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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..........to..........
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3284048
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
75 Arlington Street, Boston, Massachusetts
(Address of principal executive offices)
02116
(Zip Code)
(617) 368-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Class A Common Stock ($.01 par value) held by
non-affiliates of the Registrant totaled $122,449,913 (based on the closing
price of the Company's Class A Common Stock on the New York Stock Exchange on
March 13, 1998). All of the Registrant's Class B Common Stock ($.01 par value)
is held by an affiliate.
As of March 13, 1998 there were 16,362,036 shares outstanding of the Company's
Class A Common Stock ($.01 par value) and 4,107,355 shares outstanding of the
Company's Class B Common Stock ($.01 par value).
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting to be held on June 2, 1998 are incorporated by reference into Part III
of this report.
1
THE BOSTON BEER COMPANY, INC.
PART 1
Item 1. Business
General
Boston Beer is the largest craft brewer in the United States and overall is the
eighth largest brewer in the United States. In fiscal 1997, the Company sold
1,168,000 barrels of its proprietary products, which it believes to be more than
the next five largest craft brewers combined.
In 1997, in addition to its flagship brand, Samuel Adams Boston Lager(R), the
Company produced nineteen beers under the Boston Beer Company name: Boston
Ale(R), Lightship(R), Cream Stout, Honey Porter, Scotch Ale, Double Bock, Triple
Bock(R), Octoberfest, Winter Lager(R), Cherry Wheat, Summer Ale, Cranberry
Lambic, Golden Pilsner, White Ale, Boston Cream(TM) and four beers brewed under
the LongShot(R) label. The Company also produces beer and cider sold under the
Oregon Original(TM) and Hardcore(R) brand names, respectively. The Company brews
certain beers under contract at five breweries located in Pittsburgh,
Pennsylvania, Lehigh Valley, Pennsylvania, Portland, Oregon, Rochester, New
York, and Lake Oswego, Oregon. The Company also brews most of its brands at a
brewery in Cincinnati, Ohio. The Company acquired the equipment and other
brewery-related personal property associated with this brewery on March 1, 1997.
It will acquire the real property on which the brewery is situated, once certain
preconditions are met. The Company also brews beers for the local market at its
Boston brewery.
Since its founding in 1984, the Company had operated as Boston Beer Company
Limited Partnership, a Massachusetts limited partnership, including through its
sole general partner Boston Brewing Company, Inc., a Massachusetts corporation.
Through a Recapitalization effected November 1995, The Boston Beer Company,
Inc., a Massachusetts corporation, became the parent corporation of Boston Beer
Company Limited Partnership and Boston Brewing Company, Inc. As a result of the
Recapitalization, all of the ownership interests in Boston Beer Company Limited
Partnership are owned, directly or indirectly, by The Boston Beer Company, Inc.
The Company's principal executive offices are located at 75 Arlington Street,
5th Floor, Boston, Massachusetts 02116, and its telephone number is (617) 368-
5000.
Industry Background
The Company actively participates in the Better Beer segment of the beer
industry. Along with imports and other craft beers, the Company's beers are
viewed as a more flavorful, higher priced and more intriguing alternative to the
regular domestic beers which make up some 90% of U.S. beer consumption. This
Better Beer segment includes craft beers and the bulk of imports, (excluding
imported beer volume sold at regular domestic prices primarily along the
Canadian and Mexican border). The Better Beer segment is approximately 8% of U.S
beer consumption and has been growing at approximately 5-10% compounded for
twenty years. The Company is the largest craft brewer in the U.S. and is the
third largest brewer in the Better Beer segment of the U.S. brewing industry
following only Corona and Heineken. The terms craft brewer and micro-brewer are
often used interchangeably by consumers and within the industry to mean a small,
independent brewer whose predominant product is brewed with only traditional
brewing processes and ingredients. Craft brewers include contract brewers, small
regional brewers, and brewpubs. Craft beers are full-flavored beers brewed by
craft brewers with higher quality hops, malted barley, yeast, and water, and
without adjuncts such as rice, corn, or stabilizers, and without water dilution
used in beer for mass production and consumption. The Company estimates that in
1997, the craft brew segment accounted for approximately 5 million barrels. Over
the five-year period ended December 31, 1997, craft beer shipments have grown at
a compounded annual rate of approximately 31%, while total U.S. beer industry
shipments have remained substantially level. It should be noted, however, that
during 1997 craft beers grew at only an estimated 1%, while the growth of the
overall Better Beer category continued in line with its historic trends.
The primary cause for the rapid growth of Better Beers is consumers' rediscovery
of and demand for more traditional, full-flavored beers. Before Prohibition, the
U.S. beer industry consisted of hundreds of small breweries that brewed such
full-flavored beers. Since the end of Prohibition, U.S. brewers have shifted
production to less flavorful, lighter beers, which use lower cost ingredients,
and can be mass-produced to take advantage of economies of scale in production
and advertising. This shift toward these mass-produced beers has coincided with
extreme consolidation in the beer industry. Today, three major brewers (Anheuser
Busch, Inc., Miller Brewing Co., and Coors Brewing Co.) control approximately
85% of all U.S. beer shipments.
2
Per capita beer consumption in the U.S. has declined from its peak in the early
1980's. As consumers began to drink less beer, they focused their consumption on
more flavorful or otherwise distinctive beers. Initially, this demand was met by
imported beers from Holland, Germany, Canada, and Mexico. Beginning in the late
1980's, domestic craft brewers began selling heavier, more full-flavored beers,
usually in small, local geographic markets, and often through their own
brewpubs. When Samuel Adams Boston Lager(R) was first brewed in 1984, only a
handful of craft breweries existed, few of which distributed outside their
immediate geographical area. In response to increased consumer demand for more
flavorful beers, the number of craft-brewed beers has increased dramatically.
Currently there are more than 500 craft brewers plus approximately 800 brewpubs.
In addition to the many independent brewers, the three major brewers have all
entered this craft market, either through developing their own beers or by
acquiring, in whole or part, or forming partnerships with existing craft
brewers.
Business Strategy
The Company's business strategy is to become the leading brewer in the Better
Beer market by creating and offering a wide variety of the highest quality full-
flavored beers, while increasing sales through new product introductions and
substantial trade and consumer awareness programs, supported by a large, well
trained sales organization. This strategy is detailed below.
Quality Assurance
As of December 27, 1997 the Company employed ten brewmasters and retained a
world recognized brewing authority as consulting brewmaster to monitor the
Company's contract brewing operations and control production of its beers. Over
125 tests, tastings, and evaluations are typically required to ensure that each
batch of Samuel Adams(R) beer conforms to the Company's standards. For Samuel
Adams(R) products, the Company uses only higher quality hops grown in Europe.
Its brewing department is supported by a quality control lab at the Company's
brewery in Boston. In order to assure that its customers enjoy only the freshest
beer, the Company includes a "freshness" date on every bottle of its Samuel
Adams(R) and Oregon Original(TM) products. Boston Beer was among the first craft
brewers to follow this practice.
Product Innovations
The Company is committed to developing new products in order to introduce beer
drinkers to different styles of beer, promote the Samuel Adams(R) product line
and to remain a leading innovator. These new products allow the Samuel Adams(R)
drinker to try new styles of beer while remaining loyal to the Samuel Adams(R)
brand. In 1997 the Samuel Adams(R) product line added two new styles, a seasonal
product and a product sold exclusively in Massachusetts. The Company also
introduced hard cider under the HardCore(TM) label. The Company continued to
market its Oregon Original(TM) line through the Oregon Beer and Brewing Company.
One additional beer was created during 1997 for the Company's venture, marketed
under the Devil Mountain name, with Joseph E. Seagram & Sons, Inc. ("Seagram").
Brewing
The Company believes that its strategy of contract brewing, which utilizes the
excess capacity of other breweries, gives the Company flexibility as well as
quality and cost advantages over its competitors. The Company carefully selects
breweries with (i) the capability of utilizing traditional brewing methods, and
(ii) first rate quality control capabilities throughout brewing, fermentation,
finishing, and packaging. Furthermore, by brewing in multiple locations, the
Company can reduce its distribution costs and deliver fresher beer to its
customers better than other craft brewers with broad distribution from a single
brewery. While the Company currently plans to continue its contract-brewing
strategy, it has, as discussed on page 2, acquired an existing brewery in
Cincinnati in order to increase its brewing options by way of smaller brew
streams and greater brewing flexibility among other reasons and will
periodically evaluate the economics involved with acquiring other breweries.
In addition to the Company's breweries in Boston and Cincinnati, the Company
currently has relationships with four brewers regarding production of its
Samuel Adams(R) and Oregon Original(TM) lines of beers in the U.S., each of
which is described in greater detail below. The Company believes that its
breweries and its contract brewers have capacity to brew annually approximately
one and one half times as much of the Company's beer as the Company sold during
fiscal 1997.
The Company continues to brew its Samuel Adams Boston Lager(R) at each of its
brewing sites but does not brew all of its other products at each site.
Therefore, at any particular time, the Company may be relying on only one
supplier for its products other than Samuel Adams Boston Lager(R).
3
In the event of a labor dispute, governmental action or other events that cause
any of the Company's contract breweries to be unable to produce the Company's
beer, the Company believes it would be able to increase production at its other
contract breweries so as to meet demand for its beer. In such event, however,
the Company may experience temporary shortfalls in production and/or increased
production or distribution costs, the combination of which could have a material
adverse effect on the Company's results of operations.
Pittsburgh Brewing Company. Pittsburgh Brewing's facilities were used to brew
approximately 10% and 22% of the Company's total beer production in 1997 and
1996, respectively. The Company's agreement with Pittsburgh Brewing expires in
February 1999, subject to termination by the Company, upon thirty days advance
notice, if there is a proposed change in control or sale of the assets of
Pittsburgh Brewing. The Company is charged a per unit rate for brewing,
fermenting, and packaging, as well as the cost of raw materials. Pittsburgh
Brewing has the right of first refusal for all beer requirements for the Samuel
Adams(R) family of beers for a specified region if it has the ability to meet
the quality standards of the Company and is financially sound. Pittsburgh
Brewing is required to maintain product liability insurance coverage for
products produced for the Company and has agreed to indemnify the Company and
its affiliates for certain losses incurred in connection with the manufacturing
or packaging of its products.
Pittsburgh Brewing was formerly owned by Pittsburgh Food & Beverage which filed
for Chapter 11 bankruptcy protection on February 24, 1995. In November 1995, the
Trustee for Pittsburgh Food & Beverage sold the assets of Pittsburgh Brewing to
Keystone Brewers, Inc. ("Keystone"), which assumed the brewing contract with the
Company. While the Company believes that Pittsburgh Brewing, under Keystone
ownership, will continue as a source of supply for the Company, no assurance can
be given that Keystone will be able to continue the Pittsburgh operations or
that it will not encounter financial or operating difficulties, such as labor
and other employee relations problems which might disrupt its operations.
The Stroh Brewery Company. In January 1997, the Company entered into an amended
and restated brewing contract ("Production Agreement") with Stroh related to the
production of Samuel Adams(R) beer products at Stroh's Allentown (Lehigh
Valley), Pennsylvania, and Portland, Oregon breweries (the "Stroh Breweries").
At the same time, the Company and Stroh also executed a letter agreement setting
forth the terms on which the Company may elect to make an investment to
facilitate certain expansion efforts at the Lehigh Valley Brewery ("Letter
Agreement"). Both the Production Agreement and Letter Agreement have been
subsequently amended on various dates in 1997 and 1998. If the Company does not
make the proposed investment, the contract will expire on September 14, 1998.
Production from the Stroh Breweries represented approximately 50% and 57% of the
Company's total beer production in 1997 and 1996, respectively.
Under the amended brewing contract, Stroh has committed access to certain
minimum capacity at the Stroh facilities for the Company to brew its Samuel
Adams(R) and Oregon Original(TM) lines of products, as well as certain seasonal
products. For such access, Stroh charges the Company a per unit rate for
production and the Company bears the costs of raw materials, excise taxes,
deposits for case pallets and kegs, and a per unit charge for using bulk rather
than packaged glass. The contract contains provisions relating to certain cost
adjustments if Stroh reallocates production to brewing facilities other then
those in Lehigh Valley and Portland.
The Genesee Brewing Company. In May, 1997, the Company amended and restated its
brewing contract with Genesee related to the production of Samuel Adams(R) beer
products at its Rochester, New York brewery. The Company is charged a per unit
rate for the production of beer, as well as the costs of raw materials and
excise taxes that Genesee is obligated to pay. This agreement caps the maximum
number of barrels that Genesee is obligated to produce for the Company. The
Company commenced packaging of products at this brewery during the fourth
quarter of 1995. This agreement expires in December 2016. However, Genesee has
the right to terminate this agreement if the volume of production during the
immediately preceding 12-month period falls below certain levels. The Company
has the right to terminate immediately with cause and, subject to certain stated
notice periods, also based on the volume of production during the prior 12-
months. Production from the Genesee Brewery represented approximately 25% in
1997 and 17% in 1996
The Saxer Brewing Company. In July 1994, the Company's subsidiary, Oregon Beer
and Brewing Co., Inc. I ("Oregon Beer"), entered into a brewing contract with
Saxer Brewing relating to the production of certain products specified by Oregon
Beer and Brewing, bearing the Company's "Oregon Original(TM)" trademark. This
agreement expires on July 1, 2004. The products produced for the Company by
Saxer Brewing at its facility in Lake Oswego, Oregon ("Lake Oswego Brewery")
represents approximately 1% of the Company's beer brewed in 1997 and 1996.
Oregon Beer is charged a per unit rate for the production of beer, as well as
the costs of raw materials and excise taxes that Saxer Brewing is obligated to
pay as a result of products brewed for Oregon Beer. Oregon Beer has the right to
terminate the agreement immediately with cause and otherwise upon providing a
45-day notice. Saxer Brewing has the right to terminate the contract upon
providing at least twelve months' notice to Oregon Beer.
4
The Samuel Adams Brewery Company, Ltd. Since the Company acquired the
equipment and other brewery-related personal property of a brewery in
Cincinnati, Ohio, on March 1, 1997, the Company has been brewing most of its
products in Cincinnati as well as producing alcoholic and non-alcoholic products
for contract customers. As soon as certain preconditions are met with respect to
the real property on which the brewery in Cincinnati is located, the Company
intends to purchase such real estate. The Samuel Adams Brewery Company, Ltd.
(the "Cincinnati Brewery") is a wholly owned affiliate of the Company. The
production from the Samuel Adams Brewery represented approximately 15% of the
Company's total beer production in 1997. In 1996, under a contract with
Schoenling Brewing Company, production at this facility represented
approximately 5% of the Company's beer produced.
The Boston Beer Company Brewery. The Company uses its Boston brewery to develop
new types of innovative and traditional beers and to supply, in limited
quantities, certain beers for the local market. All of its beers are typically
brewed at its Boston brewery in the course of a year. Product development
entails researching market needs and competitive products, sample brewing, and
market taste testing.
Strong Sales and Distribution Presence
Boston Beer sells its products through a sales force, which the Company believes
is the largest of any craft brewer and one of the largest in the domestic beer
industry. The Company sells its beer to wholesale distributors, which then sell
to retailers such as pubs, restaurants, grocery chains, package stores, and
other retail outlets. The Company's sales force has a high level of product
knowledge, and is trained in the details of the brewing process. Its sales force
receives selling skills training each year from outside training experts. Sales
representatives typically carry hops, barley, and other samples to educate
wholesale and retail buyers as to the quality and taste of its beers. The
Company has developed strong relationships with its distributors and retailers,
many of which have benefited from the Company's premium pricing strategy and
rapid growth.
Advertising and Promotion
The Company has historically invested in advertising and promotion. The Company
uses television, radio, outdoor advertising and print media, the latter
primarily to the trade. The Company works closely with its distributors and
customers to develop and implement promotions designed to increase consumer
awareness and sales. Its on-premise promotions, where legal, include beer
tastings and extensive use of user-friendly menu cards. Off-premise promotions
include incentive contests, periodic discounts to retailers and other programs
which often combine consumer, distributor, and retailer elements.
Products marketed
The Company's product strategy is to create and offer a world class variety of
traditional beers and to promote the Samuel Adams(R) product line. At the end of
1997, the Company marketed ten year-round and six seasonal beers under the
Samuel Adams(R) brand names and four year-round beers under the Oregon
Original(TM) brand name. The Company's Samuel Adams Boston Lager(R) has
historically accounted for the majority of the Company's sales. From time to
time the Company will discontinue certain styles. The following is a list of
continuing styles on December 27, 1997.
Beers Year First Brewed or Introduced
Year-Round Beers
Samuel Adams Boston Lager(R) 1984
Samuel Adams Boston Ale(R) 1987
Boston Lightship(R) 1987
Samuel Adams Cream Stout 1993
Samuel Adams Honey Porter 1994
Samuel Adams Triple Bock(R) 1994
Samuel Adams Scotch Ale 1995
Samuel Adams Cherry Wheat 1995
Samuel Adams Golden Pilsner 1996
Samuel Adams Boston Cream(TM) 1997
Oregon Original India Pale Ale 1994
Oregon Original Nut Brown Ale 1994
Oregon Original Raspberry Wheat 1995
Oregon Original Honey Ale 1996
5
Seasonal Beers
Samuel Adams Double Bock 1988
Samuel Adams Octoberfest 1989
Samuel Adams Winter Lager(R) 1989
Samuel Adams Cranberry Lambic 1989
Samuel Adams Summer Ale 1996
Samuel Adams White Ale 1997
In 1997, the Company expanded its product line with the addition of HardCore(R)
hard cider. Two versions of this hard cider were introduced, Crisp and
Cranberry, which enabled the Company to enter the small but growing cider
category.
On March 19, 1996, the Company entered into an Agreement with Seagram, pursuant
to which Seagram sells a line of beers developed jointly by it and the Company
under the "Devil Mountain" name. As of December 27, 1997, the Company had spent
approximately $2,240,000 with respect to this venture. The Company does not
expect to spend any additional money on the project in 1998. The Agreement also
sets forth the circumstances in which the relationship can be terminated and the
terms on which rights to the product line will revert to the Company or may be
acquired by the Company, as well as the royalty payments which are to be
received by the Company beginning in 1998. These payments are not expected to be
material.
Ingredients and Packaging
The Company has been successful to date in obtaining sufficient quantities of
the ingredients used in the production of its beers. These ingredients include:
Malt. The Company currently directs the purchase of the malt used in the
production of its beer to four suppliers, although it enters into discussions
from time to time with other vendors. The two-row varieties of barley used in
the Company's malt are grown in the U.S. and Canada.
Hops. The Company currently buys principally Noble hops for its Samuel Adams(R)
beers. Noble hops are varieties from specific growing areas usually recognized
for superior taste and aroma properties and include Hallertau-Hallertauer,
Tettnang-Hallertauer, Tettnang-Tettnanger, and Spalt-Spalter from Germany, and
Bohemian Saaz from the Czech Republic. Noble hops are rarer and more expensive
than other varieties of hops. Traditional English hops, East Kent Goldings and
English Fuggles, are used in the Company's ales. The Company has yet to find
alternative hops which duplicate the flavor and aroma of the Noble hops and
traditional English ale hops. As a result, the Company must purchase sufficient
quantities of these Noble hops to continue to meet its sales demands. The
Company stores its hops in multiple cold storage warehouses to minimize the
impact of a catastrophe at a single site.
The Company purchases its hops from hops dealers, the largest of which (John.
Barth & Son) has over the past five years accounted for between 30% and 61% of
the hops purchased each year by the Company. The Company has entered into
purchase commitments to ensure its supply of a portion of its requirements for
up to five years. Because of a slowing in its growth rate, the Company has
commitments which are in excess of its projected needs. The Company is now
working to reduce its excess commitments. The cost of reducing these
commitments may be substantial but is not currently quantifiable. Reducing or
deferring the Company's hop commitments may also result in foreign exchange
losses, as noted below.
The Company's hops contracts are denominated in German marks or English pounds,
depending on the location of the supplier. Prior to late 1996, the Company had,
as a practice, not hedged the foreign currency risk associated with these
contracts. Through that date, the Company's gains and losses from exchange rate
volatility were not material. Beginning in late 1996, the Company began to hedge
some of its currency risks. However, the Company's current actions to reduce its
excess hop commitments or defer its obligation to accept hops in 1998 are likely
to result in as much as $600,000 in foreign exchange losses in 1998.
Yeast. The Company maintains a supply of proprietary strains of yeast that it
supplies to its contract brewers. Since these yeasts would be impossible to
duplicate if destroyed, the Company maintains supplies in several locations. In
addition, the Company's contract brewers maintain a supply of these yeasts that
are reclaimed from the batches of beer brewed. The contract brewers are
obligated by their brewing contracts only to use these yeasts to brew the
Company's beers and the Company's yeasts cannot be used without the Company's
approval to brew any other beers produced at the respective breweries.
Packaging Materials. The Company maintains competitive sources of supply of
packaging materials, such as bottles, shipping cases, six-pack carriers, and
crowns. Currently, labels are supplied by a single source, although the Company
believes that alternative suppliers are available. In those instances where the
Company can negotiate preferential pricing, the Company enters into limited term
supply agreements with these vendors.
6
To date, the Company has not experienced material difficulties in obtaining
timely delivery from its suppliers. Although the Company believes there are
alternate sources available for the ingredients and packaging materials
described above, there can be no assurance that the Company would be able to
acquire such ingredients or packaging materials from other sources on a timely
or cost effective basis in the event current suppliers were unable to supply
them on a timely basis. The loss of a supplier could, in the short-term,
adversely affect the Company's business until alternative supply arrangements
were secured. Hops and malt are agricultural products and therefore many outside
factors such as, weather conditions, crop production, government regulations and
legislation affecting agriculture could effect both price and supply.
Sales and Marketing
The Company's products are sold to independent distributors through a large
field sales force. With few exceptions, the Company's products are not the
primary brands in the distributor's portfolio. Thus, the Company, in addition to
competing with other beers for a share of the consumer's business, competes with
other beers for a share of the distributor's attention, time, and selling
efforts. The Company considers its distributors its primary customers and is
focused on the relationship it has with its distributors.
In addition to this distributor focus, the Company has set up its sales
organization to include on-premise and retail account specialists. This is
designed to develop and strengthen relations at the chain headquarter level, and
to provide educational and promotional programs aimed at distributors,
retailers, and consumers, in each channel of distribution.
The Company has also engaged in extensive media campaigns, historically weighted
toward radio. In 1995, the Company launched its first ever television campaign.
Television was used in 1997 and the Company plans on continuing this strategy in
1998. In addition, its sales force complements these efforts by engaging in
sponsorships of cultural and community events, local beer festivals, industry-
related trade shows, and promotional events at local establishments for sampling
and awareness. All of these efforts are designed to stimulate consumer demand by
educating consumers, retailers, and distributors, on the qualities of beer. The
Company uses a wide array of point-of-sale items (banners, neons, umbrellas,
glassware, display pieces, signs, menu stands, etc.) designed to stimulate
impulse sales and continued awareness.
Distribution
The Company distributes its beers in every state in the U.S., as well as the
District of Columbia and Puerto Rico. The Company distributes its beer through a
network of over 450 distributors. During 1997, the Company's two largest
distributors combined to account for approximately 8% of the Company's net
sales. No other distributors accounted for more than 3% of the Company's net
sales during 1997. In some states, the terms of the Company's contracts with its
distributors may be affected by laws that restrict enforceability of some
contract terms, especially those related to the Company's right to terminate the
services of its distributors.
The Company also distributes its beers to Canada, Germany, Hong Kong, Japan,
Sweden, Switzerland, and the United Kingdom, along with select Caribbean
islands. Exports, however, represented less than 1% of 1997 revenues.
The Company typically receives orders by the fifth of a month with respect to
products to be shipped the following month. Products are shipped within days of
completion and, accordingly, there has historically not been any significant
product order backlog.
Competition
The craft-brewed and Better Beer segments of the U.S. beer market are highly
competitive due to continuing product proliferation from craft brewers and the
recent introduction of specialty beers by national brewers. Growth in the sales
of craft-brewed beers have increased competition. In 1997, the Company's growth
rate was flat. The Company's products also compete generally with other
alcoholic beverages, including other segments of the beer industry and low
alcohol products. The Company competes with other beer and beverage companies
not only for consumer acceptance and loyalty but also for shelf and tap space in
retail establishments and for marketing focus by the Company's distributors and
their customers, all of which also distribute and sell other beers and alcoholic
beverage products. The principal methods of competition in the Better Beer
segment of the beer industry include product quality and taste, brand
advertising, trade and consumer promotions, pricing, packaging and the
development of new products. The competitive position of the Company is enhanced
by its uncompromising product quality, its development of new beer styles,
innovative point of sale materials, a large sales force, tactical introduction
of seasonal beers and pricing strategies generating above-average profits to
distributors and retailers.
7
The Company expects competition with craft brewers to intensify as existing
craft brewers retrench to their key markets and core brands. While some of the
smaller micro-brewers and craft brewers have begun to leave the marketplace, new
entrants into the market continue and competition, overall, is high. In
addition, large brewers have developed or are developing niche brands and are
acquiring interests in small brewers to compete in the craft-brewed segment of
the domestic beer market. These competitors may have substantially greater
financial resources, marketing strength, and distribution networks than the
Company.
The Company competes directly with regional specialty brewers such as Sierra
Nevada Brewing Company, Pyramid Brewing Company, Anchor Brewing Company, other
contract brewers such as Pete's Brewing Company, foreign brewers such as
Heineken, Molson, Corona, Amstel, and Becks, and other regional craft brewers
and brewpubs. Niche beers produced by affiliates of certain major domestic
brewers such as Anheuser-Busch, Incorporated, Miller Brewing Co., and Coors
Brewing Co., also compete with the Company's products.
The Company believes that with such a significant portion of its production of
beers being produced as a contract brewer, it has competitive advantages over
the regional craft brewers because of its higher quality, greater flexibility,
and lower initial capital costs. Its use of contract brewing frees up capital
for other uses and allows the Company to brew its beer closer to major markets
around the country, providing fresher beer to customers and affording lower
transportation costs. The Company's recent purchase of a brewery in Cincinnati
where it previously contract-brewed its beers, will continue to provide certain
logistical advantages while at the same time providing the Company with added
flexibility of production through its ownership, which complements its strategy
of contract brewing. The Company also believes that its products enjoy
competitive advantages over foreign beers, including lower transportation costs,
no import charges, and superior product freshness.
Alcoholic Beverage Regulation and Taxation
The manufacture and sale of alcoholic beverages is a highly regulated and taxed
business. The Company's operations are subject to more restrictive regulations
and increased taxation by federal, state, and local governmental entities than
are those of non-alcohol related beverage businesses. Federal, state, and local
laws and regulations govern the production and distribution of beer. These laws
and regulations govern permitting, licensing, trade practices, labeling,
advertising, marketing, distributor relationships, and related matters. Federal,
state, and local governmental entities also levy various taxes, license fees,
and other similar charges and may require bonds to ensure compliance with
applicable laws and regulations. Failure by the Company to comply with
applicable federal, state, or local laws and regulations could result in
penalties, fees, suspension, or revocation of permits, licenses, or approvals.
There can be no assurance that other or more restrictive laws or regulations
will not be enacted in the future.
Licenses and Permits
The Company produces beer either at one or more of its contract breweries or
produces beer itself and sells it to distributors pursuant to a federal
wholesaler's basic permit. Brewery and wholesale operations require various
federal, state, and local licenses, permits, and approvals. In addition, some
states prohibit wholesalers and/or retailers from holding an interest in any
supplier, such as the Company. Violation of such regulations can result in the
loss or revocation of existing licenses by the wholesaler, retailer, and/or the
supplier. The loss or revocation of any existing licenses, permits, or
approvals, and/or failure to obtain any additional or new licenses, including
those required as a result of the Recapitalization in 1995, could have a
material adverse effect on the ability of the Company to conduct its business.
On the federal level, brewers are required to file with the Bureau of Alcohol,
Tobacco, and Firearms ("ATF") an amended Brewer's Notice every time there is a
material change in the brewing process or brewing equipment, change in the
brewery's location, change in the brewery's management, or a material change in
the brewery's ownership. Brewers must notify ATF within 30 days of any change in
the wholesaler's operations, change in the wholesaler's location, change in the
wholesaler's management or a material change in the wholesaler's ownership. The
Company's operations are subject to audit and inspection by ATF at any time.
On the state and local level, some jurisdictions merely require notice of any
material change in the operations, management, or ownership of a permittee or
licensee. Some jurisdictions require advance approvals and require that new
licenses, permits, or approvals must be applied for and obtained in the event of
a change in the management or ownership of the permittee or licensee. State and
local laws and regulations governing the sale of beer within a particular state
by an out-of-state brewer or wholesaler vary from locale to locale.
ATF permits and brewer's registrations can be suspended, revoked, or otherwise
adversely affected for failure to pay tax, to keep proper accounts, to pay fees,
to bond premises, to abide by federal alcoholic beverage production and
distribution regulations and to notify ATF of any change (as described above),
or if holders of 10% or more of the Company's equity securities are found to be
of questionable character. Permits, licenses, and approvals from state
regulatory agencies can be revoked for many of the same reasons.
8
Because of the many and various state and federal licensing and permitting
requirements, there is a risk that one or more regulatory authorities could
determine that the Company has not complied with applicable licensing or
permitting regulations or does not maintain the approvals necessary for it to
conduct business within their jurisdictions. There can be no assurance that any
such regulatory action would not have a material adverse effect upon the Company
or its operating results.
Taxation
The federal government and all of the states levy excise taxes on alcoholic
beverages, including beer. For brewers producing no more than 2,000,000 barrels
of beer per calendar year, the federal excise tax is $7.00 per barrel on the
first 60,000 barrels of beer removed for consumption or sale during a calendar
year, and $18.00 per barrel for each barrel in excess of 60,000. For brewers
producing more than 2,000,000 barrels of beer in a calendar year, the federal
excise tax is $18.00 per barrel. As the brewer of record of its beers, the
Company has been able to take advantage of this reduced tax on the first 60,000
barrels of its beers produced. Individual states also impose excise taxes on
alcoholic beverages in varying amounts, which have also been subject to change.
The state excise taxes are usually paid by the Company's distributors.
In addition, the federal government and each of the states levy taxes on hard
cider. Until recently, hard cider had always been taxed as a wine under the
Federal wine excise tax at the rate of $1.07 per gallon ($33.17 per barrel) for
non-effervescent hard cider, which is the classification in which the Company's
HardCore(R) product was included. However, on October 1, 1997, the federal
government passed an amendment modifying the tax treatment of hard cider, by
lowering the federal excise tax rate on qualifying hard cider to 22.6 cents per
gallon ($7.01 per barrel). As of March 10, 1998, the industry is still awaiting
clarification from the Bureau of Alcohol, Tobacco and Firearms as to the
definition of qualifying hard cider to consider what impact, if any, this
amendment will have upon the Company's business. Sales of the Company's
HardCore(R) products represent less than 2% of the volume of all of the
Company's products.
Congress and state legislators routinely consider various proposals to impose
additional excise taxes on the production and distribution of alcoholic
beverages, including beer and hard cider. Further increases in excise taxes on
beer and/or hard cider, if enacted, could result in a general reduction of sales
for the affected products.
Trademarks
The Company has obtained U.S Trademark Registrations for the marks, Samuel
Adams(R), the design logo of Samuel Adams, Samuel Adams Boston Lager(R), Boston
Ale(R), Lightship(R), Winter Lager(R), Triple Bock(R), LongShot(R), HardCore(R),
Oregon Original(TM) and other marks. The Samuel Adams(R) mark and the Samuel
Adams Boston Lager(R) mark (including the design logo of Samuel Adams) and other
Company marks are also registered or registration is pending in various foreign
countries. The Company regards its "Samuel Adams" and other trademarks as having
substantial value and as being an important factor in the marketing of its
products. The Company is not aware of any infringing uses that could materially
affect its current business or any prior claim to the trademarks that would
prevent the Company from using such trademarks in its business. The Company's
policy is to pursue registration of its marks whenever possible and to oppose
vigorously any infringements of its marks.
The Company occasionally grants, where permissible, short term trademark
licenses to independent on-premise retailers of its products.
In 1996, the Company entered into a license arrangement with Whitbread PLC, the
fourth largest brewery in the United Kingdom, pursuant to which a new hybrid
brew was developed and marketed under the trademark, "Boston Beer". The recipe
was developed by Whitbread Beer Company, a subsidiary of Whitbread PLC, with
assistance from Boston Beer Company's brewers. The Company owns the trademarks
for the new product and has granted Whitbread an exclusive license to use that
trademark in Great Britain and Ireland. Boston Beer Company receives a royalty
from the sale of this new beer.
On March 19, 1996, the Company entered into a Trademark License and Technical
Assistance Agreement with Joseph E. Seagram & Sons, Inc. ("Seagram"), pursuant
to which the Company licensed the "Devil Mountain" trademarks for use by Seagram
on beers which Seagram developed, with technical assistance from the Company.
The Agreement provides for stated royalties to commence in 1998.
In addition, the Company has licensed its trademark, "Samuel Adams Brew House",
"Sam Adams Brew House" and various related marks to certain entities for
purposes of establishing licensed Brew Houses at airport locations and
elsewhere. The Company does not receive a royalty pursuant to these license
arrangements.
9
Environmental Regulations and Operating Considerations
As the owner of a brewery in Boston, Massachusetts and, as of March 1, 1997, of
a brewery in Cincinnati, Ohio, the Company's operations are subject to a variety
of extensive and changing federal, state, and local environmental laws,
regulations, and ordinances that govern activities or operations that may have
adverse effects on human health or the environment. Such laws, regulations or
ordinances may impose liability for the cost of remediating, and for certain
damages resulting from, sites of past releases of hazardous materials. The
Company believes that it currently conducts, and in the past has conducted, its
activities and operations in substantial compliance with applicable
environmental laws, and believes that costs arising from existing environmental
laws will not have a material adverse effect on the Company's financial
condition or results of operations. There can be no assurance, however, that
environmental laws will not become more stringent in the future or that the
Company will not incur costs in the future in order to comply with such laws.
The Company's operations are subject to certain hazards and liability risks
faced by all brewers, such as potential contamination of ingredients or products
by bacteria or other external agents that may be wrongfully or accidentally
introduced into products or packaging. While the Company has never experienced a
contamination problem in its products, the occurrence of such a problem could
result in a costly product recall and serious damage to the Company's reputation
for product quality, as well as giving rise to product liability claims. The
Company and its contract brewers maintain insurance which the Company believes
is sufficient to cover any liability claims which might result from a
contamination problem in its products.
Employees
The Company employs approximately 335 employees. As of December 27, 1997,
eighty-four of those employees employed at the Company's newly-acquired brewery
in Cincinnati, Ohio, were covered by collective bargaining agreements. The
representation involves three labor unions, all of whom are under contracts
expiring in 2001 or 2002. The Company believes it maintains a good relationship
with those labor unions and has no reason to believe that a good working
relationship will not continue. The Company has experienced no work stoppages
and believes that its employee relations are good.
Item 2. Properties
The Company maintains its principal corporate offices and a brewery in Boston,
Massachusetts. The Company also maintains sales and administrative offices in
California, Maryland, Tennessee and Oregon. The Company leases all of its
facilities, but will buy the brewery-related real estate in Cincinnati upon
satisfaction of certain pre-conditions. The Company believes that its facilities
are adequate for its current needs and that suitable additional space will be
available on commercially acceptable terms as required.
Item 3. Legal Proceedings
The Company is party to certain claims and litigation in the ordinary course of
business. The Company does not believe any of these proceedings will result,
individually or in the aggregate, in a material adverse effect upon its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter ended December 27, 1997.
DIRECTORS AND OFFICERS OF THE REGISTRANT
Directors:
Pearson C. Cummin, 55, Mr. Cummin has been a General Partner of Consumer
Venture Partners, a venture capital company, since 1985. He is also currently
Chairman of the Board of Natural Wonders, Inc. and a Director of Pacific Sunwear
of California, Inc. He was elected a Director in 1995.
James C. Kautz, 67, Mr. Kautz is currently a Limited Partner of The Goldman
Sachs Group, L.P. and the second cousin of the Company's founder and Chief
Executive Officer, C. James Koch. Mr. Kautz was elected a Director in 1995.
C. James Koch, 48, Mr. Koch founded the Company in 1984 and has been the Chief
Executive Officer throughout the Company's history. Mr. Koch also serves as the
Corporation's President and Clerk and is the Company's Principal Executive
Officer. Mr. Koch was elected a Director in 1995.
10
Alfred W. Rossow, Jr., 65, Mr. Rossow joined the Company in late 1989 and is the
Executive Vice President and Chief Financial Officer. Mr. Rossow was elected a
Director in 1995.
Rhonda L. Kallman, 37, Ms. Kallman co-founded the Company. She has been Vice
President of Sales since 1985. Ms. Kallman was elected a Director in 1995.
Charles Joseph Koch, 75, Mr. Koch is the father of founder C. James Koch. In
1989, Mr. Koch retired as founder and co-owner of Chemicals, Inc., a distributor
of brewing and industrial chemicals in southwestern Ohio. Mr. Koch was elected
a Director in 1995.
John B. Wing, 51, Mr. Wing has been Chairman and CEO of The Wing Group Limited,
Co., a developer of energy projects in Turkey, Kuwait and China, since 1991. Mr.
Wing was elected a Director in 1995.
Officers:
C. James Koch, 48, Mr. Koch founded the Company in 1984 and has been the Chief
Executive Officer throughout the Company's history. From 1978 to 1984, he was a
manufacturing consultant with the Boston Consulting Group, Boston,
Massachusetts.
Rhonda L. Kallman, 37, Ms. Kallman co-founded the Company. She has been Vice
President-Sales since 1985. From 1982 to 1985, she worked for the Boston
Consulting Group, Boston, Massachusetts, as an administrative assistant.
Alfred W. Rossow, Jr., 65, Mr. Rossow is the Executive Vice President and Chief
Financial Officer. He joined the Company in late 1989 as both Chief Operating
Officer and Chief Financial Officer. Related prior positions in the beverage
industry include Vice President-Marketing and Vice President-Sales at Pepsi-Cola
Company from 1971 to 1974, Chief Executive Officer of the predecessor company to
A&W Beverages, Inc. from 1975 to 1980 and consultant to soft drinks and bottled
water companies from 1980 to 1989.
Martin Roper, 35, Mr. Roper is Chief Operating Officer. He has served in his
current position since April of 1997. He joined the Company in September 1994 as
Vice President-Operations. Prior to that he worked for Steel Works Inc., a
manufacture of store fixture equipment, of which he was President of the MEG
Division. From July 1990 to October 1992, Mr. Roper was Executive Vice President
of Blocksom & Co., a processor of natural fibers. Prior to July, he was an
associate consultant with the Boston Consulting Group in London.
John Chappell, 40, Mr. Chappell is Vice President-Brand Development. He joined
the Company in 1994 after nine years at Labatt's USA where he was Director of
Brand Management. From 1983 to 1985 he worked for PepsiCo in brand management.
David Grinnell, 40, Mr. Grinnell is Manager of Brewing Operations. He joined
the Company in 1988 and has served in such capacity since. Prior to joining the
Company, Mr. Grinnell held various positions with New Amsterdam Brewing Co.
Susan Stanley, 49, Ms. Stanley is Vice President-Human Resources. She joined
the Company in February 1996. Prior to joining the Company, she worked for CSC
Index as Managing Associate for three years. From 1991 to 1993 she was the
Director of Organization & Employee Development for Colgate-Palmolive. Prior to
that she worked for Digital Equipment Company as Senior Organizational
Development Manager.
Jeffrey D. White, 40, Mr. White is Vice-President-Operations. He has served in
his current position since April of 1997. Prior to that he was Director of
Operations from 1994 to 1997, Operations Manager from 1991 to 1994 and was
originally hired as Distribution Manager where he served from 1989 to 1991. He
worked for Anheuser-Busch from 1988 to 1989 as a Packaging Supervisor and Prior
to that for New Amsterdam Brewing Company as Operations Manager.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class A Common Stock is listed for trading on the New York Stock
Exchange. The Company's NYSE symbol is SAM. For the fiscal periods indicated,
the high and low sales price for the Class A Common Stock of the Boston Beer
Company, Inc. as reported on the New York Stock Exchange-Composite Transaction
Reporting System were as follows:
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter $10.8750 $ 8.0000
Second Quarter $10.6250 $ 8.1250
Third Quarter $10.0000 $ 8.2500
Fourth Quarter $11.0000 $ 7.8125
Fiscal 1996 High Low
- ----------- ---- ---
First Quarter $24.7500 $18.3750
Second Quarter $24.0000 $18.2500
Third Quarter $23.7500 $19.0000
Fourth Quarter $20.3750 $10.0000
There were 18,442 holders of record of the Company's Class A Common Stock as of
March 13, 1998. Included in the number of stockholders of record are
stockholders who hold shares in "nominee" or "street" name. The closing price
per share of the Company's Class A Common Stock as of March 13, 1998, as
reported under the New York Stock Exchange-Composite Transaction Reporting
System, was $9.375.
The Company's Class B Common Stock is not listed for trading. However, each
share of Class B Common Stock is convertible, at any time, at the option of the
holder thereof, into one share of Class A Common Stock.
As of March 13, 1998, there was one holder of record of the Company's Class B
Common Stock: C. James Koch
The holders of the Class A and Class B Common Stock are entitled to dividends,
on a share-for-share basis, only when and if declared by the Board of Directors
of the Company out of funds legally available for payment thereof. The Company
does not anticipate paying dividends on the Class A or Class B Common Stock in
the foreseeable future. It should be further noted that under the terms of the
Revolving Credit Agreement, the Company is prohibited from paying dividends.
12
Item 6. Selected Financial Data
THE BOSTON BEER COMPANY, INC.
SELECTED FINANCIAL DATA
Year Ended
---------------------------------------------------------
Dec. 27, Dec. 28, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1994 1993
---------------- -------- --------- -------- ---------
(in thousands, except per share, per barrel and employee data)
Income Statement Data:
Sales $209,490 $213,879 $169,362 $128,077 $85,758
Less excise taxes 25,703 22,763 18,049 13,244 8,607
--------------------------------------------------------
Net sales 183,787 191,116 151,313 114,833 77,151
Cost of Sales 89,998 95,786 73,847 52,851 35,481
--------------------------------------------------------
Gross Profit 93,789 95,330 77,466 61,982 41,670
Advertising, promotional, and
selling expenses 69,537 70,131 60,461 46,503 32,669
General and administrative 11,666 12,042 7,585 6,593 4,105
--------------------------------------------------------
Total operating expenses 81,203 82,173 68,046 53,096 36,774
--------------------------------------------------------
Operating income 12,586 13,157 9,420 8,886 4,896
Other income (expense), net 695 1,714 959 199 (2)
--------------------------------------------------------
Income before income taxes 13,281 14,871 10,379 9,085 4,894
Provision (benefit) for income taxes (1) 5,723 6,486 (2,195) - -
--------------------------------------------------------
Net income $ 7,558 $ 8,385 $ 12,574 $ 9,085 $ 4,894
========================================================
Income before income taxes $ - $ - $ 10,379 $ 9,085 $ 4,894
Pro forma income taxes (unaudited) (2) - - 4,483 3,765 2,040
--------------------------------------------------------
Pro forma net income (unaudited) (2) $ - $ - $ 5,896 $ 5,320 $ 2,854
========================================================
Earnings per share - basic $0.37 $0.42 - - -
Earnings per share - diluted $0.37 $0.41 - - -
Pro forma earnings per share - basic (unaudited) (2) - - $0.35 $0.32 -
Pro forma earnings per share - diluted (unaudited) (2) - - $0.33 $0.29 -
Weighted average shares outstanding - basic (3) 20,324 19,970 16,991 16,642 -
Weighted average shares outstanding - diluted (3) 20,490 20,352 17,906 18,128 -
Statistical Data:
Barrels sold 1,352 1,213 961 714 475
Net sales per barrel (4) $ 136 $ 158 $ 158 $ 161 $ 162
Employees (4) 335 253 196 138 110
Net sales per employee (4) $ 549 $ 755 $ 772 $ 832 $ 701
Balance Sheet Data at period end:
Working capital $ 50,550 $ 47,769 $ 45,266 $ 3,996 $ 8,173
Total assets $105,399 $ 97,115 $ 76,690 $ 31,776 $24,054
Total long term debt $ 10,000 $ 1,800 $ 1,875 $ 1,950 $ 2,000
Total partners'/stockholders' equity $ 71,284 $ 64,831 $ 54,798 $ 6,600 $ 8,854
Dividends - - - - -
(1) In 1995, the Company recorded a one-time tax benefit of $1,960,000 upon
change in tax status of the entity, and a tax benefit of $235,000 for the
period November 21, 1995 to December 31, 1995.
(2) Reflects pro forma provisions for income taxes using statutory federal and
state corporate income tax rates that would have been applied had the
Company been required to file income tax returns during the indicated
period.
See Note B of notes to the consolidated financial statements.
(3) Reflects weighted average number of common and common equivalent shares of
the Class A and Class B Common Stock assumed to be outstanding during the
respective periods. For the years ended December 31, 1995 and December 31,
1994, shares reflect pro forma weighted average numbers. See Note B of
notes to the consolidated financial statements.
(4) On March 1, 1997, the Company acquired the equipment and other brewery-
related property of a brewery in Cincinnati, Ohio.
(See overview on Page 14)
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Effective in fiscal 1996, the Company changed its fiscal year to end on the last
Saturday in December. The impact on 1997 and 1996 of three and two fewer days of
operations, respectively, was not material.
The Company prices its beers at a premium compared to domestic mass-produced
beers but at a level consistent with others in the Better Beer category. The
Company believes that this pricing is appropriate given the quality and
reputation of its core products. The Company expects that its pricing may become
subject to change as sales volume and competition increase; however, such
expectations have not been realized in a material way.
The Company's gross profit may be affected by the Company's product mix,
packaging and brewing location. Seasonal beers tend to be more expensive to
produce and the additional expenses may not be fully offset by increased
pricing. Increases in sales of seasonal beers, therefore, may reduce the
Company's gross profit per barrel in certain quarters. The Company sells its
products in bottles and kegs. The ratio of kegs to cases has increased in its
"core business" (excluding sales of the Cincinnati Brewery to others). A shift
toward a higher proportion of keg sales versus bottle sales may not have a
negative impact on profit due to the fact that while kegs generate lower revenue
per barrel, there is generally a corresponding reduction in the cost of
producing keg products. However, it does reduce the revenue realized per barrel.
An increase in sales of the 12 pack package in 1997 has also reduced the revenue
realized per case without a corresponding reduction in cost of goods sold.
The financial statements of the Company for the periods prior to the
Recapitalization do not include a provision for income taxes. Prior to the
Recapitalization, the Company operated solely as Boston Beer Company Limited
Partnership. As a partnership, the income of the Company was included in the
income tax returns of the Partnership's partners. For information purposes, the
statements of income include a pro forma income tax provision on taxable income
for financial statement purposes using the effective federal and state rates
that would have resulted if the Partnership had filed corporate tax returns
during those periods. The Company had historically distributed between 40% and
50% of pre-tax income to its partners for the purpose of funding their tax
obligations. Tax payments by the Company following the Recapitalization,
therefore, have not caused a material change to the Company's cash flow or
liquidity.
Effective March 1, 1997, the Company acquired all of the equipment and other
brewery related personal property of an independent brewing company located in
Cincinnati, Ohio. The Cincinnati Brewery is currently owned and managed by the
Samuel Adams Brewery Company, Ltd., a wholly owned affiliate of the Company. The
results of operations of the Samuel Adams Brewery Company, Ltd., since the date
of acquisition, are included in the accompanying consolidated financial
statements. Primarily because the sales revenue per barrel sold by the
Cincinnati Brewery to outsiders is much lower than the comparable revenue of the
"core" business, net sales per barrel and net sales per employee are lower in
fiscal 1997 than in fiscal 1996.
14
Quarterly Results
The Company has historically experienced, and expects to continue experiencing
quarterly fluctuations in its sales, operating income and net income. The
Company's sales also historically tend to be lower in the first quarter of each
year. Sales tend to increase in the third and fourth quarters, while decreasing
in the month of December. However, over the last two years, the second quarter
has been the strongest quarter for sales. The Company has also historically
expended less on advertising, promotion, and selling expenses in the first
quarter.
Quarterly sales and quarterly spending on advertising, promotion, and selling
expenses are shown in the following table which sets forth certain unaudited
quarterly results of operations for each of the eight quarters ended December
27, 1997. In management's opinion, this unaudited information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
quarters.
The following is a summary of selected unaudited quarterly financial data:
Quarters
Ended
-----------------------------------------------------------------------------------------
Dec. 27, Sept. 27, June 28, March 29, Dec. 28, Sept. 28, June 29, March 30,
1997 1997 1997 1997 1996 1996 1996 1996
------------ ---------- -------- --------- -------- --------- -------- ---------
Barrels Sold 327 357 387 281 301 294 343 275
Sales $49,869 $55,664 $57,158 $46,799 $53,422 $51,598 $60,583 $48,276
Less excise taxes 6,392 7,047 7,320 4,944 5,618 5,486 6,512 5,147
-----------------------------------------------------------------------------------------
Net sales 43,477 48,617 49,838 41,855 47,804 46,112 54,071 43,129
Cost of sales 21,420 22,000 24,671 21,907 23,955 22,901 27,065 21,865
-----------------------------------------------------------------------------------------
Gross profit 22,057 26,617 25,167 19,948 23,849 23,211 27,006 21,264
Advertising, promotional,
and selling expenses 17,735 17,415 19,829 14,558 18,644 17,118 20,340 14,029
General and administrative
expenses 2,449 3,190 3,097 2,930 3,790 2,402 2,867 2,983
-----------------------------------------------------------------------------------------
Total operating expenses 20,184 20,605 22,926 17,488 22,434 19,520 23,207 17,012
-----------------------------------------------------------------------------------------
Operating income 1,873 6,012 2,241 2,460 1,415 3,691 3,799 4,252
Other income
(expenses), net 284 (243) 304 350 473 437 370 434
-----------------------------------------------------------------------------------------
Income before income taxes 2,157 5,769 2,545 2,810 1,888 4,128 4,169 4,686
Provision for income taxes 862 2,521 1,110 1,230 800 1,832 1,808 2,046
-----------------------------------------------------------------------------------------
Net income $ 1,295 $ 3,248 $ 1,435 $ 1,580 $ 1,088 $ 2,296 $ 2,361 $ 2,640
========================================================================================
Earnings per share - basic $ 0.06 $ 0.16 $ 0.07 $ 0.08 $ 0.05 $ 0.12 $ 0.12 $ 0.13
Earnings per share - diluted $ 0.06 $ 0.16 $ 0.07 $ 0.08 $ 0.05 $ 0.11 $ 0.12 $ 0.13
Weighted average shares - basic 20,445 20,425 20,325 20,099 20,069 20,051 19,899 19,861
Weighted average shares - diluted 20,574 20,557 20,475 20,356 20,296 20,427 20,320 20,366
15
Period to Period Comparison of Results
The following table sets forth certain items included in the Company's
consolidated statements of income as a percentage of net sales:
Percentage of Net Sales
-----------------------
Years Ended
-----------
12/27/97 12/28/96 12/31/95
-------- -------- --------
Gross Sales 114.0% 111.9% 111.9%
Less Excise Taxes 14.0% 11.9% 11.9%
-------- -------- --------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 49.0% 50.1% 48.8%
-------- -------- --------
Gross Profit 51.0% 49.9% 51.2%
Advertising, promotional, and selling
expense 37.8% 36.7% 40.0%
General and Administrative expenses 6.3% 6.3% 5.0%
-------- -------- --------
Total operating expenses 44.2% 43.0% 45.0%
-------- -------- --------
Operating income 6.8% 6.9% 6.2%
Income before income taxes 7.2% 7.8% 8.3%
-------- -------- --------
Net income 4.1% 4.4% 3.9% (1)
-------- -------- --------
(1) Pro forma unaudited see Note B.
Years Ended December 27, 1997 and December 28, 1996.
Sales. Volume increased by 11.5% to 1,352,000 barrels in 1997 from 1,213,000
barrels in 1996. This increase in 1997, was due to the inclusion of 184,000
barrels of non-Company products (products which do not carry the Company's
trademarks) produced and sold by the Cincinnati Brewery, beginning March 1,
1997. The Company's core brands sold 3.7% fewer barrels in 1997 than in 1996;
however sales of Samuel Adams Boston Lager(R) and Seasonals, which make up 73%
of the Company's core sales continued to increase. Despite this, net sales
decreased by 4% to $183,787,000 in 1997 from $191,116,000 in 1996 (for the core
business sales decreased to $181,669,000 in 1997), as sales of products produced
by the Cincinnati Brewery under contract to third parties are made at prices
much lower than those of other Company products. Net sales price per barrel
decreased $21.62 due primarily to sales of non-company products produced by the
Cincinnati Brewery.
Gross Profit. Gross profit decreased to $93,789,000 in 1997 from $95,330,000
in 1996. Cost of sales decreased $12.40 per barrel to 49.0% of net sales in 1997
from 50.1% of net sales in 1996. This decrease was due principally to the
following: a decrease in raw material costs, reduced packaging costs (due to a
shift in the core business package mix towards kegs, resulting in decreased
packaging material costs), lower packaging obsolescence expense and lower
freight in and warehousing costs, offset by an increase in depreciation
(principally on kegs & the Cincinnati Brewery assets) and a reduction of savings
from re-used glass.
Advertising, Promotional, and Selling. Advertising, promotional, and selling
expenses decreased by 0.8% to $69,537,000 in 1997 from $70,131,000 in 1996. The
per barrel expense decreased by $6.39 to $51.43 in 1997 from $57.82 in 1996
primarily as a result of the additional non-promoted barrels from the Cincinnati
Brewery (for the core business expenses were $59.35 per bbl in 1997). As a
percentage of net sales, advertising, promotional, and selling expenses
increased to 37.8% in 1997 from 36.7% in 1996. The 0.8% decrease in expenditures
reflected a change in marketing mix with increased emphasis on selling expenses.
16
General and Administrative. General and administrative expenses decreased by
3.1% to $11,666,000 in 1997 from $12,042,000 in 1996. This net decrease was
primarily caused by a $2,449,000 reduction in bad debt expense. This was
partially offset by the inclusion of G & A expense of the Cincinnati Brewery, as
well as increases in personnel, salaries and related employee benefits.
Operating Income. Operating income decreased by 4.3% to $12,586,000 in 1997
from $13,157,000 in 1996. This decrease was due primarily to the inclusion of
the Cincinnati Brewery which recorded a loss in 1997. This loss was partially
offset by the savings in G & A expense and Advertising, Promotional and Selling
expenses as discussed above.
Other Income, Net. Other income, net, decreased by 59.5% to $695,000 in 1997
from $1,714,000 in 1996. This decrease of $1,019,000 is primarily due to an
increase in interest expense due to borrowings against the revolving line of
credit and our long term note and a charge for the repurchase of an overseas
distribution right in Western Europe.
Net Income. Net income decreased by 9.9% to $7,558,000 in 1997 from $8,385,000
in 1996. The decrease is due to a reduction in operating income of $571,000 and
other income of $1,019,000 as discussed above. This decrease is offset by a
reduction in income tax expense of 11.8% in 1997 to $5,723,000 from $6,486,000
in 1996.
Years Ended December 28, 1996 and December 31, 1995.
Sales. Volume increased by 26.2% to 1,213,000 in 1996 from 961,000 barrels in
1995. Net sales increased by 26.3% to $191,116,000 in 1996 from $151,313,000 in
1995. Sales volume reflected continued growth in Samuel Adams Boston Lager(R),
increases in the volume of seasonal beers and Oregon Original(TM) beers, and the
introduction of Golden Pilsner and the Longshot(TM) line of beers. The average
net sales price per barrel increased $.10 due primarily to an increase in
selling prices offset by increases in quality assurance and in customer
discounts.
Gross Profit. Gross profit increased by 23.1% to $95,330,000 in 1996 from
$77,466,000 in 1995. Cost of sales per barrel increased to 50.1% of net sales in
1996 from 48.8% of net sales in 1995. This increase was due principally to
increased obsolescence expense (consisting primarily of a write down of re-used
glass and work-in-process), higher depreciation (principally on kegs) and a
reduction in re-used glass savings, offset only partially by a net decrease in
raw material cost and packaging costs.
Advertising, Promotional, and Selling. Advertising, promotional, and selling
expenses increased by 16.0% to $70,131,000 in 1996 from $60,461,000 in 1995. The
per barrel expense actually decreased by $5.09 to $57.82 in 1996 from $62.91 in
1995. As a percentage of net sales, advertising, promotional, and selling
expenses decreased to 36.7% in 1996 from 40.0% in 1995. The aggregate dollar
increase in advertising, promotional, and selling expenses reflected increases
in purchases of point of sales materials, advertising, and promotional expenses,
freight, and salaries and related employee benefits. These expenses include
expenditures for advertising, promotions, and selling expenses for new product
introductions not related to the Samuel Adams(R) product line.
General and Administrative. General and administrative expenses increased by
58.8% to $12,042,000 in 1996 from $7,585,000 in 1995. This increase of
$4,457,000 was primarily caused by an increase of $1,722,000 in bad debt
expense, which are both customer specific and general in nature, and increases
in personnel and salaries and related employee benefits, additional leased space
at the executive office, and additional costs related to the Company becoming a
public entity.
Other Income, Net. Other income, net, increased by 78.7% to $1,714,000 in 1996
from $959,000 in 1995. This increase of $755,000 reflects $1,480,000 increase in
interest income on the proceeds of the November, 1995 stock offering, offset by
the $807,000 one-time gain on the sale of distribution rights sold in 1995.
Interest expense remained relatively stable from 1995 to 1996. It should be
noted that the interest income earned during 1995 on the proceeds from the stock
offering in November, 1995 reflects a period of approximately one and one half
months versus an entire year during 1996.
Net Income. Net income decreased by 33.3% to $8,385,000 in 1996 from
$12,574,000 in 1995. The decrease is due to an income tax expense of $6,486,000
in 1996 versus an income tax benefit of $2,195,000 in 1995. This decrease is
offset by an increase in other income of $755,000 and an increase in operating
income of $3,737,000 as discussed above.
Pro Forma Net Income. Net income increased by 42.2% to $8,385,000 in 1996 from
a pro forma net income of $5,896,000 in 1995. The increase in net income is
comprised of a net increase in other income of $755,000 and a net increase in
operating income of $3,737,000, as discussed above. This increase is somewhat
offset by a $2,003,000 increase in state and federal income taxes (reflecting
the higher graduated tax brackets applicable to the higher income before tax).
17
Liquidity and Capital Resources
The Company's financial condition continued to be strong in 1997 due primarily
to the unspent net proceeds raised by its initial public offering. Effective on
March 21, 1997, the Company negotiated an additional $1,000,000 on the existing
$14,000,000 revolving line of credit, and secured an additional revolving line
of credit of $30,000,000 which converts to a term loan on March 31, 1999. With a
substantial amount of highly liquid assets and working capital of $50,550,000 at
December 27, 1997, capital resources in conjunction with existing lines of
credit should be sufficient to meet the Company's operating, capital, and debt
service requirements over the next few years.
As of December 27, 1997, net borrowings were $10,000,000. The Company repaid the
remaining $1,875,000 owed under the MIFA loan on July 15, 1997. The Company
could invest as much as $25,000,000 in capital expenditures in 1998 to upgrade
packaging and brewing equipment in both owned and contracted breweries and to
secure its sources of supply. At this level of expenditure the Company's
$30,000,000 revolving line of credit could be fully utilized during the year.
Operating activities provided cash of $6,983,000 in 1997 compared to $15,763,000
in 1996. The primary cause of this reduction was due to a substantial decrease
in accounts payable, principally due to the timing of the receipt of hops at
year end 1996, and an increase in inventory versus last year. Cash used in
investment activities increased by $7,730,000, primarily due to increased
capital spending. Cash provided by financing activities primarily reflects the
$10,000,000 borrowed by the Company on the $30,000,000 revolver.
Assuming there is no significant change in the Company's business, the Company
believes that the existing cash and short term investments as well as cash flows
from operations and the existing lines of credit will be sufficient to meet its
working capital requirements for at least the next twelve months.
Certain Factors Affecting Future Operating Results
Statements made or incorporated in this Form 10-K include a number of forward-
looking statements within the meaning of Section 27A of the Securities Act of
1993 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements include, without limitation, statements containing the words
"anticipates", "believes", "expects", "intends", "future" and words of similar
import which express management's belief, expectations, or intentions regarding
the Company's future performance. The Company's actual results could differ
materially from those set forth in the forward-looking statements.
The Company may experience significant fluctuations in future operating results,
which may be caused by many factors, including, but not limited to (1) further
slowing of the growth rate of the craft brewing segment; (2) share-of-market
erosion due to increased competition; (3) increased promotional expenditures
versus historical spending and versus the 1997 operating plan; (4) higher-than-
planned costs of operating the Samuel Adams brewery in Cincinnati; (5) an
unexpected increase in raw material or packaging costs which cannot be passed
along through increased prices; (6) slower-than-planned acceptance of
HardCore(R) cider by the trade and consumer; and (7) inability of Oregon
Original(TM) beers and other Samuel Adams(R) styles to maintain historic growth
rates.
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing both the
internal readiness of its systems as well the compliance of its vendors for the
handling of the year 2000. The Company expects to implement successfully the
systems and programming changes necessary to address year 2000 issues, and does
not believe that the cost of such actions will have a material effect on the
Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
18
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Accountants....................................... 20
Consolidated Financial Statements of The Boston Beer Company, Inc.
Consolidated Balance Sheets at December 27, 1997 and
December 28, 1996.................................................. 21
Consolidated Statements of Income for the Years Ended
December 27, 1997, December 28, 1996, and December 31, 1995........ 22
Consolidated Statements of Stockholders' Equity
For the Years Ended December 27, 1997, December 28, 1996, and
December 31, 1995.................................................. 23
Consolidated Statements of Cash Flows for the Years Ended
December 27, 1997, December 28, 1996, and December 31, 1995........ 24
Notes to the Consolidated Financial Statements........................ 25 - 35
Financial Statement Schedules for the years ended December 27, 1997, December
28, 1996, and December 31,1995
All schedules are omitted because the required information is shown in the
financial statements or the notes thereto.
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Boston Beer Company, Inc.
We have audited the accompanying consolidated balance sheets of The Boston Beer
Company, Inc. (formerly Boston Beer Company Limited Partnership) as of December
27, 1997 and December 28, 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three fiscal years
in the period ended December 27, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Boston Beer
Company, Inc. as of December 27, 1997 and December 28, 1996, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 27, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1998
20
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 27, December 28,
1997 1996
---- ----
ASSETS
Current Assets:
Cash & cash equivalents $ 13 $ 5,060
Short term investments 35,787 35,926
Accounts receivable 17,636 18,109
Allowance for doubtful accounts (1,153) (1,930)
Inventories 13,675 13,002
Prepaid expenses 4,344 1,236
Deferred income taxes 2,266 2,968
Other current assets 1,308 3,882
--------------- ---------------
Total current assets 73,876 78,253
Restricted investments - 611
Equipment and leasehold improvements, at cost 39,652 21,043
Accumulated depreciation (10,871) (6,412)
Deferred income taxes - 151
Other assets 2,742 3,469
--------------- ---------------
Total assets $105,399 $97,115
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,556 $17,783
Accrued expenses 13,770 12,626
Current maturities of long-term debt - 75
--------------- ---------------
Total current liabilities 23,326 30,484
Long-term debt, less current maturities 10,000 1,800
Long-term deferred taxes 789 -
Commitments and Contingencies (Note I) - -
Stockholders' Equity:
Class A Common Stock, $.01 par value;
20,300,000 shares authorized; 16,337,744, and 15,972,058
issued and outstanding as of December 27, 1997 and
December 28, 1996, respectively 163 160
Class B Common Stock, $.01 par value;
4,200,000 shares authorized; 4,107,355
issued and outstanding as of December 27, 1997
and December 28, 1996, respectively 41 41
Additional paid-in-capital 56,445 55,391
Unearned compensation (423) (363)
Unrealized loss on investments in marketable securities (2,223) (442)
Unrealized gain/(loss) on forward exchange contracts (290) 31
Retained earnings 17,571 10,013
--------------- ---------------
Total stockholders' equity 71,284 64,831
--------------- ---------------
Total liabilities and stockholders' equity $105,399 $97,115
=============== ===============
The accompanying notes are an integral part of the financial statements.
21
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
------------------------------------------------
December 27, December 28, December 31,
1997 1996 1995
---- ---- ----
Sales $209,490 $213,879 $169,362
Less excise taxes 25,703 22,763 18,049
-------------- ------------ ------------
Net sales 183,787 191,116 151,313
Cost of sales 89,998 95,786 73,847
-------------- ------------ ------------
Gross profit 93,789 95,330 77,466
Operating expenses:
Advertising, promotional and selling expenses 69,537 70,131 60,461
General and administrative expenses 11,666 12,042 7,585
-------------- ------------ ------------
Total operating expenses 81,203 82,173 68,046
-------------- ------------ ------------
Operating income 12,586 13,157 9,420
Other income (expense):
Interest income 1,772 1,932 452
Interest expense (759) (236) (250)
Other income, net (318) 18 757
-------------- ------------ ------------
Total other income 695 1,714 959
Income before income taxes 13,281 14,871 10,379
Provision (benefit) for income taxes 5,723 6,486 (2,195)
-------------- ------------ ------------
Net income $ 7,558 $ 8,385 $ 12,574
============== ============ ============
Pro forma data (unaudited) (Note B):
Income before pro forma income taxes 10,379
Pro forma income tax expense 4,483
------------
Pro forma net income $ 5,896
============
Net income per common share - basic $ 0.37 $ 0.42 $ 0.35 (1)
============== ============ ============
Net income per common share - diluted $ 0.37 $ 0.41 $ 0.33 (1)
============== ============ ============
Weighted average number of common shares - basic 20,324 19,970 16,991 (1)
============== ============ ============
Weighted average number of common shares - diluted 20,490 20,352 17,906 (1)
============== ============ ============
(1) Pro forma, (unaudited) (see Note B).
The accompanying notes are an integral part of the financial statements.
22
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 27, 1997,
December 28, 1996, and December 31, 1995
(in thousands)
Total Class A Class B
General Limited Unearned Partners' Common Common
Partner Partner Compensation Equity Stock Stock
------- ------- ------------ --------- ------ ------
Balance December 31, 1994 232 6,368 6,600
Net income - January 1 through 2,694 8,252 10,946
November 20, 1995 allocated
to the Partnership,
thereafter to the Company
Partner distributions (4,712) (14,343) (19,055)
Conversion of incentive/ 4,763 (618) 4,145
investment stock plans
to stock option/purchase plans
Stock options issued 141 (141) -
Amortization of unearned 250 250
compensation expense
Contributed capital upon 1,786 (5,181) 509 (2,886) $ 125 $ 41
recapitalization
Common stock issued 31
-------------------------------------------------------------------
Balance December 31, 1995 - - - - 156 41
Net income
Unearned compensation
on stock options granted
Forfeiture of unvested
stock options
Stock options exercised 4
Tax benefit related to exercise
of employee stock options
Proceeds from sale under stock
purchase plan
Repurchase of shares under employee
investment and incentive share plans
Amortization of unearned
compensation expense
Unrealized loss on short
term investments
Unrealized gain on forward exchange
contract
-------------------------------------------------------------------
Balance December 28, 1996 - - - - 160 41
Net income
Unearned compensation
on stock options granted
Stock options exercised 3
Amortization of unearned
compensation expense
Unrealized loss on short
term investments
Unrealized loss on forward exchange
contract
-------------------------------------------------------------------
Balance December 27, 1997 $ - $ - $ - $ - $ 163 $ 41
Additional Total
Paid in Unearned Unrealized Retained Stockholders
Capital Compensation Gains/Losses Earnings Equity
---------- ------------ ------------ -------- ------------
Balance December 31, 1994
Net income - January 1 through $ 1,628 1,628
November 20, 1995 allocated
to the Partnership,
thereafter to the Company
Partner distributions
Conversion of incentive/
investment stock plans
to stock option/purchase plans
Stock options issued
Amortization of unearned
compensation expense
Contributed capital upon 3,822 $ (509) 3,479
recapitalization
Common stock issued 49,660 49,691
-------------------------------------------------------------------------------
Balance December 31, 1995 53,482 (509) 1,628 54,798
Net income 8,385 8,385
Unearned compensation
on stock options granted 157 (157) -
Forfeiture of unvested
stock options (144) 144 -
Stock options exercised 556 560
Tax benefit related to exercise
of employee stock options 1,376 1,376
Proceeds from sale under stock
purchase plan 40 40
Repurchase of shares under employee
investment and incentive share plans (103) (103)
Amortization of unearned
compensation expense 27 159 186
Unrealized loss on short
term investments (442) (442)
Unrealized gain on forward exchange
contract 31 31
-------------------------------------------------------------------------------
Balance December 28, 1996 55,391 (363) (411) 10,013 64,831
Net income 7,558 7,558
Unearned compensation
on stock options granted 430 (430) -
Stock options exercised 574 577
Amortization of unearned
compensation expense 50 370 420
Unrealized loss on short
term investments (1,781) (1,781)
Unrealized loss on forward exchange
contract (321) (321)
-------------------------------------------------------------------------------
Balance December 27, 1997 $56,445 $ (423) $ (2,513) $ 17,751 $ 71,284
The accompanying notes are an integral part of the financial statements.
Page 23
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended
---------------------------------------------------
December 27, December 28, December 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 7,558 $ 8,385 $ 12,574 (1)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,501 3,030 1,565
(Gain) loss on disposal of fixed asset (23) (4) 38
Bad debt expense (recovery) (617) 1,832 (557)
Stock option compensation expense 420 186 250
Changes in assets & liabilities:
Accounts receivable 313 (1,921) (5,473)
Inventory 287 (3,722) (1,525)
Prepaid expenses (2,995) (799) 64
Other current assets 2,253 (1,993) (753)
Deferred taxes 1,642 (331) (2,195)
Other assets 727 (743) (2,459)
Accounts payable (8,227) 7,990 (666)
Accrued expenses 1,144 3,853 1,577
------------- ------------- -------------
Total adjustments (575) 7,378 (10,134)
------------- ------------- -------------
Net cash provided by operating activities 6,983 15,763 2,440
------------- ------------- -------------
Cash flows for investing activities:
Acquisition of certain assets of the Schoenling Brewery Company (4,438) - -
Purchases of fixed assets (15,286) (11,359) (4,268)
Proceeds on disposal of fixed assets 23 4 45
Net (purchases) maturities of government securities (1,642) 2,648 (27,027)
Purchase of marketable securities - (4,286) -
Purchases of restricted investments (625) (1,225) (612)
Maturities of restricted investments 1,236 1,216 615
------------- ------------- -------------
Net cash used in investing activities (20,732) (13,002) (31,247)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 49,691
Proceeds from exercise of stock option plans 577 560 -
Proceeds from sale under stock purchase plan - 40 -
Repurchase of shares under employee investment and
incentive share plans - (103) -
Principal payments on long-term debt (1,875) (75) (50)
Net Borrowings under Term Loan 10,000 - -
Partners' distributions - - (19,055)
------------- ------------- -------------
Net cash provided by financing activities 8,702 422 30,586
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (5,047) 3,183 1,779
Cash and cash equivalents at beginning of period 5,060 1,877 98
------------- ------------- -------------
Cash and cash equivalents at end of period $ 13 $ 5,060 $ 1,877
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 687 $ 224 $ 252
Taxes paid $ 7,243 $ 5,992 -
============= ============= =============
(1) Net income for the fiscal year ended December 31, 1995 is before pro forma
income taxes. See Note B.
The accompanying notes are an integral part of the financial statements.
24
THE BOSTON BEER COMPANY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
The Boston Beer Company, Inc. (the "Company"), is engaged in the business of
brewing and selling beer, ale and cider products throughout the United States
and in select international markets. On November 20, 1995, in connection with
the initial public offering of the Company's stock effected that date, the non-
corporate limited partners transferred their respective partnership interests to
the Company and the owners of the general partner and corporate limited partners
transferred their respective ownership interests in such entities to the
Company. In exchange, the transferors received an aggregate of 16,641,740 shares
of the Company's common stock on a pro rata basis, based on their then
respective percentage equity interests in the Partnership. The aforementioned
transactions are collectively referred to hereinafter as the "Recapitalization."
B. Summary of Significant Accounting Policies:
Fiscal Year
Effective in fiscal 1996, the Company changed its fiscal year to end on the last
Saturday in December. The impact on the last two years of operations was not
material.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
subsidiaries, and the Partnership. All intercompany accounts and transactions
have been eliminated.
Revenue Recognition
Revenue is recognized when goods are shipped to customers.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and short-term, highly liquid
investments with original maturities of three months or less at the time of
purchase.
Short Term Investments and Restricted Investments
Short term investments consist primarily of marketable equity securities and
money market funds backed by U.S. Government securities. All short term
investments have been classified as available-for-sale and are reported at fair
value with unrealized gains and losses included in stockholders' equity. Fair
value is based on quoted market prices as of December 27, 1997.
Restricted investments consisted solely of the unexpended proceeds from the
$2,200,000 loan the Company took out in 1988 with the Massachusetts Industrial
Finance Authority ("MIFA"). The loan was paid in full in 1997.
Inventories
Inventories, which consist principally of hops, bottles, and packaging, are
stated at the lower of cost, determined on a first-in, first-out (FIFO) basis,
or market.
Risks & Uncertainties
The Better Beer segment is an extremely competitive environment and the Company
faces competition from many companies considerably larger and with more
resources than the Company. As the industry continues to consolidate the
historical growth rate of the Company may not be maintained and price pressures
may reduce the revenue the Company may earn. Packaging and raw material prices
may also increase and because of the competitive market place the Company may
not be able to pass these increases on. The continued supply of raw materials
could also be affected since they are mainly agricultural and supply may be
effected by many reasons.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affected the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
25
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Summary of Significant Accounting Policies (Continued):
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash, short-term investments, and
trade receivables. The Company places its temporary cash and short-term
investments with high credit quality financial institutions. The Company sells
primarily to independent beer and ale distributors across the United States.
Receivables arising from these sales are not collateralized; however, credit
risk is minimized as a result of the large and diverse nature of the Company's
customer base. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends, and other information.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Expenditures for
maintenance, repairs, and renewals are charged to expense; major improvements
are capitalized. Upon retirement or sale, the cost of the assets disposed of and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the determination of net income. Provision
for depreciation is computed on the straight-line method based upon the
estimated useful lives of the underlying assets as follows:
Kegs 3 to 5 years
Office equipment and furniture 3 to 5 years
Leasehold improvements 5 years, or the life of the lease,
whichever is shorter
Plant and equipment 10 to 20 years
Deposits
The Company recognizes a liability for estimated refundable deposits in kegs and
for unclaimed deposits on bottles which are subject to state regulations. Total
redemption's associated with reusable bottles during the years ended December
27, 1997, December 28, 1996, and December 31, 1995 were $2,284,000, $3,053,000,
and $1,441,000 respectively.
Fair Value of Financial Instruments
The carrying amount of the Company's long term debt, including current
maturities, approximates fair value because the interest rates on these
instruments change with market interest rates. The carrying amounts for accounts
receivable and accounts payable approximate their fair values due to the short
term maturity of these instruments.
Advertising and Sales Promotions
Advertising and sales promotional programs are charged to expense during the
period in which they are incurred. Total advertising and sales promotional
expense for the years ended December 27, 1997, December 28, 1996, and December
31, 1995, were $33,469,000, $35,730,000, and $35,039,000 respectively.
Purchase Commitments
The Company recognizes losses on hop purchase commitments when amounts from the
sale price of the related product are expected to be less than the cost of the
product. The Company has not historically experienced any losses related to hop
purchase commitments.
Forward Exchange
Unrealized gains and losses on contracts designated as hedges of existing
purchase commitments are recorded as exchange rates change and are recorded as a
component of Stockholders' Equity. Realized gains and losses are recognized when
the contracts are exercised.
The Company enters into foreign currency forward exchange contracts to protect
itself from adverse currency rate fluctuations on foreign currency commitments
entered into in the ordinary course of business. These commitments are for terms
of less than one year. The foreign currency forward exchange contracts are
executed with creditworthy banks and are denominated in German Marks, English
Pounds and French Francs. The gains and losses relating to these foreign
currency exchange contracts are deferred and included in the measurement of the
foreign currency transaction subject to the hedge.
26
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Summary of Significant Accounting Policies (Continued):
Income Taxes
The Company records income taxes under the asset and liability method whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
by applying enacted tax rates for the taxable years in which those differences
are expected to reverse.
Pro Forma Income Taxes (unaudited)
The financial statements of the Company for the periods prior to the
Recapitalization do not include a provision for income taxes because the taxable
income of the Company, up until the effective date of the Recapitalization, is
included in the income tax returns of the Partnership's partners and former
Subchapter S corporation's shareholder. The statements of income include a pro
forma income tax provision on taxable income for financial statement purposes
using an estimated effective federal and state income tax rate which would have
resulted if the Partnership and Subchapter S corporation had filed a corporate
income tax return during those periods.
Earnings Per Share
Earnings per share is based on the weighted average number of shares outstanding
during the period after consideration of the dilutive effect, if any, for stock
options. Statement of Financial Accounting Standards No. 128 "Earnings Per
Share", requires dual presentation of basic and diluted EPS. SFAS 128 has been
adopted in the Company's 1997 financial statements with comparable disclosures
for the prior years.
Pro Forma Earnings Per Share (unaudited)
Pro forma earnings per share is based on the weighted average number of common
and common equivalent shares outstanding during the period (assuming a
conversion of partnership units for the period prior to the Recapitalization),
and an additional 3,109,279 shares issued during November 1995 in connection
with the Company's initial public offering. In addition, pursuant to the rules
of the Securities and Exchange Commission, approximately 273,000 shares in 1995
have been included in the share calculation representing distributions in excess
of net income. The calculation includes 686,000 common equivalent shares for the
year ended December 31, 1995, using the treasury stock method.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for annual periods beginning
after December 15, 1997 and the Company will adopt its provisions in fiscal
1998. Reclassification for earlier periods is required for comparative purposes.
While this pronouncement will effect additional disclosure, the statement will
not have an impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the manner in which public
companies report information about their operating segments. SFAS No. 131, which
is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenue.
Management is currently evaluating the effects of this change on its reporting
of segment information. The Company will adopt SFAS No. 131 for its fiscal year
ending 1998.
Reclassifications
Beginning in 1996, certain expenses which were previously classified as general
and administrative expenses were reclassified as advertising, promotional, and
selling expenses. All financial information has been restated to conform with
the 1996 presentation. Certain other prior year amounts have also been
reclassified to conform with the current year's presentation.
27
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
C. Acquisition of certain assets of the Schoenling Brewery Company:
Effective March 1, 1997, the Company acquired all of the equipment and other
brewery related personal property of an independent brewing company located in
Cincinnati, Ohio at a purchase price of approximately $4,438,000, which
approximates the fair value of the assets purchased. The Company believes this
acquisition will complement the contract breweries currently utilized by giving
the Company greater flexibility for brewing production and adding to the
existing brewing capacity. The Cincinnati Brewery is currently managed by the
Samuel Adams Brewery Company, Ltd., a wholly owned affiliate of the Company. The
results of operations of the Samuel Adams Brewery Company, Ltd., since the date
of acquisition, are included in the accompanying consolidated financial
statements. The pro forma effect of this acquisition was immaterial.
D. Short Term Investments:
Short term investments consist of a marketable security having a cost of
$4,286,000 and a market value of $2,063,000 in 1997 and $3,844,000 in 1996,
which results in an unrealized loss of $2,223,000 in 1997 and $442,000 in 1996.
The Company also has investments in money market funds backed by U.S. Government
securities having a cost of $33,725,000 and $32,082,000 at December 27, 1997 and
December 28, 1996, respectively, which approximates fair value.
E. Inventories:
December 27, December 28,
------------ ------------
1997 1996
---- ----
(in thousands)
Raw material, principally hops $12,481 $12,677
Work in process 511 -
Finished goods 683 325
------- -------
$13,675 $13,002
======= =======
F. Equipment and Leasehold Improvements:
December 27, December 28,
------------ ------------
1997 1996
---- ----
(in thousands)
Kegs and equipment $32,929 $16,457
Office equipment and furniture 4,257 3,527
Leasehold improvements 2,466 1,059
------- -------
$39,652 $21,043
Less accumulated depreciation 10,871 6,412
------- -------
$28,781 $14,631
======= =======
The Company recorded depreciation expense related to these assets of $4,501,000,
$2,886,000, and $1,565,000 for the years ended December 27, 1997, December 28,
1996, and December 31, 1995, respectively.
G. Accrued Expenses:
December 27 December 28,
----------- ------------
1997 1996
---- ----
(in thousands)
Advertising $ 4,835 $ 4,019
Keg deposits 2,245 1,813
Employee wages and reimbursements 2,506 1,906
Point of sale related accruals 1,499 1,288
Other accrued liabilities 2,685 3,600
------- -------
$13,770 $12,626
======= =======
28
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Long-Term Debt and Line of Credit:
During 1988, the Company entered into a $2,200,000 loan with the Massachusetts
Industrial Finance Authority ("MIFA"). As of December 28, 1996, $1,875,000 was
outstanding. During 1997, the Company paid off the loan in full.
On March 21, 1997, the Company entered into a credit agreement to increase its
existing $14,000,000 line of credit to $15,000,000 ("the $15,000,000 line") and
to establish an additional $30,000,000 line of credit ("the $30,000,000 line").
On March 31, 1999, the $15,000,000 line expires and the balance outstanding
under the $30,000,000 line converts to a term note. Principal payments on the
term note are payable in twenty quarterly installments, with the final payment
due at maturity, December 31, 2003. Through March 31, 1999, interest is payable
either quarterly or upon expiration on terms of 30, 60 or 90 days at the Prime
Rate (8.50% and 8.25% at December 27, 1997 and December 28, 1996, respectively)
or the applicable Adjusted Libor Rate plus .50%, respectively. After March 31,
1999, interest on the term note is payable quarterly at either the Prime Rate or
the applicable Adjusted Libor Rate plus .75%.
As of December 27, 1997, $ 0 and $10,000,000 are outstanding under the
$15,000,000 and $30,000,000 lines, respectively. The Company must pay a
commitment fee of .15% per annum on the average daily unused portion of the
total $45,000,000 commitment. Additionally, the Company is obligated to meet
certain financial covenants, including the maintenance of specified levels of
tangible net worth and net income. As of December 28, 1996 the Company had no
borrowings outstanding under the line of credit.
I. Income Taxes:
Income Taxes
Effective with the Recapitalization described in Note A, the Company became
subject to federal and state income taxes. The historical income tax benefit
reflects the recording of a one-time tax benefit of $1,960,000 upon the change
in tax status of the entity as required by SFAS 109, and a tax benefit of
$235,000 for the period from November 21 to December 31, 1995. Significant
components of the Company's deferred tax assets and liabilities as of December
27, 1997 and December 28, 1996 are as follows:
(In thousands)
1997 1996
---------------------------------- --------------------------------
Current Long-Term Total Current Long-Term Total
Total
- -----
Deferred tax assets:
Incentive/investment unit and option plan $ 11 $ 892 $ 903 $ 11 $1,052 $1,063
Accrued expenses not currently deductible 1,160 - 1,160 943 - 943
Reserves 1,253 - 1,253 1,828 - 1,828
Deferred Compensation - 117 117 - 90 90
Other (94) 8 (86) 250 (2) 248
--------------------------------------------------------------------
Total deferred tax assets 2,330 1,017 3,347 3,032 1,140 4,172
Deferred tax liabilities:
Depreciation - (1,693) (1,693) - (814) (814)
Tax installment sale (64) (113) (177) (64) (175) (239)
--------------------------------------------------------------------
Net deferred tax assets $2,266 $ (789) $ 1,477 $2,968 $ 151 $3,119
=====================================================================
Based upon prior earnings history and expected future taxable income, the
Company does not believe that a valuation allowance is required for the net
deferred tax asset.
29
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Income Taxes: (Continued):
Significant components of the income tax provision (benefit) for income taxes
for the years ended December 27, 1997 and December 28, 1996 are as follows:
(In thousands)
1997 1996
-------- --------
Current:
Federal $3,096 $5,261
State 985 1,556
------- -------
Total Current 4,081 6,817
Deferred:
Federal 1,286 (251)
State 356 (80)
------- -------
Total deferred $1,642 $ (331)
------- -------
Total income tax expense (benefit) $5,723 $6,486
======= =======
1997 1996
-------- --------
Statutory rate 35.00% 35.00%
State income tax, net of federal benefit 6.57% 6.50%
Meals & Entertainment 2.62% 1.83%
Other -1.10% 0.27%
-------- --------
43.09% 43.60%
======== ========
J. Commitments and Contingencies:
Purchase Commitments
In the normal course of business, the Company has entered into various supply
agreements with brewing companies. These agreements are cancelable by the
Company and by the brewing companies with advanced written notice. Title to beer
products brewed under these arrangements remains with the brewing company until
shipped by it and accordingly, the liquid is not reflected as inventory by the
Company in the accompanying financial statements. The Company is required to
reimburse the supplier for all unused material and beer products on termination
of the agreements and under certain conditions to purchase excess materials. At
December 27, 1997, there was approximately $3,180,000 of material and beer
products in process at the brewing companies which had not yet been transferred
to the Company. Purchases under these agreements for the years ended December
27, 1997, December 28, 1996, and December 31, 1995 were approximately
$43,075,000, $57,766,000, and $41,199,000, respectively. The reduction of
purchases under the agreements are attributed to production being done at the
Samuel Adams Brewery Company.
The Company has entered into contracts for the supply of a portion of its hops
requirements. These purchase contracts, which expire at various dates through
2004, specify both the quantities and prices the Company is committed to. The
prices are denominated in German marks and English pound sterling. The amount of
the hop commitments outstanding at December 27, 1997 in U.S. dollars, is
$43,337,000. Purchases under these contracts for the years ended December 27,
1997, December 28, 1996, and December 31, 1995 were approximately $8,908,000,
$10,000,000, and $5,924,000 respectively. The performance of the dealers under
such contracts may be materially affected by factors such as adverse weather,
the imposition of export restrictions and changes in currency exchange rates
resulting in increased prices.
At December 27, 1997, the Company had outstanding purchase commitments of
approximately $9,300,000 principally related to capital expenditures and
advertising expenditures. There is a possibility the Company could expend
additional capital investments at the brewing locations in the approximate range
of $25,000,000 during 1998.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Commitments and Contingencies (Continued):
Lease Commitments
The Company has various operating lease agreements primarily involving real
estate. Terms of the leases include purchase options, renewals, and maintenance
costs, and vary by lease. These lease obligations expire at various dates
through 2009.
Minimum annual rental payments under these agreements are as follows:
(in thousands)
1998........................................ $ 791
1999........................................ 789
2000........................................ 785
2001........................................ 644
2002........................................ 220
Thereafter.................................. 1,182
------
$4,411
======
Rent expense for the years ended December 27, 1997, December 28, 1996, and
December 31, 1995 was approximately $760,000, $512,000, and $340,000
respectively.
Distribution
The Company's two largest distributors combined accounted for approximately 8%
of the Company's net sales.
License Agreement
The Company signed a contract in March, 1996, with a major beverage company with
respect to a transaction in which that company will license and sell a new craft
brew beer whose trademark and trade names are owned by the Company. The Company
has expensed approximately $805,000 and $1,435,000 during 1997 and 1996,
respectively, and does not expect to spend any additional money on this project.
The agreement also sets forth the circumstances in which the relationship can be
terminated and the terms on which rights to the product will revert to the
Company or may be reacquired by the Company, as well as the royalty payments
which are to be received beginning in 1998. These payments are not expected to
be material.
Litigation
In early 1996, Boston Brewing Company, Inc. ("Boston Brewing"), an affiliate of
both Boston Beer Company Limited Partnership and The Boston Beer Company, Inc.,
had an action filed against it in a court in England by one of its distributors.
The action was settled in 1997 and was not material.
In addition, the Company is subject to legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
K. Common Stock:
Initial Public Offering
On November 20, 1995, the Company completed an initial public offering and sold
an aggregate of 3,109,279 shares of Common Stock, of which 990,000 shares were
sold for $15.00 per share in a best efforts offering and 2,119,279 shares were
sold for $20.00 in an underwritten offering, resulting in net proceeds, after
deducting underwriting discounts and expenses, of $49,691,000. In addition, as
described in Note A, upon Recapitalization the owners of the general and
corporate limited partners transferred their respective ownership interests to
the Company. In exchange, the transferors received an aggregate of 16,641,740
shares of the Company's common stock on a pro rata basis based on their then
respective equity interest in the Partnership. The total number of shares of
Class A and Class B Common Stock outstanding after completion of the offering
was 19,751,019.
31
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Common Stock: (Continued):
Upon Recapitalization, the Company recognized no gain or loss upon receipt of
the units of the Partnership from individual partners, and no gain or loss upon
receipt of stock in the corporate partners from the stockholders of the
corporate partners in exchange for the Company's stock based upon an opinion
from the Company's legal counsel interpreting the Internal Revenue Code of 1986,
as amended (the "Code"), the regulations of the Treasury Department (the
"Regulations"), and judicial opinions interpreting the Code. The opinion is
qualified by detailed and material limitations set forth in the opinion
concerning, among other things, the possibility of Regulations being adopted
with a retroactive effect. Any new legislation, changes to and clarifications of
the administrative positions of the IRS, including by way of amendments to
existing Regulations or adoption of new Regulations, and subsequent judicial
decisions including any retroactive effects could have a material consequence to
the Company.
Stock Compensation Plan
The Company's Employee Equity Incentive Plan (the "Equity Plan") was amended
effective December 19, 1997. The equity plan was the successor to the
Partnership's 1995 Management Option Plan, which was, in turn, the successor to
a series of the Partnership's Incentive Share Plans. In connection with the
Recapitalization, the grants under the Partnership's Incentive Share Plans, as
adjusted for the one and one half conversion of partnerships units, became
grants to acquire Class A Common Stock. On October 20, 1997 and December 19,
1997, respectively, the Equity Plan was amended to delete the provision which
allowed management options to be granted at $.01 per share and to add an
additional 1,000,000 authorized shares to the Equity Plan.
The Plan permits the grant of discretionary options and investment shares. The
Plan is administered by the Board of Directors, based on recommendations
received from the Compensation Committee of the Board of Directors. The
Compensation Committee consists of non-employee directors.
The Committee may also grant to eligible employees discretionary options to
acquire shares of Class A Common Stock upon such terms and conditions, including
exercise price, as the Committee shall determine.
Information related to the options granted under the Equity Plan is as follows:
Weighted
Average
Option Exercise
Shares Price Price
---------- ------------- ----------
Outstanding at December 31, 1995 1,002,677 $.01 - 14.00 $ 4.40
Granted 403,729 $.01 - 25.56 $ 13.15
Canceled (10,749) $.01 - 20.00 $ 2.19
Exercised (264,530) $.01 - 20.00 $ 2.45
--------- ------------ --------
Outstanding at December 28, 1996 1,131,127 $.01 - 25.56 $ 8.00
Granted 267,857 $.01 - 9.53 $ 9.25
Canceled (61,314) $.01 - 25.56 $ 15.31
Exercised (369,958) $.01 - 2.00 $ 1.65
--------- ------------ --------
Outstanding at December 27, 1997 967,712 $.01 - 25.56 $ 10.32
As of December 27, 1997, 292,364 stock options were exercisable.
The Equity Plan also permits Company employees who have been with the Company
for at least one year to invest up to ten percent of their annual earnings in
Class A Common Stock ("Investment Shares"). The price at which Investment Shares
are issued to participating employees is at a discount from current market value
of from 0% to 40% based on the employee's tenure with the Company. These shares
vest ratably over a five year period. At December 27, 1997 and December 28,
1996, there were 23,766 and 66,249 investment shares issued and outstanding, of
which 11,340 and 55,269 shares were vested.
Prior to the Recapitalization, the Partnership had various other employee
investment unit plans in which eligible employees could purchase the economic
equivalent of partnership units at not less than 60% of the unit value. The
total expense recognized for the years ended December 31, 1995 and 1994,
approximated $20,000 representing all discount amortized over the related
vesting period.
32
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Common Stock: (Continued):
Upon Recapitalization, the investment units were replaced with 67,731 investment
shares. Effective with the issuance of the shares, approximately $411,000 of the
investment unit plan accrued liability recorded was reclassified as equity in
consideration of the stock issued.
The Company has reserved 1,085,812 and 235,594 shares of Class A Common Stock
for issuance pursuant to the Equity Plan at December 27, 1997 and December 28,
1996, respectively.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS is effective for periods beginning after December 15, 1995.
The Company adopted the disclosure provisions of SFAS 123 in 1996 and has
applied APB Opinion 25 and related Interpretations for its stock option plan.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 28, 1996 and December 31, 1995 would have been reduced
to the pro forma amounts indicated below:
(in thousands, except per share amounts)
1997 1996
------------------------ ----------------------------
Earnings Per Earnings Per
------------ ------------
Net Income Share Net Income Share
---------- ----- ------------ -----
As Reported - Basic $7,558 $0.37 $8,385 $0.42
As Reported - Diluted $7,558 $0.37 $8,385 $0.41
Pro forma - Basic $7,117 $0.35 $8,305 $0.42
Pro forma - Diluted $7,117 $0.35 $8,305 $0.41
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: an expected life of from 5.5 years to 6.5 years for stock options,
expected volatility of 45%, a dividend yield of 0%, and a risk-free interest
rate that ranges from 5.43% to 7.79%, depending upon the term of the respective
stock options. The weighted average fair value of stock options granted in 1997
and 1996 was $5.46 and $7.06, respectively.
Because some options vest over several years and additional awards may be made
each year, the pro-forma amounts above may not be representative of the effects
on net income for future years.
In 1997, there were no options granted with an exercise price that exceeded fair
value. In 1997, there were 7,857 management options granted, net of forfeiture,
at an exercise price of $.01 per share, which was less than fair value.
Therefore, the weighted average exercise price of these grants were $.01. In
1996, there were 10,000 discretionary options granted with an exercise price
that exceeded fair value, and the weighted average exercise price of this single
option grant was $25.56.
The following table summarizes information about stock options outstanding at
December 27, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ -----------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life Exercise-Price Exercisable Exercise Price
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
$ .01-$ 2.50 117,829 4 years $ .32 91,965 $ .41
$ 7.00-$16.00 814,883 10 years $11.44 186,149 $11.37
$17.00-$23.00 35,000 9 years $20.08 14,250 $19.20
------- ----------
Total 967,712 292,364
======= ==========
33
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Common Stock: (Continued):
During 1997 and 1996, there were 0 and 2,577 shares, respectively, granted and
exercised pursuant to the terms of the Company's Investment Share Program under
the Equity Plan. The weighted average grant price for grants made in 1996 was
$15.26. As of December 28, 1996, the number of restricted shares was 16,399.
The Company recognized compensation expense of $420,000 and $186,000 under the
described programs for the years ending December 27, 1997 and December 28, 1996,
respectively.
L. Financial Instruments:
During 1997 the Company entered into forward exchange contracts to reduce
exposure to currency movements affecting existing foreign currency denominated
firm commitments. At the time the Company entered into the foreign exchange
contracts, those contracts' durations matched the duration of the currency
position. The future value of the contracts and the related currency position
are subject to offsetting market risk resulting from foreign currency exchange
rate volatility. The carrying amounts of the contracts and the unrealized gain
(loss) recognized as a component of Stockholders' Equity totaled $9,254,000 and
($290,000) respectively, at December 27, 1997 versus $1,195,000 and $31,070,
respectively, at December 28, 1996. Fair value of the contracts approximates the
carrying value adjusted for gains and losses.
M. Related Party Transactions:
The Company has a deferred compensation agreement with its Chief Financial
Officer which calls for specific payments upon retirement on or after April 1,
2000 with pro-rated annual payments called for upon early retirement. The
Company has expensed approximately $61,000, $59,000, and $56,000 for the three
years ended December 27, 1997, December 28, 1996 and December 31, 1995,
respectively.
N. 401 (k) Savings Plan and Multi Employer Benefit Plans:
During 1993, the Company established the Boston Beer Company 401(k) Savings Plan
(the "Plan"). The Plan is a defined contribution plan which covers substantially
all of the Company's employees. Participants may make voluntary contributions of
their annual compensation. The Company made contributions to the Plan in each of
the three years ended December 27, 1997, December 28, 1996, and December 31,1995
of $356,000, $280,000, and $175,000 respectively.
Certain hourly paid workers in Cincinnati are covered by the Samuel Adams Local
Union #1199 Defined Benefit Pension Plan. The Company contributes approximately
$50,000 per year to this plan. Certain hourly paid workers in Cincinnati are
also covered by two Multi Employer Retirement Plans. The Company contributes
approximately $20,000 per year to these plans.
O. Sale of Distribution Rights:
In September 1995, the Company sold its distribution rights to a major
metropolitan area and associated receivables and inventories for approximately
$1,200,000 and the assumption of certain deposit liabilities and truck leases.
On closing approximately $420,000 was paid in cash with the remainder in the
form of a note which is payable in equal monthly installments of $13,000 plus
interest at 10% per annum. This transaction resulted in a gain to the Company of
approximately $807,000 and is included in other income.
P. Valuation and Qualifying Accounts:
The information required to be included in Schedule II, Valuation and Qualifying
Accounts, for the years ended December 27, 1997, December 28, 1996, and December
31, 1995 is as follows:
34
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
P. Valuation and Qualifying Accounts: (Continued):
Additions
Balance at Charged to Net Balance
Beginning Costs and Additions At End
of Period Expenses (Deductions) of Period
---------- ---------- ------------ ----------
(in thousands)
Allowance for Doubtful Accounts
1995 $ 182 107 (114) 175
1996 175 1,832 (77) 1,930
1997 1,930 (617) (160) 1,153
Inventory Reserves
1995 $ 248 782 (1,014) 16
1996 16 2,860 (386) 2,490
1997 2,490 271 (704) 2,057
Deductions from allowance for doubtful accounts represent the write-off of
uncollectable balances whereas deductions from inventory reserves represent
inventory destroyed in the normal course of business.
Q. Net Income per Share:
The following table sets forth the computation of basic and diluted earnings per
share:
(in thousands)
1997 1996 1995
Net income..................................................... $ 7,558 $ 8,385 $ 5,896
------- ------- -------
Shares used in net income per common share - basic............. 20,324 19,970 16,991
Dilutive effect on common equivalent shares ................. 166 382 915
------- ------- -------
Shares used in net income per common share - diluted........... 20,490 20,352 17,905
Net income per common share - basic............................ $ 0.37 $ 0.42 $ 0.35
======= ======= =======
Net income per common share - diluted.......................... $ 0.37 $ 0.41 $ 0.33
======= ======= =======
35
Item 9. Changes in and Disagreements with Accountants on Financial
Disclosures
None.
PART III
Item 10. Director and Executive Officers of the Registrant
The information required by Item 10 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
1998 Annual Meeting to be held on June 2, 1998.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
1998 Annual Meeting to be held on June 2, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
1998 Annual Meeting to be held on June 2, 1998.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
1998 Annual Meeting to be held on June 2, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements of The Boston Beer
Company, Inc. are included in Item 8 of Part II of this report:
Report of Independent Accountants on page 20 of this report
Consolidated Balance Sheets at December 27, 1997 and December 28,
1996 on page 21 of this report
Consolidated Statements of Income for the Years Ended December 27,
1997, December 28, 1996, and December 31, 1995 on page 22 of this
report
Consolidated Statements of Stockholders' Equity for the Years Ended
December 27, 1997, December 28, 1996, and December 31, 1995 on page
23 of this report
Consolidated Statements of Cash Flows for the Years Ended December
27, 1997, December 28, 1996, and December 31, 1995 on page 24 of this
report
Notes to Consolidated Financial Statements on pages 25 to 35 of this
report
36
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued):
(a)(2) Financial Statement Schedule
The following financial statement schedule is included in this
report.
Schedule II -- Valuation and Qualifying Accounts on page 35.
The Report of Independent Accountants is included on page 20 of this
report.
All other schedules for which provision is made in Regulation S-X of
the Securities and Exchange Commission, are not required under the
related instructions or are not applicable and, therefore, have been
omitted.
37
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued):
(a)(3) Exhibits
The following is a list of exhibits filed as part of this report:
Exhibit No. Title
----------- -----
3.1 Articles of Organization (incorporated by reference
to Exhibit 3.2 to the Company's Registration
Statement No. 33-96162).
3.2 By-Laws of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration
Statement No. 33-96162).
3.3 Restated Articles of Organization of the Company.
3.4 Amended and Restated By-Laws of the Company.
4.1 Form of Class A Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 33-96164).
10.1 Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and Boston Beer Company Limited
Partnership (the "Partnership"), dated as of May 2,
1995 (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement No. 33-96162).
10.2 Loan Security and Trust Agreement, dated October 1,
1987, among Massachusetts Industrial Finance
Agency, the Partnership and The First National Bank
of Boston, as Trustee, as amended (incorporated by
reference to Exhibit 10.2 to the Company's
Registration Statement No. 33-96164).
10.3 Deferred Compensation Agreement between the
Partnership and Alfred W. Rossow, Jr., effective
December 1, 1992 (incorporated by reference to
Exhibit 10.3 to the Company's Registration
Statement No. 33-96162).
10.4 The Boston Beer Company, Inc. Employee Equity
Incentive Plan, as adopted effective November 20,
1995 and amended effective February 23, 1996
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 333-1798).
10.5 Form of Employment Agreement between the
Partnership and employees (incorporated by
reference to Exhibit 10.5 to the Company's
Registration Statement No. 33-96162).
10.6 Services Agreement between The Boston Beer Company,
Inc. and Chemical Mellon Shareholder Services,
dated as of October 27, 1995.
10.7 Form of Indemnification Agreement between the
Partnership and certain employees and Advisory
Committee members (incorporated by reference to
Exhibit 10.7 to the Company's Registration
Statement No. 33-96162).
10.8 Stockholder Rights Agreement, dated as of December,
1995, among The Boston Beer Company, Inc. and the
initial Stockholders.
+10.10 Agreement between Boston Brewing Company, Inc. and
The Stroh Brewery Company, dated as of January 31,
1994 (incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement No. 33-96164).
+10.11 Agreement between Boston Brewing Company, Inc. and
the Genesee Brewing Company, dated as of July 25,
1995 (incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement No. 33-96164).
38
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued):
Exhibit Index (Continued)
Exhibit No. Title
----------- -----
+10.12 Amended and Restated Agreement between Pittsburgh
Brewing Company and Boston Brewing Company, Inc.
dated as of February 28, 1989 (incorporated by
reference to Exhibit 10.11 to the Company's
Registration Statement No. 33-96164).
10.13 Amendment to Amended and Restated Agreement between
Pittsburgh Brewing Company, Boston Brewing Company,
Inc., and G. Heileman Brewing Company, Inc., dated
December 13, 1989 (incorporated by reference to
Exhibit 10.12 to the Company's Registration
Statement No. 33-96162).
+10.14 Second Amendment to Amended and Restated Agreement
between Pittsburgh Brewing Company and Boston
Brewing Company, Inc. dated as of August 3, 1992
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement Registration
Statement No. 33-96164).
+10.15 Third Amendment to Amended and Restated Agreement
between Pittsburgh Brewing Company and Boston
Brewing Company, Inc. dated December 1,1994
(incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement No. 33-96164).
10.16 Fourth Amendment to Amended and Restated Agreement
between Pittsburgh Brewing Company and Boston
Brewing Company, Inc. dated as of April 7,1995
(incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement No. 33-96162).
+10.17 Letter Agreement between Boston Beer Company
Limited Partnership and Joseph E. Seagram & Sons,
Inc. (incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement No. 33-96162).
10.18 Services Agreement and Fee Schedule of Mellon Bank,
N.A. Escrow Agent Services for The Boston Beer
Company, Inc. dated as of October 27, 1995).
10.19 Amendment to Revolving Credit Agreement between
Fleet Bank of Massachusetts, N.A. and the
Partnership (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement No.
33-96164).
10.20 1996 Stock Option Plan for Non-Employee Directors.
+10.21 Production Agreement between The Stroh Brewery
Company and Boston Beer Company Limited
Partnership, dated January 14, 1997.
+10.22 Letter Agreement between The Stroh Brewery Company
and Boston Beer Company Limited Partnership, dated
January 14, 1997.
+10.23 Agreement between Boston Beer Company Limited
Partnership and The Schoenling Brewing Company,
dated May 22, 1996.
10.24 Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and The Boston Beer Company,
Inc., dated as of March 21, 1997 (incorporated by
reference to the Company's Form 10-Q, filed on May
12, 1997).
+10.25 Amended and Restated Agreement between Boston
Brewing Company, Inc. and the Genesee Brewing
Company, Inc. dated April 30, 1997 (incorporated by
reference to the Company's Form 10-Q, filed on
August 11, 1997).
39
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued):
Exhibit Index (Continued)
Exhibit No. Title
----------- -----
*+10.26 Fifth Amendment, dated December 31, 1997, to
Amended and Restated Agreement between Pittsburgh
Brewing Company and Boston Brewing Company, Inc.
*+10.27 Extension letters, dated August 19, 1997, November
19, 1997, December 19, 1997, January 22, 1998,
February 25, 1998 and March 11, 1998 between The
Stroh Brewery Company and Boston Brewing Company,
Inc.
*+10.28 Employee Equity Incentive Plan, as amended and
effective on December 19, 1997.
*+10.29 1996 Stock Option Plan for Non-Employee Directors,
as amended and effective on December 19, 1997.
*11 Schedule of Computation of Pro Forma Earnings Per
Share.
*21.1 List of subsidiaries of The Boston Beer Company,
Inc.
*23.1 Consent of Coopers and Lybrand L.L.P., independent
accountants with respect to the Partnership, as
Exhibit 24 to this report.
*27 Financial Data Schedule (electronic filing only).
* Filed with this report.
+ Portions of this Exhibit have been omitted
pursuant to an application for an order declaring
confidential treatment filed with the Securities
and Exchange Commission.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 25th of March,
1998.
THE BOSTON BEER COMPANY, INC.
/s/ C. JAMES KOCH
-------------------------
C. James Koch
President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ C. JAMES KOCH President, Chief Executive Officer,
Clerk and Director (principal
executive officer)
/s/ ALFRED W. ROSSOW, JR Treasurer, Chief Financial Officer
(principal financial and
accounting officer and Director)
/s/ RHONDA L. KALLMAN Director
/s/ CHARLES JOSEPH KOCH Director
/s/ PEARSON C. CUMMIN, III Director
/s/ JAMES C. KAUTZ Director
/s/ JOHN B. WING Director
41