable deposits and intangible assets will
result in adjustments to the balance sheet
and/or
statements of operations. There can be no assurance that the
final determination will not result in material changes from
these preliminary amounts.
Redhook expects to incur significant costs associated with
integrating Widmer. The unaudited pro forma combined condensed
financial statements do not reflect the cost of any integration
activities or benefits that may result from synergies that may
be derived from any integration activities.
Based on Redhook’s preliminary review of Widmer’s
summary of significant accounting policies disclosed in
Widmer’s financial statements, the nature and amount of any
adjustments to the historical financial statements of Widmer to
conform its accounting policies to those of Redhook are not
expected to be significant. Upon consummation of the merger,
further review of Widmer’s accounting policies and
financial statements may result in required revisions to
Widmer’s policies and classifications to conform to such
policies and classifications of Redhook.
These unaudited pro forma combined condensed financial
statements should be read in conjunction with the historical
financial statements and notes thereto of Redhook and Widmer and
other financial information pertaining to Redhook, Widmer, and
Craft Brands including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
and “Risk Factors.”
Notes to
Unaudited Pro Forma Combined Condensed Statement of
Operations
1.
Basis of
Presentation
The unaudited pro forma combined condensed financial statements
included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.
On November 13, 2007, Redhook entered into the merger
agreement with Widmer, pursuant to which Widmer will merge with
and into Redhook, and each outstanding share of capital stock of
Widmer (other than any dissenting shares entitled to statutory
dissenters’ rights under Oregon law) will be converted into
the right to receive 2.1551 shares of Redhook common stock.
The merger will result in Widmer shareholders and existing
Redhook shareholders each holding approximately 50% of the
outstanding shares of the combined company (assuming that no
Widmer shareholder exercises statutory dissenters’ rights
and that currently outstanding options held by Redhook
employees, officers, directors, and former directors to acquire
689,140 shares of Redhook common stock are not exercised
prior to consummation of the merger). In connection with the
merger, Redhook will change its name to “Craft Brewers
Alliance, Inc.”
In connection with the discussions leading up to the merger
agreement, Redhook has incurred approximately $738,000 in legal,
consulting and meeting costs during the year ended
December 31, 2007. Of the total, approximately $584,000 is
reflected in the Redhook statement of operations as selling,
general and administrative expenses and $154,000 has been
capitalized, reflected as other current assets in the Redhook
balance sheet, in accordance with SFAS No. 141,
Business Combinations. As of December 31, 2007,
Widmer expensed $1,554,000 in merger related costs, primarily
for legal, consulting and accounting professional services. As
of December 31, 2006, the Company had incurred costs of
$851,000 which were reflected as a deferred charge as of that
date. As of December 31, 2007, all Widmer merger-related
costs have been charged to current operations.
Redhook adopted a company-wide severance plan that permits the
payment of severance benefits to all full-time employees, other
than executive officers, in the event that an employee’s
employment is terminated as a result of a merger or other
business combination with Widmer.
2.
Purchase
Price
The preliminary estimated purchase price of Widmer is as follows:
Fair value of Redhook stock to be issued
$
52,677,538
Incremental Redhook direct merger costs
153,711
Total preliminary estimated purchase price
$
52,831,249
The per share fair value was computed using the average of the
five trading days before and after November 13, 2007, the
date of the merger agreement, multiplied times the number of
shares of Redhook common stock that Widmer security holders will
be entitled to receive pursuant to the merger. Incremental
merger costs incurred by Redhook since October 2007 increase the
purchase price.
Under the purchase method of accounting, the total estimated
purchase price as shown in the table above is allocated to
Widmer’s tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values. The
following table summarizes the preliminary allocation of the
purchase price:
Acquired intangibles and their estimated remaining useful lives
include:
Trade name and trademarks
Indefinite
Recipes
Indefinite
Distributor agreements
15 years
Non-compete agreements
3 years
Goodwill represents the value of Widmer’s anticipated
profit and EBITDA streams, including its equity investment in
Kona and FSB, in excess of the net assets acquired, as adjusted.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the combined company will not amortize
goodwill but instead will perform an annual impairment test. If
the carrying amount of goodwill exceeds its implied fair value,
an impairment loss will be recognized. The combined company will
also evaluate potential impairment of long-lived assets in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 establishes procedures for review of recoverability
and measurement of impairment, if necessary, of long-lived
assets and certain identifiable intangibles.
Following the merger, Redhook will complete its assessment of
the fair value of assets and liabilities. Redhook anticipates
that the final purchase price allocation will differ from the
preliminary allocation outlined above. Any changes to the
preliminary estimates of the fair value of the assets and
liabilities will be recorded as adjustments to those assets and
liabilities and residual amounts will be allocated to goodwill.
3.
Pro Forma
Adjustments
Pro forma adjustments are necessary to reflect the estimated
purchase price, amounts related to Redhook’s and
Widmer’s net tangible and intangible assets at an amount
equal to an estimate of their fair values, along with the
amortization expense related to the estimated identifiable
intangible assets, changes in depreciation and amortization
expense resulting from the estimated fair value adjustments to
net tangible assets and to reflect the income tax effect related
to the pro forma adjustment.
The pro forma combined provision for income taxes does not
necessarily reflect the amounts that would have resulted had
Redhook and Widmer filed consolidated income tax returns during
the periods presented.
The unaudited pro forma combined condensed financial statements
do not include any adjustments for liabilities that will result
from the integration of Redhook and Widmer, as management of
both companies are in the process of making these assessments
and estimates of these costs are not currently known. However,
additional liabilities may be recorded for severance costs or
other costs associated with combining operations that would
affect amounts in the unaudited pro forma combined condensed
financial statements. Any such liabilities would be recorded as
adjustments to the Widmer purchase price and increase goodwill.
In addition, the combined company may incur significant
restructuring charges upon consummation of the merger or in
subsequent quarters for severance or other costs associated with
the merger. Any such restructuring charges would be recorded as
an expense in the statement of operations in the period in which
they were incurred.
The pro forma adjustments included in the unaudited pro forma
combined condensed financial statements as of and for the year
ended December 31, 2007 are as follows:
(a) To reclassify balances on Widmer’s financial
statements to conform to Redhook’s presentation.
(b) To record the exchange of Redhook common stock for
Widmer preferred and common stock.
(c) To eliminate intercompany balances.
(d) To record an adjustment to tangible assets and to
intangible assets based on an estimate of their value, and
record associated depreciation and amortization.
(e) To eliminate one small brewer’s excise tax
exemption with the TTB and the state of Washington.
(f) To record tax expense and adjust tax assets and
liabilities based on the combined company’s tax position.
Redhook has incurred approximately $738,000 in merger related
legal, consulting and meeting costs during 2007. Of this total,
approximately $584,000 is included in the Redhook statement of
operations as selling, general and administrative expenses. In
2007, Widmer expensed $1,554,000 in merger related costs. The
unaudited pro forma financial statements do not include an
adjustment to eliminate these nonrecurring expenses.
Widmer is an Oregon corporation, and the rights of its
shareholders are currently governed by the OBCA. If the merger
is completed, Widmer shareholders will become shareholders of
Redhook, and their rights will then be governed by the WBCA and
by the articles of incorporation and bylaws of Redhook.
The following is a summary of the material differences between
the rights of Redhook shareholders and the rights of Widmer
shareholders under the WBCA, the OBCA and each company’s
respective articles of incorporation and bylaws. While Redhook
and Widmer believe that this summary covers the material
differences between the two, this summary may not contain all of
the information that is important to you. This summary is not
intended to be a complete discussion of the respective rights of
Redhook and Widmer shareholders and is qualified in its entirety
by reference to the OBCA, the WBCA and the various documents of
Redhook and Widmer that are referred to in this summary. You
should carefully read this entire joint proxy
statement/prospectus and the other documents referred to in this
joint proxy statement/prospectus for a more complete
understanding of the differences between being a shareholder of
Redhook and being a shareholder of Widmer. Redhook has filed
copies of its articles of incorporation and bylaws with the
Securities and Exchange Commission, which are exhibits to the
registration statement of which this joint proxy
statement/prospectus is a part, and will send copies of these
documents to you upon your request. Widmer will also send copies
of its documents referred to herein to you upon your request.
See the section entitled “Where You Can Find Additional
Information” beginning on page 151 of this joint proxy
statement/prospectus.
Provision
Widmer
Redhook
Authorized Capital Stock
Widmer’s articles of incorporation authorize the issuance
of up to 25,000,000 shares of common stock, no par value,
and 2,000,000 shares of preferred stock, $0.01 par
value.
Redhook’s articles of incorporation authorize the issuance
of up to 50,000,000 shares of common stock, par value
$0.005, and 7,467,271 shares of preferred stock, par value
$0.005.
Number of Directors
Widmer’s articles of incorporation provide that the number
of directors that constitute the board of directors will be
determined in the manner provided by Widmer’s bylaws.
Widmer’s bylaws provide that the board of directors shall
consist of eight directors.
Redhook’s bylaws provide that Redhook’s board of
directors will consist of seven directors.
Shareholder Nominations and Proposals
Widmer’s articles of incorporation and bylaws do not
address how a shareholder can make a director nomination or
propose business for an annual meeting of shareholders.
Redhook’s bylaws provide that, in order for a shareholder
to make a director nomination or propose business for an annual
meeting of shareholders, the shareholder must give timely
written notice to Redhook’s secretary not less than
120 days prior to the first anniversary of the date
Redhook’s proxy statement for the previous year’s
annual meeting was first released to shareholders (with certain
adjustments if the date of the annual meeting is changed by more
than 30 days from the date
of the previous year’s annual meeting). Any such notice
must comply with other requirements specified in the bylaws.
Removal of Directors
Under Widmer’s bylaws, at a meeting of shareholders called
expressly for that purpose, one or more directors may be
removed, with or without cause, by a vote of the holders of a
majority of the Widmer shares then entitled to vote on the
election of directors, so long as the number of votes cast to
remove the director exceeds the number of votes cast not to
remove the director.
Under Redhook’s bylaws, one or more directors may be
removed, with or without cause, at a special meeting of
shareholders called expressly for that purpose. A director may
be removed only if the number of votes cast in favor of removing
such director exceeds the number of votes cast against removal.
However, a director may not be removed if a number of votes
sufficient to elect such director under cumulative voting
(computed on the basis of the number of votes actually cast at
the meeting on the question of removal) is cast against such
director’s removal.
Special Meetings of Shareholders
Widmer’s bylaws provide that a special meeting of the
shareholders may be called by the chairman of the board of
directors, the president, the board of directors or holders of
not less than one-tenth of the outstanding shares entitled to
vote on any issue proposed to be considered at the meeting.
Redhook’s bylaws provide that a special meeting of the
shareholders may be called by the board of directors, the
chairman of the board of directors, the President or
shareholders holding not less than 25% of all the shares
entitled to be cast on any issue proposed to be considered at
that meeting.
Cumulative Voting
Holders of Widmer’s common stock are not entitled to
cumulative voting in the election of directors.
Redhook’s articles of incorporation provide that
shareholders generally will not have the right to cumulate
voting in the election of directors. However, shareholders will
generally have the right to cumulative voting in the election of
directors if, prior to the record date for the shareholder
meeting at which such election is to be held, Redhook or a
shareholder of Redhook publicly announces that such holder and
its affiliates are the beneficial owners of at least 30% of
Redhook’s outstanding common stock.
Widmer’s bylaws provide that any vacancy on the board of
directors, including a vacancy created by an increase in the
number of directors, may be filled by Widmer’s
shareholders, by its board of directors or by the affirmative
vote of a majority of the remaining directors though less than a
quorum. A director elected to fill a vacancy shall be elected
for the unexpired term of his or her predecessor in office.
Redhook’s bylaws provide that any vacancy on the board of
directors may be filled by the affirmative vote of a majority of
the directors present at a meeting of the board at which a
quorum is present, or, if the directors in office constitute
less than a quorum, by the affirmative vote of a majority of all
of the directors in office. A director elected to fill a vacancy
will hold office until the next meeting of shareholders at which
directors are elected, and until his or her successor is elected
and qualified.
Voting Stock
Under the OBCA, the holders of Widmer common stock are entitled,
subject to any voting rights that may be granted by the board of
directors to the holders of any class or series of preferred
stock, to vote at all meetings of shareholders and are entitled
to cast one vote in person or by proxy for each share of stock
held by them as of the record date for the meeting.
Under the WBCA, the holders of Redhook common stock are
entitled, subject to any voting rights that may be granted by
the board of directors to the holders of any class or series of
preferred stock, to vote at all meetings of shareholders and are
entitled to cast one vote in person or by proxy for each share
of stock held by them as of the record date for the meeting
fixed by Redhook’s board of directors.
Shareholder Action by Written Consent
Widmer’s bylaws provide that any action that could be taken
at a meeting of shareholders may be taken without a meeting if a
written consent setting forth the action so taken is signed by
all shareholders entitled to vote with respect to the subject
matter thereof. Any action taken by written consent is effective
on the date on which the last signature is placed on the
consent, or at such earlier or later time as is set forth in the
consent.
Redhook’s bylaws provide that any action that may be or is
required by law to be taken at a meeting of shareholders may be
taken, without a meeting or notice of a meeting, if one or more
consents in writing, setting forth the action so taken, are
signed by all of the shareholders entitled to vote or, in the
place of any one or more of such shareholders, by a person
holding a valid proxy to vote with respect to the subject matter
thereof, and are delivered to Redhook for inclusion in the
minutes or filing with the corporate records.
Notice of Shareholder Meetings
Under Widmer’s bylaws, written notice of each shareholder
meeting must include the place, day and
Under Redhook’s bylaws, not less than 10 nor more than
sixty 60 days before the date of any
hour of the meeting and must be given not less than 10 nor more
than 60 days prior to the date of the meeting to each
shareholder entitled to notice of or to vote at such meeting. In
the case of a special meeting, the purpose or purposes for which
the meeting is called must be included in the notice.
meeting of shareholders, written notice stating the place, day,
and time of the meeting must be given to each shareholder of
record entitled to vote at the meeting. If the business to be
conducted at any meeting includes any proposed amendment to the
articles of incorporation or any proposed merger or exchange of
shares, or any proposed sale, lease, exchange, or other
disposition of all or substantially all of Redhook’s
property and assets not in the usual or regular course of its
business, then the written notice must be given not less than
20 days before the date of the meeting.
Indemnification
Widmer’s articles of incorporation provide that, to the
full extent permitted by the OBCA, Widmer shall indemnify any
person who is made, or threatened to be made, a party to any
action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise, by reason of the
fact that the person is or was a director of Widmer or a
fiduciary with respect to an employee benefit plan of Widmer, or
serves or served at the request of Widmer as a director or
officer or as a fiduciary of an employee benefit plan of Widmer
or another corporation, partnership, joint venture, trust or
other enterprise. Indemnification under Widmer’s articles
is not exclusive.
Widmer carries directors and officers insurance insuring its
directors and officers against certain liabilities.
Redhook’s articles of incorporation and bylaws provide that
Redhook shall, to the full extent permitted by the WBCA,
indemnify all directors and officers of Redhook. In addition,
Redhook’s articles of incorporation contain a provision
eliminating the personal liability of directors to Redhook or
its shareholders for monetary damage arising out of a breach of
fiduciary duty.
Redhook maintains appropriate policies of insurance on behalf
of its directors and officers against liabilities asserted
against any such person arising out of his or her status as
such.
Approval of Certain Transactions
Under the OBCA, a merger in which Widmer will not be the
surviving corporation or a sale of substantially all of
Widmer’s assets requires the affirmative vote of holders of
a majority of all the votes entitled to be cast on the
Under the WBCA and Redhook’s articles of incorporation, a
merger in which Redhook will not be the surviving corporation or
a sale of substantially all of Redhook’s assets also
requires the affirmative approval of holders of a majority
transaction. Only holders of Widmer’s outstanding common
stock are entitled to vote on approval of the merger agreement.
of outstanding Redhook common stock.
In addition, the WBCA generally prohibits corporations such as
Redhook that have a class of voting stock registered under the
Exchange Act from engaging in any significant business
transaction (defined to include mergers or consolidations,
certain sales, termination of 5% or more of a corporation’s
employees, sales of assets, liquidation or dissolution, and
other specified transactions) for a period of five years after a
person or group acquires 10% or more of the corporation’s
outstanding voting stock, unless the acquisition is approved in
advance of the stock acquisition by a majority vote of the board
of directors.
Under the OBCA, Widmer’s articles of incorporation may be
amended upon the affirmative vote of holders of a majority of
its outstanding voting shares.
Widmer’s bylaws may be amended at any regular or special
meeting of the shareholders or by the board of directors.
Under the WBCA and Redhook’s articles of incorporation,
amendment of the articles of incorporation generally requires
the affirmative vote of the holders of a majority of
Redhook’s outstanding voting stock. However, Redhook’s
board of directors may make certain amendments, as listed in the
WBCA, to the articles of incorporation without shareholder
approval. These amendments include authorization of the rights
and preferences of preferred stock that the board of directors
may determine to issue in the future. The rights and preferences
of any such preferred stock may have priority over the rights of
holders of Redhook common stock.
Redhook’s board of directors may, by a majority vote,
amend Redhook’s bylaws, which may also be amended by
shareholders.
The following table and the related notes show information known
to Redhook with respect to the beneficial ownership of
Redhook’s common stock as of February 29, 2008 by:
•
each person or group of affiliated persons who is known by
Redhook to own beneficially more than 5% of Redhook’s
common stock;
•
each of Redhook’s current directors;
•
each of Redhook’s named executive officers identified
below; and
•
all of Redhook’s directors and executive officers as a
group.
As of February 29, 2008, there were 8,354,239 shares
of Redhook common stock issued and outstanding. The number of
shares beneficially owned includes shares of common stock that
the listed beneficial owners have the right to acquire within
60 days of February 29, 2008 upon the exercise of
options beneficially owned on that date. Unless otherwise noted,
Redhook believes that all persons named in the table have sole
voting and investment power with respect to all the shares
beneficially owned by them.
Number of Shares of Common
Percent of Common Stock
Name and Address
Stock Beneficially Owned(1)
Outstanding(1)
Busch Investment Corporation(2)
2,761,713
33.06
%
Dimensional Fund Advisors LP(3)
705,338
8.44
%
Paul S. Shipman(4)
316,550
3.72
%
Frank H. Clement(5)
281,070
3.35
%
David J. Mickelson(6)
180,500
2.13
%
Allen L. Triplett(7)
133,750
1.58
%
Gerard C. Prial(7)
125,750
1.48
%
David R. Lord(8)
18,073
*
John D. Rogers, Jr.(9)
16,800
*
Michael Loughran(10)
14,900
*
Jay T. Caldwell
—
*
John W. Glick
—
*
Anthony J. Short
—
*
All executive officers and directors as a group
(11 individuals)(11)
1,087,393
12.15
%
*
Less than 1%
(1)
Includes shares of common stock subject to options currently
exercisable or exercisable within 60 days of
February 29, 2008. Shares subject to an option are not
deemed outstanding for purposes of computing the percentage
ownership of any person other than the person holding the option.
(2)
The business address of Busch Investment Corporation is
1220 N. Market Street, Suite 606, Wilmington,
Delaware19801.
(3)
The business address of Dimensional Fund Advisors LP is
1299 Ocean Avenue, 11th Floor, Santa Monica, California90401.
The number of shares shown as beneficially owned is based
entirely on information contained in the Schedule 13G/A
filed by Dimensional Fund Advisors LP on February 6,2008. As noted in the Schedule 13G/A, Dimensional
Fund Advisors LP disclaims beneficial ownership of these
shares.
(4)
Includes 155,750 shares subject to options. Also includes
650 shares held by Mr. Shipman’s spouse.
(5)
Includes 32,000 shares subject to options,
33,436 shares held by Mr. Clement’s spouse, and
28,430 shares held by Mr. Clement as trustee for his
children.
The following table and the related notes show information known
to Widmer with respect to the beneficial ownership of
Widmer’s common stock as of February 29, 2008 by:
•
each person or group of affiliated persons who is known by
Widmer to own beneficially more than 5% of Widmer’s common
stock;
•
each of Widmer’s current directors;
•
each of Widmer’s executive officers identified
below; and
•
all of Widmer’s directors and executive officers as a group.
As of February 29, 2008 there were 3,793,604.5 shares
of Widmer common stock issued and outstanding. The numbers of
shares beneficially owned include shares of common stock that
the listed beneficial owners have the right to acquire within
60 days of February 29, 2008. Unless otherwise noted,
Widmer believes that all persons named in the table have sole
voting and investment power with respect to all the shares
beneficially owned by them.
Under a letter agreement among Kurt and Robert Widmer and A-B
dated July 1, 2004, the Widmer brothers have agreed to vote
their shares of Widmer common stock in favor of the election of
up to three individuals designated by A-B to be a director of
Widmer. The letter agreement is expected to be terminated upon
the closing of the merger of Widmer into Redhook.
Number of Shares of Common
Percent of Common Stock
Name and Address
Stock Beneficially Owned
Outstanding
Busch Investment Corporation(1)
1,534,655.0
40.5
%
Kurt R. Widmer(2)(3)
914,056.0
24.1
%
Robert P. Widmer(3)(4)
510,334.0
13.5
%
Kristen Maier-Lenz(5)
222,635.0
5.9
%
Timothy P. Boyle(6)
210,970.0
5.6
%
John W. Glick
—
*
Andrew R. Goeler
—
*
Kevin R. Kelly
—
*
Timothy G. McFall(7)
—
*
Terry E. Michaelson(3)(7)(8)
21,720.0
*
V. Sebastian Pastore
—
*
Raymond B. Rudy
6,532.5
*
Anthony J. Short
—
*
Martin J. Wall, IV(7)
—
*
All executive officers and directors as a group
(12 individuals)
1,650,012.5
43.4
%
*
Less than 1%
(1)
The business address of Busch Investment Corporation is
1220 N. Market Street, Suite 606, Wilmington,
Delaware19801.
(2)
The business address of Kurt Widmer is 929 N. Russell,
Portland, Oregon97227. Includes 18,035 shares held by
Mr. Widmer’s spouse.
(3)
Messrs. Kurt and Robert Widmer will each transfer
6,800 shares of Widmer common stock to Mr. Michaelson
prior to the closing of the merger, if the merger closes on or
before July 31, 2008. Shares shown in the table as
beneficially owned by Messrs. Kurt and Robert Widmer
include the 6,800 shares that each will transfer to
Mr. Michaelson. As well, shares shown in the table as
beneficially owned by Mr. Michaelson include the
13,600 shares that will be transferred from
Messrs. Kurt and Robert Widmer.
The business address of Mr. Robert Widmer is
929 N. Russell, Portland, Oregon97227. Includes
6,162 shares held by Mr. Widmer’s spouse.
(5)
The business address of Ms. Maier-Lenz is Schavinsland Str.
85, 0-79100 Freiburg, Germany. Includes 28,494 shares held
by the children of Ms. Maier-Lenz.
(6)
Includes 844 shares held by Mr. Boyle’s daughter,
as to which Mr. Boyle disclaims beneficial ownership.
(7)
Messrs. McFall, Michaelson and Wall are executive officers
of Craft Brands. Due to the nature of their roles at Craft
Brands, each individual’s ownership has been reflected here.
(8)
Pursuant to a consulting agreement between Mr. Michaelson
and Widmer, Mr. Michaelson will be compensated $288,000 and
issued 8,120 shares of Widmer common stock if the merger
closes on or before July 31, 2008. The cash compensation
and stock issuance will occur immediately prior to the closing
of the merger.
The following table and the related notes show information with
respect to the beneficial ownership of Redhook’s common
stock upon consummation of the merger by:
•
each person or group of affiliated persons who Redhook knows
will beneficially own more than 5% of Redhook’s common
stock;
•
each person who will serve as a director of the combined company;
•
each person identified below who will serve as an executive
officer of the combined company; and
•
all person who will serve as directors and executive officers as
a group.
The percent of common stock of Redhook is based on
8,354,239 shares of common stock of Redhook outstanding as
of February 29, 2008 and assumes that no security holder of
Widmer will exercise statutory dissenters’ rights in
connection with the merger. The number of shares to be
beneficially owned include shares of common stock that the
listed beneficial owners have the right to acquire within
60 days of February 29, 2008 upon the exercise of
options beneficially owned on that date. Unless otherwise noted,
Redhook believes that all persons named in the table will have
sole voting and investment power with respect to all the shares
beneficially owned by them.
Number of Shares of Common
Percent of Common Stock
Name and Address
Stock Beneficially Owned(1)
Outstanding(1)
Busch Investment Corporation(2)
6,069,047
36.3
%
Kurt R. Widmer(3)(4)
1,955,227
11.7
%
Robert P. Widmer(4)(5)
1,085,165
6.5
%
Kristen Maier-Lenz(6)
479,800
2.9
%
Timothy P. Boyle(7)
454,661
2.7
%
David J. Mickelson(8)
180,500
1.1
%
Terry E. Michaelson(4)(9)
46,808
*
David R. Lord(10)
18,073
*
John D. Rogers, Jr.(11)
16,800
*
Jay T. Caldwell
—
*
Andrew R. Goeler
—
*
Kevin R. Kelly
—
*
Timothy G. McFall
—
*
V. Sebastian Pastore
—
*
Anthony J. Short
—
*
Martin J. Wall, IV
—
*
All executive officers and directors as a group
(15 individuals)(12)
2,672,069
15.8
%
*
Less than 1%
(1)
Includes shares of common stock subject to options currently
exercisable or exercisable within 60 days of
February 29, 2008. Shares subject to an option are not
deemed outstanding for purposes of computing the percentage
ownership of any person other than the person holding the option.
(2)
The business address of Busch Investment Corporation is
1220 N. Market Street, Suite 606, Wilmington,
Delaware19801.
(3)
The business address of Kurt Widmer is 929 N. Russell,
Portland, Oregon97227. Includes 38,867 shares that will be
held by Mr. Widmer’s spouse.
(4)
Messrs. Kurt and Rob Widmer each will transfer
6,800 shares of Widmer common stock to Mr. Michaelson
prior to the closing of the merger, if the merger closes on or
before July 31, 2008. These shares will be exchanged for a
total of 29,309 shares of Redhook common stock upon closing
of the merger.
(5)
The business address of Mr. Robert Widmer is
929 N. Russell, Portland, Oregon97227. Includes
13,279 shares that will be held by Mr. Widmer’s
spouse.
The business address of Ms. Maier-Lenz is Schavinsland Str.
85, 0-79100 Freiburg, Germany. Includes 61,407 common shares
that will be held by the children of Ms. Maier-Lenz.
(7)
Includes 1,818 shares that will be held by
Mr. Boyle’s daughter, as to which Mr. Boyle
disclaims beneficial ownership.
(8)
Includes 133,500 shares subject to options.
(9)
Pursuant to a consulting agreement between Mr. Michaelson
and Widmer, Mr. Michaelson will be compensated $288,000 and
granted 8,120 shares of Widmer common stock, which will be
exchanged for 17,499 shares of Redhook common stock upon
closing of the merger, if the merger closes on or before
July 31, 2008. The cash compensation and stock issuance
will occur immediately prior to the closing of the merger.
(10)
Includes 12,000 shares subject to options.
(11)
Includes 8,000 shares subject to options. Also includes
3,000 shares held by Mr. Roger’s spouse.
Moss Adams LLP, independent registered public accounting firm,
has audited the Redhook financial statements and Craft Brands
financial statements included in the Redhook Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007, as set
forth in their reports, which are incorporated by reference in
this joint proxy statement/prospectus. The financial statements
of Redhook and Craft Brands are incorporated by reference in
reliance on Moss Adams LLP’s reports, given on their
authority as experts in accounting and auditing.
Moss Adams LLP, independent public accounting firm, has also
audited the consolidated financial statements of Widmer at
December 31, 2007 and 2006, and for each of the years in
the
three-year
period ended December 31, 2007, included in this joint
proxy statement/prospectus, as set forth in their report,
appearing elsewhere herein. These consolidated financial
statements of Widmer are included in this joint proxy
statement/prospectus in reliance on Moss Adams LLP’s
report, given on their authority as experts in accounting and
auditing.
Redhook is a reporting company and files annual, quarterly and
current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any
document Redhook files with the Securities and Exchange
Commission at the Securities and Exchange Commission’s
Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information about
the operation of the Public Reference Room by calling the
Securities and Exchange Commission at
1-800-SEC-0330.
The Securities and Exchange Commission also maintains a website
at www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the Securities and Exchange Commission.
Redhook’s Securities and Exchange Commission filings are
available at this website.
As of the date of this joint proxy statement/prospectus, Redhook
has filed a registration statement on
Form S-4
to register with the Securities and Exchange Commission the
Redhook common stock that Redhook will issue to Widmer security
holders in the merger. This joint proxy statement/prospectus is
a part of that registration statement and constitutes a
prospectus of Redhook, as well as a proxy statement of Redhook
and Widmer for their respective shareholder meetings. As
permitted by Securities and Exchange Commission rules, this
joint proxy statement/prospectus, which constitutes a part of
the registration statement, does not contain all of the
information set forth in the registration statement or the
exhibits which are part of the registration statement. For
further information with respect to Redhook, Widmer and the
securities being offered under this joint proxy
statement/prospectus, please refer to the registration statement
and the exhibits filed as a part of the registration statement.
The Securities and Exchange Commission allows Redhook to
“incorporate by reference” information that it files
into its registration statement on
Form S-4
of which this joint proxy statement/prospectus is a part, which
means that Redhook can disclose important information to you by
referring you to those documents. The information incorporated
by reference is an important part of this joint proxy
statement/prospectus. Information in this joint proxy
statement/prospectus supersedes information incorporated by
reference that Redhook filed with the Securities and Exchange
Commission prior to the date of this joint proxy
statement/prospectus, while information that Redhook files later
with the Securities and Exchange Commission will automatically
update and supersede the information in this joint proxy
statement/prospectus. Redhook incorporates by reference into
this registration statement and joint proxy statement/prospectus
the documents listed below, and any future filings it will make
with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this joint proxy statement/prospectus
but prior to the date of the Redhook annual meeting (other than
Current Reports on
Form 8-K
or portions thereof furnished under Item 2.02 or
Item 7.01 of
Form 8-K):
•
Amendment No. 4 to Redhook’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007 filed on
May 12, 2008 (a copy of which accompanies this joint proxy
statement/prospectus);
The description of Redhook’s common stock contained in
Redhook’s Registration Statement on
Form 8-A
filed on August 1, 1995, including any amendment or reports
filed for the purpose of updating that description.
You may obtain copies of any or all of the documents that have
been incorporated by reference in this joint proxy
statement/prospectus, without charge, by requesting them from
Redhook. Please note that copies of the documents provided to
you will not include exhibits, unless the exhibits are
specifically incorporated by reference into the documents or
this joint proxy statement/prospectus.
Redhook has supplied all information contained or incorporated
by reference in this joint proxy statement/prospectus relating
to Redhook, and Widmer has supplied all such information
relating to Widmer.
If you would like to request documents from Redhook or Widmer,
please send a request in writing or by telephone to either
Redhook or Widmer at the following address:
In order to obtain timely delivery of such documents, you
must request the documents no later than five business days
prior to the date of the Redhook or Widmer shareholders meeting,
as applicable, and so must request such documents no later than
June 17, 2008.
You should rely only on the information contained or
incorporated by reference in this joint proxy
statement/prospectus to vote on the Redhook proposals and the
Widmer proposal. Neither Redhook nor Widmer has authorized
anyone to provide you with information that is different from
what is contained in this joint proxy statement/prospectus. This
joint proxy statement/prospectus is dated May 13, 2008. You
should not assume that the information contained or incorporated
by reference in the joint proxy statement/prospectus is accurate
as of any date other than such date, and neither the mailing of
this joint proxy statement/prospectus to shareholders nor the
issuance of Redhook common stock in the merger shall create any
implication to the contrary.
Redhook maintains a website at www.redhook.com.
Information contained in or accessible through Redhook’s
website does not constitute part of this joint proxy
statement/prospectus and you should not rely on that information
in deciding whether to approve any of the proposals described in
this joint proxy statement/prospectus, unless that information
is also in or incorporated by reference in this joint proxy
statement/prospectus.
Widmer maintains a website at www.widmer.com. Information
contained in or accessible through Widmer’s website does
not constitute part of this joint proxy statement/prospectus and
you should not rely on that information in deciding whether to
approve any of the proposals described in this joint proxy
statement/prospectus, unless that information is also in this
joint proxy statement/prospectus.
Redhook, Redhook’s logos and all other Redhook product and
service names are registered trademarks or trademarks of Redhook
in the U.S. and in other select countries. Widmer, the
Widmer logos and all other Widmer product and service names are
registered trademarks or trademarks of Widmer in the
U.S. and in other select countries.
“®”
and
“tm”
indicate U.S. registration and U.S. trademark,
respectively. Other third-party logos and product/trade names
are registered trademarks or trade names of their respective
companies.
We have audited the accompanying consolidated balance sheets of
Widmer Brothers Brewing Company and Subsidiary (the
“Company”) as of December 31, 2007 and 2006, and
the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended
December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Widmer Brothers Brewing Company and Subsidiary as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United
States of America.
As stated in Note 2 to the financial statements, Widmer Brothers
Brewing Company and Subsidiary restated its 2006 and 2005
financial statements.
Organization — The accompanying financial
statements include the accounts of Widmer Brothers Brewing
Company (“Widmer”) and its 50% joint venture, Craft
Brands Alliance LLC (“Craft Brands” or
“CBA”), which are collectively referred to herein as
the “Company.” Widmer was incorporated in Oregon in
1984 and produces malt beverages at its production facilities in
Portland, Oregon. In 1995, the Company opened the Gasthaus
restaurant adjacent to the production facilities. The
Company’s draft and bottled malt beverages are sold to
distributors in 14 states with sales of 67%, 74% and 75%
occurring in Oregon, California and Washington for the years
ended December 31, 2007, 2006 and 2005, respectively.
In July 2004, the Company entered into agreements with Redhook
Ale Brewery, Incorporated (“Redhook”) with respect to
the creation and operation of the joint venture, Craft Brands.
Pursuant to the Craft Brands Master Distribution Agreement,
(“Craft Brands Distribution Agreement”), Redhook and
Widmer manufacture and sell products to Craft Brands at a price
substantially below wholesale pricing levels. Craft Brands then
advertises, markets, sells and distributes products to wholesale
outlets in the western United States pursuant to a Master
Distributor Agreement with Anheuser-Busch, Inc
(“A-B”), (“A-B Distribution Agreement”).
Concurrent with the Craft Brands Distribution Agreement, the
Company also entered into a Master Distributor Agreement with
A-B to sell directly to the A-B wholesale network in the State
of Washington. Under the terms of these agreements, the Company
has granted A-B the exclusive right to serve as the master
distributor for the Company’s products.
The A-B Distribution agreement remains in effect until
December 31, 2014 and renews automatically for an
additional
10-year
period unless terminated by either party upon at least
6 months prior written notice. In addition, A-B may
terminate the agreement at any time upon 90 days to six
months prior written notice in the event of certain changes in
Company ownership or incompatible conduct on the part of the
Company.
In 2004, the Company converted 1,404,398 shares of its
preferred stock held by A-B into common stock, bringing
A-B’s ownership to 1,534,655 common shares. This
represented 39.5% of the outstanding common shares on
July 1, 2004. There have been no other sales of equity
interests to A-B since that date.
Redhook Merger Agreement — In January 2007, the
Company entered into preliminary discussions with Redhook
regarding the possibility of combining the companies. On
November 13, 2007, the Company and Redhook entered into an
Agreement and Plan of Merger (“Merger Agreement”). The
Merger Agreement includes a number of conditions to closing,
including, but not limited to, approval by the shareholders of
both Redhook and Widmer, that must be satisfied or waived in
order for merger to be completed. Pursuant to the proposed terms
of the Merger Agreement, Redhook will be the surviving
corporation in the merger. It is anticipated the merger will
close during 2008.
NOTE 2 —
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of
presentation — The accompanying consolidated
financial statements include the accounts of Widmer and its 50%
joint venture, Craft Brands. All significant intercompany
amounts have been eliminated in these consolidated financial
statements. In December 2003, the Financial Accounting Standards
Board (“FASB”) issued FASB Interpretation No. 46R
(“FIN 46R”), Consolidation of Variable
Interest Entities, a revision to Interpretation No. 46
(“FIN 46”). FIN 46R clarifies the
application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest;
these entities are referred to as “variable interest
entities.” Variable interest entities within the scope of
FIN 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of
the entity’s expected losses, receives a majority of its
expected
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
returns, or both. FIN 46R also requires disclosure of
significant variable interests in variable interest entities for
which a company is not the primary beneficiary. The Company has
assessed Craft Brands under the provisions of FIN 46R and
has concluded that it meets the definition of a variable
interest entity and that Widmer is the primary beneficiary.
Accordingly, Widmer has consolidated Craft Brands.
Cash equivalents — All highly liquid investment
instruments with a remaining maturity of three months or less
when purchased are considered to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest, which
approximates market value.
Inventories — Inventories are stated at the
lower of cost or market. Finished goods are stated at standard
cost, which approximates the
first-in,
first-out (“FIFO”) method, except for certain supplies
and merchandise held for sale, which are based on the average
cost method and are stated at the lower of cost or market.
During 2007, the Company reevaluated the future utility of
promotional inventory items and wrote down inventory by
recording a lower of cost or market charge of $687,000. The
write-down of inventory to the lower of cost or market creates a
new cost basis that subsequently would not be marked up based on
changes in underlying facts and circumstances.
Property, equipment and leasehold
improvements — Property, equipment and leasehold
improvements are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Estimated
useful lives range from 5 to 20 years for equipment and
from 10 to 32 years for leasehold improvements.
Expenditures for repairs and maintenance are expensed as
incurred; renewals and betterments are capitalized. Upon
disposal of equipment and leasehold improvements, the accounts
are relieved of the costs and related accumulated depreciation,
and resulting gains or losses are reflected in operations.
Property, plant and equipment are reviewed for impairment in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, Accounting for the Disposal
of Long-Lived Assets. The Company assesses impairment of
property, plant and equipment whenever events or changes in
circumstances indicate the carrying values of the assets may not
be recoverable.
Intangibles and other assets — Intangibles and
other assets include trademark costs, deferred financing fees,
and expenditures related to glass molds.
Trademarks have a value of $896,000 at each of December 31,2007 and 2006 and represent the costs of acquiring the Widmer
trade name and trademark. The Company’s trademarks have
been deemed to have an indefinite life and accordingly, are not
amortized but reviewed for loss impairment under the guidance of
SFAS No. 142, Goodwill and Other Intangible Assets
(“FAS 142”). The Company has had no
impairment charges in the years ended December 31, 2007,
2006 or 2005.
Other assets include deferred financing fees which are stated at
cost and amortized over the life of the debt using the
straight-line method. Deferred financing fees totaled $63,000
and $48,000 with related accumulated amortization of $1,300 and
$73,715 at December 31, 2007 and 2006, respectively. See
Note 9.
Expenditures related to glass molds represent costs incurred to
create proprietary bottle molds. In 2006, the Company invested
in two new glassware molds for $110,000. One of the glassware
molds was refunded by the vendor in 2007 as a part of the
initial agreement. During 2007, the $60,000 investment was
returned and $5,000 in amortization expense reversed. Glassware
molds are amortized using the straight-line method over five
years. Glassware molds totaled $37,000 and $103,000 with related
accumulated amortization of $13,300 and $7,300 as of
December 31, 2007 and 2006, respectively.
Use of estimates — The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on
various
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
assumptions that are believed to be reasonable under the
circumstances at the time. Actual results could differ from
those estimates under different assumptions or conditions.
Fair value of financial instruments — The
recorded value of the Company’s financial instruments is
considered to approximate the fair value of the instruments, in
all material respects, because the Company’s receivables
and payables are recorded at amounts expected to be realized and
paid, and the Company’s debt obligations bear interest at
rates which approximate the current rates for financial
instruments with a similar degree of risk and duration.
Comprehensive income — The Company accounts for
comprehensive income under SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes
standards for the reporting and display of elements of
comprehensive income, including foreign currency translation
adjustments, unrealized gains and losses on certain investments
in debt and equity securities, deferred gains and losses on
unrealized derivative hedge transactions, and minimum pension
liability adjustments.
Derivative instruments and hedging activities —
The Company has adopted the provisions of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which requires that all derivatives
be recognized at fair value in the consolidated balance sheet,
and that the corresponding gains or losses be reported either in
the consolidated statement of income or as a component of
comprehensive income, depending on whether the instrument meets
the criteria to apply hedge accounting.
Derivative financial instruments are utilized by the Company to
reduce interest rate risk. The counterparties to derivative
transactions are major financial institutions, which the Company
believes to be of low credit risk. The Company does not hold or
issue derivative financial instruments for trading purposes.
Revenue recognition — Revenue from product
sales reflected in the consolidated statements of income is
comprised of sales of Widmer Redhook and Kona Product. The
Company recognizes revenue from product sales, net of excise
taxes, discounts and certain fees the Company must pay related
to such sales, when the products are shipped to customers.
Although title and risk of loss do not transfer until delivery
of the Company’s products to A-B, or the A-B distributor,
the Company recognizes revenue upon shipment rather than when
title passes because the time between shipment and delivery is
short and product damage claims and returns are immaterial. The
Company recognizes revenue from fees earned in connection with
the licensing agreement with Redhook when the Widmer
Hefeweizen product is shipped by Redhook to the customer.
The Company recognizes revenue on retail sales at the time of
sale. The Company recognizes revenue from events at the time of
the event.
The Company has two revenue sources with respect to its
relationship with Kona Brewery LLC
(“Kona”) — the sale and distribution of Kona
product through the
A-B
distribution network, and an alternating proprietorship
arrangement. The Company recognizes revenue in connection with
an alternating proprietorship arrangement with Kona, whereby the
Company’s facility is leased by Kona for its use in brewing
Kona products. Revenue is recognized by the Company at two
points during the production process: (1) upon completion
of the brewing process, the Company recognizes a
contractually-determined fee computed on the number of barrels
produced; (2) upon packaging the product, the Company
recognizes a contractually-determined fee computed on the number
of barrels packaged. Under a distribution arrangement, the
Company purchases the product from Kona and recognizes revenue
when the product is shipped to
A-B or the
A-B
distributor.
Excise taxes — The federal government levies
excise taxes on the sale of alcoholic beverages, including beer.
For brewers producing less than 2.0 million barrels of beer
per calendar year, the federal excise tax is $7 per barrel on
the first 60,000 barrels of beer removed for consumption or
sale during a calendar year, and $18 per barrel for each barrel
in excess of 60,000. Individual states also impose excise taxes
on alcoholic beverages in varying amounts. Sales as presented in
the Company’s statements of operations reflect the amount
invoiced to the Company’s wholesalers and other customers.
Excise taxes due to federal and state
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
agencies are not collected from the Company’s customers,
but rather are the responsibility of the Company. Net sales, as
presented in the Company’s statements of operations, are
reduced by applicable federal and state excise taxes. When the
Company purchases products under contract brewing arrangements,
the excise tax is a component of inventory costs.
Shipping and handling costs — Costs incurred
for the shipping of finished goods are included in cost of sales
in the Company’s statements of operations.
Income taxes — The Company records federal and
state income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, whereby deferred taxes are
provided for the temporary differences between the financial
reporting basis and the tax basis of the Company’s assets
and liabilities as well as for tax net operating loss and credit
carry forwards. These deferred tax assets and liabilities are
measured under the provisions of the currently enacted tax laws.
The Company will establish a valuation allowance if it is more
likely than not that these items will either expire before the
Company is able to realize their benefits or that future
deductibility is uncertain.
Restatement — During 2007, the Company
identified errors in the presentation on the statements of
income attributed to the Company’s policy for recording
sales incurred in Washington state under the Craft Brands
Operating Agreement, customer payments for estimated freight
costs, and the incorrect classification of royalty income and
expense transactions. The errors had no impact on previously
reported net income or cash flows.
Under the Craft Brands Operating Agreement, the Company receives
a fee equal to the margin on sales within the state of
Washington. Previously, the Company had recorded the receipts as
both a sale and cost of sale transaction. The Company has
reviewed this presentation under the guidelines of Emerging
Issues Task Force (“EITF”)
99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent,
and determined that a net presentation of the fees received is
appropriate. Accordingly, sales and cost of sales have each been
reduced by $10,430,000 and $9,997,000, respectively in 2006 and
2005.
An error in the classification of customer payments received by
the Company for estimated freight costs resulted in a $391,000
increase in 2006 sales and cost of sales. The Company had
previously recorded these payments as an offset to actual
freight costs incurred. Errors in the classification of royalty
income earned by the Company under a licensing agreement and
royalty costs paid under a separate licensing agreement resulted
in an increase to 2006 and 2005 sales of $447,000 and $373,000,
respectively, and increased 2006 and 2005 cost of sales by
$358,000 and $284,000, respectively. These royalty transactions
had been presented on a net basis and as a component of other
income in prior years. These restatements had no impact on the
Company’s reported net operating results.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the errors follows:
2006
As Previously
Reported
Correction
As Restated
Consolidated Statements of Income:
Sales
$
73,190,734
$
(9,592,090
)
$
63,598,644
Cost of Sales
48,367,622
(9,681,411
)
38,686,211
Other Income (expense)
$
227,271
$
(89,321
)
$
137,950
2005
As Previously
Reported
Correction
As Restated
Consolidated Statements of Income:
Sales
$
64,641,175
$
(9,624,127
)
$
55,017,048
Cost of Sales
39,506,606
(9,713,384
)
29,793,222
Other Income (expense)
$
(356,523
)
$
(89,057
)
$
(445,580
)
NOTE 3 —
EQUITY
INVESTMENTS
The Company is a 42% equity owner of Fulton Street Brewery, LLC
(“FSB”). In accordance with APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock (APB No. 18), the Company accounts for
this investment using the equity method. The Company’s
investment in FSB was $3,837,265 and $3,579,075 at
December 31, 2007 and 2006, respectively. The
Company’s portion of equity reported on FSB’s
financial statement was $1,835,536 and $1,576,464 at
December 31, 2007 and 2006, respectively. The difference
between the carrying value of the equity investment and the
Company’s amount of underlying equity in the net assets of
the investee is considered equity method goodwill and is not
amortized but rather reviewed for impairment.
The Company is a 20% equity owner in Kona. In accordance with
APB No. 18, the Company accounts for this investment using
the equity method. The Company’s investment in Kona was
$335,514 and $270,178 at December 31, 2007 and 2006,
respectively. The investment in Kona is not considered
significant to the financial position or results of operations
of the Company.
Condensed financial statement information at December 31,2007 and 2006 for FSB is as follows:
Fulton Street Brewery
2007
2006
Assets
$
7,864,869
$
6,243,648
Liabilities
$
3,467,536
$
2,490,162
Equity
$
4,370,325
$
3,753,486
Revenue
$
15,419,368
$
3,063,833
Expense
$
14,802,528
$
2,875,550
NOTE 4 —
RECENT
ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an interpretation
of FASB Statement No. 109,
(“FIN No. 48”). FIN No. 48
clarifies the accounting and disclosure requirements for
uncertainty in income taxes recognized in an entity’s
financial statements in accordance with SFAS No. 109.
The interpretation prescribes the minimum recognition threshold
and measurement attribute
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
required to be met before a tax position that has been taken or
is expected to be taken is recognized in the financial
statements. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition, and
clearly excludes uncertainty in income taxes from guidance
prescribed by FASB No. 5, Accounting for
Contingencies. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006. This pronouncement
was deferred for privately held companies in November 2007. It
is anticipated that when the Company adopts FIN 48, it will
not have a significant impact on the Company’s financial
statements.
In February 2007, FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is
expected to expand the use of fair value measurement, which is
consistent with the FASB’s long-term measurement objectives
for accounting for financial instruments. SFAS No. 159
is effective for fiscal years beginning after November 15,2007 but early adoption is permitted. The Company is currently
evaluating the requirements and impact, if any, of
SFAS No. 159 and has not yet determined the impact on
the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R), which
replaces SFAS No. 141, Business Combinations,
requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions.
SFAS No. 141(R) also requires the acquirer in a
business combination achieved in stages to recognize the
identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of
their fair values. SFAS No. 141(R) makes various other
amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that
literature to that provided in this statement.
SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. The objective of
SFAS No. 141(R) is to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects. The
Company is currently evaluating the impact that
SFAS No. 141(R) would have on the proposed merger with
Redhook and has not yet determined the impact on the
Company’s financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51. The
objective of SFAS No. 160 is to improve the relevance,
comparability, and transparency of the financial information
that a reporting entity provides in its consolidated financial
statements. SFAS No. 160 establishes accounting and
reporting standards that require the ownership interests in
subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial
position within equity, but separate from the parent’s
equity. This statement also requires the amount of consolidated
net income attributable to the parent and to the non-controlling
interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s
ownership interest while the parent retains its controlling
financial interest must be accounted for consistently, and when
a subsidiary is deconsolidated, any retained non-controlling
equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation
of the subsidiary is measured using the fair value of any
non-controlling equity investment. SFAS No. 160 also
requires entities to provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the non-controlling owners.
SFAS No. 160 applies prospectively to all entities
that prepare consolidated financial statements and applies
prospectively for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
Company is currently evaluating the
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
impact that SFAS No. 160 would have the proposed
merger with Redhook and has not yet determined the impact on the
Company’s financial statements.
In December 2007, the Emerging Issues Tax Force
(“EITF”) of the FASB reached a consensus on issue
No. 07-1,
Accounting for Collaborative Arrangements. The EITF
concluded on the definition of a collaborative arrangement and
that revenues and costs incurred with third parties in
connection with collaborative arrangements would be presented
gross or net based on the criteria in EITF
No. 99-19
and other accounting literature. Based on the nature of the
arrangement, payments to or from collaborators would be
evaluated and its terms, the nature of the entity’s
business, and whether those payments are within the scope of
other accounting literature would be presented. Companies are
also required to disclose the nature and purpose of
collaborative arrangements along with the accounting policies
and the classification and amounts of significant
financial-statement balances related to the arrangements.
Activities in the arrangement conducted in a separate legal
entity should be accounted for under other accounting
literature; however required disclosure under EITF
No. 07-1
applies to the entire collaborative agreement. EITF
No. 07-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years, and is to be applied retrospectively
to all periods presented for all collaborative arrangements
existing as of the effective date. The Company does not expect
this will have a significant impact on the financial statements
of the Company.
NOTE 5 —
CRAFT
BRANDS ALLIANCE
On July 1, 2004, the Company entered into a definitive
agreement with Redhook with respect to the operating activities
of the joint venture, Craft Brands. Widmer and Redhook
separately entered into a supply, distribution and licensing
agreement with Craft Brands pursuant to which Craft Brands
purchases products from each and advertises, markets, sells and
distributes these products in the western United States. Widmer
and Redhook also entered into a restated operating agreement
with Craft Brands (the “Operating Agreement”) that
governs the operations of Craft Brands and the obligations of
its members. As noted above, the financial results of Craft
Brands are consolidated with those of Widmer in accordance with
FIN 46R and all intercompany transactions have been
eliminated in the accompanying financial statements.
The Operating Agreement addresses the allocation of profits and
losses of Craft Brands. The profits and losses of Craft Brands
are allocated between Widmer and Redhook based on the cash flow
percentages of 58% and 42%, respectively. Net cash flow, if any,
will generally be distributed monthly based upon the cash flow
percentages. No distribution will be made unless, after the
distribution is made, the assets of Craft Brands will be in
excess of its liabilities, with the exception of liabilities to
members, and Craft Brands will be able to pay its debts as they
become due in the ordinary course of business.
The Operating Agreement requires a sales and marketing
contribution in 2009 if the volume of sales of Redhook or Widmer
products in 2008, within defined territories, is less than 92%
of the volume of sales of Redhook or Widmer products in 2003,
within the same territories. These terms are included in an
amendment to the Operating Agreement that the Company executed
in February 2008. See Note 17. The capital contribution
cannot exceed $750,000 for Widmer and $310,000 for Redhook. The
Operating Agreement also obligates the Company and Redhook to
make other additional capital contributions only upon the
request and consent of the Craft Brands Board of Directors. To
the extent cash flow from operations and borrowings from
financial institutions is not sufficient for Craft Brands to
meet its obligations, Widmer and Redhook are obligated to lend
to Craft Brands the funds the President of Craft Brands deems
necessary to meet such obligations.
Included in the accompanying financial statements of the Company
are Craft Brands assets totaling $8,147,304 in 2007 and
$6,976,019 in 2006, less intercompany eliminations of $2,966,914
and $1,703,088 in 2007 and 2006, respectively.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 6 —
RELATED
PARTY TRANSACTIONS
The Company has identified related party transactions with four
entities as described below.
A-B
For the year ended December 31, 2007, sales to A-B through
the A-B Distribution Agreement represented 76% of total sales,
or $59,437,000. For the year ended December 31, 2006, sales
to A-B through the A-B Distribution Agreement represented 82% of
total sales or $51,972,000. For the year ended December 31,2005, sales to A-B through the A-B Distribution Agreement
represented 80% of total sales, or $44,207,000. A-B is
considered to be the Company’s major customer.
As part of the A-B Distribution Agreement, the Company paid a
margin fee to A-B based on per barrel shipped through the A-B
distribution network. The margin fee does not apply to sales in
the Company’s retail operations or to dock sales. The
distribution agreement also provides that the Company will pay
an additional fee on shipments that exceed the volume of
shipments in the same geographical areas as in 2003, the base
year. This fee is an additional or incremental margin fee. For
the years ended December 31, 2007, 2006 and 2005, the
margin fee was paid to A-B on shipments totaling 435,000,
404,000, and 360,000 barrels to 207, 188, and 151
distribution points, respectively. As shipments of product have
increased from the 2003 volumes, the Company also paid an
incremental margin fee on 114,000, 81,000, and
38,000 barrels in the three years ended December 31,2007, 2006 and 2005, respectively. For the years ended
December 31, 2007, 2006 and 2005, the Company paid a total
of $4,080,000, $3,498,000, and $2,868,000, respectively, related
to the margin and incremental margin. The margin and incremental
margin are reflected as a reduction of sales in the
Company’s consolidated statements of operations.
In connection with all sales through the A-B Distribution
Agreement, the Company also paid fees to A-B related to
administration and handling, invoicing costs, staging costs, and
inventory manager fees which are reflected in cost of sales in
the Company’s statements of operations. These fees
collectively totaled $155,000, $161,000 and $118,000 for the
three years ended December 31, 2007, 2006 and 2005,
respectively.
In certain instances, the Company may ship its product to A-B
wholesaler support centers rather than directly to the
wholesaler. Wholesaler support centers assist the Company by
consolidating small wholesaler orders with orders of other A-B
products prior to shipping to the wholesaler. A wholesaler
support center fee of $165,000, $126,000 and $0 is reflected in
the Company’s statements of operations for the years ended
December 31, 2007, 2006, 2005, respectively
The Company purchased certain materials through A-B totaling
$6,915,000, $6,516,000 and $4,727,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
The Company entered into an agreement with A-B during 2007 in
connection with a contract brewing arrangement. During 2007 the
Company paid A-B $651,000 for services and $241,000 for
equipment related to this arrangement.
The net amount due to A-B was $4,138,000 and $2,692,000 as of
December 31, 2007 and 2006.
Redhook
In 2003, the Company entered into a licensing agreement with
Redhook to produce and sell the Widmer Hefeweizen brand
in states east of the Mississippi River. In March 2005, the
Widmer Hefeweizen distribution territory was expanded to
include all of the midwest and eastern markets. Brewing of this
product is conducted at Redhook’s New Hampshire Brewery
under the supervision and assistance of the Company’s
brewing staff to insure brand quality and matching taste
profile. The term of this agreement originally expired
February 1, 2008 with an additional one-year automatic
renewal unless either party notifies the other of its desire to
have the term expire at the end of the then existing term at
least 150 days prior to such expiration. The agreement was
automatically renewed for a one year term in February 2008. See
Note 17. The agreement may be
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
terminated by either party at any time without cause pursuant to
150 days notice or for cause by either party under certain
conditions. Additionally, the Company entered into an agreement
with Redhook providing that if the Company terminates the
licensing agreement or causes it to expire before
December 31, 2009, the Company will be required to pay
Redhook a lump sum payment to partially compensate Redhook for
capital equipment expenditures made at the New Hampshire Brewery
to support the Company’s growth. During the term of these
agreements, Redhook will not brew, advertise, market, or
distribute any product that is labeled or advertised as a
“Hefeweizen” or any similar product in the agreed upon
midwest and eastern territory. Brewing and selling of
Redhook’s Hefe-weizen was discontinued in conjunction with
this agreement. Under the terms of the agreement, the Company
recognized licensing fee income of $432,000, $436,000 and
$376,000 for the three years ended December 31, 2007, 2006
and 2005, respectively. The licensing fees are included in the
Company’s statements of operations as sales.
In connection with a contract brewing arrangement between the
Company and Redhook, Redhook produced 81,900, 43,000 and
8,900 barrels of Widmer beer during the years ended
December 31, 2007, 2006 and 2005, respectively.
Widmer’s payments under these contract brewing arrangements
totaled $7,363,000, $3,264,000 and $781,000 during the years
ended December 31, 2007, 2006 and 2005, respectively.
Pursuant to Redhook’s agreement with Craft Brands, if
shipments of Redhook’s products in the western United
States decrease, as compared to the previous year’s
shipments, Redhook will have the right to brew the
Company’s products in an amount equal to the lower of
(i) the Redhook’s product shipment decrease or
(ii) the Company’s product shipment increase. The
contract brewing arrangement with Redhook expired
December 31, 2007. A new 2008 agreement with Redhook to
continue contract brewing was executed in February 2008. See
Note 17.
Pursuant to the Company’s distribution agreement with
Redhook through its subsidiary, Craft Brands, the Company
purchases product from Redhook for distribution. During each of
the three years ended December 31, 2007, 2006 and 2005, the
Company purchased 121,900 barrels, 122,600 barrels,
and 126,500 barrels, respectively, of Redhook product.
Pursuant to the Company’s distribution agreement with
Redhook through its subsidiary, Craft Brands, the Company
receives a fee from Redhook equal to the margin on
Redhook’s product sales in the state of Washington. The
amounts received from Redhook under this agreement totaled
$4,380,000, $3,915,000 and $3,715,000 for the years ended
December 31, 2007, 2006, and 2005, respectively.
The net amount due to Redhook was $302,000 and $484,000 as of
December 31, 2007 and 2006.
Kona
The Company entered into an updated Alternating Proprietorship
Agreement in September 2007 with Kona. The new agreement expires
in December 2014 and provides for automatic renewals as well as
termination rights for each party. This brewing arrangement,
initially established in 2003, allows Kona to manufacture Kona
products at the Company’s brewery for which Kona pays a
fee. Kona produced 53,100, 36,500 and 25,900 barrels of
product during the years ended December 31, 2007, 2006 and
2005, respectively, for which the Company earned fees of
$6,642,000, $3,791,000, and $2,710,000 in each of those years.
Pursuant to the Company’s distribution agreement with Kona,
through its subsidiary, Craft Brands, the Company purchases
product from Kona for distribution. During the years ended
December 31, 2007, 2006 and 2005, the Company purchased
product for which it paid $7,809,000, $6,276,000, and
$4,832,000, respectively.
The Company has a licensing agreement with Kona to represent the
Kona brand on the Continental United States. For this right, the
Company paid Kona royalty fees of $478,000, $354,000 and
$272,000 in the years ended December 31, 2007, 2006 and
2005, respectively. The licensing fees are included in the
Company’s statements of operations as cost of sales.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pursuant to the Company’s distribution agreement with Kona
through its subsidiary, Craft Brands, the Company receives a fee
from Kona equal to the margin on Kona’s product sales in
the state of Washington. The amounts received from Kona under
this agreement totaled $372,000, $203,000 and $170,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.
The Company and Kona provide certain administrative services for
each other. The net payments for these services totaled $59,000,
$60,000 and $76,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
The net amount due from Kona was $676,000 and $2,000 as of
December 31, 2007 and 2006.
Certain Stockholders
The Company leases certain real property and equipment from two
LLCs of which certain stockholders are members. The leased
properties are utilized by the Company for normal operating
activities, including its corporate office and restaurant
locations. These operating leases expire in years 2017 through
2034. The Company paid rent under the leases in the amounts of
$109,000, $106,000 and $99,000 in the years ended
December 31, 2007, 2006 and 2005, respectively.
In December 2007, the Company entered into a five year line of
credit facility with a bank. See Note 9. The facility is
secured by the Company’s assets as well as by certain real
property owned by one of the LLC(s). The LLC has granted a deed
of trust as collateral and is a party to the debt agreement as a
grantor. The property is used by the Company in normal operating
activities. There were no amounts owing to or from the LLCs as
of December 31, 2007 and 2006.
Although the Company owns a 42% equity ownership in Fulton
Street Brewery, see Note 3, there are no related party
transactions between FSB and the Company.
NOTE 7 —
INVENTORIES
Inventories consist of the following:
2007
2006
Merchandise held for sale
$
1,104,188
$
1,979,122
Raw materials and supplies
836,430
1,106,733
Beer in tanks
314,021
416,941
Draft malt beverages
48,633
42,264
Bottled malt beverages
363,411
332,257
Gasthaus inventory
27,199
29,125
$
2,693,882
$
3,906,442
Merchandise held for sale is net of an inventory allowance
reserve of $52,000.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 8 —
PROPERTY,
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consist of the
following:
2007
2006
Properties and equipment
Buildings
$
10,796,459
$
10,796,459
Brewing and packaging equipment
19,261,417
18,547,805
Kegs
7,259,467
6,106,839
Office and data processing equipment
2,449,492
335,031
Delivery vehicles
38,477
18,215
Gasthaus equipment
624,030
364,078
Construction in progress
14,777,693
2,181,238
55,207,035
38,349,665
Property improvements
Leasehold improvements — building
8,068,630
7,271,682
Land improvements
758,975
758,975
64,034,640
46,380,322
Accumulated depreciation
(19,375,311
)
(17,276,168
)
$
44,659,329
$
29,104,154
Construction in progress includes $326,000 and $108,000 of
capitalized interest for interest paid under bank borrowings
used to fund the brewery and corporate office expansion and
remodel projects during the years ended December 31, 2007
and 2006, respectively.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NOTE 9 —
DEBT
Debt is comprised of a line of credit facility, term notes
payable and an equipment loan. All debt is collateralized by
real and personal property. In addition, an LLC of which certain
stockholders are members has granted a deed of trust covering
real property owned by the LLC as additional collateral on the
line of credit facility. See Note 6.
Line of credit of up to $7,500,000 payable to bank, interest
payable monthly at LIBOR plus a variable specified margin (1.50%
at December 31, 2007, all-in rates ranging from 5.84% to
6.20% at December 31, 2007), maturing January 1,2013.
$
753,333
$
—
Term note payable to bank, interest only payable January 2008 to
August 2008 at LIBOR plus a variable specified margin (1.50% at
December 31, 2007, all-in rates ranging from 5.94% to 6.51%
at December 31, 2007), payable in monthly principal
payments of $97,500 beginning September 2008, maturing
August 1, 2018.
13,500,000
—
Equipment loan payable to bank, monthly payments of $119,020
beginning July 2007 and maturing June 2014, prepayment penalty
until after fourth year of payments. Effective interest rate of
6.56%, secured by brewery equipment.
7,541,981
—
Term note payable to bank, at LIBOR plus a variable specified
margin (1.50% at December 31, 2006, all-in rate of 6.82% at
December 31, 2006), payable in monthly principal payments
of $93,330, maturing August 1, 2009. Amounts fully repaid
in December 2007.
—
6,996,667
Promissory note, dated July 1, 2005, payable to an
individual lender in connection with the acquisition of
commercial real estate. The note bears interest at a fixed rate
of 24% per annum, subject to a one-time adjustment on
July 1, 2010 to reflect the change in the consumer price
index. Note matures on the earlier of the lender’s death
and July 1, 2015. If the lender dies before July 1,2010, lender is deemed to have died on July 1, 2010.
Prepayment of the note is not allowed.
200,000
200,000
Promissory note, dated July 1, 2005, payable to an
individual lender in connection with the acquisition of
commercial real estate. The note bears interest at a fixed rate
of 24% per annum, subject to a one-time adjustment on
July 1, 2010 to reflect the change in the consumer price
index. Note matures on the earlier of the lender’s death
and July 1, 2015. If the lender dies before July 1,2010, lender is deemed to have died on July 1, 2010.
Prepayment of the note is not allowed.
200,000
200,000
Promissory note, dated July 1, 2005, payable to an
individual lender in connection with the acquisition of
commercial real estate. The note bears interest at a fixed rate
of 24% per annum, subject to a one-time adjustment on
July 1, 2010 to reflect the change in the consumer price
index. Note matures on the earlier of the lender’s death
and July 1, 2015. If the lender dies before July 1,2010, lender is deemed to have died on July 1, 2010.
Prepayment of the note is not allowed.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future maturities of debt for the years ending December 31 are
as follows:
2008
$
1,075,620
2009
1,381,744
2010
1,473,660
2011
1,571,694
2012
1,676,255
Thereafter
15,216,341
$
22,395,314
In conjunction with the Company’s debt refinancing in
December 2007, the Company evaluated its financing costs and
related debt pursuant to the guidelines set forth in
EITF 96-16,
Debtor’s Accounting for a Modification or Exchange of
Debt Instruments. The Company concluded that the prior debt
has been “modified” rather than
“extinguished” and therefore remaining loan costs
associated with the prior debt will remain a deferred cost and
amortized over the life of the new debt. New financing costs in
2007 totaled $33,987 comprised of $15,000 related to bank debt
and $18,987 in fees related to a new equipment loan.
The bank agreements provide for certain financial covenants
including a leverage ratio, a fixed charge ratio and certain
limitations on capital expenditures. The agreements also provide
for certain restrictions on dividends and stock repurchases. The
Company is in compliance with all financial and operational
covenants of the agreements as of December 31, 2007.
NOTE 10 —
DERIVATIVE
FINANCIAL INSTRUMENTS
On November 1, 2007, the Company entered into a $7,000,000
notional amount interest rate swap to hedge its exposure to
variability in expected future cash flows resulting from
interest rate risk related to a portion of its bank debt. See
Note 9. The contract requires the Company to pay interest
at a fixed rate of 4.60% and receive interest at a floating rate
of one month LIBOR and expires on November 1, 2010.
Periodic cash settlements with the bank are recorded as a
component of interest expense and the fair value of the
instrument is reflected on the Company’s balance sheet.
As of December 31, 2007, the fair value of the interest
rate swap was in a loss position of $161,000 and is reflected as
a long term liability. The mark to market change in fair value
is reflected as a component of other income and expense in the
statements of operations. Cash settlements with the bank during
2007 totaled $29,000 and are recorded as a component of interest
expense. As of December 31, 2007, the Company has also
recorded a current receivable from the bank of $26,000.
The Company had outstanding interest rate swaps in 2006 and 2005
for notional amounts of $2,000,000 and $8,300,000, respectively.
The contract for $2,000,000 had a fixed rate of 2.1% and expired
July 2006. Contracts with an aggregate value of $8,300,000 had a
fixed rate of 8.57% and expired June 2005.
NOTE 11 —
STOCKHOLDERS’
EQUITY AND SERIES D REDEEMABLE PREFERRED STOCK
The authorized capital stock of the Company is
25,000,000 shares of common stock and 78,155 shares of
Series D preferred stock.
In 2003, the Company’s Board of Directors designated
78,155 shares of preferred stock as Series D preferred
stock and the Company issued those shares to Kona in exchange
for a 20% equity interest in Kona in the form of Class B
Units. See Note 3. The Series D preferred stock has
the same dividend rights as the Company’s common stock. The
Series D preferred stock is not entitled to voting rights,
except as otherwise provided by law. Redemption is required upon
the receipt of notice from a holder of Series D preferred
stock
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
following a “trigger event” which is defined as
termination or expiration of specified agreements relating to
Kona. Upon redemption, the Series D preferred stock would
be redeemed in exchange for the Class B units in Kona held
by the Company. Optional redemption may occur following a
repurchase event involving the insolvency or bankruptcy or
similar event relating to a holder of Series D preferred
stock at a redemption price equal to the book value per
Series D share. Optional redemption in exchange for
class B units may also occur following a “trigger
event” upon written notice to the Series D Preferred
shareholders. If the proposed merger with Redhook is completed,
the Series D preferred shares will be converted into
Redhook common shares at the same exchange ratio as shares of
Widmer common stock.
NOTE 12 —
INCOME
TAXES
The provision for income taxes has been calculated in accordance
with SFAS No. 109, Accounting for Income Taxes,
which requires the use of the liability method of computing
deferred income taxes. The provision for income taxes is
comprised of the following:
2007
2006
2005
Current
Federal
$
450,218
$
1,502,735
$
495,667
State and local
(98,061
)
216,342
148,981
352,157
1,719,077
644,648
Deferred
Federal
129,905
(144,853
)
782,482
State and local
(99,217
)
(306,708
)
172,040
30,688
(451,561
)
954,522
$
382,845
$
1,267,516
$
1,599,170
Reconciliation of the statutory federal income tax to the
Company’s effective tax is as follows:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the net deferred tax liability at
December 31, 2007 and 2006 are as follows:
2007
2006
Assets
Long-term incentive
$
154,328
$
274,220
Other
285,372
42,530
439,700
316,750
Liabilities
Property, equipment and leasehold improvements
4,285,737
4,141,728
Other
455,294
445,666
4,741,031
4,587,394
$
(4,301,331
)
$
(4,270,644
)
NOTE 13 —
RETIREMENT
PLAN
The Company maintains a defined contribution plan for employees.
Under the terms of the plan, participating employees may defer a
portion of their gross wages. As of 2007, the Company
contributes a discretionary match equal to 50% of the
employee’s contributions up to a maximum of 6% of the
employee’s gross wages paid in the prior year.
The Company match is at management’s discretion. Such
contributions, which are funded currently, totaled $354,000,
$260,000 and $240,000 for the years ended December 31,2007, 2006 and 2005, respectively.
NOTE 14 —
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
Supplemental schedule of noncash investing and financing
activities:
2007
2006
Interest paid
$
1,110,184
$
311,015
Income taxes paid
$
832,586
$
2,735,791
Derivative instrument-interest rate swap income
$
55,000
$
29,374
NOTE 15 —
CONTINGENCIES
AND COMMITMENTS
The Company has entered into various operating leases in the
normal course of business. Under the terms of the non-cancelable
leases that expire in years through November 2034, the Company
has:
Future minimum payments under all non-cancelable operating
leases as follows:
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Rent expense totaled $1,546,000, $1,290,000, and $737,000 for
the years ended December 31, 2007, 2006 and 2005,
respectively.
The Company periodically enters into commitments to purchase
certain raw materials in the normal course of business. The
Company has entered into purchase commitments to ensure it has
the necessary supply of malt, wheat and hops to meet future
production requirements. Malt, wheat and hop commitments are for
crop years through 2012. The Company believes these commitments
are not in excess of future requirements, and if any, will not
materially affect its financial condition or results of
operations.
Aggregate payments under unrecorded, unconditional purchase
commitments as of December 31, 2007 are as follows:
2008
$
6,469,639
2009
816,676
2010
687,608
2011
555,014
2012
471,638
Thereafter
—
$
9,000,575
Purchases of malt, wheat and hops totaled $2,721,543, $2,984,965
and $1,937,323 for the years ended December 31, 2007, 2006
and 2005, respectively.
Litigation — The Company is involved in various
legal proceedings arising in the normal course of business.
While the outcome of these matters cannot be determined at this
time, management does not presently believe the outcome of these
matters will have a material adverse effect on the
Company’s financial position or its results of operations.
However, the evaluation of these matters and the estimate of the
potential impact of the Company’s financial position or
overall results of operations for any legal proceedings could
change in the future.
Deferred Compensation — The Company has a
long-term bonus plan (the “Plan”) for certain members
of senior management. The Plan is based on an EBITDA/Enterprise
value growth formula and has a three-year vesting period that
begins in the first year the bonus is earned. During the years
ended December 31, 2007, 2006 and 2005, the Company
recognized compensation expense related to this Plan of
$192,000, $45,000 and $260,000, respectively. As of
December 31, 2007, there is $569,000 accrued for future
payments under the Plan.
The Company executed an employment arrangement with an executive
officer which provides that if the proposed merger with Redhook
is completed, the officer would receive a cash payment of
$288,000 and 8,120 shares of Widmer common stock
immediately prior to the merger. Because of the contingent
nature of the payment and stock award, the amounts are not
reflected in the financial statements as of December 31,2007.
NOTE 16 —
MERGER
COSTS
Pursuant to the terms of the Merger Agreement, the Company will
merge with and into Redhook. Redhook will be the surviving
entity. The Merger Agreement includes a number of conditions,
including shareholder and other third party approvals.
As of December 31, 2007, the Company has expensed
$1,554,000 in merger related costs. These costs are primarily
for legal, consulting and accounting professional services. As
of December 31, 2006, the Company had incurred costs of
$851,000 which were reflected as a deferred charge as of that
date. As of
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2006, management believed that the Company
would be the accounting acquirer. Due to the change in the
proposed merger structure, as of December 31, 2007, all
merger-related costs have been charged to current operations.
NOTE 17 —
SUBSEQUENT
EVENTS
The 2003 licensing agreement with Redhook expired in February
2008 and was then renewed for an additional one year period per
the terms of the agreement. In addition, an amended
Manufacturing and Licensing Agreement was executed between the
Company and Redhook in February 2008. This agreement relates to
the contract brewing arrangement and is now effective until
December 31, 2008. The amendment adds the Company’s
Broken Halo IPA to the contract production list along with the
existing Hefeweizen product. The contract brew pricing has been
updated for the upcoming year as a part of the agreement.
The Company executed an amendment to the Craft Brands Operating
Agreement in February 2008 that redefines certain capital
contribution requirements of Widmer and Redhook. The capital
contribution related to volume growth in certain geographical
areas was amended to modify the timeframe for determining if a
capital contribution would be required from 2007 to 2008 and the
payment date, if any, from 2008 to 2009.
The Company signed an agreement in 2008 to sell its
35-barrel
brew house to an unrelated party for $60,000 in sales
consideration. The sale will not have a significant impact on
the Company’s results of operations or financial position.
The Company will be responsible for decommissioning the brew
house.
This Agreement and Plan of Merger (“Agreement”)
is entered into effective as of November 13, 2007, by and
between Redhook Ale Brewery, Incorporated, a Washington
corporation (“Buyer”), and Widmer Brothers
Brewing Company, an Oregon corporation
(“Target”). Buyer and Target are referred to
collectively herein as the
“Parties. ”
WHEREAS, the respective Boards of Directors of Buyer and Target
deem it advisable and in the best interests of their respective
shareholders to consummate the business combination provided for
herein;
WHEREAS, in furtherance thereof, the respective Boards of
Directors of Buyer and Target have approved this Agreement and
the Merger, upon the terms and subject to the conditions set
forth in this Agreement;
WHEREAS, the Board of Directors of Buyer has authorized, and
shall recommend to the shareholders of Buyer, for their
approval, the issuance of shares of Buyer Common Stock pursuant
to the Merger;
WHEREAS, the Board of Directors of Target has authorized and
shall recommend to the shareholders of Target, for their
approval, the Merger and this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that
the acquisition of Target by Buyer pursuant to this Agreement
shall qualify as a reorganization under the provisions of
Section 368(a) of the Code;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the
representations, warranties, and covenants herein contained, and
intending to be legally bound hereby, the Parties agree as
follows.
1. Definitions.
“A-B” means Anheuser-Busch,
Incorporated, and its Affiliate, Busch Investment Corporation.
“A-B Agreements” means the Exchange and
Recapitalization Agreement dated June 30, 2004 between
Target and A-B, Letter Agreement regarding the Exchange and
Recapitalization Agreement dated July 1, 2004 between
Target and A-B, and the Registration Rights Agreement dated
July 1, 2004 between Target and A-B.
“Affiliate” has the meaning set forth in
Rule 12b-2
of the Exchange Act.
“Affiliate Transactions” means any
contract or other arrangement between or among Target on the one
hand, and an Affiliate, or employees, directors or family
members of an Affiliate, on the other hand.
“Articles of Merger” shall mean the
Articles of Merger filed to consummate the Merger and
substantially in the form attached hereto as Exhibit A.
“Balance Sheet” means the audited
balance sheet of Target as of December 31, 2006.
“Bonus Plans” has the meaning set forth
in Section 5(y).
“Business” means the business conducted
by Target prior to and as of the Closing Date.
“Buyer” has the meaning set forth in the
preface above.
“Buyer Common Stock” means the Common
Stock, Par Value $0.005 Per Share, of Buyer.
“Buyer Disclosure Schedule” has the
meaning set forth in Section 6.
“Buyer Material Adverse Effect” means
any fact, circumstance, occurrence, change, or development which
has a material adverse effect on the business, assets,
liabilities, prospects, capitalization, or condition (financial
or otherwise), of Buyer and its Subsidiaries, taken as a whole,
or on the ability of Buyer to consummate the Transactions in
accordance with the terms of this Agreement and the Documents;
provided, however, that none of the following
shall be deemed, either alone or in combination, to constitute,
and none of the following shall be taken into account in
determining whether there has been or will be a Buyer Material
Adverse Effect: any fact, circumstance, occurrence, change or
development primarily arising out of or resulting from:
(A) changes, after the date hereof, in laws, rules or
regulations of general applicability or interpretations thereof
by any courts or Governmental Authority; (B) changes, after
the date hereof, in global or national political conditions or
in general U.S. economic or market conditions affecting
Buyer’s business; or (C) public disclosure of the
transactions contemplated hereby, including the impact thereof
on customers, suppliers, licensors, and employees.
“Buyer Nondisclosure Agreement” means
that Non-Disclosure Agreement dated January 3, 2007 between
Buyer and Target relating to the confidential information of
Buyer.
“CBA” means Craft Brands Alliance LLC,
an Oregon limited liability company, of which Buyer and Target
are the sole members.
“CBA Agreements” means the CBA Restated
Operating Agreement dated July 1, 2004, as amended; the
Supply, Distribution and Licensing Agreement dated July 1,2004 between CBA and Target; the Management Services Agreement
dated July 1, 2004 between CBA and Target; the Consulting
Services Agreement dated July 1, 2004 between CBA and
Target, and the Cross-Indemnity Agreement dated July 1,2004 between CBA, Target and Buyer.
“Certificates” means the stock
certificates issued to the Target Shareholders representing the
Target Shares.
“Claim” means any claim, demand, cause
of action, chose in action, right of recovery or right of
set-off of whatever kind or description against any Person.
“Closing” has the meaning set forth in
Section 2(b).
“Closing Date” has the meaning set forth
in Section 2(b).
“Code” means the Internal Revenue Code
of 1986, as amended.
“Consulting Agreement” means a one-year
Consulting Agreement between Buyer and Paul Shipman.
“Copyrights” has the meaning set forth
in the definition of the term “Intellectual Property
Rights”.
“Dissenting Share” means any Target
Share as to which the holder of record thereof has exercised
his, her or its appraisal rights under the Oregon Business
Corporation Act.
“Documents” means the Buyer Disclosure
Schedule, the Consulting Agreement, the Non-Competition and
Non-Solicitation Agreements, the Shareholder
Lock-Up
Agreements, the Target Disclosure Schedule, the Employment
Agreements, the Articles of Merger and any other agreements or
certificates required to be executed or delivered by Target or
Buyer in accordance with Section 4 or Section 8.
“Effective Time” means the date and time
specified in the Articles of Merger as the effective date of the
consummation of the Merger.
“Employee Benefit Plan” means any
employment, bonus, deferred compensation, incentive
compensation, stock purchase, stock option, stock appreciation
right or other stock-based incentive, severance,
change-in-control,
or termination pay, hospitalization or other medical,
disability, life or other insurance, supplemental unemployment
benefits, profit-sharing, pension, or retirement plan, program,
agreement or arrangement and each other employee benefit plan,
program, agreement or arrangement, sponsored, maintained or
contributed to or required to be contributed to by Target, or
any ERISA Affiliate for the benefit of any current or former
employee, consultant or director of Target, or any ERISA
Affiliate.
“Employment Agreements” means employment
agreements between Buyer and each of Kurt Widmer, Robert Widmer,
Terry Michaelson, David Mickelson, Timothy McFall, Martin Wall,
and Sebastian Pastore.
“Encumbrances” means any and all
encumbrances, liens, charges, security interests, easements,
servitudes, rights of others, assessments, zoning or planning
limitations, or any similar limitations and restrictions,
restrictions on transfer, rights of first refusal or first
offer, options, claims, mortgages or pledges of any nature
whatsoever.
“Environmental Claim” means any written
claim, action, cause of action, suit, proceeding, investigation,
order, demand, notice or other communications by any Person
alleging potential Liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based
on or resulting from (a) the presence, or release into the
environment, of, or exposure to, any Material of Environmental
Concern at any location, whether or not owned or operated by
Target or (b) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law, and
any enforcement order or injunction relating to or arising under
any Environmental Law.
“Environmental Laws” means all federal,
state, local and foreign laws, regulations, ordinances,
requirements of governmental authorities, and common law
regulating the protection or clean up of the environment or
relating to pollution or protection, health or safety of human
health, wildlife or the environment (including, without
limitation, ambient air, surface water, ground water, land
surface or subsurface strata, and natural resources), including,
without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of, or exposure to,
Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental
Concern.
“ERISA” means the Employee Retirement
Income Security Act of 1974, as amended.
“ERISA Affiliate” means any trade or
business, whether or not incorporated, that together with Target
would be deemed a “single employer” within the meaning
of Section 414(b), (c), (m) or (o) of the Code.
“Exchange Act” means the Securities
Exchange Act of 1934, as amended.
“Exchange Agent” has the meaning set
forth in Section 3(g)(i).
“Financial Statements” has the meaning
set forth in Section 5(h).
“FSB” means Fulton Street Brewery, LLC,
an Illinois limited liability company.
“GAAP” means United States generally
accepted accounting principles.
“Governmental Authority” means any
court, administrative agency or commission or other federal,
state or local governmental authority or instrumentality.
“Indebtedness” means (i) all
indebtedness (including any current portion) for borrowed money
or for the deferred purchase price of property or services
(other than current trade liabilities incurred in the ordinary
course of business and payable in accordance with customary
practices), (ii) any other indebtedness (including any
current portion) that is evidenced by a note, bond, debenture or
similar instrument, (iii) all obligations (including any
current portion) under financings (other than operating leases),
(iv) all liabilities secured by any Encumbrances on any
property, and (v) all guarantee obligations.
“Intellectual Property Rights” means
intellectual property rights arising from or in respect of the
following, whether protected, created or arising under the laws
of the United States or any other jurisdiction: (i) trade
names, trademarks and service marks (whether registered or
unregistered, including any applications for registration of any
of the foregoing), logos, Internet domain names, trade dress
rights, together with the goodwill associated with any of the
foregoing; (ii) patents and applications therefor,
including continuation, divisional, continuation in part, or
reissue patent applications and patents issuing thereon
(collectively, “Patents”);
(iii) copyrights and registrations and applications
therefor (collectively, “Copyrights”) and mask
work rights; (iv) know how, inventions, discoveries,
concepts, ideas, methods, processes, designs, formulae,
technical data, drawings, specifications, and databases to the
extent proprietary and confidential to Target, including
customer lists, in each case excluding any rights in respect of
any of the foregoing that comprise or are protected by
Copyrights, mask work rights or Patents (collectively,
“Trade Secrets”); (v) all other
proprietary rights, (vi) all copies and tangible
embodiments thereof (in whatever form or medium), and
(vii) License Agreements.
“Interim Balance Sheet” means the
unaudited balance sheet of Target as of September 30, 2007.
“Knowledge of Buyer” (or any formulation
thereof) means the actual knowledge of any of Paul Shipman,
David Mickelson and Jay Caldwell.
“Knowledge of Target” (or any
formulation thereof) means the actual knowledge of any of:
(i) Kurt Widmer, Robert Widmer, and Terry Michaelson;
(ii) Timothy McFall, Martin Wall, and Sebastian Pastore
with respect to Sections 5(l), 5(r) and 5(s) only; and
(iii) Rich Shawen with respect to Sections 5(l), 5(r),
5(s), and 5(x) only.
“Kona” means Kona Brewery LLC, a Hawaii
limited liability company.
“Lease” has the meaning set forth in
Section 5(p).
“Leased Real Property” has the meaning
set forth in Section 5(p).
“Liability” means any liability or
obligation (whether known or unknown, whether asserted or
unasserted, whether absolute, contingent, fixed or otherwise,
whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), including any
liability for Taxes.
“License Agreements” means all material
written agreements between Target, and third parties, other than
those which have expired or been terminated by the parties
thereto, and in which: (i) such third party has licensed or
granted to Target any right to use, exploit or practice any of
such third party’s Intellectual Property Rights or
technology; or (ii) Target (x) has granted to such
third party any right to use, exploit or practice any of
Target’s Intellectual Property Rights or technology, or
(y) has agreed to any restriction on the right of Target to
use or enforce any of Target’s Intellectual Property Rights
or technology owned by Target.
“Materials of Environmental Concern”
means chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and petroleum
products, asbestos or asbestos-containing materials or products,
polychlorinated biphenyls, lead or lead-based paints or
materials, radon, fungus, mold or other substances that may have
an adverse effect on human health.
“Merger” has the meaning set forth in
Section 2(a).
“Merger Consideration” has the meaning
set forth in Section 2(c).
“Multiemployer Plan” has the meaning set
forth in ERISA Section 3(37).
“Non-Competition and Non-Solicitation
Agreements” means the agreements attached hereto as
Exhibit C, to be executed by Kurt Widmer and Robert Widmer.
“Oregon Business Corporation Act” means
the Business Corporation Act of the State of Oregon, as amended.
“Owned Real Property” has the meaning
set forth in Section 5(p).
“Patents” has the meaning set forth in
the definition of the term “Intellectual Property
Rights.”
“Party” has the meaning set forth in the
preface above.
“Per Share Consideration” means
2.1551 shares of Buyer Common Stock.
“Person” means an individual, a
partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an
unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or any
other entity or organization.
“Portland Brewery Project” means the
expansion of the brewing facility owned by Target located at
2511 N. Mississippi, Portland, Oregon.
“Requisite Shareholder Approval” means
the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of Target Common
Stock in favor of this Agreement and the Merger, voting as a
single class.
“SEC” means the Securities and Exchange
Commission.
“Securities Act” means the Securities
Act of 1933, as amended.
“Shareholder
Lock-Up
Agreements” means Shareholder
Lock-Up
Agreements in substantially the form attached hereto as
Exhibit B.
“Subsidiary” means any Person with
respect to which a specified Person (or a Subsidiary thereof)
owns a majority of the common stock or other securities or has
the power to vote or direct the voting of sufficient securities
to elect a majority of the board of directors or similar body.
“Surviving Corporation” has the meaning
set forth in Section 2(a).
“Target” has the meaning set forth in
the preface above.
“Target Common Stock” means the Common
Stock, $.01 par value per share, of Target.
“Target Disclosure Schedule” has the
meaning set forth in Section 5.
“Target Material Adverse Effect” means
any fact, circumstance, occurrence, change, or development which
has a material adverse effect on the Business, assets,
liabilities, prospects, capitalization, or condition (financial
or otherwise), of Target, or on the ability of Target to
consummate the Transactions in accordance with the terms of this
Agreement and the Documents, or on the ability of Buyer to
operate the Business immediately after the Closing;
provided, however, that none of the following
shall be deemed, either alone or in combination, to constitute,
and none of the following shall be taken into account in
determining whether there has been or will be a Target Material
Adverse Effect: any fact, circumstance, occurrence, change or
development primarily arising out of or resulting from:
(A) changes, after the date hereof, in laws, rules or
regulations of general applicability or interpretations thereof
by any courts or Governmental Authority; (B) changes, after
the date hereof, in global or national political conditions or
in general U.S. economic or market conditions affecting the
Business; or (C) public disclosure of the transactions
contemplated hereby, including the impact thereof on customers,
suppliers, licensors, and employees.
“Target Nondisclosure Agreement” means
that Non-Disclosure Agreement dated January 3, 2007 between
Buyer and Target relating to the confidential information of
Target.
“Target Series D Preferred Stock”
means the Series D Preferred Stock, $.01 par value
per share, of Target.
“Target Shareholder” means any Person
who or which holds any Target Shares.
“Target Shares” means collectively,
outstanding shares of the Target Common Stock and the Target
Series D Preferred Stock.
“Tax” or “Taxes”
means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental
(including taxes under Code Section 59A), customs duties,
capital stock, franchise, profits, withholding, social security
(or similar), unemployment, workers compensation, disability,
real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
“Tax Return” means any return,
declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
“Trade Secrets” has the meaning set
forth the definition of the term “Intellectual Property
Rights.”
“Transactions” means all the
transactions provided for by this Agreement and the other
Documents.
“TTB” means the Alcohol and Tobacco Tax
and Trade Bureau of the U.S. Department of the Treasury.
“Washington Business Corporation Act”
means the Business Corporation Act of the State of
Washington, as amended.
2. Basic Transaction.
(a) The Merger. On and subject to
the terms and conditions of this Agreement, Target will merge
with and into Buyer (the “Merger”) at the
Effective Time. Buyer shall be the corporation surviving the
Merger (the “Surviving Corporation”).
(b) The Closing. The closing of
the Transactions (the “Closing”) as provided in
Section 4 shall take place at the offices of Riddell
Williams P.S., 1001 Fourth Avenue, Suite 4500, in Seattle,
Washington, commencing at 9:00 a.m. local time on a day
agreeable to Buyer and Target and no later than three business
days following the satisfaction or waiver of all conditions to
closing set forth in Section 8. The date on which the
Closing occurs is referred to herein as the “Closing
Date”.
(c) Merger Consideration. Subject
to the terms and conditions of this Agreement, the merger
consideration payable by Buyer hereunder is the number of shares
of Buyer Common Stock calculated by multiplying 2.1551 times the
number of Target Shares that are outstanding at the Effective
Time and are not Dissenting Shares (the “Merger
Consideration”).
3. Effect of Merger.
(a) General. The Merger shall have
the effect set forth in the Articles of Merger and the
Washington Business Corporation Act.
(c) Bylaws. The Amended and
Restated Bylaws of Buyer dated April 7, 2004, amended as
provided in the Articles of Merger, shall be the bylaws of the
Surviving Corporation until further duly amended in accordance
with the terms thereof, Buyer’s Restated Articles of
Incorporation and the laws of the State of Washington.
(d) Directors. The directors of
the Surviving Corporation at and as of the Effective Time shall
be the directors listed in the Articles of Merger.
(e) Conversion of Target
Shares. At and as of the Effective Time, by
virtue of the Merger and without any action on the part of
Target or the Target Shareholders, all of the Target Shares
shall be canceled and converted into and represent the right to
receive the following consideration:
(i) Target Shares. Each Target Share that
is not a Dissenting Share shall be converted into the right to
receive the Per Share Consideration. Each Target Share converted
into the right to receive the Per Share Consideration will
automatically be canceled and retired and cease to exist as of
the Effective Time, and each Certificate shall thereafter
represent only the right to receive the portion of the Merger
Consideration, and any cash to be paid in lieu of fractional
shares, payable with respect to the Target Shares previously
represented by such Certificate, in each case without any
interest.
(ii) Dissenting Shares. Each Dissenting
Share shall be automatically canceled and retired and cease to
exist as of the Effective Time and shall thereafter solely have
the rights set forth in ORS 60.551 to 60.594 of the Oregon
Business Corporation Act.
(f) Fractional Shares. No
fractional shares of Buyer Common Stock will be issued by virtue
of the Merger and any Target Shareholder otherwise entitled
hereunder to receive a fractional share of Buyer Common Stock
(after aggregating all fractional shares of Buyer Common Stock
that would otherwise be received by such holder) will be
entitled to receive in lieu of such fractional share (rounded to
the nearest ten thousandth of a share) a cash payment in an
amount, rounded to the nearest cent, equal to such fraction
multiplied by the closing price of the Buyer Common Stock
reported on the Nasdaq Stock Market on the last trading day
before the Closing Date.
(i) At or prior to the Closing Date, Buyer will enter into
an agreement with Mellon Investor Services (or such other bank
or trust company in the United States as may be designated by
Buyer, the “Exchange Agent”), which will
provide that Buyer will, as part of the Closing, deliver to the
Exchange Agent the shares of Buyer Common Stock representing the
Merger Consideration. Buyer will pay the fees and expenses of
the Exchange Agent.
(ii) As soon as reasonably practicable after the Effective
Time, Buyer will cause the Exchange Agent to deliver or mail to
each holder of record of an outstanding Certificate: (i) a
letter of transmittal specifying that delivery of each
Certificate is effected, and risk of loss and title to the
Certificate passes, only upon actual delivery of the Certificate
to the Exchange Agent, which transmittal letter will be in such
form as Buyer and Target may reasonably specify or the Exchange
Agent may reasonably request; and (ii) instructions for
surrendering Certificates. Upon surrender of a Certificate to
the Exchange Agent, together with a duly executed transmittal
letter and other documents reasonably required by the Exchange
Agent, the holder of such Certificate will receive in exchange
therefor the portion of the Merger Consideration, and any cash
to be paid in lieu of fractional shares, payable with respect to
the Target Shares previously represented by such Certificate, in
each case without any interest.
(iii) All Merger Consideration paid upon the surrender of
Certificates will be deemed to have been paid in full
satisfaction of all rights pertaining to Target Shares
represented by such Certificates. If, after the Effective Time,
Certificates are presented to Buyer or the Exchange Agent for
any reason, they will be exchanged as provided in this
Section 3, except as otherwise provided by law.
(iv) None of Buyer or any of its Affiliates or the Exchange
Agent is liable to any person in respect of any shares of Buyer
Common Stock or cash delivered to a public official in
accordance with any applicable abandoned property, escheat or
other similar law. If any Certificate is not surrendered within
three years of the Effective Time (or immediately prior to such
earlier date on which any amounts payable in accordance with
this Section 3 would otherwise escheat to or become the
property of any governmental entity), any such amounts will, to
the extent permitted by applicable law, become the property of
Buyer, free and clear of all claims or interest of any Person
previously entitled thereto.
(v) If any Certificate is lost, stolen or destroyed, upon
the execution and delivery to the Exchange Agent by the holder
of record of such Certificate of such additional documentation
that the Exchange Agent may reasonably request, the payment to
the Exchange Agent by such holder of any indemnity/surety bond
in such amount as required by the Exchange Agent and the payment
to the Exchange Agent by such holder of any handling or other
fee required by the Exchange Agent, the Exchange Agent will pay
and issue in exchange for such lost, stolen or destroyed
Certificate the portion of the Merger Consideration, and any
cash to be paid in lieu of fractional shares, payable with
respect to the Target Shares previously represented thereby, in
each case without any interest.
4. The Closing. At the Closing,
(i) Target shall deliver to Buyer the various certificates,
instruments and documents referred to in Section 8(a)
below, to the extent not previously delivered;
(ii) Buyer shall deliver to Target the various
certificates, instruments and documents referred to in
Section 8(b) below, to the extent not previously delivered;
(iii) The Surviving Corporation shall file with the
Secretary of State of the State of Washington and the Secretary
of State of the State of Oregon the Articles of Merger; and
(iv) Buyer shall deposit the Merger Consideration with the
Exchange Agent.
5. Representations and Warranties of
Target. Target represents and warrants to Buyer
that the statements contained in this Section 5 are:
(x) correct and complete as of the date of this Agreement;
and (y) will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this
Section 5) except as set forth in the disclosure
schedule accompanying this Agreement (the “Target
Disclosure Schedule”). The Target Disclosure Schedule
is arranged in paragraphs and subparagraphs corresponding to the
lettered and numbered paragraphs and subparagraphs contained in
this Section 5, as applicable, and any fact or item
disclosed on any disclosure schedule shall be deemed disclosed
on all other disclosure schedules to which such disclosure is
appropriately cross-referenced and otherwise full, fair, and in
sufficient detail to enable a reasonable person to identify the
other article, section, or subsection of this Agreement to which
the disclosure is responsive.
(a) Organization, Qualification, and Corporate
Power. Target is a corporation duly
organized, validly existing, and in good standing under the laws
of the jurisdiction of its incorporation. Target is duly
authorized to conduct business and is in good standing and holds
all material licenses and registrations required to conduct its
Business in the jurisdictions set forth in Section 5(a) of
the Target Disclosure Schedule, which are all of the
jurisdictions in which the character of the property owned or
leased by it or the conduct of its Business makes such
qualification necessary, except where the failure to be so duly
qualified and in good standing would not materially and
adversely affect the ongoing Business of Target. Target has not
received notice from any jurisdiction in which it is not duly
qualified of a requirement to register in such jurisdiction.
Target has full corporate power and authority to carry on the
businesses in which it is engaged as such are being conducted
and to own and use the properties owned and used by it. Target
has made available to Buyer complete and correct copies of the
Articles of Incorporation and Bylaws or other applicable
organizational documents of Target as presently in effect.
(b) Capitalization. The entire
authorized capital stock of Target consists of
25,000,000 shares of Target Common Stock, $0.01 par
value, with 3,793,603 shares outstanding;
2,000,000 shares of preferred stock, $.01 par value,
of which 120,000 shares have been designated as Target
Series A Shares, with zero issued and outstanding,
1,404,398 shares have been designated as Target
Series B Shares, with zero shares issued and outstanding,
42,730.6 shares have been designated as Target
Series C Shares, with zero shares issued and outstanding,
and 78,155 shares have been designated as Target
Series D Preferred Stock, with 78,155 shares issued
and outstanding. All of the issued and outstanding Target Shares
have been duly authorized and are validly issued, fully paid,
and nonassessable. Target is not obligated to purchase, and
Target does not own, directly or indirectly, any equity
securities or securities convertible into or exchangeable or
exercisable for equity securities of any Person. Except for
Target’s ownership interests in CBA, FSB, and Kona, Target
does not have any direct or indirect equity or ownership
interest in any Person. All securities of Target have been
issued in compliance with applicable laws. There are no voting
trusts or other agreements or understandings in respect of the
voting of the securities of Target. Section 5(b) of the
Target Disclosure Schedule sets forth the name of each
shareholder of Target and opposite the name of each such
shareholder, the number and type of Target Shares held by such
Person, as of the date of this Agreement. Except as set forth in
Section 5(b) of the Target Disclosure Schedule, there are
no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or
other securities, contracts or commitments that could require
Target to: (i) issue, sell, or otherwise cause to become
outstanding any of its securities (equity, debt, convertible or
otherwise); (ii) acquire any of its securities (equity,
debt, convertible or otherwise); (iii) pay any dividends on
any of its securities (equity, debt, convertible or otherwise);
or (iv) purchase, redeem or retire any outstanding shares
of any of its securities (equity, debt, convertible or
otherwise). There are no outstanding or authorized restricted
stock, restricted units, stock appreciation, phantom stock,
stock options, stock warrants or similar rights with respect to
Target.
(c) Authorization of
Transaction. Target has the requisite
corporate power and authority to execute and deliver each of
this Agreement and the Documents, to perform its obligations
hereunder and thereunder and to consummate the Transactions.
Upon execution and delivery by Target, each of this Agreement
and the Documents to which Target is a party will constitute the
legal, valid and binding obligation of Target, enforceable
against Target in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors’ rights generally and by
general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law). The Board of
Directors of Target has: (i) adopted resolutions approving
this Agreement and the Transactions; (ii) determined that
this Agreement and the Transactions are in the best interests of
the Target Shareholders and recommended approval of this
Agreement and the Transactions to the
Target Shareholders; and (iii) authorized the submission of
this Agreement to the Target Shareholders for their approval.
(d) Noncontravention. Neither the
execution and delivery of this Agreement or any Document, nor
the performance by Target of its obligations hereunder or
thereunder and consummation of the Transactions will:
(i) violate any constitution, statute, law, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or
other restriction of any government or Governmental Authority to
which Target is subject or any provision of the Articles of
Incorporation or Bylaws of Target; (ii) contravene,
conflict with, or result in a violation of any of the terms or
requirements of, or give any Governmental Authority the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any
Permit that is held by Target or that otherwise relates to the
Business of, or any of the assets owned or used by, Target,
except such as would not constitute a Target Material Adverse
Effect; or (iii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate,
materially modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other
arrangement to which Target is a party or by which Target is
bound or to which any of its assets is subject, except such as
would not result in a Target Material Adverse Effect (but this
exception shall not apply to Affiliate Transactions).
Section 5(d) of the Target Disclosure Schedule lists all
notices, filings, authorizations, consents and approvals
required to be given by Target to, made by Target with or
obtained by Target from any Governmental Authority or third
party in order for the Parties to consummate the Transactions,
except such as relate to the regulation of alcoholic beverages
or would not result in a Target Material Adverse Effect.
(e) Brokers’ Fees. Target
does not have any Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the
Transactions.
(f) Title to Properties; Encumbrances; Condition of
Properties. Target has good, valid and
marketable title to all the properties and assets reflected in
the Interim Balance Sheet and all of the properties and assets
purchased or otherwise acquired by Target since the Interim
Balance Sheet Date, in each case free and clear of all
Encumbrances, except for: (i) any of such properties or
assets sold or otherwise disposed of in the ordinary course of
business and consistent with past practice; (ii) liens for
current taxes not yet due or which are being contested in good
faith by appropriate proceedings and for which appropriate
reserves have been established and disclosed on the Target
Disclosure Schedule; (iii) Encumbrances which are not
material to the value of the properties or assets encumbered and
which do not impair in any material respect the current use or
operation of such properties and assets; (iv) liens and
security interests securing Indebtedness incurred in the
ordinary course of business, including, without limitation, all
Indebtedness incurred in connection with the Portland Brewery
Project; and (v) mechanics’, materialmen’s,
carriers’, warehousemen’s and other like liens arising
in the ordinary course of business in respect of obligations not
overdue for a period in excess of 90 days or that are being
contested in good faith by appropriate proceedings and for which
appropriate reserves have been established and disclosed on the
Target Disclosure Schedule. Target has the right to use all
assets and properties not owned by Target but utilized in
connection with its Business. The rights, properties and other
assets presently owned, leased, licensed or otherwise used by
Target include all such rights, properties and other assets
necessary to permit Target to conduct its Business in all
material respects in the same manner as such Business has been
conducted prior to the date hereof or the Closing Date, as
applicable. The equipment and other tangible property or assets
owned or used by Target are in the aggregate in sufficient
condition and adequate for the uses to which they are being put,
and conform with applicable laws.
(h) Financial Statements. Copies
of the following financial statements of Target have been
provided to Buyer: (i) audited consolidated balance sheets
and statements of income, changes in stockholders’ equity
and cash flows as of and for the fiscal years ended
December 31, 2004, 2005 and 2006; and (ii) the Interim
Balance Sheet and an unaudited consolidated statement of income
as of the Interim Balance Sheet Date and for the partial fiscal
year then ended (collectively the “Financial
Statements”). The Financial Statements (including the
notes thereto) have been prepared from, are in accordance with
and accurately reflect the books and records of Target, have
been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby and fairly present
the financial condition of Target as of such dates and the
results
of operations of Target for such periods; provided,
however, that the Financial Statements for periods
subsequent to January 1, 2007 are subject to normal
year-end adjustments in accordance with past practice and do not
contain complete footnotes.
(i) Internal
Controls. Target’s internal accounting
controls are effective to provide reasonable assurance that:
(a) transactions are executed in accordance with
management’s general or specific authorization;
(b) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and
to maintain accountability for assets; (c) material
misstatements in Target’s annual and interim financial
statements will be prevented or detected on a timely basis;
(d) access to assets is permitted only in accordance with
management’s general or specific authorization; and
(e) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(j) No Undisclosed
Liabilities. Target does not have any
Liabilities, except: (a) as and to the extent reflected or
reserved against on the Interim Balance Sheet; and
(b) Liabilities incurred in the ordinary course of business
and consistent with past practice since the Interim Balance
Sheet Date. The reserves reflected in the Financial Statements
are reasonable and have been calculated consistent with past
practice.
(k) Books and Records. The books
and records of Target are complete and correct in all material
respects and have been maintained in accordance with sound
business practices. True and complete copies of all minute books
and stock record books of Target have heretofore been made
available to Buyer, except for minutes relating to the
Transaction and the consideration of other potential
transactions similar to the transactions contemplated by this
Agreement.
(l) Absence of Certain
Changes. Since the Balance Sheet Date, there
has not occurred any event or circumstance constituting or
giving rise to a Target Material Adverse Effect and Target is
not aware of any events or circumstances which could, upon the
passage of time or otherwise, give rise to a Target Material
Adverse Effect. During the period commencing on July 1,2007, and ending on the date of this Agreement, Target has
conducted its Business only in the normal and ordinary course in
a manner consistent with past practice and there has not been
any:
(i) change in Target’s authorized or issued equity
securities; grant of any option or right to purchase equity
securities of Target; issuance of or grant of any option or
right to purchase, any security convertible into or exchangeable
or exercisable for such equity securities; grant of any
registration rights; purchase, redemption, retirement, or other
acquisition by Target of any equity securities; or declaration
or payment of any dividend or other distribution or payment by
Target in respect of equity securities;
(iii) labor dispute or claim of unfair business practices
involving Target; entry into or change in the compensation
payable or to become payable to any of the officers, directors
or employees of Target who have total annual compensation in
excess of $50,000; any change of compensation payable to or to
become payable to a class or category of employees of Target
other than in the ordinary course of business, consistent with
past practices; any change, or to the Knowledge of Target any
prospective change (other than changes which may occur in
connection with the Transactions) with respect to the employment
status or compensation of any officer or director of Target; any
grant of any severance or termination pay to any officer,
director or employee of Target; or any change in benefits
payable under any existing severance or termination pay
policies, employment agreements or other generally applicable
compensation policies;
(iv) grant, issuance, acceleration, payment, accrual or
agreement to pay or make any accrual or arrangement for payment
of salary or other payments or benefits pursuant to, or adoption
or amendment of, any new or existing Employee Benefit Plan;
(v) entry into, termination or amendment of, or receipt of
notice (oral or written) of termination of or reduction of
business under any Material Contract;
(vi) change in any method of calculating any bad debt,
contingency or other reserves, or any other change in the
accounting methods or practices used by Target;
(vii) cancellation or waiver of any claims or rights with a
value to Target greater than $25,000 individually;
(viii) new election or change in any existing election
relating to Taxes, settlement of any claim or assessment
relating to Taxes, consent to any claim or assessment relating
to Taxes, or waiver of the statute of limitations for any such
claim or assessment;
(ix) write-down or write-off of any notes or accounts
receivable, either individually or in the aggregate, in excess
of $25,000;
(x) disposal or lapse of or material amendment to any
material Intellectual Property Rights;
(xi) declaration, payment or setting aside for payment of
any dividend or other distribution in respect of equity
securities of Target or redemption, purchase or other
acquisition, directly or indirectly, of any equity securities or
other securities of Target;
(xii) payment, loan or advance of any amount to, or sale,
transfer or lease of any properties or assets (real, personal or
mixed, tangible or intangible) to, agreement or arrangement
with, or change in its existing borrowing or lending
arrangements for or on behalf of, Target’s officers or
directors or any Affiliate of any of its officers or directors
except for directors’ fees and compensation to officers as
disclosed to Buyer;
(xiii) change in the methods, practices, or timing of
Target’s collection of receivables or payment of payables;
(xiv) material destruction, damage or loss (casualty or
other) to any properties or other assets of Target;
(xv) purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other
disposition, of any of the properties or assets of Target other
than in the ordinary course of business consistent with past
practice; or
(xvi) agreement, whether oral or written, by Target or any
of its Affiliates to do any of the foregoing.
(m) Legal Compliance. Target has
materially complied, and is in material compliance, with all
applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments
(and all agencies thereof), including but not limited to laws
and regulations applicable to the production and sale of
alcoholic beverage products, “dram shop” laws, safety
laws or regulations, or laws or regulations relating to illegal
payments, kickbacks or commercial bribery. Target has provided
to Buyer a copy of the audit report from its recent audit by the
TTB.
(n) Licenses and Permits. All
governmental, agency or commission licenses, approvals,
registrations and permits (the “Permits”)
required by applicable law to be held or secured by Target are
listed on Section 5(n) of the Target Disclosure Schedule.
Target is and at all times has been, in material compliance with
all of the terms and requirements of such Permits. Each Permit
is in full force and effect, and will continue to be so upon
consummation of the Transaction, and all necessary renewals have
been, and upon consummation of the Transaction will be, duly
filed.
(o) Tax Matters.
(i) All Tax returns, statements, reports, forms and similar
statements (including estimated Tax returns, claims for refunds,
amended returns and reports and information returns and reports)
required to be filed with any taxing authority by or on behalf
of Target (the “Target Returns”), were filed
when due (including any applicable extension periods) in
accordance with all applicable laws and were correct and
complete. In the past six years, no Claim has been made by an
authority in a jurisdiction where Target does not file Tax
returns that Target may be subject to taxation in that
jurisdiction.
(ii) Target has timely paid, or withheld and remitted to
the appropriate taxing authority, all Taxes due and payable by
Target under any applicable law.
(iii) The charges, accruals and reserves for Taxes on the
Interim Balance Sheet (whether or not due and whether or not
shown on any Target Return but excluding any provision for
deferred income Taxes) are adequate under GAAP to cover Taxes
accruing through the date thereof.
(iv) There is no action or audit now pending or threatened
in writing against or in respect of any Tax or “tax
asset” of Target. For purposes of this
Section 5(o)(iv), the term “tax asset” shall
include any net operating loss, net capital loss, investment tax
credit, foreign tax credit, charitable deduction or any other
credit or tax attribute which could reduce Taxes.
(v) Target is not party to any tax sharing agreement.
(p) Real
Property. Section 5(p) of the Target
Disclosure Schedule contains a list of any real property owned
by Target (the “Owned Real Property”) or
otherwise occupied by Target, and all leases and agreements for
the rental of real property to which Target is a party (as
lessor or lessee) or by which such real property may be bound
(the “Leased Real Property”). Neither the
execution or delivery of this Agreement or any Document, nor the
performance by Target of its obligations hereunder or thereunder
and consummation of the Transactions will accelerate, modify, or
terminate any of the arrangements with respect to the Leased
Real Property, except as otherwise provided herein. Target has
good and marketable fee simple title to the Owned Real Property,
and has valid and existing leasehold interests in all of the
real property that it possesses, operates or occupies (or has
similar rights to possess, operate or occupy). All Owned Real
Property is free and clear of all Encumbrances. No part of the
Owned Real Property is subject to any assignment, lease, license
or other similar agreement for the enjoyment of such Owned Real
Property. Target has provided to Buyer copies of all existing
title policies held in its files relating to Owned Real
Property, and to the Knowledge of Target, no exceptions,
reservations, or encumbrances have arisen or been created since
the date of issuance of those policies (other than Liens for
taxes not yet delinquent). A true, correct and complete copy of
each lease relating to Leased Real Property (each, a
“Lease”) has heretofore been made available to
Buyer. Each Lease is valid, binding and enforceable in
accordance with its terms and is in full force and effect. There
are no existing defaults by Target under any of the Leases. No
event has occurred that (whether with or without notice, lapse
of time or the happening or occurrence of any other event) would
constitute a default by Target under any Lease. To the Knowledge
of Target, there is no material default by the landlord under
any Lease. No condemnation, eminent domain, or similar
proceeding exists, is pending or, to the Knowledge of Target, is
threatened, with respect to or that could affect, any Real
Property. The Owned Real Property and Leased Real Property and
the business conducted thereon comply in all material respects
with the terms of the applicable Leases and applicable laws.
(q) Intellectual Property. Target
owns, or is licensed or otherwise has the right to use, all
Intellectual Property Rights which are material to the Business,
financial condition or results of operations of Target taken as
a whole. No claims are pending or, to the Knowledge of Target,
threatened that Target is infringing or otherwise adversely
affecting the rights of any Person with regard to any
Intellectual Property Rights. To the Knowledge of Target, no
person is infringing the rights of Target with respect to any
Intellectual Property Rights. There are no Claims pending which
challenge the legality, validity, enforceability, use or
ownership of any of Target’s Intellectual Property Rights.
Section 5(q) of the Target Disclosure Schedule lists all of
Target’s Intellectual Property Rights.
(i) Section 5(r)(i) of the Target Disclosure Schedule
sets forth a complete and accurate list and (in the case of oral
contracts) description of each contract, whether written or
oral, (i) with Persons to whom Target is required to make
aggregate payments in any twelve-month period in excess of
$100,000 other than with respect to Leases; (ii) with
Persons to whom Target received revenues in excess of $100,000
during the year ended December 31, 2006 or for which the
lump sum or fixed price thereunder is in excess of $100,000;
(iii) that relates to Indebtedness of Target; (iv) for
capital expenditures in excess of $100,000; (v) for
consulting services to Target with Persons to whom Target has
made (or is likely to make) aggregate payments
in any twelve-month period in excess of $50,000;
(vi) providing for the purchase of all or substantially all
of its requirements of a particular product or service from a
supplier; or (vii) with suppliers providing for aggregate
payments in any twelve-month period in excess of $100,000 (each
of the contracts listed in clauses (i) through (vii),
together with the Leases, the License Agreements, the A-B
Agreements and the CBA Agreements, and the contracts disclosed
under Section 5(s), a “Material
Contract”). Each Material Contract is in full force and
effect and is enforceable in accordance with its terms. Upon the
consummation of the Transactions, each such contract will remain
in full force and effect. With respect to each Material
Contract, there is not any default or event that, with notice or
lapse of time or both, would constitute a default on the part of
Target (nor, to the Knowledge of Target, on the part of any
other party thereto).
(ii) Target has made available to Buyer a complete and
accurate copy of each written Material Contract.
(iii) Target has not received any notice, and Target has no
Knowledge, that any party to a Material Contract intends to
cancel or otherwise materially modify its relationship with
Target (or Buyer following the Closing) as a result of the
Transactions.
(iv) Target does not have any outstanding contracts with
shareholders, directors, officers or employees that are not
cancelable by Target on notice of not longer than thirty
(30) days and without Liability, penalty or premium.
(v) Target is not party to any employment agreement,
separation agreement, retention agreement, change in control
agreement, collective bargaining agreement or any other
agreement that contains any severance or termination pay
Liabilities or obligations.
(vi) There are no outstanding loans from Target to any
Person. Target is not party to any agreement requiring it to
acquire or guarantee any debt obligations of, or make any loan
or capital contribution to, any Person.
(vii) Target is not restricted by agreement from carrying
on its Business anywhere in the world.
(viii) Section 5(r)(viii) of the Target Disclosure
Schedule sets forth a complete list of all powers of attorney
granted by or to Target.
(ix) Target does not have any Liabilities, as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise,
in respect of the obligation of any Person (including pursuant
to any indemnification agreements) other than indemnification
obligations under Material Contracts.
(s) Customers and Suppliers.
(i) Section 5(s)(i) of the Target Disclosure Schedule
sets forth (x) a list of each customer from whom Target
received aggregate revenues in excess of $500,000 during the
twelve months ended December 31, 2006. No Person listed in
Section 5(s)(i) of Target Disclosure Schedule has
suspended, canceled or otherwise terminated its relationship
with Target or to the Knowledge of Target materially decreased
its usage or purchase of the services or products of Target. To
Target’s Knowledge, no Person listed in
Section 5(s)(i) of the Target Disclosure Schedule has any
intention to suspend, terminate or cancel its relationship with
Target.
(ii) Section 5(s)(ii) of the Target Disclosure
Schedule sets forth a list of each supplier from whom Target
received aggregate products or services in excess of $250,000
during the twelve months ended December 31, 2006 (the
“Material Suppliers”). Target’s
relationship with each of the Material Suppliers is a good
commercial working relationship, and since the Balance Sheet
Date, no Material Supplier has canceled, suspended, materially
modified, or otherwise terminated its relationship with Target,
or to the Knowledge of Target materially decreased availability
of its services, supplies or materials to Target. To
Target’s Knowledge, no Material Supplier has any intention
to do any of the foregoing.
(t) Accounts Receivable. All
accounts receivable reflected in the Financial Statements
represent valid obligations arising from sales actually made or
services actually performed in the ordinary course of business,
and are properly reflected in the Financial Statements in
accordance with GAAP and the accounts receivables reserves are
reasonable and calculated consistent with past practice. Since
the Balance Sheet Date, Target has
collected its accounts receivable in the ordinary course of
business and in a manner which is consistent with past practices
and has not accelerated any such collections.
(u) Disputed Accounts
Payable. There are no material (individually
or in the aggregate) unpaid invoices or bills, representing
amounts alleged to be owed by Target, or other alleged
obligations of Target, which Target has disputed or determined
to dispute or refuse to pay. All accounts payable and notes
payable of Target arose in bona fide arm’s length
transactions in the ordinary course of business and no material
account payable or note payable is delinquent in its payment.
Since the Balance Sheet Date, Target has paid its accounts
payable in the ordinary course of its business and in a manner
which is consistent with its past practices.
(v) Affiliate Transactions. Target
has not entered into and is not subject or a party to any
Affiliate Transaction.
(w) Litigation. There is no
action, suit, proceeding, dispute resolution proceeding, charge,
grievance or investigation (each, a
“Proceeding”), by or before any Governmental
Authority or other regulatory or administrative agency or
commission or arbitration panel or dispute resolution board or
other adjudicative entity pending, or, to the Knowledge of
Target, threatened against or involving Target, or which
questions or challenges or could reasonably be expected to have
the effect of preventing, delaying, making illegal or otherwise
interfering with, any of the Transactions. Target is not subject
to any judgment, order or decree.
(x) Employee Benefits.
(i) Section 5(x) of the Target Disclosure Schedule
contains a true and complete list of each Employee Benefit Plan.
(ii) With respect to each Employee Benefit Plan, Target has
heretofore made available to Buyer true and complete copies of
each of the following documents, as applicable:
(1) a copy of the Employee Benefit Plan documents
(including all amendments thereto) for each written Employee
Benefit Plan or a written description of any Employee Benefit
Plan that is not otherwise in writing;
(2) a copy of the annual report or Internal Revenue Service
Form 5500 Series, if required under ERISA, with respect to
each Employee Benefit Plan for the last three plan years ending
prior to the date of this Agreement for which such a report was
filed;
(3) a copy of the actuarial report, if required under
ERISA, with respect to each Employee Benefit Plan for the last
three plan years ending prior to the date of this Agreement;
(4) a copy of the most recent Summary Plan Description
(“SPD”), together with all Summaries of
Material Modification issued with respect to such SPD, if
required under ERISA, with respect to each Employee Benefit
Plan, and all other material employee communications relating to
each Employee Benefit Plan;
(5) if the Employee Benefit Plan is funded through a trust
or any other funding vehicle, a copy of the trust or other
funding agreement (including all amendments thereto) and the
latest financial statements thereof, if any;
(6) all contracts relating to the Employee Benefit Plan
with respect to which Target or any ERISA Affiliate may have any
liability, including insurance contracts, investment management
agreements, subscription and participation agreements and record
keeping agreements; and
(7) the most recent determination letter received from the
IRS with respect to each Employee Benefit Plan that is intended
to be qualified under Section 401(a) of the Code.
(iii) No liability under Title IV of ERISA has been
incurred by Target or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a
material risk to Target or any ERISA Affiliate of incurring any
liability under such Title, other than liability for premiums
due the Pension Benefit Guaranty Corporation
(“PBGC”), which payments have been or will be
made when due. To the extent this
representation applies to Sections 4064, 4069 or 4204 of
Title IV of ERISA, it is made not only with respect to the
Employee Benefit Plans but also with respect to any employee
benefit plan, program, agreement or arrangement subject to
Title IV of ERISA to which Target or any ERISA Affiliate
made, or was required to make, contributions during the past six
years.
(iv) The PBGC has not instituted proceedings pursuant to
Section 4042 of ERISA to terminate any of the Employee
Benefit Plans subject to Title IV of ERISA, and no
condition exists that presents a material risk that such
proceedings will be instituted by the PBGC.
(v) With respect to each Employee Benefit Plan that is
subject to Title IV of ERISA, the present value of
accumulated benefit obligations under such plan, as determined
by the plan’s actuary based upon the actuarial assumptions
used for funding purposes in the most recent actuarial report
prepared by such plan’s actuary with respect to such plan,
did not, as of its latest valuation date, exceed the then
current value of the assets of such plan allocable to such
accumulated benefit obligations.
(vi) None of Target, any ERISA Affiliate, any Employee
Benefit Plan, any trust created thereunder, nor to Target’s
Knowledge, any trustee or administrator thereof has engaged in a
transaction or has taken or failed to take any action in
connection with which Target or any ERISA Affiliate could be
subject to any material liability for either a civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a
tax imposed pursuant to Section 4975(a) or (b), 4976 or
4980B of the Code.
(vii) All contributions and premiums which Target or any
ERISA Affiliate is required to pay under the terms of each
Employee Benefit Plan and Section 412 of the Code, have, to
the extent due, been paid in full or properly recorded on the
financial statements or records of Target or any ERISA
Affiliate, and none of the Employee Benefit Plans subject to
Section 302 of ERISA or Section 412 of the Code or any
trust established thereunder has incurred any “accumulated
funding deficiency” (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived,
as of the last day of the most recent fiscal year of each of the
Employee Benefit Plans ended prior to the date of this
Agreement. No lien has been imposed under Section 412(n) of
the Code or Section 302(f) of ERISA on the assets of Target
or any ERISA Affiliate, and no event or circumstance has
occurred that is reasonably likely to result in the imposition
of any such lien on any such assets on account of any Employee
Benefit Plan.
(viii) Target has no Multiemployer Plans.
(ix) Each of the Employee Benefit Plans has been operated
and administered in all material respects in accordance with
applicable laws, including but not limited to ERISA and the Code.
(x) Each of the Employee Benefit Plans that is intended to
be “qualified” within the meaning of
Section 401(a) of the Code is so qualified in all material
respects. Target has applied for and received a currently
effective determination letter from the IRS stating that it is
so qualified, and no event has occurred which would affect such
qualified status. Any fund established under an Employee Benefit
Plan that is intended to satisfy the requirements of
Section 501(c)(9) of the Code has so satisfied such
requirements.
(xi) No amounts payable under any of the Employee Benefit
Plans or any other contract, agreement or arrangement with
respect to which Target may have any liability could fail to be
deductible for federal income tax purposes by virtue of
Section 280G of the Code.
(xii) No Employee Benefit Plan provides benefits, including
without limitation death or medical benefits (whether or not
insured), with respect to current or former employees, officers,
directors or consultants of Target or any ERISA Affiliate after
retirement or other termination of service (other than
(i) coverage mandated by applicable laws, (ii) death
benefits or retirement benefits under any “employee pension
plan,” as that term is defined in Section 3(2) of
ERISA, (iii) deferred compensation benefits accrued as
liabilities on the books of Target or any ERISA Affiliate,
(iv) benefits, the full direct cost of which is borne by
the current or former employee, officer, director or consultant
(or beneficiary thereof), or (v) benefits provided under
the Widmer Brothers Brewing Company Severance Pay Plan).
(xiii) The consummation of the transactions contemplated by
this Agreement will not, either alone or in combination with any
other event, (i) entitle any current or former employee,
officer, director or consultant of
Target or any ERISA Affiliate to severance pay (other than
severance pay under the Widmer Brothers Brewing Company
Severance Pay Plan), unemployment compensation or any other
similar termination payment unless required by applicable law,
or (ii) accelerate the time of payment or vesting, or
increase the amount of or otherwise enhance any benefit due any
such employee, officer, director or consultant unless required
by applicable law.
(xiv) There are no pending or, to the Knowledge of Target,
threatened or anticipated claims by or on behalf of any Employee
Benefit Plan, by any current or former employee, officer,
director or consultant (or beneficiary thereof) against any
Employee Benefit Plan or otherwise involving any such plan
(other than claims for benefits made to an Employee Benefit
Plan).
(y) Employees. Section 5(y)
of the Target Disclosure Schedule sets forth for the current
employees of Target a list of the names, job titles or
classifications, work locations, current pay rates and total
compensation paid during the fiscal year ended December 31,2006. Except as specifically detailed in Section 5(y) of
the Target Disclosure Schedule, after Closing Target will not
have any material bonus, stock option, management incentive, or
similar incentive compensation plans (collectively, the
“Bonus Plans”) in effect, nor will it have any
amounts outstanding and owing under any such Bonus Plans. Target
is not a party to or bound by any collective bargaining
agreement, nor has it experienced any strike or material
grievance, claim of unfair labor practices, labor dispute,
lockout, work slowdown or work stoppage or any other collective
bargaining dispute within the past five years. Target has no
Knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to
Target or its employees. Target has complied in all material
respects with all applicable federal, state and local laws,
ordinances, rules and regulations and requirements relating to
the employment of labor, including, but not limited to, laws
governing wages and hours, payment of overtime, classification
of independent contractors, workplace safety, collective
bargaining, immigration, payment of Social Security, plant
closures and layoffs, unemployment and withholding taxes, and
equal employment opportunity, affirmative action, employee
leave, and workplace discrimination or harassment.
(z) Environmental, Health, and Safety Matters.
(i) Target is in material compliance with the Environmental
Laws, which compliance includes, but is not limited to, the
possession by Target of all Permits and other governmental
authorizations required under the Environmental Laws, and
compliance with the terms and conditions thereof.
(ii) There is no Environmental Claim pending or, to the
Knowledge of Target, threatened against Target or against any
Person whose liability for any Environmental Claim Target has
retained or assumed contractually or for which Target may be
liable by operation of law.
(iii) There are no past or present actions, inactions,
omissions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Material of Environmental
Concern, that constitute a material violation of Environmental
Laws or for which Target has retained or assumed either
contractually or by operation of law any material costs or
liabilities under Environmental Law.
(iv) Target has made available to Buyer all assessments,
reports, and results of investigations or audits conducted by or
at the direction of Target in connection with the Real Property,
including any of the foregoing regarding any violation of
Environmental Laws by Target, or the noncompliance by Target
with any Environmental Laws.
(v) Target is not required by virtue of the Transactions,
or as a condition to the effectiveness of the Transactions,
(i) to perform a site assessment for Materials of
Environmental Concern, (ii) to remove or remediate
Materials of Environmental Concern, (iii) to give notice to
or receive approval from any Governmental Authority, or
(iv) to record or deliver to any Person any disclosure
document or statement pursuant to any Environmental Law.
(aa) Insurance. Section 5(aa)
of the Target Disclosure Schedule sets forth (a) a true and
complete list of all of Target’s insurance policies
currently in force and (b) a description of such risks that
Target has
designated as being self-insured. All such policies are in full
force and effect and shall continue to be in full force and
effect through the Closing Date, all premiums due thereon have
been paid by Target, and Target is in compliance in all material
respects with the terms and provisions of such policies. Target
has not received (i) any notice of cancellation of any such
policies or refusal of coverage thereunder, (ii) any notice
that any issuer of any of such policies has filed for protection
under applicable bankruptcy laws or is otherwise in the process
of liquidating or has been liquidated, (iii) any notice
that such policies are no longer in full force and effect or
that the issuer of any of such policies is no longer willing or
able to perform its obligations thereunder or (iv) any
notice that any issuer of any such policies intends to
substantially increase rates or that substantial capital
improvements or other expenditures will have to be made in order
to continue such insurance at present rates. Section 5(aa)
of the Target Disclosure Schedule sets forth any and all Claims
made by Target for insurance policy coverage in excess of
$100,000 for any single event during the prior two
(2) years from the date of this Agreement.
(bb) Bank
Accounts. Section 5(bb) of the Target
Disclosure Schedule sets forth the names and locations of all
banks and other financial institutions at which Target maintains
accounts or safe deposit boxes of any nature and the names of
all persons authorized to have access thereto, draw thereon or
make withdrawals therefrom.
(cc) Product Liability. To the
Knowledge of Target, Target has no material Liability arising
out of any injury to individuals or property as a result of any
product produced, manufactured, supplied, marketed, distributed
or sold by Target.
(dd) Outstanding
Indebtedness. Section 5(dd) of the
Target Disclosure Schedule sets forth the approximate amount of
outstanding Indebtedness of Target as of the effective date of
this Agreement.
(ee) Keg
Deposits. Section 5(ee) of the Target
Disclosure Schedule sets forth the number of kegs owned by
Target as of the Interim Balance Sheet Date and the amount of
keg deposits reflected on the Interim Balance Sheet.
(ff) Product Quality. With respect
to any product currently (or within the past seven years)
produced, manufactured, supplied, marketed distributed or sold
by Target: Such products (i) are not, and have not been,
adulterated or misbranded within the meaning of those terms
under the Federal Food, Drug and Cosmetic Act, as amended, or
any applicable federal or state law or regulation, and
(ii) in all material respects, do comply, and have
complied, with all federal, state or local laws and regulations
relating to the product’s manufacture, quality, labeling,
identity, quantity, packaging or any other matter applicable to
the products.
(gg) Correctness of Representations and
Warranties. To the Knowledge of Target, this
Section 5, together with the Target Disclosure Schedule,
does not contain any untrue statement of material fact or omit
to state any material fact necessary to make the statements and
information contained herein or therein, under the circumstances
under which they were made, not misleading.
6. Representations and Warranties of
Buyer. The Buyer represents and warrants to
Target that the statements contained in this Section 6 are
(x) correct and complete as of the date of this Agreement
and (y) will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this
Section 6) except as set forth in Buyer’s
disclosure schedule accompanying this Agreement (the
“Buyer Disclosure Schedule”). The Buyer
Disclosure Schedule is arranged in paragraphs and subparagraphs
corresponding to the lettered and numbered paragraphs and
subparagraphs contained in this Section 6, as applicable,
and any fact or item disclosed on any disclosure schedule shall
be deemed disclosed on all other disclosure schedules to which
such disclosure is appropriately cross-referenced and otherwise
full, fair, and in sufficient detail to enable a reasonable
person to identify the other article, section, or subsection of
this Agreement to which the disclosure is responsive.
(a) Organization. Buyer is a
corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its
incorporation. Buyer is duly authorized to conduct business and
is in good standing and holds all material licenses and
registrations required to conduct its business in the
jurisdictions set forth in Section 6(a) of the Buyer
Disclosure Schedule, which are all of the jurisdictions in which
the character of the property owned or leased by it or the
conduct of its business makes such qualification
necessary, except where the failure to be so duly qualified and
in good standing would not materially and adversely affect the
ongoing business of Buyer. Buyer has not received notice from
any jurisdiction in which it is not duly qualified of a
requirement to register in such jurisdiction. Buyer has full
corporate power and authority to carry on the businesses in
which it is engaged as such are being conducted and to own and
use the properties owned and used by it. Buyer has made
available to Target complete and correct copies of the Articles
of Incorporation and Bylaws of Buyer as presently in effect.
(b) Authorization of
Transaction. Buyer has the requisite
corporate power and authority to execute and deliver each of
this Agreement and the Documents, to perform its obligations
hereunder and thereunder and to consummate the Transactions.
Upon execution and delivery by Buyer, each of this Agreement and
the Documents to which Buyer is a party will constitute the
legal, valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors’ rights generally and by
general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law). The Board of
Directors of Buyer has adopted resolutions approving this
Agreement and the Transactions.
(c) Noncontravention. Neither the
execution and delivery of this Agreement or any Document, nor
the performance by Buyer of its obligations hereunder or
thereunder and consummation of the Transactions will:
(i) violate any constitution, statute, law, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or
other restriction of any government or Governmental Authority to
which Buyer is subject or any provision of the Restated Articles
of Incorporation or Amended and Restated Bylaws of Buyer; or
(ii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any Governmental
Authority the right to revoke, withdraw, suspend, cancel,
terminate, or modify, any Permit that is held by Buyer or that
otherwise relates to the business of, or any of the assets owned
or used by, Buyer, except such as would not constitute a Buyer
Material Adverse Effect; or (iii) conflict with, result in
a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate,
terminate, materially modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or
other arrangement to which Buyer is a party or by which Buyer is
bound or to which any of its assets is subject, except such as
would not result in a Buyer Material Adverse Effect.
Section 6(c) of the Buyer Disclosure Schedule lists all
notices, filings, authorizations, consents and approvals
required to be given by Buyer to, made by Buyer with or obtained
by Buyer from any Governmental Authority or third party in order
for the Parties to consummate the Transactions, except such as
relate to the regulation of alcoholic beverages or would not
result in a Buyer Material Adverse Effect.
(d) Capitalization. The entire
authorized capital stock of Buyer consists of
50,000,000 shares of common stock, par value $.005 per
share, of which 8,354,239 shares were issued and
outstanding as of November 9, 2007, and
7,467,271 shares of preferred stock, par value $.005 per
share, of which no shares are outstanding. All of the issued and
outstanding Buyer Common Stock has been duly authorized and is
validly issued, fully paid, and nonassessable. Buyer is not
obligated to purchase, and does not own, directly or indirectly,
any equity securities or securities convertible into or
exchangeable or exercisable for equity securities of any Person
nor does it have any direct or indirect equity or ownership
interest in any Person other than a Subsidiary and equity
securities of CBA. All securities of Buyer have been issued in
compliance with applicable laws. There are no voting trusts or
other agreements or understandings in respect of the voting of
the securities of Buyer. Except for the outstanding stock
options disclosed in Buyer’s annual report on
Form 10-K
for the fiscal year ended December 31, 2006, there are no
outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or
other securities, contracts or commitments that could require
Buyer to (i) issue, sell, or otherwise cause to become
outstanding any of its securities (equity, debt, convertible or
otherwise), (ii) acquire any of its securities (equity,
debt, convertible or otherwise), (iii) pay any dividends on
any of its securities (equity, debt, convertible or otherwise),
or (iv) purchase, redeem or retire any outstanding shares
of any of its securities (equity, debt, convertible or
otherwise).
(e) Brokers’ Fees. Buyer has
no Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the Transactions.
(f) No Buyer Material Adverse
Effect. Since the Balance Sheet Date, there
has not occurred any event or circumstance constituting or
giving rise to a Buyer Material Adverse Effect and Buyer is not
aware of any events or circumstances which could, upon the
passage of time or otherwise, give rise to a Buyer Material
Adverse Effect. Buyer has not received any notice, and Buyer has
no Knowledge, that any material customer, supplier, licensor or
employee intends to cancel or otherwise materially modify its
relationship with Buyer as a result of the Transactions.
(g) Tax Matters. All Taxes due and
owing by Buyer have been paid. No Claim has ever been made by an
authority in a jurisdiction where Buyer does not file Tax
Returns that it may be subject to taxation by that jurisdiction.
Buyer has filed all required Tax Returns, and all such Tax
Returns are true, complete and correct in all material respects.
Buyer has never been a party to any agreement allocating or
sharing the payment of (or Liability for) any Taxes.
(h) Tax Treatment. Buyer has not
taken or agreed to take any action and is not aware of any fact
or circumstance that would prevent or impede, or would be
reasonably likely to prevent or impede, the Merger from
qualifying as a reorganization under Section 368(a) of the
Code.
(i) Licenses and Permits. All
Permits required by applicable law to be held or secured by
Buyer are listed on Section 6(i) of the Buyer Disclosure
Schedule. Buyer is and at all times has been, in material
compliance with all of the terms and requirements of such
Permits. Each Permit is in full force and effect, and will
continue to be so upon consummation of the Transaction, and all
necessary renewals have been, and upon consummation of the
Transaction will be, duly filed.
(j) Product Quality. With respect
to any product currently (or within the past seven years)
produced, manufactured, supplied, marketed, distributed or sold
by Buyer: Such products (i) are not, and have not been,
adulterated or misbranded within the meaning of those terms
under the Federal Food, Drug and Cosmetic Act, as amended, or
any applicable federal or state law or regulation, and
(ii) in all material respects, do comply, and have
complied, with all federal, state or local laws and regulations
relating to the product’s manufacture, quality, labeling,
identity, quantity, packaging or any other matter applicable to
the products.
(k) Correctness of Representations and
Warranties. To the Knowledge of Buyer, this
Section 6, together with the Buyer Disclosure Schedule,
does not contain any untrue statement of material fact or omit
to state any material fact necessary to make the statements and
information contained herein or therein, in light of the
circumstances under which they were made, not misleading.
(l) SEC Filings; Buyer Financial Statements.
(i) Buyer has filed each report and definitive proxy
statement (together with all amendments thereof and supplements
thereto) required to be filed by it with the SEC since
January 1, 2004 (as such documents have since the time of
their filing been amended or supplemented, the “Buyer
SEC Reports”). As of the respective dates they were
filed, after giving effect to any amendments or supplements
thereto filed prior to the date hereof, (i) each Buyer SEC
Report complied as to form in all material respects with the
requirements of the Exchange Act, and (ii) none of the
Buyer SEC Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were
made, not misleading.
(ii) Each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the
Buyer SEC Reports (the “Buyer Financial
Statements”) was prepared in accordance with GAAP
applied on a consistent basis throughout the periods indicated
(except as may be indicated in the notes thereto or, in the case
of unaudited statements, as permitted by
Form 10-Q
of the SEC) and each presents fairly, in all material respects,
the consolidated financial position, results of operations and
cash flows of Buyer and its consolidated Subsidiaries as at the
respective dates thereof and for the respective periods
indicated therein, except as otherwise noted therein (subject,
in the case of unaudited statements, to normal year-end
adjustments and the absence of complete footnotes).
(iii) Buyer has furnished to Target a complete and correct
copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to
agreements, documents or
other instruments that previously had been filed by Buyer with
the SEC pursuant to the Securities Act or the Exchange Act.
(iv) Buyer is in compliance with the applicable listing and
corporate governance rules and regulations of The Nasdaq Stock
Market.
7. Covenants. The Parties shall
comply with the following covenants:
(a) From Execution through
Closing. From the date of execution of this
Agreement through the Closing Date:
(i) General. Upon the terms and
subject to the conditions of this Agreement, each of the Parties
will use its commercially reasonable efforts to take all actions
and to do all things necessary, proper or advisable in order to
consummate and make effective the Merger in accordance with the
terms of this Agreement (including satisfaction, but not waiver,
of the closing conditions set forth in Section 8 below).
(ii) Notices and Consents. Each of
Target and Buyer will give the notices to third parties and
Governmental Authorities, and will use its commercially
reasonable efforts to obtain or make the filings,
authorizations, consents and approvals listed in
Section 5(d) of the Target Disclosure Schedule and
Section 6(c) of the Buyer Disclosure Schedule,
respectively; provided that neither Party shall make any
agreements or understandings adversely affecting it or its
business or assets in any material respect as a condition to
obtaining any such authorizations, consents or approvals, except
with the prior written consent of the other Party (which consent
shall not be unreasonably withheld or delayed).
(iii) Regulatory Matters and
Approvals. Each of the Parties will give any
notices to, make any filings with, and use its commercially
reasonable efforts to obtain requisite authorizations, consents,
and approvals of governments and Governmental Authorities.
Without limiting the generality of the foregoing:
(1) Registration Statement on
Form S-4.
(A) Buyer agrees to prepare a registration statement on
Form S-4
or other applicable form (the “Registration
Statement”), to be filed by Buyer with the SEC in
connection with the issuance of Buyer Common Stock in the Merger
(including the joint proxy statement of Buyer and Target (the
“Proxy Statement”), which also constitutes the
prospectus of Buyer, and all other documents filed therewith or
incorporated therein. Target shall furnish all information
concerning itself as Buyer may reasonably request in connection
with such actions and the preparation of the Proxy Statement.
Target shall prepare and furnish such information relating to it
and its directors, officers and shareholders as may be
reasonably required or requested in connection with the
Registration Statement and the Proxy Statement, and Target and
its counsel will cooperate with and assist Buyer and its counsel
in the preparation of the Proxy Statement. Target agrees to
cooperate with Buyer and Buyer’s counsel, financial advisor
and accountants in requesting and obtaining appropriate
opinions, consents and letters from its independent auditors in
connection with the Registration Statement and the Proxy
Statement. Provided that Target has cooperated as described
above, Buyer agrees to file, or cause to be filed, the
Registration Statement and the Proxy Statement with the SEC as
promptly as reasonably practicable but in no event later than
60 days after the date hereof. Buyer agrees to use all
reasonable efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as
reasonably practicable after the filing thereof. After the
Registration Statement is declared effective under the
Securities Act, Buyer and Target will each, at their own
expense, promptly mail the Proxy Statement to their respective
shareholders.
(B) Each of Target and Buyer agrees that none of the
information supplied or to be supplied by it for inclusion or
incorporation by reference in the Registration Statement shall,
at the time the Registration Statement and each amendment or
supplement thereto, if any, becomes
effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein
not misleading, and the Proxy Statement and any amendment or
supplement thereto shall not, at the date of mailing to
shareholders of Target and Buyer and at the time of their
respective shareholders’ meetings, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading. Each of Target and Buyer
further agrees that if such party shall become aware prior to
the Effective Time of any information furnished by such party
that would cause any of the statements in the Registration
Statement or the Proxy Statement to be false or misleading with
respect to any material fact, or to omit to state any material
fact necessary to make the statements therein not false or
misleading, it shall promptly inform the other party thereof and
to take the necessary steps to correct the Registration
Statement or the Proxy Statement.
(2) Alcoholic Beverage
Regulation. Each of the Parties shall give
all notices, make all filings and use its commercially
reasonable efforts to obtain all authorizations, consents, and
approvals that relate to the regulation of alcoholic beverages
and are required to be given by the Party to, made by the Party
with or obtained by the Party from any Governmental Authority in
order for the Parties to consummate the Transactions.
(3) Other Regulatory Matters. Each
of Buyer and Target shall cooperate and use its reasonable best
efforts to prepare all documentation, to effect all filings and
to obtain all permits, consents, approvals and authorizations of
all third parties and Governmental Authorities necessary to
consummate the Transactions, and each of Buyer and Target shall
promptly provide to the other all information necessary or
otherwise reasonably requested in connection with such filings.
Each of Buyer and Target shall have the right to review in
advance, and to the extent practicable each shall consult with
the other, in each case subject to applicable laws relating to
the exchange of information, with respect to all material
written information submitted to any third party or any
Governmental Authority in connection with the transactions
contemplated by this Agreement. In exercising the foregoing
right, each of the Parties agrees to act reasonably and as
promptly as practicable. Each of Buyer and Target agrees that it
shall consult with the other with respect to the obtaining of
all material permits, consents, approvals and authorizations of
all third parties and Governmental Authorities necessary or
advisable to consummate the Transactions and shall keep the
other apprised of the status of material matters relating to
completion of the Transactions.
(iv) Operation of Business. Each
Party covenants and agrees that, after the date hereof and prior
to the Closing Date, except as expressly contemplated by this
Agreement, the Target Disclosure Schedule or the Buyer
Disclosure Schedule or as agreed to in writing by the other
Party, it will conduct its business in the same manner as
heretofore conducted and only in the ordinary course consistent
with past practice, and it will use its commercially reasonable
efforts to preserve its business organization and keep available
the services of its current officers and employees, to the end
that its goodwill and ongoing business shall not be impaired at
the Closing Date in any material respect; provided, however,
that the following changes will not constitute a breach of this
covenant: changes resulting from developments or occurrences
relating to or affecting the United States economy in general or
the craft brewing industry in general; and changes resulting
from actions taken by the Parties prior to the Closing that are
in furtherance of the Transactions but that have an effect on
the business of a Party, including but not limited to any
disruptions to the business of a Party as a result of the
execution of this Agreement, the announcement by the Parties of
the proposed Merger, or the consummation of the Transactions.
Without limiting the generality of the foregoing, each Party
covenants and agrees that, after the date hereof and prior to
the Closing Date,
except as expressly contemplated by this Agreement, the Target
Disclosure Schedule or the Buyer Disclosure Schedule or as
agreed to in writing by the other Party, it will not:
(1) institute any new methods of operation, purchase, sale,
lease, management, or accounting (except as may be required
under GAAP), or engage in any transaction or activity other than
in the ordinary course of business consistent with past practice;
(2) (A) amend its Articles of Incorporation or Bylaws;
(B) purchase, issue, sell, transfer, pledge, dispose of,
grant any option in or encumber any shares of its capital stock
or other securities (equity, debt, convertible or otherwise),
other than up to 8,120 shares of Target Common Stock that
may be issued to Terry Michaelson; (C) declare, set aside
or pay any dividend or other distribution payable in cash, stock
or property with respect to any shares of its capital stock or
other securities; (D) split, combine or reclassify any
shares of its capital stock or other securities;
(E) redeem, purchase or otherwise acquire directly or
indirectly any shares of its capital stock or other securities;
or (F) purchase or otherwise invest in any securities
issued by any Person;
(3) organize any subsidiary or acquire any capital stock or
other equity securities, or equity or ownership interest in (or
any right or option to receive any of the foregoing) the
business, of any other Person;
(4) modify, amend or terminate any of its material
contracts, waive, release or assign any material rights or
claims thereunder, or fail to continue to perform its
obligations thereunder;
(5) other than in the ordinary course of business
consistent with past practice (A) incur or assume any
Indebtedness ; (B) modify the terms of any Indebtedness or
other liability; (C) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other
Person; (D) make any loans, advances or capital
contributions to, or investments in, any other Person;
(E) enter into any material contract; or (F) dispose
of any material Intellectual Property or fail to perform any
acts which permit to lapse any rights to any material
Intellectual Property;
(6) (A) sell, lease, license, assign, convey,
transfer, mortgage, pledge, encumber or otherwise dispose of any
assets (other than inventory) with a value in excess of $100,000
in the aggregate; (B) incur or create any Encumbrance on
any assets which, collectively, have a value in excess of
$100,000 in the aggregate; or (C) fail to maintain its
assets in good working order in the ordinary course of business;
(7) purchase or lease assets other than in the ordinary
course of business consistent with past practice and for fair
consideration;
(8) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization;
(9) take any action that would or is reasonably likely to
result in any of the conditions to the Closing set forth in
Section 8 not being satisfied, that would make any
representation or warranty of the Party contained herein
inaccurate in any material respect at the Closing Date, that
would result in a breach of this Agreement in any material
respect, or that would materially impair the Party’s
ability to consummate the Transactions or materially delay such
consummation;
(10) adopt or amend any Employee Benefit Plan, or enter
into or make any change in the compensation payable or to become
payable to any of its officers or directors, or any other
employees of the Party except in the ordinary course of business
consistent with past practice or as required by applicable law;
(11) enter into or amend any contract with any of its
officers or directors;
(12) enter into or make any loans to any of its officers,
directors, employees, affiliates, agents or consultants or make
any change in its existing borrowing or lending arrangements for
or on behalf of any of such persons;
(13) enter into any settlement, conciliation or similar
agreement, the performance of which will involve payment or
receipt of consideration in excess of $25,000 or place
restrictions on the conduct of its business;
(14) fail to maintain or permit to lapse or expire any
professional license or registration required for the conduct of
its business or its performance of any material contract;
(15) change, modify or make any new Tax elections; or
(16) enter into any agreement, contract or arrangement to
do any action specified in clauses (1) through
(15) above, or authorize, recommend, propose or announce an
intention to do, any of the foregoing.
(v) Full Access.
(1) Each Party (as applicable, for purposes of this
section, the “Disclosing Party”) will permit
representatives of the other Party (as applicable, for purposes
of this section, the “Recipient”) to have full
access, at all reasonable times and in a manner so as not to
unreasonably interfere with the normal business operations of
the Disclosing Party, to all premises, properties, books,
records (including tax records), contracts, and documents of or
pertaining to the Disclosing Party, including access to the
Disclosing Party’s independent accountants, and will
authorize its accountants to release any and all information
reasonably requested by the Recipient in connection with its
review of the Disclosing Party, provided, however,
that the Recipient will not be permitted to contact the
Disclosing Party’s customers, employees or suppliers in
relation to this Agreement, except by prior approval of the
Disclosing Party, which approval will not be unreasonably
withheld, conditioned or delayed. The Disclosing Party will
provide to Recipient copies of its monthly financial statements
beginning with the month of October 2007 within 30 days
following the end of each month through the Closing Date. The
Disclosing Party is not required to provide access to or to
disclose information where such access or disclosure would
violate or prejudice the rights of the Disclosing Party’s
customers, jeopardize the attorney-client privilege or
contravene any law, rule, regulation, order, judgment, decree,
fiduciary duty or binding agreement entered into prior to the
date of this Agreement; provided, however, that
the Disclosing Party will use all commercially reasonable
efforts to obtain any necessary authorizations or consents from
its customers to provide Recipient full access to such
information.
(2) Subject to the terms and conditions of the Buyer
Nondisclosure Agreement and the Target Nondisclosure Agreement,
as applicable, the Recipient will treat and hold as confidential
any information it receives from the Disclosing Party pursuant
to this Section.
(vi) Notice of Developments. Each
of Target and Buyer shall give prompt written notice to the
other of any material breach of any of its covenants contained
herein or in the Documents. No disclosure by any Party pursuant
to this Section 7(a)(vi), however, shall be deemed to amend
or supplement the Target Disclosure Schedule or the Buyer
Disclosure Schedule, as applicable, or to cure any
misrepresentation, breach of representation or warranty, or
breach of covenant.
(vii) Shareholder Approval.
(1) Buyer agrees to take, in accordance with applicable law
and Buyer’s Restated Articles of Incorporation and Amended
and Restated Bylaws, all action necessary to convene as soon as
practicable a meeting of its shareholders (including any
adjournment or postponement, the “Buyer
Shareholders’ Meeting”) to consider and vote upon
the approval of the issuance of Buyer Common Stock pursuant to
the Merger, and any other matters required to be approved by
Buyer’s shareholders for consummation of the Transactions.
Subject to fiduciary obligations under applicable law,
Buyer’s
Board of Directors shall at all times prior to and during such
meeting recommend such approval and shall take all reasonable
lawful action to solicit such approval by its shareholders.
(2) Target agrees to take, in accordance with applicable
law and Target’s Articles of Incorporation and Bylaws, all
action necessary to convene as soon as practicable a meeting of
its shareholders (including any adjournment or postponement, the
“Target Shareholders’ Meeting”) to
consider and vote upon the approval of this Agreement and the
Merger, and any other matters required to be approved by Target
Shareholders for consummation of the Transactions. Subject to
fiduciary obligations under applicable law, Target’s Board
of Directors shall at all times prior to and during such meeting
recommend such approval and Target shall take all reasonable
lawful action to solicit such approval by Target Shareholders.
(viii) Title Insurance. To
the extent Buyer deems it to be appropriate, Buyer will obtain
title insurance commitments (to include complete copies of all
recorded exception documents listed on such title commitments),
policies, endorsements and riders (including in preparation for
the Closing) with respect to the Owned Real Property and the
Leased Real Property, each such policy to be an ALTA
(Owner’s or Leasehold, as the case may be) Policy of
Title Insurance in a form acceptable to Buyer, issued by a
title insurer reasonably satisfactory to Buyer, and in such
amount as Buyer reasonably may determine to be the fair market
value of such real property (including all facilities located
thereon) or such other appropriate value as determined by Buyer
in the case of leaseholds, insuring title to such real property
to be held by Target as of the Closing (subject only to
Permitted Encumbrances) (the
“Title Policies”). If this Agreement is
terminated prior to Closing, the costs associated with obtaining
the Title Policies will be shared equally by Buyer and
Target.
(ix) Nasdaq Listing. Buyer agrees
to use its reasonable best efforts to list, prior to the
Effective Time, on Nasdaq, subject to official notice of
issuance, the shares of Buyer Common Stock to be issued to the
Target Shareholders in the Merger.
(x) Officers and Directors of Buyer; Corporate
Name. Buyer will exercise its commercially
reasonable efforts to cause, immediately following the Effective
Time, the following individuals to be appointed to the following
indicated positions: (a) Kurt Widmer, Chairman of the
Board; (b) Paul Shipman, Chairman Emeritus and Consultant
to the Board; (c) Terry Michaelson, Co-Chief Executive
Officer, (d) David Mickelson, Co-Chief Executive Officer;
(e) Jay Caldwell, Chief Financial Officer; (f) Timothy
McFall, Vice President of Marketing; (g) Sebastian Pastore,
Vice President of Brewing Operations and Technology;
(h) Gerald Prial, Vice President of Business Development;
(i) Richard Shawen, Vice President of Finance;
(j) Martin Wall, Vice President of Sales; and
(k) Robert Widmer, Vice President of Corporate Quality
Assurance and Industry Relations. Buyer and Target will
cooperate to select and engage a Chief Financial Officer with
substantial public company experience in accounting and finance
to commence work on May 1, 2008 or as soon thereafter as
practicable.
(b) From and After the Date of Closing.
(i) D&O Insurance. For a
period of three years after the Closing, Buyer will maintain
director and officer insurance coverage insuring the directors
and officers of Target currently insured by Target’s
existing director and officer policies, with the same scope of
coverage and subject to the same deductibles and limits.
(ii) Comparability of Employee
Benefits. Redhook intends that its personnel
policies will apply to each employee of Widmer or CBA who is
retained in the service of Redhook after the Closing. Such
retained employees will be eligible to participate in all of the
benefit plans of Redhook that are generally available to
similarly situated employees of Redhook in accordance with and
subject to the terms of such plans; provided, however, that if
any Widmer Plan or CBA employee compensation or benefit plan is
maintained after the Closing Date, such retained employees may
not participate in any duplicative Redhook benefit plans until
their participation in the Widmer Plan or CBA plan, as
applicable, ceases.
(iii) Treatment of Past
Service. For purposes of participation in
Redhook’s benefit plans, current employees’ prior
service with Widmer
and/or CBA
will constitute prior service with Redhook for purposes of
determining eligibility and vesting (including but not limited
to vacation time).
(iv) No Contract Created. Except
as may be provided in any Employment Agreement executed and
delivered at the Closing, nothing in this Agreement will give
any employee of Widmer or CBA a right to continuing employment.
8. Conditions to Obligation to Close.
(a) Conditions to Obligation of
Buyer. The obligation of Buyer to consummate
the Transactions is subject to satisfaction at or prior to the
Closing Date of the following conditions:
(i) Target has given all notices, made all filings and
obtained all authorizations, consents, and approvals listed in
Section 5(d) of the Target Disclosure Schedule;
(ii) Target has given all notices, made all filings and
obtained all authorizations, consents, and approvals that relate
to the regulation of alcoholic beverages and are required to be
given by Target to, made by Target with or obtained by Target
from any Governmental Authority in order for the Parties to
consummate the Transactions;
(iii) the representations and warranties set forth in
Section 5 above are true and correct in all material
respects at and as of the date of this Agreement and at and as
of the Closing Date as if made thereon, except to the extent
such representations and warranties are expressly made only as
of an earlier date, in which case as of such earlier date;
provided, however, that representations and
warranties in Section 5 above that contain an express
materiality qualification shall be true and correct in all
respects at and as of the date of this Agreement and at and as
of the Closing Date as if made thereon (other than for failures
to be true and correct that are de minimis in effect);
(iv) Target has performed and complied in all material
respects with its covenants and obligations under this Agreement;
(v) less than 5% of the outstanding Target Shares are
Dissenting Shares;
(vi) the Merger and this Agreement have been duly approved
by Target’s Board of Directors, which approval remains in
full force and effect as of the Closing Date, the Merger and
this Agreement has received the Requisite Shareholder Approval,
and Target has provided Buyer with certified copies of
resolutions of Target’s Board of Directors and Shareholders
authorizing the execution and delivery of this Agreement and
consummation of the Transactions;
(vii) no statute, rule or regulation has been enacted or
promulgated and no action, suit, or proceeding is pending or
threatened before any court or quasi judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, stipulation, ruling, or charge would:
(A) prevent consummation of any of the Transactions;
(B) cause any of the Transactions to be rescinded following
consummation; or (C) affect adversely the right of Buyer to
own its assets and to operate its businesses (and no such
injunction, judgment, order, decree, stipulation, ruling, or
charge shall be in effect);
(viii) Target has delivered to Buyer a certificate executed
by Target’s Chief Executive Officer and Secretary on behalf
of Target to the effect that each of the conditions specified in
Sections 8(a)(i)-(vii)
above is satisfied in all respects;
(ix) the Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of
the Registration Statement has been issued and not withdrawn and
no proceedings for that purpose are threatened by the SEC or
initiated by the SEC and not withdrawn;
(x) the issuance of shares of Buyer Common Stock as
provided in this Agreement has been duly approved by the
affirmative vote of a majority of the outstanding shares of
Buyer Common Stock entitled to vote;
(xi) the shares of Buyer Common Stock to be issued in the
Merger have been approved for listing on The Nasdaq Stock
Market, effective upon notice of issuance.
(xii) Buyer has received confirmation that the
Title Policies will be issued;
(xiii) the Employment Agreements have been duly executed
and delivered by the parties thereto other than Buyer;
(xiv) the Non-Competition and Non-Solicitation Agreements
have been duly executed and delivered by Kurt Widmer and Robert
Widmer;
(xv) the Shareholder
Lock-Up
Agreements have been duly executed and delivered by Kurt Widmer,
Robert Widmer, Ann Widmer, and Kristen Maier-Lenz;
(xvi) A-B has provided evidence satisfactory to Buyer of
its waiver of its rights under the Master Distributor Agreement
between A-B and Target dated June 6, 2006, and the Master
Distributor Agreement between A-B and Target dated July 1,2004, to terminate such agreements as a result of consummation
of the Transactions;
(xvii) Target has entered into long-term leases for the
parcels described in Schedule 5(p) (II)(2), (3) and
(6);
(xviii) Target has provided evidence satisfactory to Buyer
that Goose Holdings, Inc., and Fulton Street Brewery LLC, have
each consented to the Merger and have agreed to enter into an
amendment to the Amended and Restated Operating Agreement of
Fulton Street Brewery LLC after the Closing Date in a form
satisfactory to Buyer;
(xix) Buyer has received from counsel for Target an opinion
dated the Closing Date and addressed to Buyer in the form of
Exhibit D hereto; and
(xx) Target has delivered to Buyer: (i) a certificate
of existence of Target issued by the Oregon Secretary of State
dated within five days of the Closing Date; (ii) a
certified copy of Target’s Articles of Incorporation and
Bylaws as in effect on the Closing Date; and (iii) a
certification in accordance with Treasury
Regulation Section 1.1445-2(c),
and otherwise in form and substance reasonably satisfactory to
Buyer, certifying that an interest in Target is not a United
States real property interest because Target is not and has not
been a United States real property holding corporation (as
defined in Section 897(c)(2) of the Code) during the
five-year period ending with the Closing Date.
All actions to be taken by Target in connection with
consummation of the Transactions and all certificates, opinions,
instruments, and other documents required to effect the
Transactions will be reasonably satisfactory in form and
substance to Buyer. Buyer may waive any condition specified in
this Section 8(a) if it executes a writing so stating at or
prior to the Closing.
(b) Conditions to Obligation of
Target. The obligation of Target to
consummate the Transactions is subject to satisfaction at or
prior to the Closing Date of the following conditions:
(i) Buyer has given all notices, made all filings and
obtained all authorizations, consents, and approvals listed in
Section 6(c) of the Buyer Disclosure Schedule;
(ii) Buyer has given all notices, made all filings and
obtained all authorizations, consents, and approvals that relate
to the regulation of alcoholic beverages and are required to be
given by Buyer to, made by Buyer with or obtained by Buyer from
any Governmental Authority in order for the Parties to
consummate the Transactions;
(iii) Buyer and Paul Shipman have entered into the
Consulting Agreement;
(iv) Paul Shipman has tendered his resignation from all
officer positions with Buyer as of the Effective Date;
(v) Paul Shipman and two of Buyer’s independent
directors have tendered their resignations as directors of Buyer
as of the Effective Date;
(vi) the representations and warranties set forth in
Section 6 above are true and correct in all material
respects at and as of the date of this Agreement and at and as
of the Closing Date as if made thereon, except to the extent
such representations and warranties are expressly made only as
of an earlier date, in which case as of such earlier date;
provided, however, that representations and
warranties in Section 6 above that contain an express
materiality qualification shall be true and correct in all
respects at and as of the date of this Agreement and at and as
of the Closing Date as if made thereon (other than for failures
to be true and correct that are de minimis in effect);
(vii) Buyer has performed and complied in all material
respects with its covenants and obligations under this Agreement;
(viii) no statute, rule or regulation has been enacted or
promulgated and no action, suit, or proceeding shall be pending
or threatened before any court or quasi judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, stipulation, ruling, or
charge would: (A) prevent consummation of any of the
Transactions; (B) cause any of the Transactions to be
rescinded following consummation (and no such judgment, order,
decree, stipulation, injunction, ruling or charge shall be in
effect);
(ix) the issuance of shares of Buyer Common Stock as
provided in this Agreement has been duly approved by the
affirmative vote of the holders of a majority of the outstanding
shares of Buyer Common Stock entitled to vote;
(x) the Merger and this Agreement have been duly approved
by Buyer’s Board of Directors, which approval remains in
full force and effect as of the Closing Date;
(xi) the Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of
the Registration Statement has been issued and not withdrawn and
no proceedings for that purpose are threatened by the SEC or
initiated by the SEC and not withdrawn;
(xii) the shares of Buyer Common Stock to be issued in the
Merger have been approved for listing on The Nasdaq Stock
Market, effective upon notice of issuance;
(xiii) Buyer has executed and delivered such of the
Employment Agreements as have been duly executed and delivered
by the other parties thereto;
(xiv) Buyer has delivered to Target a certificate executed
by Buyer’s Chief Executive Officer and Secretary on behalf
of Buyer to the effect that each of the conditions specified
above in
Section 8(b)(i)-(xiii)
is satisfied in all respects;
(xv) the Merger and this Agreement have received the
Requisite Shareholder Approval;
(xvi) Target has received from counsel to Buyer an opinion
dated the Closing Date and addressed to Target in the form of
Exhibit E hereto; and
(xvii) Buyer has delivered to Target a certificate of
existence of Buyer from the Secretary of State of the State of
Washington, dated within five days of the Closing Date.
All actions to be taken by Buyer in connection with consummation
of the Transactions and all certificates, opinions, instruments,
and other documents required to effect the Transactions will be
reasonably satisfactory in form and substance to Target. Target
may waive any condition specified in this Section 8(b) if
it executes a writing so stating at or prior to the Closing.
9. Specific Performance. The
Parties agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the Parties shall be
entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and
provisions of this Agreement, this being in addition to any
other remedy to which they are entitled pursuant to this
Agreement.
(a) Termination of
Agreement. Either Party may terminate this
Agreement with the prior authorization of its board of directors
(whether before or after shareholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual
written consent at any time prior to the Closing Date;
(ii) Buyer may terminate this Agreement by giving written
notice to Target at any time prior to the Closing Date:
(A) in the event Target has breached any covenant contained
in this Agreement in any material respect, Buyer has notified
Target of the breach, and the breach has continued without cure
for a period of 10 days after the notice of breach,
(B) in the event that there shall be any applicable law
that makes consummation of the Transactions illegal or otherwise
prohibited, or any judgment, injunction, order or decree
permanently enjoining any of the Parties hereto from
consummating the Transactions is entered and such judgment,
injunction, order or decree shall become final and
non-appealable, or (C) if the Closing shall not have
occurred on or before March 31, 2008, and Buyer is not in
default of any of its obligations hereunder;
(iii) Target may terminate this Agreement by giving written
notice to Buyer at any time prior to the Closing Date:
(A) in the event Buyer has breached any covenant contained
in this Agreement in any material respect, Target has notified
Buyer of the breach, and the breach has continued without cure
for a period of 10 days after the notice of breach,
(B) in the event that there shall be any applicable law
that makes consummation of the Transactions illegal or otherwise
prohibited, or any judgment, injunction, order or decree
permanently enjoining any of the Parties hereto from
consummating the Transactions is entered and such judgment,
injunction, order or decree shall become final and
non-appealable; or (C) if the Closing shall not have
occurred on or before March 31, 2008, and Target is not in
default of any of its obligations hereunder;
(iv) Either party may terminate this Agreement if it is
notified by A-B that it will not consent to the Transactions.
(b) Effect of Termination. If
either Party terminates this Agreement pursuant to
Section 10(a) above, all rights and obligations of the
Parties hereunder shall terminate without any liability of
either Party to the other Party (except as otherwise provided
herein and except for any liability of any Party then in
breach); provided, however, that the
confidentiality provisions contained in this Agreement and the
Target Nondisclosure Agreement and Buyer Nondisclosure Agreement
and the fee and expenses provisions in Section 11(m) below
shall survive any such termination and provided, further, that
if this Agreement is terminated by a Party because of a breach
of this Agreement by the other Party, the terminating
Party’s right to pursue all legal remedies shall survive
such termination unimpaired.
11. Miscellaneous.
(a) Nonsurvival of Representations, Warranties, and
Agreements. None of the representations,
warranties, covenants, and agreements in this Agreement,
including any rights arising out of any breach of the
representations, warranties, covenants, and agreements, survive
the Effective Time, except for covenants and agreements that by
their express terms apply after the Effective Time. This
Section 11(a) shall not affect any rights or liabilities of
any Person under the Securities Act, the Exchange Act or any
applicable state securities laws.
(b) Press Releases and Public
Announcements. No Party shall issue any press
release or make any public announcement relating to the subject
matter of this Agreement without the prior written approval of
the other Party; provided, however, that any Party may make any
public disclosure it believes in good faith is required by
applicable law or any listing or trading agreement concerning
its publicly traded securities (in which case the disclosing
Party will use its reasonable best efforts to advise the other
Party and give it an opportunity to comment prior to making the
disclosure).
(c) No Third-Party
Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the
Parties and their respective successors and permitted assigns;
provided, however, that the provisions in Section 7(b)
above are intended for the benefit of the individuals specified
therein.
(d) Entire Agreement. This
Agreement (including the Documents referred to herein)
constitutes the entire agreement between the Parties and
supersedes any prior understandings, agreements, or
representations by or between the Parties, written or oral, to
the extent they relate in any way to the subject matter hereof.
(e) Succession and
Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and
their respective successors and permitted assigns. A Party may
not assign this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the
other Party.
(f) Counterparts. This Agreement
may be executed in one or more counterparts, each of which shall
be deemed an original but all of which together will constitute
one and the same instrument.
(g) Headings. The section headings
contained in this Agreement are inserted for convenience only
and shall not affect in any way the meaning or interpretation of
this Agreement.
(h) Notices. All notices,
requests, demands, claims, and other communications hereunder
will be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly given if (and then
three business days after) it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed
to the intended recipient as set forth below:
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address
set forth above using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail, or electronic mail), but no such notice, request,
demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the
intended recipient. Any Party may change the address to which
notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
(i) Governing Law and
Disputes. This Agreement shall be governed by
and construed in accordance with the domestic laws of the State
of Washington without giving effect to any choice or conflict of
law provision or rule (whether of the State of Washington or any
other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Washington.
(j) Consent to Jurisdiction; Waivers of Trial by
Jury. Each Party irrevocably submits to the
non-exclusive jurisdiction of the United States District Court
for the Western District of Washington for the
purposes of any disputes arising in connection with this
Agreement. Each Party agrees to commence any action, suit or
proceeding relating to any such dispute either in such court,
or, if such suit, action or other proceeding may not be brought
in such court for jurisdictional reasons, in the state courts of
Washington. By execution and delivery of this Agreement, each
Party (for itself, its Affiliates and its designees) irrevocably
and unconditionally consents and submits to the exclusive
jurisdiction of such courts and the appellate courts therefrom,
and waives any right it may have to assert the doctrine of forum
non conveniens or similar doctrine or to object to venue with
respect to any proceeding. The Parties irrevocably consent to
the service of process in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, first
class postage prepaid to the addresses set forth above. EACH
PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY
JURY IN ANY ACTION, SUIT OR PROCEEDING RELATING TO A DISPUTE AND
FOR ANY COUNTERCLAIM WITH RESPECT THERETO.
(k) Amendments and Waivers. The
Parties may mutually amend any provision of this Agreement at
any time prior to the Closing Date; provided, however, that any
amendment effected subsequent to shareholder approval will be
subject to the restrictions contained in the Washington Business
Corporation Act. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by
all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
(l) Severability. Any term or
provision of this Agreement that is invalid or unenforceable in
any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof
or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
(m) Fees and Expenses. Except as
otherwise expressly provided in this Agreement, Buyer and Target
(including its shareholders) will each be solely responsible for
paying their own costs and expenses (including their respective
advisors, accountants and attorneys’ fees and expenses)
incurred in connection with this Agreement and the Transactions,
whether or not the Closing occurs.
(n) Construction. The Parties have
participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if
drafted jointly by the Parties and no presumption or burden of
proof shall arise favoring or disfavoring any Party by virtue of
the authorship of any of the provisions of this Agreement. Any
reference to any federal, state, local, or foreign statute or
law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context otherwise requires.
The word “including” shall mean including without
limitation.
(o) Further Assurances. The
Parties agree (a) to furnish upon request to each other
such other information, (b) to execute and deliver to each
other such other documents, and (c) to do such other acts
and things, all as the other Party may reasonably request for
the purpose of carrying out the intent of this Agreement.
AMENDMENT
NO. 1
TO
AGREEMENT AND PLAN OF MERGER
BETWEEN
REDHOOK ALE BREWERY, INCORPORATED
AND
WIDMER BROTHERS BREWING COMPANY
This Amendment No. 1 to Agreement and Plan of Merger (this
“Amendment”) is entered into effective as of
April 30, 2008, by and between Redhook Ale Brewery,
Incorporated, a Washington corporation (“Buyer”), and
Widmer Brothers Brewing Company, an Oregon corporation
(“Target”).
RECITALS
A. Effective as of November 13, 2007, Redhook and
Widmer entered into an Agreement and Plan of Merger (the
“Merger Agreement”). Capitalized terms used but not
defined in this Amendment will have the meanings given those
terms in the Merger Agreement.
B. The Parties now desire to amend the Merger Agreement in
certain respects.
NOW THEREFORE, the Parties agree as follows.
1. The definition of “Consulting Agreement” in
Section 1 shall be amended as follows:
“Consulting Agreement” means the Amended and
Restated Employment Agreement executed on February 13, 2008
between Buyer and Paul Shipman.
2. Section 7(a)(x) shall be amended to read as follows:
“(x) Officers and Directors of Buyer; Corporate
Name. Buyer will exercise its commercially
reasonable efforts to cause, immediately following the Effective
Time, the following individuals to be appointed to the following
indicated positions: (a) Kurt Widmer, Chairman of the
Board; (b) Paul Shipman, Chairman Emeritus and Consultant
to the Board; (c) Terry Michaelson, Co-Chief Executive
Officer; (d) David Mickelson, Co-Chief Executive Officer;
(e) Jay Caldwell, Chief Financial Officer and Treasurer;
(f) Timothy McFall, Vice President of Marketing;
(g) Sebastian Pastore, Vice President of Brewing Operations
and Technology; (h) Martin Wall, Vice President of Sales;
(i) Robert Widmer, Vice President of Corporate Quality
Assurance and Industry Relations; and (j) Mark Moreland,
Chief Accounting Officer.
3. Section 8(a)(x) shall be amended to read as follows:
‘‘(x) the issuance of shares of Buyer Common Stock as
provided in this Agreement has been duly approved by a majority
of the total votes cast on the proposal at the Buyer
Shareholders’ Meeting;
4. Section 8(a)(xx) shall be amended to read as
follows:
‘‘(xx) the Shareholder
Lock-Up
Agreements have been duly executed and delivered by Kurt Widmer,
Robert Widmer, Ann Widmer, Barbara Widmer, Kristen Maier-Lenz
and Tim Boyle.”
5. Clause (C) in the last sentence of
Section 10(a)(ii) is amended to read as follows:
‘‘(C) if the Closing shall not have occurred on or
before August 1, 2008, and Buyer is not in default of any
of its obligations hereunder;
6. Clause (C) in the last sentence of
Section 10(a)(iii) is amended to read as follows:
‘‘(C) if the Closing shall not have occurred on or
before August 1, 2008, and Target is not in default of any
of its obligations hereunder;
7. Section 2(d) of Exhibit A to the Articles of
Merger, attached to the Merger Agreement as Exhibit A,
shall be amended in its entirety to read as follows:
(d) Directors and Officers. Upon the
Effective Time, the directors and officers of the Surviving
Corporation shall be as follows:
DIRECTORS:
Kurt Widmer, Chair
Timothy P. Boyle
Andrew R. Goeler
Kevin R. Kelly
David R. Lord
John D. Rogers, Jr.
Anthony J. Short
OFFICERS:
Chairman of the Board
Kurt Widmer
Chairman Emeritus and Consultant to the Board
Paul Shipman
Co-Chief Executive Officer
David Mickelson
Co-Chief Executive Officer
Terry Michaelson
Chief Financial Officer and Treasurer
Jay Caldwell
Chief Accounting Officer
Mark Moreland
Vice President of Marketing
Timothy McFall
Vice President of Brewing Operations and Technology
Sebastian Pastore
Vice President of Sales
Martin Wall
Vice President of Corporate Quality Assurance and Industry
Relations
Robert Widmer
Secretary
Mary Ann Frantz
Assistant Secretary
Nancy Deibert
8. The Form of Shareholder
Lock-Up
Agreements attached to the Merger Agreement as Exhibit B is
amended in its entirety to read as is set forth on the Form of
Shareholder
Lock-Up
Agreements attached to this Amendment as Exhibit A.
9. Except as expressly amended hereby, the Merger Agreement
remains unaltered and in full force and effect and is hereby
ratified, adopted and confirmed in all respects.
10. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all
of which together will constitute one and the same instrument.
The duly authorized representatives of the undersigned have
executed this Amendment as of the date first above written.
Re:
Fairness Opinion —
Opinion of the Special Committee to the Board of Directors’
Financial Advisor
Gentlemen:
We understand that pursuant to an Agreement and Plan of Merger
dated November 13, 2007 (the “Merger Agreement”)
between Redhook Ale Brewery, Incorporated (“Redhook”
or the “Company”) and Widmer Brothers Brewing Company
(“Target”) each share of outstanding stock of Target
will be exchanged for 2.1551 shares of Redhook common stock
for a total exchange consideration of approximately
8.36512 million common shares of Redhook (the
“Purchase Consideration”). Additionally, you have
informed us that Redhook will assume up to $23,000,000 of debt
and capital leases associated with Target’s Brewery
Expansion Project currently in progress in Portland, Oregon. The
transaction described above is hereinafter referred to as the
“Merger”.
Houlihan Smith & Company, Inc. (“Houlihan”)
was engaged by the Special Committee to the Board of Directors
of Redhook (the “Special Committee”) to render an
opinion (whether or not favorable) to the Special Committee as
to whether, on the date of such opinion, the Purchase
Consideration and other terms of the Merger are fair, from a
financial point of view, to the shareholders of the Company (the
“Opinion”).
In performing our analyses and for purposes of the Opinion set
forth herein, we have, among other things:
a. Reviewed the financial terms and conditions of the draft
Merger Agreement;
b. Reviewed financial and other information with regards to
Target, including Target’s audited financial statements for
the fiscal years ended December 31, 2001 through
December 31, 2006, Target’s unaudited financial
statements for the six month periods ending June 30, 2005
and 2006, the audited financial statements for Craft Brands
Alliance, LLC for the fiscal years ended December 31, 2005
and 2006, and other financial information and projections
prepared by Target;
c. Reviewed publicly available financial information and
other data with respect to Redhook, including the Company’s
Form 10-K
for the year ended December 31, 2006, the Quarterly Reports
on
Form 10-Q
for the three months ended March 31, 2007 and the six
months ended June 30, 2007, and other such publicly
available financial information;
d. Conducted an
on-site
visit and held discussions with the senior management of Target
regarding, among other items, the historic performance, current
situation, and future prospects for Target;
e. Conducted an
on-site
visit and conducted with the senior management of the Company
regarding the selection process conducted with regards to the
acquisition, the Company’s decision to form a business
combination with Target, and the Company’s outlook for the
future prospects of Target;
f. Reviewed an appraisal of Target prepared by an
independent third party appraiser dated as of May 4, 2007;
g. Reviewed a proposal for a creditor to provide credit
facilities to the Company to finance the potential acquisition
of Target and to complete a facility expansion dated as of
August 15, 2007;
h. Reviewed financial and operating information with
respect to certain publicly-traded companies in the breweries
industry which Houlihan believes to be generally comparable to
the business of the Company;
i. Reviewed the financial terms of certain recent business
combinations in the brewery industry specifically and in other
industries generally; and
j. Performed other financial studies, analyses and
investigations, and considered such other information, as we
deemed necessary or appropriate.
We have relied upon and assumed, without independent
verification, the accuracy, completeness and reasonableness of
the financial, legal, tax, and other information discussed with
or reviewed by us and have assumed such accuracy and
completeness for purposes of rendering the Opinion. In addition,
we have not made any independent evaluation or appraisal of any
of the assets or liabilities (contingent or otherwise) of
Target. We have further relied upon the assurances from senior
management of both the Company and Target that they are unaware
of any facts that would make the information provided to us to
be incomplete or misleading for the purposes of our Opinion. We
have not assumed responsibility for any independent verification
of this information nor have we assumed any obligation to verify
this information.
Further, our Opinion is necessarily based upon information made
available to us, as well as the economic, monetary, market,
financial, and other conditions as they exist as of the date of
this letter. We disclaim any obligation to advise the Special
Committee to the Board of Directors of Redhook or any person of
any change in any fact or matter affecting our Opinion, which
may come or be brought to our attention after the date of this
Opinion.
Each of the analyses conducted by Houlihan was carried out to
provide a particular perspective of the Merger. Houlihan did not
form a conclusion as to whether any individual analysis, when
considered in isolation, supported or failed to support our
Opinion as to the fairness of the Purchase Consideration to the
shareholders of the Company. Houlihan does not place any
specific reliance or weight on any individual analysis, but
instead, concludes that its analyses taken as a whole, supports
its conclusion and Opinion. Accordingly, Houlihan believes that
its analyses must be considered in its entirety and that
selecting portions of its analyses or the factors it considered,
without considering all analyses and factors collectively, could
create an incomplete view of the processes underlying the
analyses performed by Houlihan in connection with the
preparation of the Opinion.
Our Opinion does not constitute a recommendation to proceed with
the Merger. This Opinion relates solely to the question of the
fairness of the Purchase Consideration to the shareholders of
Redhook, from a financial point of view. We are expressing no
opinion as to the income tax consequences of the Merger to the
shareholders of Redhook.
Houlihan, a Financial Industry Regulatory Authority member, as
part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with
mergers and acquisitions, underwritings, private placements,
bankruptcy, capital restructuring, solvency analyses, stock
buybacks, and valuations for corporate and other purposes.
Houlihan has no prior investment banking relationships with
Redhook or Target. Houlihan has received a non-contingent fee
from Redhook relating to its services in providing the Opinion.
In an engagement letter dated August 17, 2007, Redhook has
agreed to indemnify Houlihan with respect to Houlihan’s
services relating to the Opinion.
Based on and subject to the foregoing, it is our opinion that,
as of the date hereof, the Purchase Consideration and other
terms of the Merger are fair, from a financial point of view, to
the shareholders of the Company
RE: Widmer Brothers Brewing Company (“Widmer” or
“the Company”)
Gentlemen,
You have retained Corporate Advisory Associates, Inc.
(“CAA”) to determine the market value of a
100 percent equity interest in Widmer. This letter and the
attached exhibits present our findings.
The objective of our assignment is to determine a range of
market value as of March 31, 2007 for a 100 percent
equity interest in Widmer including its interests in
subsidiaries. Market value, as used herein, is defined as the
price at which the 100 percent equity interest will be
exchanged between willing and informed buyer and seller, other
than in a forced or liquidation sale. In determining market
value, we have not assumed the specific identity of a potential
buyer, and have not included any analysis or assumption of
synergistic effects with certain types of buyers.
In connection with this assignment, we have visited
Widmer’s facilities in Portland, Oregon; and met with its
management to discuss the business operations of Widmer and
Craft Brand Alliance LLC (“CBA”). We have reviewed
various financial reports prepared by management, the
Company’s audited financial statements from 2002 to 2006,
and certain property appraisals. We have researched and reviewed
certain market pricing information, and performed such analyses
and review as we have deemed appropriate. We have not assumed
any obligation to independently verify the foregoing information
and have relied upon its accuracy and completeness in all
material respects. The appendix to this letter lists the main
documents provided by Widmer and CBA that have been reviewed by
us.
We understand that our valuation results are exclusively for the
use of the Corporate Strategy Committee. This letter and the
attached exhibits are intended for those in the Corporate
Strategy Committee who are already familiar and knowledgeable
about the operations of Widmer and CBA. This letter and exhibits
and their contents may not be used or referred to by parties
other than the Special Strategy Committee, or quoted or
disclosed in any public filings by Redhook Ale Brewery, Inc.
(“Redhook”) with the Securities and Exchange
Commission or any public communications.
Overview
of Analysis
The 100 percent equity interest of Widmer is being valued
on the going concern basis. The Company’s recent and
projected future earnings are used in the valuation. We viewed
Widmer’s and CBA’s operations as intertwined such that
they should be valued as an integrated operation. This is
accomplished by using their combined earnings (net of the
portion accrued to Redhook, the other member of CBA) in the
valuation analysis. We have also used revenues to derive
additional indications of value. For valuation purposes,
Widmer’s revenue is determined as if it directly sells to
its customer instead of through CBA.
For market pricing ratios, we have researched and reviewed
market information on certain publicly traded firms and
acquisitions of firms deemed comparable to Widmer. We have not
specifically developed a discounted future cash flow analysis to
value Widmer. Projecting future earnings over multiple periods
is inherently speculative. We believe a steady growth projection
is adequately accounted for in the capitalization valuation.
Furthermore, the pricing ratios for capitalization valuations
are directly derived from market transactions and are more
reliable.
To the Corporate Strategy Committee
Redhook Ale Brewery, Inc. May 4, 2007
Page 2
We have not independently appraised the individual assets of
Widmer. Based on available property appraisals, we have
estimated the Company’s net tangible asset value.
Intangible assets such as goodwill, assembled workforce, etc.
are not reflected in the net asset valuation approach. However,
these assets are reflected in the going concern valuation. The
following describe key aspects of our analyses:
Expansion
Project
Widmer’s brewing facility in Portland, Oregon has an annual
capacity of approximately 240,000 barrels. With sales
volume currently above capacity, the Company has turned to a
contract brewing arrangement with Redhook to meet demand. In
2006, Redhook produced approximately 43,000 barrels for
Widmer under the contract brewing arrangement. The amount was
expected to increase significantly for 2007.
To increase production capacity, Widmer has embarked on an
expansion of its Portland brewing facility. The expansion plan
centers around increasing the fermentation capacity at the
brewery, which is currently the primary constraint on the
site’s overall production. Phase 1 of the project would
include additional fermentation tanks, as well as cooler and
storage space, and is expected to be completed in early 2008.
The total cost is estimated at $22 million. Phase 2 of the
project would be completed at a later date and includes adding
additional fermentation tanks. The ultimate brewing capacity is
estimated at 550,000 barrels per year.
Funding of phase 1 of the expansion project would come mostly in
the form of debt. The $22 million cost for phase 1 is
expected to be financed with the following:
1) $10 million from construction loan with seven year
life.
2) $8 million from equipment loan or capital lease
with seven year life.
3) $3 million from line of credit or operating cash
flow.
We analyzed the expansion project’s effects on
Widmer’s valuation as follows: The production capacity will
be much larger after completion of phase 1. Moreover, the
expansion project will not impact the Company’s operating
results until 2008. In the valuation analysis, we will develop
indications of value based on both current and projected
operating results. In this way, the analysis incorporates the
operating and financial characteristics of the existing
operation as well as post-expansion. The analysis does not
incorporate the affects of phase 2 of the expansion as the full
impact would not be felt until 2009, if Widmer goes forward with
Phase 2 of the project. Accordingly, the analysis also does not
recognize the additional debt that is required for phase 2.
Value indications derived from actual 2006 and projected 2007
operating results would not include incremental revenue and
profit from the capacity expansion. Therefore, the valuation
would also not recognize the additional debt associated with the
expansion. However, because at the valuation date the Company
has already incurred some expansion related debt, the
construction in progress is added back as a non-operating asset.
Essentially, in this valuation the increase in assets from the
expansion project will be offset by the additional debt of the
same amount.
The 2008 operating results largely reflect the capacity addition
from the phase 1 expansion. Therefore, value indications based
on projected 2008 will also recognize the incremental debt
associated with the expansion project. Unlike the value
indications based on actual 2006 and projected 2007,
construction in progress at the valuation date is not treated as
a non-operating asset.
Precedent
Transaction Analysis
We researched transactions of domestic craft brewing companies
where control ownership changed hands. Our research identified
only two transactions in which the terms of the transaction and
financial or operational
To the Corporate Strategy Committee
Redhook Ale Brewery, Inc. May 4, 2007
Page 3
data on the target company were publicly available. The details
of the identified transactions are presented in Exhibit 1.
For each transaction, we researched the financial data of the
target company for the purpose of calculating the valuation
ratios implied by the transaction. These include market value of
invested capital
(MVICa()
to annual production; MVIC to revenue; MVIC to earnings before
interest, tax, depreciation, and amortization (EBITDA); and
price to earnings.
For the Frederick Brewing Company (“FBC”) acquisition,
financial data was not available. However, information on annual
production (in barrels) was found. For the Portland Brewing
Company (“PBC”) acquisition, financial data was
available. However, PBC had operating losses. Therefore, only
MVIC to production and MVIC to revenue ratios could be
calculated from the sample. We note that FBC was acquired in
bankruptcy.
Comparable
Public Company Analysis
We reviewed the stock price, financial information, and implied
valuation ratios of certain publicly-traded companies operating
in the domestic craft brewing industry. Four companies were
deemed to be comparable to Widmer in their operations:
•
Boston Beer Co., Inc.
•
Mendocino Brewing Co., Inc.
•
Pyramid Breweries, Inc.
•
Redhook Ale Brewery, Inc.
None of the selected companies is identical to Widmer. Mendocino
Brewing Co., Inc. was eliminated from the analysis due to the
limited liquidity of its common stock. The trading value of an
illiquid stock may be speculative, and may not be reflective of
the company’s underlying fundamental value.
The stock price and certain financial data of the selected
public companies are presented in Exhibit 2. For each
company, we computed the implied MVIC to revenue and MVIC to
EBITDA ratios for a variety of periods. As shown, the valuation
ratios varied over a range. We used three statistical measures
to represent the range for each ratio: harmonic average, mean,
and median. The difference between mean and median is indicative
of the degree of dispersion in the range.
(a MVIC
is the market value of equity plus the market value of
interest-bearing debt.
To the Corporate Strategy Committee
Redhook Ale Brewery, Inc. May 4, 2007
Page 4
Future
Projection
Exhibit 3 shows the Company’s projected operating
results for 2007 and 2008 based on management’s internal
forecasts. Among other assumptions, the projection is based on
the expected completion of the initial brewery expansion in
early 2008. The projection is for net income of $2,571,000 in
2007 and $3,626,000 in 2008, an increase of 41 percent. The
projected increase in barrel sales is put in historical
perspective in the following chart, which does not include
products brewed by Redhook:
The uncertainty with the projected earnings will be considered
in our selection of the valuation ratios.
Going-Concern
Valuation
There are inherent differences between the business, operations,
and prospects of Widmer and those of both the acquired companies
in Exhibit 1 and the selected public companies in
Exhibit 2. Accordingly, we did not solely rely upon the
quantitative results presented in the exhibits. Rather, we made
qualitative judgments concerning differences between the
financial and operating characteristics and prospects of such
companies, relative to Widmer, that would affect their market
valuations. Based on our analysis, we selected the following
valuation ratios to apply to Widmer:
Projected
Projected
Actual
2008
2007
2006
EBITDA
8.50
10.50
13.50
Revenue
1.02
1.15
1.28
In applying the selected ratios to Widmer, we have made certain
adjustments to the Company’s revenue. We have included all
of CBA’s sales of Widmer products (including Kona Brewery,
LLC sales).
Applying the selected valuation ratios to Widmer results in
MVIC, which is the value of all capital invested in the
operation. From MVIC, the value of debt is subtracted and the
values of Widmer’s interests in the two breweries is added
to arrive at equity value. Exhibit 4 shows the
calculations. In 2006 and projected 2007, the Company’s
current balance of interest-bearing debt is subtracted from
MVIC. As explained earlier,
To the Corporate Strategy Committee
Redhook Ale Brewery, Inc. May 4, 2007
Page 5
construction in progress is added because it represents
investment by the Company that would not be reflected in the
Company’s financial results until project completion. The
Company’s 20 percent interest in Kona Brewery, LLC and
its 42 percent interest in Fulton Street Brewery, LLC are
also included.
For MVIC based on projected 2008, it includes the incremental
income generated by the business after the completion of phase 1
of the brewery expansion project. But further investment in the
project is required to generate the projected 2008 results. We
have subtracted the estimated cost to complete the project, and
have assumed the cost would be financed through borrowings (as
enumerated earlier).
The indicated values range from $51.5 million to
$81.6 million. The value indications based on EBITDA are
higher than those based on revenue, with an average of
$76,655,000. The average of the value indications based on
revenue is $59,790,000. We also note that the value indications
based on projected 2008 are lower than those based on actual
2006 or projected 2007. We believe that it is from the
uncertainty related to the benefits from the expansion project.
After completion of phase 1, if demand for Widmer products is
not sufficient to fill the incremental capacity, then to some
extent the added debt would act as a reduction to equity value.
Net Asset
Value Analysis
The going-concern valuation recognizes that an owner of a
business interest realizes value from the company’s future
income and dividends. Alternatively, the holder of a
100 percent equity interest can realize value by
liquidating the company’s assets and distributing the
proceeds. Under this scenario, the value of a business is equal
to its tangible net worth. For Widmer, we have determined the
net tangible asset value as shown in Exhibit 5. At this
time, we do not have appraised values for the brewery and
production equipment. Their net book value is used instead. We
note that the net asset value of $22,613,000 is significantly
lower than the market value of the Company as a going concern
because of the absence of intangible asset values.
Conclusion
Based upon the foregoing analysis, we conclude that the range of
market value for a 100 percent equity interest in Widmer
can be reasonably stated at $60,000,000 to $77,000,000.
This range of value considers the impact of the
Company’s expansion project and the associated debt. It
also recognizes the risk of the operation before and after
expansion, including the risk that the capacity addition may not
be fully utilized.
The preceding discussion is a summary of the material financial
analyses undertaken by CAA on behalf of the Corporate Strategy
Committee. It does not purport to be a complete description of
analyses performed by CAA. Analysis and conclusion of a range of
market value for a business ownership interest is a complex
process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. CAA made
no attempt to assign specific weights to particular analyses or
factors considered, but rather made qualitative judgments as to
the significance and relevance of all the analyses and factors
considered. Accordingly, CAA believes that its analyses, and the
summary set forth above, must be considered as a whole, and that
selecting portions of the analysis or the summary without
considering the analyses as a whole, could create an incomplete
view of the process underlying CAA’s opinion.
In formulating its opinion, CAA has made numerous assumptions
with respect to Widmer, industry performance, general business,
economic, market, and financial conditions, and other matters,
many of which are beyond the control of Widmer. Any estimates
contained in CAA’s analyses are not necessarily indicative
of actual values or predictive of future results or values,
which may be considerably more or less favorable than suggested
by the forgoing analysis. The analyses do not purport to
necessarily predict the price at which a transaction involving
the 100 percent equity interest of Widmer would occur. CAA
assumes no responsibility if future results are materially
different from those estimated above.
To the Corporate Strategy Committee
Redhook Ale Brewery, Inc. May 4, 2007
Page 6
In accordance with recognized professional ethics, the fee for
this service is not contingent upon CAA’s conclusion of a
particular range of value. Neither CAA. nor any of its employees
currently or prospectively has an ownership interest in the
Company. CAA and its employees are independent of the management
and shareholders of the Company.
CAA is regularly engaged in performing financial analyses with
respect to businesses and their securities. CAA’s opinion
is addressed to the Corporate Strategy Committee, and was
intended solely to assist the Corporate Strategy Committee in
its deliberations. No other person is entitled to rely upon the
analyses described above.
WIDMER
BROTHERS BREWING COMPANY
VALUATION RATIOS FOR SELECTED PUBLIC COMPANIES
a
MVIC; based on:
SHARE PRICE
Average Share Price ($000)
March
March
March
MARKET
MARKET
LESS
MKT VAL
2007
2007
2007
VALUE OF
VALUE OF
CASH &
INVESTED
PUBLIC COMPANIES
High
Low
Avg
EQUITY
DEBT
o
EQUIV
o
CAPITAL
BOSTON BEER COMPANY
34.70
30.80
32.75
467,299
0
82,370
384,929
PYRAMID BREWERIES
4.19
3.09
3.64
33,257
8,561
227
41,591
REDHOOK ALE BREWERY
7.80
6.25
7.03
58,340
4,786
9,435
53,691
MVIC/EBITDA RATIOS; based on:
MVIC/R RATIOS; based on:
Latest
Latest
Latest 3 Yr
Latest 3 Yr
Latest
Latest
12 Months
Fiscal Year
Wtd Avg
Str Avg
12 Months
Fiscal Year
EBITDA
EBITDA
EBITDA
EBITDA
Net Revenue
Net Revenue
BOSTON BEER COMPANY
11.45
11.45
12.71
13.40
1.35
1.35
PYRAMID BREWERIES
29.33
29.33
28.21
32.95
0.83
0.83
REDHOOK ALE BREWERY
14.54
14.54
18.47
20.24
1.50
1.50
HARMONIC AVERAGE (b)
15.77
15.77
17.83
19.43
1.15
1.15
MEAN
18.44
18.44
19.80
22.20
1.23
1.23
MEDIAN
14.54
14.54
18.47
20.24
1.35
1.35
(a)
Earnings data adjusted for interest income
(b)
Harmonic average is calculated by averaging the reciprocals of
each number in the sample, and then taking the reciprocal of the
result. It is one of the statistical methods used to calculate
the average of a group of numbers which are ratios.
WIDMER
BROTHERS BREWING COMPANY
Qualifications of Valuation Consultant
T.S. Tony
Leung
Since 1978, Mr. Leung has provided business valuation
service to clients in a variety of industries for various
purposes. A majority of the companies appraised are closely held
businesses. Mr. Leung has made appraisals and provided
valuation advice for merger/acquisition transactions; strategic
planning as related to ownership transition and corporate
reorganization; estate and gift tax reportings; and business
litigations. Mr. Leung has testified as an expert witness
in Washington, Oregon, Alaska and California state and federal
courts.
Education
1977 M.B.A. in Finance from University of Washington
1975 B.A. in English Literature from University of
Washington
Professional
Designations
1979 Certified Public Accountant (C.P.A.)
1982 Chartered Financial Analyst (C.F.A.)
1983 Accredited Senior Appraiser (A.S.A.)
Publications
“Useful Business Valuation Concepts for the Planner.”Personal Financial Planning, May/June 1993.
“Value of a Design Firm: Some Useful Concepts.”FMG
Journal, March 1992
“Financing Techniques for Small Business Buy Outs.”The Practical Accountant, February 1990.
“Examining the Economic Dynamics in a Leveraged ESOT.”Business Valuation Review, September 1989.
“Tax Reform Act of 1986; Considerations for Business
Valuations.”Business Valuation Review,
June 1987.
“Myths about Capitalization Rate and Risk Premium.”Business Valuation News, March 1986.
“Affordable Financing & Tax Free Rollover May
Stimulate Business Owners to Try ESOPs.”Valuation
Bulletin, Winter 1985.
“Business Valuation Considerations for Emerging High Growth
Companies.”Business Valuation Review, March 1985.
“Pricing a Practice.”Financial Planning,
October 1984.
“Revenue Rulings
83-119 and
83-120:
Impact of Preferred Stock Recapitalizations.”Valuation
Bulletin, Winter 1984.
“Valuing Emerging High-Growth Companies: A New
Approach.”Valuation Bulletin, Summer 1984.
“Professional Goodwill Value.”Washington State Bar
News, June 1984.
“Recapitalization Planning.”Financial
Planning, June 1984.
“Evaluating Professional Goodwill.”Seattle-King
County Bar Bulletin, October 1983.
Annex D:
Section 60.551 to Section 60.594 of the Oregon
Business Corporation Act
DISSENTERS’
RIGHTS
(Right to Dissent and Obtain Payment for Shares)
60.551 Definitions for ORS 60.551 to
60.594. As used in ORS 60.551 to 60.594:
(1) “Beneficial shareholder”means the
person who is a beneficial owner of shares held in a voting
trust or by a nominee as the record shareholder.
(2) “Corporation” means the issuer of the
shares held by a dissenter before the corporate action, or the
surviving or acquiring corporation by merger or share exchange
of that issuer.
(3) “Dissenter” means a shareholder who is
entitled to dissent from corporate action under ORS 60.554 and
who exercises that right when and in the manner required by ORS
60.561 to 60.587.
(4) “Fair value,” with respect to a
dissenter’s shares, means the value of the shares
immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
(5) “Interest” means interest from the
effective date of the corporate action until the date of
payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
(6) “Record shareholder”means the person
in whose name shares are registered in the records of a
corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a
corporation.
(7) “Shareholder” means the record
shareholder or the beneficial shareholder. [1987 c.52
§ 124; 1989 c.1040 § 30]
60.554 Right to
dissent. (1) Subject to subsection (2)
of this section, a shareholder is entitled to dissent from, and
obtain payment of the fair value of the shareholder’s
shares in the event of, any of the following corporate acts:
(a) Consummation of a plan of merger to which the
corporation is a party if shareholder approval is required for
the merger by ORS 60.487 or the articles of incorporation and
the shareholder is entitled to vote on the merger or if the
corporation is a subsidiary that is merged with its parent under
ORS 60.491;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or
substantially all of the property of the corporation other than
in the usual and regular course of business, if the shareholder
is entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order or
a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter’s shares because it:
(A) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so created is
to be acquired for cash under ORS 60.141;
(e) Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation, bylaws or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain
payment for their shares; or
(f) Conversion to a noncorporate business entity pursuant
to ORS 60.472.
(2) A shareholder entitled to dissent and obtain payment
for the shareholder’s shares under ORS 60.551 to 60.594 may
not challenge the corporate action creating the
shareholder’s entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(3) Dissenters’ rights shall not apply to the holders
of shares of any class or series if the shares of the class or
series were registered on a national securities exchange or
quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System as a National Market System issue on
the record date for the meeting of shareholders at which the
corporate action described in subsection (1) of this
section is to be approved or on the date a copy or summary of
the plan of merger is mailed to shareholders under ORS 60.491,
unless the articles of incorporation otherwise provide. [1987
c.52 § 125; 1989 c.1040 § 31; 1993 c.403
§ 9; 1999 c.362 § 15]
60.557 Dissent by nominees and beneficial
owners. (1) A record shareholder may assert
dissenters’ rights as to fewer than all the shares
registered in the shareholder’s name only if the
shareholder dissents with respect to all shares beneficially
owned by any one person and notifies the corporation in writing
of the name and address of each person on whose behalf the
shareholder asserts dissenters’ rights. The rights of a
partial dissenter under this subsection are determined as if the
shares regarding which the shareholder dissents and the
shareholder’s other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters’
rights as to shares held on the beneficial shareholder’s
behalf only if:
(a) The beneficial shareholder submits to the corporation
the record shareholder’s written consent to the dissent not
later than the time the beneficial shareholder asserts
dissenters’ rights; and
(b) The beneficial shareholder does so with respect to all
shares of which such shareholder is the beneficial shareholder
or over which such shareholder has power to direct the vote.
[1987 c.52 § 126]
(Procedure for Exercise of Rights)
60.561 Notice of dissenters’
rights. (1) If proposed corporate action
creating dissenters’ rights under ORS 60.554 is submitted
to a vote at a shareholders’ meeting, the meeting notice
must state that shareholders are or may be entitled to assert
dissenters’ rights under ORS 60.551 to 60.594 and be
accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters’ rights
under ORS 60.554 is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders entitled to
assert dissenters’ rights that the action was taken and
send the shareholders entitled to assert dissenters’ rights
the dissenters’ notice described in ORS 60.567. [1987 c.52
§ 127]
60.564 Notice of intent to demand
payment. (1) If proposed corporate action
creating dissenters’ rights under ORS 60.554 is submitted
to a vote at a shareholders’ meeting, a shareholder who
wishes to assert dissenters’ rights shall deliver to the
corporation before the vote is taken written notice of the
shareholder’s intent to demand payment for the
shareholder’s shares if the proposed action is effectuated
and shall not vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section is not entitled to payment
for the shareholder’s shares under this chapter. [1987 c.52
§ 128]
60.567 Dissenters’
notice. (1) If proposed corporate action
creating dissenters’ rights under ORS 60.554 is authorized
at a shareholders’ meeting, the corporation shall deliver a
written dissenters’ notice to all shareholders who
satisfied the requirements of ORS 60.564.
(2) The dissenters’ notice shall be sent no later than
10 days after the corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where
and when certificates for certificated shares shall be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
(c) Supply a form for demanding payment that includes the
date of the first announcement of the terms of the proposed
corporate action to news media or to shareholders and requires
that the person asserting dissenters’ rights certify
whether or not the person acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the corporation must receive the
payment demand. This date may not be fewer than 30 nor more than
60 days after the date the subsection (1) of this
section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594. [1987
c.52 § 129]
60.571 Duty to demand
payment. (1) A shareholder sent a
dissenters’ notice described in ORS 60.567 must demand
payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth
in the dissenters’ notice pursuant to ORS 60.567 (2)(c),
and deposit the shareholder’s certificates in accordance
with the terms of the notice.
(2) The shareholder who demands payment and deposits the
shareholder’s shares under subsection (1) of this
section retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit
the shareholder’s share certificates where required, each
by the date set in the dissenters’ notice, is not entitled
to payment for the shareholder’s shares under this chapter.
[1987 c.52 § 130]
60.574 Share
restrictions. (1) The corporation may
restrict the transfer of uncertificated shares from the date the
demand for their payment is received until the proposed
corporate action is taken or the restrictions released under ORS
60.581.
(2) The person for whom dissenters’ rights are
asserted as to uncertificated shares retains all other rights of
a shareholder until these rights are canceled or modified by the
taking of the proposed corporate action. [1987 c.52
§ 131]
60.577 Payment. (1) Except as
provided in ORS 60.584, as soon as the proposed corporate action
is taken, or upon receipt of a payment demand, the corporation
shall pay each dissenter who complied with ORS 60.571, the
amount the corporation estimates to be the fair value of the
shareholder’s shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation’s balance sheet as of the end of a
fiscal year ending not more than 16 months before the date
of payment, an income statement for that year and the latest
available interim financial statements, if any;
(b) A statement of the corporation’s estimate of the
fair value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter’s right to demand
payment under ORS 60.587; and
(e) A copy of ORS 60.551 to 60.594. [1987 c.52
§ 132; 1987 c.579 § 4]
60.581 Failure to take
action. (1) If the corporation does not take
the proposed action within 60 days after the date set for
demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release
the transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed
action, it must send a new dissenters’ notice under ORS
60.567 and repeat the payment demand procedure. [1987 c.52
§ 133]
60.584 After-acquired
shares. (1) A corporation may elect to
withhold payment required by ORS 60.577 from a dissenter unless
the dissenter was the beneficial owner of the shares before the
date set forth in the dissenters’ notice as the date of the
first announcement to news media or to shareholders of the terms
of the proposed corporate action.
(2) To the extent the corporation elects to withhold
payment under subsection (1) of this section, after taking
the proposed corporate action, it shall estimate the fair value
of the shares plus accrued interest and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of
such demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares an
explanation of how the interest was calculated and a statement
of the dissenter’s right to demand payment under ORS
60.587. [1987 c.52 § 134]
60.587 Procedure if shareholder dissatisfied with
payment or offer. (1) A dissenter may notify
the corporation in writing of the dissenter’s own estimate
of the fair value of the dissenter’s shares and amount of
interest due, and demand payment of the dissenter’s
estimate, less any payment under ORS 60.577 or reject the
corporation’s offer under ORS 60.584 and demand payment of
the dissenter’s estimate of the fair value of the
dissenter’s shares and interest due, if:
(a) The dissenter believes that the amount paid under ORS
60.577 or offered under ORS 60.584 is less than the fair value
of the dissenter’s shares or that the interest due is
incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577
within 60 days after the date set for demanding
payment; or
(c) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares
within 60 days after the date set for demanding payment.
(2) A dissenter waives the right to demand payment under
this section unless the dissenter notifies the corporation of
the dissenter’s demand in writing under subsection (1)
of this section within 30 days after the corporation made
or offered payment for the dissenter’s shares. [1987 c.52
§ 135]
(Judicial Appraisal of Shares)
60.591 Court action. (1) If a
demand for payment under ORS 60.587 remains unsettled, the
corporation shall commence a proceeding within 60 days
after receiving the payment demand under ORS 60.587 and petition
the court under subsection (2) of this section to determine
the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the
60-day
period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the
circuit court of the county where a corporation’s principal
office is located, or if the principal office is not in this
state, where the corporation’s registered office is
located. If the corporation is a foreign corporation without a
registered office in this state, it shall commence the
proceeding in the county in this state where the registered
office of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or
not residents of this state, whose demands remain unsettled
parties to the proceeding as in an action against their shares.
All parties must be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the
proceeding is commenced under subsection (2) of this
section is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the
powers described in the court order appointing them, or in any
amendment to the order. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is
entitled to judgment for:
(a) The amount, if any, by which the court finds the fair
value of the dissenter’s shares, plus interest, exceeds the
amount paid by the corporation; or
(b) The fair value, plus accrued interest, of the
dissenter’s after-acquired shares for which the corporation
elected to withhold payment under ORS 60.584. [1987 c.52
§ 136]
60.594 Court costs and counsel
fees. (1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs
of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court
may assess costs against all or some of the dissenters, in
amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under ORS 60.587.
(2) The court may also assess the fees and expenses of
counsel and experts of the respective parties in amounts the
court finds equitable:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not
substantially comply with the requirements of ORS 60.561 to
60.587; or
(b) Against either the corporation or a dissenter, in favor
of any other party, if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily,
vexatiously or not in good faith with respect to the rights
provided by this chapter.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters
similarly situated, and that the fees for those services should
not be assessed against the corporation, the court may award to
counsel reasonable fees to be paid out of the amount awarded the
dissenters who were benefited. [1987 c.52 § 137]
Excerpt
from Amended and Restated Bylaws of Redhook Ale Brewery,
Incorporated, dated November 30, 2007
2.3.2 Nominations for Directors.
(a) Nominations of candidates for election as directors at
an annual meeting of shareholders may only be made (i) by,
or at the direction of, the Board of Directors, or (ii) by
any shareholder of the corporation who is entitled to vote at
the meeting and who complies with the procedures set forth in
the remainder of this Section 2.3.2.
(b) If a shareholder proposes to nominate one or more
candidates for election as directors at an annual meeting, the
shareholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a
shareholder’s notice must be delivered to, or mailed and
received at, the principal office of the corporation
(i) not less than one hundred twenty (120) days prior
to the first anniversary of the date that the corporation’s
proxy statement was released to shareholders in connection with
the previous year’s annual meeting; (ii) a reasonable
time before the corporation begins to print and mail its proxy
materials if the date of this year’s annual meeting has
been changed by more than thirty (30) days from the date of
the previous year’s meeting; or (iii) not more than
seven (7) days following the mailing to shareholders of the
notice of annual meeting with respect to the current year’s
annual meeting, if the corporation did not release a proxy
statement to shareholders in connection with the previous
year’s annual meeting, or if no annual meeting was held
during such year.
(c) A shareholder’s notice to the Secretary under
Section 2.3.2(b) shall set forth, as to each person whom
the shareholder proposes to nominate for election as a director
(i) the name, age, business address and residence address
of such person, (ii) the principal occupation or employment
of such person, (iii) the number and class of shares of
stock of the corporation that are beneficially owned on the date
of such notice by such person, and (iv) if the corporation
at such time has or at the time of the meeting will have any
security registered pursuant to Section 12 of the Exchange
Act, any other information relating to such person required to
be disclosed in solicitations of proxies with respect to
nominees for election as directors pursuant to
Regulation 14A under the Exchange Act, including but not
limited to information required to be disclosed by
Schedule 14A of Regulation 14A, and any other
information that the shareholder would be required to file with
the Securities and Exchange Commission in connection with the
shareholder’s nomination of such person as a candidate for
director or the shareholder’s opposition to any candidate
for director nominated by, or at the direction of, the Board of
Directors. In addition to the above information, a
shareholder’s notice to the Secretary under
Section 2.3.2(b) shall (A) set forth (i) the name
and address, as they appear on the corporation’s books, of
the shareholder and of any other shareholders that the
shareholder knows or anticipates will support any candidate or
candidates nominated by the shareholder and (ii) the number
and class of shares of stock of the corporation that are
beneficially owned on the date of such notice by the shareholder
and by any such other shareholders and (B) be accompanied
by a written statement, signed and acknowledged by each
candidate nominated by the shareholder, that the candidate
agrees to be so nominated and to serve as a director of the
corporation if elected at the annual meeting.
(d) The Board of Directors, or a designated committee
thereof, may reject any shareholder’s nomination of one or
more candidates for election as directors if the nomination is
not made pursuant to a shareholder’s notice timely given in
accordance with the terms of Section 2.3.2(b). If the Board
of Directors, or a designated committee thereof, determines that
the information provided in a shareholder’s notice does not
satisfy the requirements of Section 2.3.2(c) in any
material respect, the Secretary of the corporation shall notify
the shareholder of the deficiency in the notice. The shareholder
shall have an opportunity to cure the deficiency by providing
additional information to the Secretary within such period of
time, not to exceed five (5) days from the date such
deficiency notice is given to the shareholder, as the Board of
Directors or such committee shall reasonably determine. If the
deficiency is not cured within such period, or if the Board of
Directors or such committee determines that the additional
information provided by the shareholder, together with
information previously provided, does not satisfy the
requirements of Section 2.3.2(c) in any material respect,
then the Board of Directors or such committee may reject the
shareholder’s notice.
(e) Notwithstanding the procedures set forth in
Section 2.3.2(d), if a shareholder proposes to nominate one
or more candidates for election as directors at an annual
meeting, and neither the Board of Directors nor any committee
thereof has made a prior determination of whether the
shareholder has complied with the procedures set forth in this
Section 2.3.2 in connection with such nomination, then the
chairman of the annual meeting shall determine and declare at
the annual meeting whether the shareholder has so complied. If
the chairman determines that the shareholder has so complied,
then the chairman shall so state and ballots shall be provided
for use at the meeting with respect to such nomination. If the
chairman determines that the shareholder has not so complied,
then, unless the chairman, in his sole and absolute discretion,
determines to waive such compliance, the chairman shall state
that the shareholder has not so complied and the defective
nomination shall be disregarded.
E-2
Dates Referenced Herein and Documents Incorporated by Reference
