UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 27, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND 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) 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___ ----- Number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 1998: CLASS A COMMON STOCK, $.01 PAR VALUE 16,385,789 CLASS B COMMON STOCK, $.01 PAR VALUE 4,107,355 (Title of each class) (Number of shares) 1
THE BOSTON BEER COMPANY, INC. FORM 10-Q QUARTERLY REPORT JUNE 27, 1998 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets June 27, 1998 and December 27, 1997 3 Consolidated Statements of Operations for the Three and Six Months Ended June 27, 1998 and June 28, 1997 4 Consolidated Statements of Cash Flows for the Six Months Ended June 27, 1998 and June 28, 1997 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13-14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15-18 SIGNATURES 19 </TABLE> 2
THE BOSTON BEER COMPANY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) <TABLE> <CAPTION> June 27, December 27, 1998 1997 -------------------- ----------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 4,259 $ 13 Short term investments 37,436 35,787 Accounts receivable, net of allowance for doubtful accounts, of $1,172 and $1,153 in 1998 and 1997, respectively 19,820 16,483 Inventories 14,575 13,675 Prepaid expenses 3,711 4,344 Deferred tax assets 2,266 2,266 Other current assets 1,538 1,308 --------------- ---------------- Total current assets 83,605 73,876 Equipment and leasehold improvements, net 30,305 28,781 Other assets 2,689 2,742 --------------- ---------------- Total assets $ 116,599 $ 105,399 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 7,190 $ 9,556 Accrued expenses 17,826 13,770 --------------- ---------------- Total current liabilities 25,016 23,326 Long-term debt, less current maturities 10,000 10,000 Long-term deferred taxes 789 789 Other long-term liabilities 2,382 - Stockholders' Equity: Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 16,384,789 and 16,337,744 issued and outstanding as of June 27, 1998 and December 27, 1997, respectively 164 163 Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 4,107,355 issued and outstanding as of June 27, 1998 and December 27, 1997 41 41 Additional paid-in-capital 56,559 56,445 Unearned compensation (324) (423) Unrealized loss on investments in a marketable - (2,223) security Unrealized loss on forward exchange contract (8) (290) Retained earnings 21,980 17,571 --------------- ---------------- Total stockholders' equity 78,412 71,284 --------------- ---------------- Total liabilities and stockholders' equity $ 116,599 $ 105,399 =============== ================ </TABLE> The accompanying notes are an integral part of the financial statements 3
THE BOSTON BEER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three months ended Six months ended ----------------------------------- ------------------------------------ June 27, June 28, June 27, June 28, 1998 1997 1998 1997 ---------------- --------------- ---------------- ---------------- <S> <C> <C> <C> <C> Sales $53,808 $57,158 $105,469 $103,957 Less excise taxes 7,278 7,320 13,690 12,264 ---------------- --------------- ---------------- ---------------- Net sales 46,530 49,838 91,779 91,693 Cost of sales 22,231 24,671 43,658 46,578 ---------------- --------------- ---------------- ---------------- Gross profit 24,299 25,167 48,121 45,115 Operating expenses: Advertising, promotional and selling expenses 18,393 19,829 31,934 34,387 General and administrative expenses 3,214 3,097 6,438 6,027 ---------------- --------------- ---------------- ---------------- Total operating expenses 21,607 22,926 38,372 40,414 ---------------- --------------- ---------------- ---------------- Operating income 2,692 2,241 9,749 4,701 Other income (expense): Interest income 486 438 951 889 Interest expense (157) (249) (327) (357) Other income (expense), net 837 115 (1,718) 122 ---------------- --------------- ---------------- ---------------- Total other income 1,166 304 (1,094) 654 Income before income taxes 3,858 2,545 8,655 5,355 Provision for income taxes 1,526 1,110 4,246 2,340 ---------------- --------------- ---------------- ---------------- Net income $ 2,332 $ 1,435 $ 4,409 $ 3,015 ================ =============== ================ ================ Earnings per share - basic $0.11 $0.07 $0.21 $0.15 ================ =============== ================ ================ Earnings per share - diluted $0.11 $0.07 $0.21 $0.15 ================ =============== ================ ================ Weighted average shares - basic 20,489 20,325 20,474 20,212 ================ =============== ================ ================ Weighted average shares - diluted 20,612 20,475 20,582 20,416 ================ =============== ================ ================ </TABLE> The accompanying notes are an integral part of the financial statements 4
THE BOSTON BEER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> Six months ended June 27, June 28, 1998 1997 --------------- --------------- <S> <C> <C> Cash flows from operating activities: Net income $ 4,409 $ 3,015 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,524 1,886 Loss on disposition of marketable security 1,435 - Bad debt expense 168 83 Amortization of unearned compensation 65 123 Changes in assets and liabilities: Accounts receivable (3,505) (5,466) Inventory (900) (3,190) Prepaid expenses 633 (2,534) Other current assets 52 767 Other assets 53 66 Accounts payable (2,366) (5,172) Accrued expenses 4,056 2,506 Other long-term liabilities 2,382 - --------------- --------------- Net cash provided by (used in) operating activities 9,006 (7,916) --------------- --------------- Cash flows from investing activities: Purchases of equipment (4,048) (10,012) Proceeds from the sale of marketable security 2,851 - Purchases of short-term investments (3,712) (802) Purchases of restricted investments - (625) Proceeds from maturities of restricted investments - 609 --------------- --------------- Net cash used in investing activities (4,909) (10,830) --------------- --------------- Cash flows from financing activities: Proceeds from exercise of management incentive options 37 602 Proceeds from sale of common stock under stock purchase plan 117 23 Repurchase of shares under employee investment and (5) - incentive share plans Net borrowings under line of credit - 13,061 --------------- --------------- Net cash provided by financing activities 149 13,686 --------------- --------------- Net increase (decrease) in cash and cash equivalents 4,246 (5,060) Cash and cash equivalents at beginning of period 13 5,060 --------------- --------------- Cash and cash equivalents at end of period $ 4,259 $ - =============== =============== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 357 $ 295 =============== =============== Income taxes 1,617 4,535 =============== =============== </TABLE> The accompanying notes are an integral part of the financial statements 5
THE BOSTON BEER COMPANY, INC. NOTES TO 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 select international markets. The accompanying consolidated balance sheet as of June 27, 1998 and the results of its consolidated operations and consolidated cash flows for the three and six months ended June 27, 1998 and June 28, 1997 have been prepared by the Company, without audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 27, 1997. In the opinion of the management of the Company, the Company's unaudited consolidated financial position as of June 27, 1998 and the results of its consolidated operations and consolidated cash flows for the interim periods ended June 27, 1998 and June 28, 1997, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. B. SHORT TERM INVESTMENTS: At June 27, 1998 short term investments consisted exclusively of money market funds, treasury bills, treasury-backed repo's and securities backed by various agencies of the U.S. Government. At December 27, 1997, short term investments also includes a marketable equity security with a cost of $4,286,000 and a market value of $2,063,000. During the first quarter of 1998, the Company recorded a charge against earnings of $2,317,000 to reflect the other than temporary decline in market value. The second quarter disposition of this security resulted in a gain of $882,000. The Company's money market funds, treasury bills, treasury-backed repo's and securities backed by various agencies of the U.S. Government have a cost of $37,436,000 and $33,724,000 at June 27, 1998 and December 27, 1997, respectively, which approximate fair value. C. INVENTORIES: Inventories, which consist principally of hops, brewery materials and packaging, are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. Inventories consist of the following (in thousands): <TABLE> <CAPTION> June 27, December 27, 1998 1997 ------------ ------------- <S> <C> <C> Raw materials, principally hops $12,618 $12,481 Work in process 920 511 Finished goods 1,037 683 ------------ ------------ $14,575 $13,675 ============ ============ </TABLE> 6
THE BOSTON BEER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) D. INCOME TAXES: The Company's effective tax rate decreased to 39.6% for the three months ended June 27, 1998 from 43.7% for the three months ended June 28, 1997 and increased to 49.1% for the six months ended June 27, 1998 from 43.7% for the six months ended June 28, 1997. The changes in the Company's effective tax rate for both the three and six month periods were influenced primarily by the accounting for the marketable equity security described in Note B, as the Company does not expect that it will be able to fully realize the tax benefit associated with the disposition of the security. The following table reconciles the Company's federal statutory rate to the effective rate: Three Months Six Months Ended ------------------- --------------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 ---- ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% 35.0% State income tax, net of federal benefit 8.1 8.7 8.1 8.7 Permanent differences (8.7) - 3.7 - Other 5.2 - 2.3 - ---- ---- ---- ---- Effective tax rate 39.6% 43.7% 49.1% 43.7% ==== ==== ==== ==== E. COMPREHENSIVE INCOME: The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in the first quarter of 1998. This standard requires disclosure of total nonowner changes in stockholders' equity, which is defined as net income plus direct adjustments to stockholders' equity such as foreign currency items and unrealized gains and losses on certain investments. Comprehensive income for the three months ended June 27, 1998 totaled $2,582,000 and for the three months ended June 28, 1997 totaled $1,849,000. For the six months ended June 27,1998 comprehensive income totaled $6,914,000 and for the six months ended June 28, 1997 totaled $2,539,000. <TABLE> <CAPTION> FOR THREE MONTHS ENDED FOR THREE MONTHS ENDED JUNE 27, 1998 JUNE 28, 1997 ------------------------------ ---------------------------- FOREIGN UNREALIZED FOREIGN UNREALIZED CURRENCY LOSS CURRENCY LOSS ITEMS ON SECURITY ITEMS ON SECURITY ----- ----------- ----- ----------- <S> <C> <C> <C> <C> Beginning balance $(258,000) $ - $(78,000) $(1,223,000) Current-period change $ 250,000 $ 882,000 $ 41,000 $ 373,000 Plus: reclassification adjustment for capital gain realized in net income $ - $(882,000) - - ---------- ------------- --------- ------------ Ending balance $ (8,000) $ - $(37,000) $ (850,000) ========== ============= ========= ============ </TABLE> 7
THE BOSTON BEER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) E. COMPREHENSIVE INCOME: (Continued): <TABLE> <CAPTION> FOR THREE MONTHS ENDED FOR THREE MONTHS ENDED JUNE 27, 1998 JUNE 28, 1997 --------------------------- -------------------------- <S> <C> <C> <C> <C> Net income $ 2,332,000 $1,435,000 ------------ ---------- Other comprehensive income, net of tax: Foreign currency translation adjustments $ 250,000 $ 41,000 Unrealized losses on security: Unrealized holding gain (loss) arising during period $ 882,000 $ 373,000 Plus: reclassification adjustments for capital (gains) included in net income $ (882,000) $ - $ - $ 373,000 ---------- ----------- --------- ---------- Other comprehensive income $ 250,000 $ 414,000 ----------- ---------- Comprehensive income $ 2,582,000 $1,849,000 =========== ========== </TABLE> <TABLE> <CAPTION> FOR SIX MONTHS ENDED FOR SIX MONTHS ENDED JUNE 27, 1998 JUNE 28, 1997 ---------------------------- ------------------------ FOREIGN UNREALIZED FOREIGN UNREALIZED CURRENCY LOSS CURRENCY LOSS ITEMS ON SECURITY ITEMS ON SECURITY ----- ----------- ----- ----------- <S> <C> <C> <C> <C> Beginning balance $ (290,000) $(2,223,000) $ 31,000 $ (442,000) Current-period change $ 282,000 $ 788,000 $ (68,000) $ (408,000) Plus: reclassification adjustment for capital gain realized in net income $ - $ 1,435,000 - - ----------- ------------ ---------- ----------- Ending balance $ (8,000) $ - $ (37,000) $ (850,000) =========== ============ ========== =========== </TABLE> <TABLE> <CAPTION> FOR SIX MONTHS ENDED FOR SIX MONTHS ENDED JUNE 27, 1998 JUNE 28, 1997 ------------------------ ------------------------ <S> <C> <C> <C> <C> Net income $ 4,409,000 $3,015,000 ----------- ---------- Other comprehensive income, net of tax: Foreign currency translation adjustments $ 282,000 $ (68,000) Unrealized losses on security: Unrealized holding gain (loss) arising during period $ 788,000 $(408,000) Plus: reclassification adjustments for capital losses included in net income $1,435,000 $ 2,223,000 $ - $ (408,000) ---------- ----------- ---------- ----------- Other comprehensive income $ 2,505,000 $ (476,000) ----------- ----------- Comprehensive income $ 6,914,000 $2,539,000 =========== =========== </TABLE> 8
THE BOSTON BEER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F. NET INCOME PER SHARE: The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> (in thousands) Three months ended Six months ended ------------------ ----------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income..................................................... $ 2,332 $ 1,435 $ 4,409 $ 3,015 ------- ------- ------- ------- Shares used in net income per common share - basic............. 20,489 20,325 20,474 20,212 Dilutive effect on potential common shares .................. 123 150 108 204 ------- ------- ------- ------- Shares used in net income per common share - diluted........... 20,612 20,475 20,582 20,416 Net income per common share - basic............................ $ 0.11 $ 0.07 $ 0.21 $ 0.15 ======= ======= ======= ======= Net income per common share - diluted.......................... $ 0.11 $ 0.07 $ 0.21 $ 0.15 ======= ======= ======= ======= </TABLE> 9
THE BOSTON BEER COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the three and six-month periods ended June 27, 1998 as compared to the three and six-month period ended June 28, 1997. It should be read in conjunction with the "Consolidated Financial Statements" of the Company and related "Notes to the Financial Statements" included in this Form 10-Q. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 27, 1998 COMPARED TO THREE MONTHS ENDED JUNE 28, 1997 SALES. Volume decreased by 16.3% to 324,000 barrels in the three months ended June 27, 1998 from 387,000 barrels in the three months ended June 28, 1997. This decrease is mainly due to discontinued and decreased contract brewing arrangements with other companies the Company had in its Cincinnati brewery. This reduced volume accounted for approximately 53,000 barrels. Net sales decreased by 6.6% to $46,530,000 in the three-month period ended June 27, 1998 from $49,838,000 in the three-month period ended June 28, 1997. The decrease in net sales was attributable in part by increased spending in discounts and allowances and in part by the Company's reduced volume. GROSS PROFIT. Gross profit decreased by 3.4% to $24,299,000 in the three months ended June 27, 1998 from $25,167,000 in the three months ended June 28, 1997. Offsetting the volume decline was a reduction in cost of sales to 47.8% of net sales in the three months ended June 27, 1998 from 49.5% in the three months ended June 28, 1997. This decrease is due to a favorable trend in raw material and packaging costs. ADVERTISING, PROMOTIONAL AND SELLING. Advertising, promotional and selling expenses decreased by 7.2% to $18,393,000 in the three months ended June 27, 1998 from $19,829,000 in the three months ended June 28, 1997. This decrease was primarily attributable to a reduction in employee-related expenses, a reduction in POS-related expenses and a decrease in promotional spending. Partially offsetting this decrease was an increase in advertising expense. As a percentage of net sales, total advertising, promotional and selling expenses decreased to 39.5% in the three months ended June 27, 1998 from 39.8% in the three months ended June 28, 1997. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by 3.8% to $3,214,000 in the three months ended June 27, 1998 from $3,097,000 in the three months ended June 28, 1997. This increase was primarily due to an increase in depreciation, which reflects an increase in leasehold improvements, legal and bad debt expense. Partially offsetting these increases were cost savings in employee and insurance related charges. As a percentage of net sales, general and administrative expenses increased to 6.9% for the three months ended June 27, 1998 from 6.2% for the three months ended June 28, 1997. OPERATING INCOME. Operating income increased by 20.1% to $2,692,000 in the three months ended June 27, 1998 from $2,241,000 in the three months ended June 28, 1997. This increase was due mainly to reduced spending in promotional and selling expenses. OTHER INCOME (EXPENSE), NET: Other income (expense) net, was $1,166,000 for the three months ended June 27, 1998, versus $304,000 for the three months ended June 28, 1997. This increase is due to the adjustment in the original write down of the marketable security of $2,317,000 which took place in the first quarter of 1998. Following the first quarter write down, the Company disposed of the security in the second quarter and recorded a gain of $882,000. NET INCOME. Net income increased by 62.5% to $2,332,000 in the three months ended June 27, 1998 from $1,435,000 in the three months ended June 28, 1997. The increase is primarily due to reductions in cost of sales, lower spending in promotional and selling expenses and the $882,000 adjustment to offset the write down of the marketable security. Income tax expense decreased to 39.6% of pretax income or $1,526,000 for the three months ended June 27, 1998 from 43.7% of pretax income or $1,110,000 for the three months ended June 28, 1997. This decrease in the tax rate is caused primarily by the adjustment to the write down of the marketable security. 10
THE BOSTON BEER COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SIX MONTHS ENDED JUNE 27, 1998 COMPARED TO SIX MONTHS ENDED JUNE 28, 1997 SALES. Sales volume decreased by 5.1% to 634,000 barrels in the first six months of 1998 from 668,000 barrels in the first six months of 1997. This decrease is due to discontinued and decreased contract brewing arrangements with other companies which the Company had at its Cincinnati brewery. This reduced volume accounted for approximately 47,000 barrels. Sales of the Company's core products have increased 2.3% in the first six months of 1998, due in part to the Company's introduction of White Ale in January of 1998. Despite the loss of volume, net sales increased to $91,779,000 in the first six months of 1998 from $91,693,000 in the first six months of 1997, as sales of products produced by the Cincinnati brewery to others are made at prices much lower than those of the Company's core products. GROSS PROFIT. Gross profit increased by 6.7% to $48,121,000 in the first six months of 1998 from $45,115,000 in the first six months of 1997. Cost of sales decreased to 47.6% of net sales in the first six months of 1998 from 50.8% of net sales in the first six months of 1997. This decrease is due to a favorable trend in raw material and packaging costs. ADVERTISING, PROMOTIONAL AND SELLING. Advertising, promotional, and selling expenses decreased by 7.1% to $31,934,000 in the first six months of 1998 from $34,387,000 in the first six months of 1997. This decrease was primarily attributable to a reduction in employee-related expenses, a reduction in POS- related expenses, and a decrease in promotional spending. Partially offsetting this decrease was an increase in advertising expense. As a percentage of net sales, total advertising, promotional, and selling expenses decreased to 34.8% in the first six months of 1998 from 37.5% in the first six months of 1997. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by 6.8% to $6,438,000 in the first six months of 1998 from $6,027,000 in the first six months of 1997. This increase is due mainly to the inclusion of G & A expenses of the Company's brewery in Cincinnati. The Company purchased the brewery on March 1,1997; therefore, only four months of brewing operations are reflected in the expense for the comparable 1997 period. Also adding to the increase in G & A are increases in depreciation and legal fees. As a percentage of net sales, general and administrative expenses increased to 7.0% in the first six months of 1998 from 6.6% in the first six months of 1997. OPERATING INCOME. Operating income increased by 107% to $9,749,000 in the first six months ended June 27,1998 from $4,701,000 in the first six months ended June 28, 1997. This increase was due to higher sales caused by the White Ale introduction, savings in cost of sales and reduced spending in promotional and selling expenses OTHER INCOME (EXPENSE), NET: Other income (expense) net, was ($1,094,000) in the first six months of 1998 vs. $654,000 for the first six months of 1997. This change is due to the loss on the sale of a marketable security of $1,435,000 offset somewhat by interest income. NET INCOME. Net income increased by 46.2% to $4,409,000 in the first six months of 1998 compared to $3,015,000 in the first six months of 1997. The increase is primarily due to increased sales volume, reductions in cost of sales, lower spending in promotional and selling expenses offset by the loss on the sale of the marketable security. Income tax expense increased to 49.1% of pretax income or $4,246,000 for the six months ended June 27,1998 from 43.7% of pretax income or $2,340,000 for the six months ended June 28, 1997. This increase in the tax rate is caused by the loss on the sale of the marketable security which reduced the profit before taxes for financial reporting but not for tax purposes, as the Company does not expect that it will be able to fully realize the tax benefit associated with the disposition of the security. 11
THE BOSTON BEER COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES During the first six months of 1998, the Company recorded net income of $4,409,000, while net cash generated by operating activities was $9,006,000. This $4,597,000 difference is primarily due to the amortization of a long term deferred contract incentive an increase in accrued expenses and depreciation and the loss on the disposition of the marketable security, offset by an increase in accounts receivable and reductions in accounts payable. During the first six months of 1998, the Company used $4,909,000 in investing activities. This reflects the purchase of $1,649,000 in government securities, the purchase of $4,048,000 of fixed assets, consisting mainly of brewery and packaging equipment at the Company's Cincinnati brewery and its contract breweries, offset by the gain on the disposition of the marketable security of $788,000. During the first six months of 1998, the Company generated $149,000 from financing activities, which primarily reflects proceeds from the sale of stock under the employee purchase plan. Assuming there is no significant change in the Company's business, the Company believes that working capital of $58,589,000 as of June 27, 1998 (of which 71.2% is in cash and equivalents and short term investments), 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. YEAR 2000 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. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS This Form 10-Q filing contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Factors which may cause actual future results to differ from forward-looking statements include, among others, the following: changes in consumer preferences; general economic and business conditions; increasing competition in the craft-brewed and high-end beer segments; success of operating initiatives; possible future increases in operating costs; advertising and promotional efforts; changes in brand awareness; the existence or absence of adverse publicity; changes in business strategy; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; change in, or the failure to comply with, government regulations; and other factors. 12
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a 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 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Boston Beer Company, Inc. held its Annual Meeting of Stockholders on June 2, 1998. The following items were voted upon at that time. "RESOLVED: That the amendment to Article IV, Section 1, of the Restated Articles of Organization and to Sections 4.1 and 4.8 of the By-Laws of the Corporation, each as amended and currently in effect, such that the number of Directors of the Corporation shall be such number as fixed annually by the Board of Directors, but not fewer than seven (7) nor more than eleven (11), consisting of not fewer than two (2) nor more than four (4) Directors elected by the holders of the Corporation's Class A Common Stock and not fewer than five (5) nor more than seven (7) Directors elected by the holders of the Corporation's Class B Common Stock, and subject to the further requirement that no Class B Directors in excess of five (5) shall be elected unless a like number of Class A Directors is, or has previously been, elected." The results of the vote were, as follows: AMENDMENT TO THE BY-LAWS AND ARTICLES OF ORGANIZATION, AS AFORESAID: FOR AGAINST WITHHELD --- ------- -------- 12,762,163 581,217 54,728 "RESOLVED: That Pearson C. Cummin, III, Robert N. Hiatt and James C. Kautz be, and they hereby are, elected Class A Directors of the Corporation, to serve for a term of one year, ending on the date of the 1999 Annual Meeting of Stockholders in accordance with the By-Laws and until their respective successors are duly chosen and qualified." The results of the vote were, as follows: ELECTION OF CLASS A DIRECTORS: <TABLE> <CAPTION> FOR WITHHELD --- -------- <S> <C> <C> Pearson C. Cummin, III 12,988,697 409,521 Robert N. Hiatt 12,988,203 410,015 James C. Kautz 12,989,636 408,582 </TABLE> 13
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION (CONTINUED) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) Mr. C. James Koch, as the sole holder of the Corporation's Class B Common Stock, voted on the election of five (5) Class B Directors: C. James Koch, Alfred W. Rossow, Jr., Rhonda L. Kallman, Charles Joseph Koch and John B. Wing. "RESOLVED: That C. James Koch, Alfred W. Rossow, Jr., Rhonda L. Kallman, Charles Joseph Koch and John B. Wing be, and they hereby are, elected Class B Directors of the Corporation to serve for a term of one year ending on the date of the 1999 Annual Meeting of Stockholders in accordance with the By-Laws and until their respective successors are duly chosen and qualified." The results of the vote were, as follows: ELECTION OF CLASS B DIRECTORS: <TABLE> <CAPTION> FOR WITHHELD --- -------- <S> <C> <C> C. James Koch 4,107,355 0 Alfred W. Rossow, Jr. 4,107,355 0 Rhonda L. Kallman 4,107,355 0 Charles Joseph Koch 4,107,355 0 John B. Wing 4,107,355 0 </TABLE> Mr. C. James Koch, as the sole holder of the Corporation's Class B Common Stock, voted on a proposed further amendment to the Company's Restated Articles of Organization, to increase the number of authorized shares of the Company's Class A Common Stock from 20,300,000 shares to 22,700,000 shares of Class A Common Stock. "RESOLVED: That the Corporation's Restated Articles of Organization be, and they hereby are, amended to increase the number of authorized shares of the Corporation's Class A Common Stock, $0.01 par value, from 20,300,000 shares to 22,700,000 shares of Class A Common Stock." The results of the vote were, as follows: AMENDMENT TO RESTATED ARTICLES OF ORGANIZATION TO INCREASE THE NUMBER OF SHARES OF THE CORPORATION'S CLASS A COMMON STOCK: FOR AGAINST WITHHELD --- ------- -------- 4,107,355 0 0 14
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION (CONTINUED) ITEM 5. OTHER INFORMATION In accordance with the provisions of Rule 14a-4 (c) promulgated under the Securities Exchange Act of 1934, if the company does not receive notice of a shareholder proposal to be raised at its 1999 Annual Meeting on or before February 26, 1999, then in such event, the management proxies shall be allowed to use their discretionary voting authority when the proposal is raised at the 1999 Annual Meeting of Stockholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT INDEX 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 (incorporated by reference to Exhibit 3.3 to the Company's Form 10-K filed on April 1, 1996). 3.4 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Form 10-K filed on April 1, 1996). *3.5 Amended and Restated By-Laws of the Company (as amended through June 2, 1998). *3.6 Restated Articles of Organization of the Company, dated July 21, 1998. 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). 15
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) EXHIBIT INDEX (CONTINUED) EXHIBIT NO. TITLE ----------- ----- 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 (incorporated by reference to the Company's Form 10-K, filed on April 1, 1996). 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 (incorporated by reference to the Company's Form 10-K, filed on April 1, 1996). +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). +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 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). 16
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) Exhibit Index (Continued) EXHIBIT NO. TITLE ----------- ----- 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 (incorporated by reference to the Company's Registration Statement No. 33-96162). 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 (incorporated by reference to the Company's Form 10-K, filed on March 28, 1997). +10.21 Production Agreement between The Stroh Brewery Company and Boston Beer Company Limited Partnership, dated January 14, 1997 (incorporated by reference to the Company's Form 10-K, filed on March 28, 1997). +10.22 Letter Agreement between The Stroh Brewery Company and Boston Beer Company Limited Partnership, dated January 14, 1997 (incorporated by reference to the Company's Form 10-K, filed on March 28, 1997). +10.23 Agreement between Boston Beer Company Limited Partnership and The Schoenling Brewing Company, dated May 22, 1996 (incorporated by reference to the Company's Form 10-K, filed on March 28, 1997). 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). +10.26 Fifth Amendment, dated December 31, 1997, to Amended and Restated Agreement between Pittsburgh Brewing Company and Boston Brewing Company, Inc. (incorporated by reference to the Company's Form 10-K, filed on March 27, 1998). 17
THE BOSTON BEER COMPANY, INC. PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) Exhibit Index (Continued) EXHIBIT NO. TITLE ----------- ----- +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. (incorporated by reference to the Company's Form 10-K, filed on March 27, 1998). +10.28 Employee Equity Incentive Plan, as amended and effective on December 19, 1997 (incorporated by reference to the Company's Form 10-K, filed on March 27, 1998). +10.29 1996 Stock Option Plan for Non-Employee Directors, as amended and effective on December 19, 1997 (incorporated by reference to the Company's Form 10-K, filed on March 27, 1998). *+10.30 Glass Supply Agreement between The Boston Beer Company and Owens' Brockway Glass Container Inc., dated April 30, 1998. *+10.31 Extension letters, dated April 13, 1998, April 27, 1998, June 11, 1998, June 25, 1998 and July 20,1998 between The Stroh Brewery Company and Boston Brewing Company, Inc. 11 The information required by exhibit 11 has been included in Note F of the notes to the consolidated financial statements. 21.1 List of subsidiaries of The Boston Beer Company, Inc. (incorporated by reference to the Company's Form 10-K, filed on March 28, 1997). *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. (B) REPORTS ON FORM 8-K. The Company filed a Form 8-K on June 18, 1998 with the Securities and Exchange Commission. The filing was regarding a change in the Company's independent accountants effective fiscal year 1998. 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. THE BOSTON BEER COMPANY, INC. (Registrant) Date: Aug 7, 1998 By: /s/: C. JAMES KOCH --------------- -------------------------------- C. James Koch President, Chief Executive Officer, Clerk and Director (principal executive officer) Date: Aug 7, 1998 By: /s/: ALFRED W. ROSSOW, JR. --------------- -------------------------------- Alfred W. Rossow, Jr. Executive Vice President, Chief Financial Officer (principal financial and accounting officer) Treasurer and Director 19