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 March 27, 1999 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 May 3, 1999: Class A Common Stock, $.01 par value 16,415,010 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 MARCH 27, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheets March 27, 1999 and December 26, 1998 3 Consolidated Statements of Operations for the Three Months Ended March 27, 1999 and March 28, 1998 4 Consolidated Statements of Cash Flows for the Three Months Ended March 27, 1999 and March 28, 1998 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14-17 SIGNATURES 18 2
THE BOSTON BEER COMPANY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) <TABLE> <CAPTION> March 27, December 26, 1999 1998 ---------------- --------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 7,054 $ 8,650 Short-term investments 45,307 45,256 Accounts receivable, net of the allowance for doubtful accounts of $1,313 and $1,309, respectively 15,138 12,062 Inventories 15,951 15,835 Prepaid expenses 657 1,125 Deferred income taxes 4,511 4,511 Other current assets 839 2,037 ---------------- --------------- Total current assets 89,457 89,476 Equipment and leasehold improvements, net of 27,493 28,165 accumulated depreciation of $16,788 and $15,460, respectively Other assets 4,974 5,048 ---------------- --------------- Total assets $ 121,924 $ 122,689 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 8,670 $ 13,194 Accrued expenses 14,783 14,233 Current maturities of long-term debt 10,000 10,000 ---------------- --------------- Total current liabilities 33,453 37,427 Long-term deferred taxes 1,116 1,116 Other long-term liabilities 1,985 2,118 Stockholders' Equity: Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 16,415,010 and 16,394,245 issued and outstanding as of March 27, 1999 and December 26, 1998, respectively 164 164 Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 4,107,355 issued and outstanding 41 41 Additional paid-in-capital 56,687 56,548 Unearned compensation (246) (219) Unrealized loss on short-term investments - (1) Retained earnings 28,724 25,495 ---------------- --------------- Total stockholders' equity 85,370 82,028 ---------------- --------------- Total liabilities and stockholders' equity $ 121,924 $ 122,689 ================ =============== </TABLE> The accompanying notes are an integral part of the consolidated financial statements 3
THE BOSTON BEER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three months ended -------------------------------- March 27, March 28, 1999 1998 ------------- ------------ <S> <C> <C> Sales $ 45,532 $ 51,660 Less excise taxes 4,682 5,334 ------------- ------------ Net sales 40,850 46,326 Cost of sales 18,077 22,506 ------------- ------------ Gross profit 22,773 23,820 Operating expenses: Advertising, promotional and selling expenses 14,768 13,540 General and administrative expenses 2,909 3,224 ------------- ------------ Total operating expenses 17,677 16,764 ------------- ------------ Operating income 5,096 7,056 ------------- ------------ Other income (expense): Interest income 561 466 Interest expense (145) (170) Other income (expense), net 24 (2,556) ------------- ------------ Total other income 440 (2,260) -------------- ------------ Income before provision for income taxes 5,536 4,796 Provision for income taxes 2,307 2,720 -------------- ------------ Net income $ 3,229 $ 2,076 ============== ============ Earnings per share - basic $ 0.16 $ 0.10 ============== ============ Earnings per share - diluted $ 0.16 $ 0.10 ============== ============ Weighted average shares - basic 20,513 20,459 ============== ============ Weighted average shares - diluted 20,574 20,551 ============== ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements 4
THE BOSTON BEER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> Three months ended -------------------------------------- March 27, March 28, 1999 1998 --------------- ---------------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,229 $ 2,076 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,403 1,225 Loss on disposal of fixed assets (30) - Loss on write-down of marketable equity security - 2,317 Bad debt expense - 58 Stock option compensation expense 25 59 Changes in assets and liabilities: Accounts receivable (3,147) (3,713) Inventory (116) 1,020 Prepaid expenses 468 2,699 Other current assets 1,284 (38) Other assets (91) 79 Accounts payable (3,824) (1,631) Accrued expenses (150) (2,857) --------------- ---------------- Net cash (used in) / provided by operating activities (949) 1,294 --------------- ---------------- Cash flows for investing activities: Purchases of fixed assets (712) (2,198) Net (purchases)/maturities of short-term investments (50) (438) Proceeds received from sale of fixed assets 100 - --------------- ---------------- Net cash used in investing activities (662) (2,636) --------------- ---------------- Cash flows from financing activities: Proceeds from exercise of stock options - 37 Proceeds from sale of shares under Investment Share plan 15 75 Repurchase of shares under the Equity Plan - (5) Net borrowings under line of credit - 1,517 --------------- ---------------- Net cash provided by financing activities 15 1,624 --------------- ---------------- Net (decrease)/increase in cash and cash equivalents (1,596) 282 Cash and cash equivalents at beginning of period 8,650 13 --------------- ---------------- Cash and cash equivalents at end of period $ 7,054 $ 295 =============== ================ Supplemental disclosure of cash flow information: Interest paid $ 150 $ 193 =============== ================ Income taxes paid $ 1,030 $ 47 =============== ================ </TABLE> The accompanying notes are an integral part of the consolidated 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 financial position as of March 27, 1999 and the results of its consolidated operations and consolidated cash flows for the quarter ended March 27, 1999 and March 28, 1998 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 for complete financial statements by generally accepted accounting principles 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 26, 1998. Management's Opinion In the opinion of the Company's management, the Company's unaudited consolidated financial position as of March 27, 1999 and the results of its consolidated operations and consolidated cash flows for the interim periods ended March 27, 1999 and March 28, 1998, 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 March 27, 1999, short-term investments consists of investments in high- quality money market instruments, United States agency securities, United States Treasury bills and high-grade commercial paper. The cost of short-term investments of $45.3 million as of both March 27, 1999 and December 26, 1998, approximates fair market 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> March 27, December 26, 1999 1998 ----------------- ------------------ <S> <C> <C> Raw materials, principally hops $14,709 $14,464 Work in process 675 778 Finished goods 567 593 ----------------- ------------------ $15,951 $15,835 ================= ================== </TABLE> D. INCOME TAXES The Company's effective tax rate decreased to 41.7% for the three months ended March 27, 1999 from 56.7% for the three months ended March 28, 1998. The 1998 effective tax rate reflects a capital loss on a marketable security; the Company does not expect to fully realize the tax benefit associated with this capital loss. There were no such losses recognized during 1999. 6
THE BOSTON BEER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS E. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standard No. 128. <TABLE> <CAPTION> For the three months ended (in thousands, except per share data) ------------------------------------------------- March 27, 1999 March 28, 1998 ---------------------- ---------------------- <S> <C> <C> Net income $ 3,229 $ 2,076 ---------------------- ---------------------- Shares used in earnings per common share - basic 20,513 20,459 Dilutive effect of common equivalent shares 61 92 ---------------------- ---------------------- Shares used in earnings per common share - diluted 20,574 20,551 Earnings per common share - basic $ .16 $ .10 ====================== ====================== Earnings per common share - diluted $ .16 $ .10 ====================== ====================== </TABLE> F. COMPREHENSIVE INCOME: Comprehensive income calculated in accordance with Statement of Financial Accounting Standard No. 130 is as follows: <TABLE> <CAPTION> For the three months ended (in thousands) ---------------------------------------------------------------------------------- March 27, 1999 March 28, 1998 --------------------------------------- -------------------------------------- <S> <C> <C> <C> <C> Net income $3,229 $2,076 ------------------- ------------------- Other comprehensive income, net of tax: Foreign currency translation adjustments - 32 Unrealized loss on security: Unrealized holding losses arising during - (94) period Plus: reclassification adjustments for capital losses included in net income 1 1 2,317 2,223 ---------------- ------------------- -------------- ------------------- Other comprehensive income 1 2,255 ------------------- ------------------- Comprehensive income $3,230 $4,331 =================== =================== </TABLE> Accumulated other comprehensive income calculated in accordance with Statement of Financial Accounting Standard No. 130 is as follows: <TABLE> <CAPTION> For the three months ended (in thousands) -------------------------------------------------------- March 27, 1999 March 28, 1998 -------------------------- ------------------------ <S> <C> <C> Beginning Balance $ (1) $ (2,513) Unrealized gain on forward exchange contract - 32 Unrealized gain on short-term investments - (94) Realized loss on marketable equity security 1 2,317 -------------------------- ------------------------ Ending balance $ - $ 258 ========================== ======================== </TABLE> 7
THE BOSTON BEER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS G. SUBSEQUENT EVENTS As of March 31, 1999, the Company repaid the entire $10.0 million outstanding under the existing $30.0 million line of credit ("the $30.0 million line"). The existing credit agreement, which was originally entered into on March 21, 1997 and provides for a $15.0 million line of credit ("the $15.0 million line") and a $30.0 million line, was amended on March 30, 1999. Per the amended agreement, future borrowings, if any, on the $30.0 million line converts to a term loan on March 31, 2002 and the $15.0 million line expires on March 31, 2004. The Company must continue to pay a commitment fee of .15% per annum on the average daily unused portion of the total $45.0 million commitment. Additionally, the Company is obligated to meet certain financial covenants, including the maintenance of specified levels of tangible net worth and net income. The Company was in compliance with all such covenants as of March 27, 1999. Effective April 30, 1999, the Stroh Brewery Company ("Stroh") sold a majority of its beer brands and the Allentown Brewery to Pabst Brewing Company ("Pabst") and certain of its brands to Miller Brewing Company ("Miller") (collectively, the "Stroh Transactions"). The Company brews approximately 40% of its production at Stroh's Allentown Brewery and Portland Brewery (the "Stroh Breweries"). Pabst has agreed to assume Stroh's obligations under the existing brewing contract between the Company and Stroh; Miller has agreed to guarantee Pabst's performance. The Company's volume brewed at the Allentown Brewery is anticipated to remain substantially unchanged as a result of the Stroh Transactions. The Company anticipates that the volume currently brewed at the Portland Brewery will be transferred to a Pabst or Miller-owned brewery during 1999. The Company has completed, to its satisfaction, detailed inspections of the potential breweries that are likely to assume the volume that is currently brewed at the Portland Brewery. The Company does not anticipate any significant problems during the transition period or thereafter, as a result of the Stroh Transactions, and does not believe that it will have a material effect on its results of operations, statement of financial position or statement of cash flows during 1999. 8
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-month period ended March 27, 1999 as compared to the three-month period ended March 28, 1998. This discussion should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements of the Company and Notes thereto included in the Form 10-K for the fiscal year ended December 26, 1998. RESULTS OF OPERATIONS Three Months Ended March 27, 1999 compared to Three Months Ended March 28, 1998 For purposes of this discussion, Boston Beer's "core brands" include all products sold under Samuel Adams(R), Oregon Original(TM) or HardCore(R) trademarks. "Core brands" do not include the products brewed at the Cincinnati Brewery under contract arrangements for third parties. Volume produced under contract arrangements is referred to below as "non-core products". Boston Beer's flagship brand is Samuel Adams Boston Lager(R) ("Boston Lager"). Net sales. Net sales decreased by $5.5 million or 11.8% to $40.9 million for the three months ended March 27, 1999 as compared to the three months ended March 28, 1998. The decline is primarily due to a decrease in volume. Volume. Volume decreased by 13.8% to 268,000 barrels in the three months ended March 27, 1999 from 311,000 barrels in the three months ended March 28, 1998. This decrease was primarily due to a decline in sales of year-round beer styles and a decline in the production of non-core products, partially offset by an increase in the sales of seasonal beer styles. Total volume for Boston Beer's core brands decreased by 10.1% to 257,000 barrels for the quarter ended March 27, 1999 as compared to 286,000 barrels for the quarter ended March 28, 1998. The decline in volume is a function of both increased competition from imported beers and a more mature market that is less inclined to sample new styles. The Company continuously evaluates the performance of its various beer and cider brands and the rationalization of its product line, as a whole. The Company discontinued certain year-round beer styles between April 1998 and December 1998, thereby contributing to the decline in volume. Volume relating to non-core products declined approximately 56%, representing approximately 31% of the total decline. Volume relating to non-core products was 11,000 barrels for the quarter ended March 27, 1999 as compared to 25,000 barrels for the quarter ended March 28, 1998. Management anticipates a continued decline in volume relating to non-core products. Selling Price. The selling price per barrel increased by $3.06 or 2.0% to $152.51 per barrel for the quarter ended March 27, 1999. This is due to a decline in sales of non-core products which have a lower selling price than core brands. The decline of shipments of non-core products improved average net sales per barrel by $4.84, or 3.3%. This decline was partially offset by changes in the packaging mix of the core brands. Significant changes in the packaging mix could have a material effect on sales per barrel. The Company packages its core brands in bottles and kegs. Assuming the same level of production, a shift in the mix from bottles to kegs would effectively decrease revenue per barrel, as the selling price per equivalent barrel is lower for kegs than for bottles. The ratio of kegs to bottles increased in core brands to 28.3% of total shipments relating to kegs in the three months ended March 27, 1999 from 26.4% for the same period last year. Gross Profit. Gross profit increased to 55.7% as a percentage of net sales or $84.97 per barrel for the quarter ended March 27, 1999, as compared to 51.4% as a percentage of net sales or $76.59 per barrel for the quarter ended March 28, 1998. The increase in gross profit is primarily due to a decline in cost of sales. Cost of sales decreased by $4.92 per barrel to 44.3% as a percentage of net sales or $67.45 per barrel for the quarter ended March 27, 1999, as compared to 48.6% as a percentage of net sales or $72.37 per barrel for the quarter ended March 28, 1998. This is primarily due to lower costs of certain raw materials, improvements in the production process at the Cincinnati Brewery, a decline in expenses related to excess hops inventory on-hand and purchase commitment contracts and a decline in barrels shipped related to non-core products. Raw material costs were lower due to new contracts with certain vendors. The Company enters into limited term supply agreements with certain vendors in order to receive preferential pricing. 9
Expenses related to excess hops inventory and purchase commitment contracts decreased to $250,000 for the quarter ended March 27, 1999 as compared to $1.0 million for the quarter ended March 28, 1998. See "Hops Purchase Commitments" below for further discussion. The gross profit margin on non-core products is significantly lower than for core brands. Therefore, a decline in the non-core product volume increased gross profit per equivalent barrel for the Company as a whole. The decline in volume relating to non-core products resulted in an increase in gross profit as a percentage of net sales by less than 1%. Additional factors that affect gross profit include changes in the packaging and product mix. The Company packages its core brands in bottles and kegs. While gross profit as a percentage of net sales is higher for kegs than for bottles, the per equivalent barrel gross profit is higher for bottles than for kegs. Therefore, an increase in kegs as a percentage of volume while increasing the overall gross profit margin as a percentage of net sales, will deliver fewer gross profit dollars with which to run the business. In the first quarter of 1999 keg sales as a percentage of total equivalent barrels of core brands increased to 28.3% in the first quarter of 1999 from 26.4% in the first quarter of 1998, thereby contributing to an increase in gross profit as a percentage of net sales. The gross profit per equivalent barrel increased for kegs and bottles due primarily to decreases in cost of sales, as previously discussed. Gross profit is not significantly affected by changes in brewing locations. The Company attempts to minimize total costs, including freight, by shifting production between plants. Effective March 31, 1999, the brewing contract between the Company and Pittsburgh Brewing Company expired. As of May 7, 1999, the Company had not entered into a new agreement with the Pittsburgh Brewing Company. The Company shifted production to other contract breweries and has not experienced a material impact on gross profit as a result of this shift in production. During 1999, production is expected to shift between plants as a result of the Stroh Transactions (see discussion below under "Stroh-Pabst-Miller Transactions"). The Company does not anticipate a material impact on gross profit as a result of the Stroh Transactions. Advertising, promotional and selling. Advertising, promotional and selling expenses increased by $1.2 million or 9.1% to $14.8 million for the three months ended March 27, 1999 as compared to $13.5 million for the three months ended March 28, 1998. As a percentage of net sales, advertising, promotional and selling expenses increased to 36.2% for the three months ended March 27, 1999 as compared to 29.2% for the same period last year, primarily due to higher point of sale and advertising expenditures. Increased point of sale expenses is largely due to the timing of the change in the Company's logo during 1998. The anticipation of the logo change resulted in a significant decline in purchases of promotional items during the three months ended March 28, 1998. Advertising expenses increased by 33.3% as compared to the same period last year as the Company continues to communicate its new advertising campaign which was launched during the third quarter of 1998. During the first quarter of 1998, the Company was in the process of developing a new campaign and as such, advertising expenses were lower. The Company has focused primarily on radio, billboards and trade print during the first quarter of 1999 and anticipates launching a new television campaign during 1999. General and administrative. General and administrative expenses decreased by $315,000 or 9.8% to $2.9 million for the three months ended March 27, 1999 as compared to the same period last year. The decrease is primarily due to declines in salaries expense, bad debt expense and legal expense. Interest income. Despite declining short-term rates, interest income increased by 20.4% to $561,000 due to an increase in average cash and short-term investments to approximately $51.8 million during the first quarter 1999 as compared to $35.5 million during the first quarter 1998. Interest expense. Interest expense decreased by 14.7% to $145,000 for the three months ended March 27, 1999 from $170,000 for the three months ended March 28, 1998. The decline is due to lower interest rates and lower average outstanding balances on the Company's $15.0 million line of credit. There were no amounts outstanding on this revolving line of credit during the three months ended March 27, 1999. Other income (expense), net. Other income (expense), net increased by $2.6 million to income of $24,000 for the three months ended March 27, 1999 from an expense of $2.6 million for same period last year. The significant expense recognized in the prior year was primarily due to the write-down of a marketable security of $2.3 million. This security was sold during the second quarter of 1998 at a loss of $1.4 million. 10
Provision for income taxes. The effective income tax rate decreased to 41.7% for the three months ended March 27, 1999 from 56.7% for the three months ended March 28, 1998. The 1998 effective tax rate reflects a capital loss on a marketable security; the Company does not expect to fully realize the tax benefit associated with this capital loss. There were no such losses recognized during 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition continued to be strong during the first quarter of 1999. Cash and short-term investments decreased to $52.4 million as of March 27, 1999 from $53.9 million as of December 26, 1998. The Company used $949,000 in operating activities during the three months ended March 27, 1999 as compared to net cash provided by operating activities of $1.3 million for the three months ended March 28, 1998. Cash used for operating activities during the three months ended March 27, 1999 represents adjusted net income of $4.6 million (adjusted primarily for depreciation and amortization of $1.4 million), offset by an increase in current net assets of $5.6 million. The change in current net assets is primarily due to an increase in accounts receivable coupled with a decline in accounts payable. This compares with adjusted net income of $5.7 million for the same period last year (adjusted primarily for a loss on the write-down of a marketable equity security of $2.3 million and depreciation and amortization of $1.2 million), partially offset by an increase in current net assets of $4.4 million. The effect of the change in current net assets as compared to the current period is primarily a result of the decline in inventory experienced during the prior period versus the slight build in inventory experienced during the three months ended March 27, 1999. Net cash used in investing activities decreased to $662,000 for the three months ended March 27, 1999 as compared to $2.6 million for the three months ended March 28, 1998. Cash used for capital expenditures declined to $712,000 during the three months ended March 27, 1999 as compared to $2.2 million during the three months ended March 28, 1998. The 1998 expenditures related primarily to production line modifications. The Company invested $50,000 of net positive cash flow in government securities during the three months ended March 27, 1999 as compared to $438,000 during the same period last year. The Company has historically invested its excess cash in money market funds, short-term treasury and agency bills, and more recently, high-grade commercial paper. Net cash provided by financing activities was $15,000 for the three months ended March 27, 1999 as compared to $1.6 million during the three months ended March 28, 1998. The Company had no borrowings under the Company's then existing $15.0 million line of credit during the current period as compared to net borrowings of $1.5 million during the prior period. Subsequent to the current quarter end, the $10.0 million balance which was outstanding under the existing $30.0 million line of credit expired and was fully repaid by the Company. As of May 7, 1999, the Company has no outstanding loans or borrowings under its existing lines of credit. Effective October 15, 1998, the Board authorized management to implement a stock repurchase, subject to an aggregate expenditure limitation of $10.0 million. There were no stock repurchases under this program as of March 27, 1999. With working capital of $56.0 million as of March 27, 1999, resources should be sufficient to meet the Company's short-term and long-term operating, capital and debt service requirements. THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES Year 2000 As has been widely publicized, many computer systems and microprocessors are not programmed to accommodate dates beyond the year 1999. The Company's exposure to this year 2000 ("Y2K") problem comes not only from its own internal computer systems and microprocessors, but also from the systems and microprocessors of its key vendors, including by way of illustration its contract breweries, raw material suppliers, utility companies, payroll services and banks, and its distributors and other customers. A failure of any of these internal or external systems could adversely affect the Company's ability to brew, package, sell, ship and bill for products and to collect on invoices and account for collections. In effect, any significant computer failure could have a material adverse effect on the Company's operations. 11
The Company currently believes that all of its internal systems are Y2K compliant as of March 27, 1999, with the exception of the depletions tracking system which is expected to be compliant by the end of the second quarter of 1999. This belief is based on its own internal evaluations and testing and on assurances from its systems vendors. Current estimates are that the total cost to achieve internal year 2000 compliance, other than at the Cincinnati Brewery, is estimated not to exceed $90,000, exclusive of amounts to be expended on contingency plans. Approximately $12,000 of this amount has been spent through March 27, 1999. This $90,000 anticipated upgrade cost is in addition to other planned information technology ("IT") projects. While the intensive effort expected to achieve Y2K compliance has caused and may continue to cause delays in other IT projects, the Company does not expect that any of these delays will have a significant effect on the Company's business or that any of the Company's other IT projects will be canceled or postponed to pay for the Y2K upgrades. Preliminary estimates of the cost to bring all systems into Y2K compliance at the Cincinnati Brewery do not exceed $25,000. None of this amount has been spent through March 27, 1999. The Company continues to evaluate and test all Cincinnati Brewery equipment. Process controls at the Cincinnati Brewery are integral to the brewery's operations. A failure of any of these controls could adversely affect the Company's ability to continue brewing operations; however, because many of the brewing processes can be controlled manually, the actual risk that the Company will be unable to brew is low. The Company relies extensively on its suppliers and contract breweries. Because their systems are not directly under the Company's control, the Company is at risk that all required external Y2K compliance efforts will not be completed on time and significant business disruptions will result. The Company has formed a committee to assure that all vendor and other relationship Y2K issues are analyzed and addressed. Under the direction of this committee, the Company compiled a list of all of its vendors and, as to each vendor, assessed the impact that a Y2K failure would likely have on the Company's business and operations. The Company then sent a Y2K questionnaire to each vendor believed to present a possible critical risk, in order to ascertain the Y2K compliance status of each. The Company is currently in the process of compiling and analyzing the information submitted by these vendors. To date, questionnaires have been sent to 37 critical vendors. All critical vendors have responded and all have asserted that they are addressing the Y2K problem or are already in compliance. The Company intends to continue to identify potential critical vendors and to monitor the progress toward compliance of those not yet compliant. The Company has also issued questionnaires to non-critical vendors and is conducting the same analysis with them. In addition to obtaining and assessing information concerning vendor Y2K status, the Company is requiring all new vendors and all existing vendors entering into new contracts with the Company to warrant Y2K compliance. Management understands the potentially serious consequences of a system failure and also understands that not all vendors may be Y2K compliant prior to January 1, 2000. For this reason, the Company is developing contingency plans for all critical services and supplies. As part of this contingency planning, the Company is assessing the cost of vendor shutdown, understanding that, because of the complex nature of the Company's supply chain and the lack of clarity as to the effect of multiple vendor failure, any assessment process is imprecise. In the unlikely event that the Company is unable to produce or ship any product (the "Worst Case Scenario"), the Company estimates its financial exposure to be in the range of $3.5 million per week of lost net revenue, over the short term. Using forward planning ratios, this lost revenue translates into lost variable gross profit, in the absence of mitigating cost cutting, of $1.9 million per week. A production disruption for an extended period is likely to affect the availability of the Company's products to consumers, leading to a decline in brand equity, the financial consequences of which are not susceptible to estimation. The Company does not expect to encounter the Worst Case Scenario. The financial consequences of a less significant disruption are difficult to predict, as they will depend on the exact circumstances and duration of the disruption. It is possible that the conclusions reached by the Company from its analysis to date will change, and as such the cost estimates and target completion dates outlined above may change. The Company will continue to explore contingency plans, so as to be in a position to mitigate the consequences of any disruption resulting from the Y2K issue. Stroh-Pabst-Miller Transactions Effective April 30, 1999, Stroh sold a majority of its beer brands and the Allentown Brewery to Pabst and certain of its brands to Miller. The Company brews approximately 40% of its production at the Stroh Breweries. Pabst has agreed to assume Stroh's obligations under the existing brewing contract between the Company and Stroh; Miller has agreed to guarantee Pabst's performance. The Company's volume brewed at the Allentown Brewery is anticipated to remain substantially unchanged as a result of the Stroh Transactions. The Company anticipates that the volume currently brewed at the Portland Brewery will be transferred to a Pabst or Miller-owned brewery during 1999. The Company has completed, to its satisfaction, detailed inspections of the potential breweries that are likely to assume the volume that is currently brewed at the Portland Brewery. The 12
Company does not anticipate any significant problems during the transition period or thereafter, as a result of the Stroh Transactions, and does not believe that it will have a material effect on its results of operations, statement of financial position or statement of cash flows during 1999. Hops Purchase Commitments The Company enters into purchase commitments for hops based on forecasted future requirements, among other factors. As a result of declining sales growth in recent years existing hops inventory and purchase commitments may exceed projected future needs. During the first quarter of 1998 the Company recorded a provision of $1.0 million to reserve for excess purchase commitments. The Company re-evaluated its hops inventory levels and existing purchase commitments to assess the reserve required for excess amounts as of March 27, 1999. During the three months ended March 27, 1999 the Company canceled certain hops purchase commitments in efforts to manage inventory levels. The Company recorded a $250,000 charge associated with the excess inventory on-hand and purchase commitment contracts during the three months ended March 27, 1999. The computation of the excess purchase commitment reserve requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. Actual results may materially differ from management's estimates. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since December 26, 1998, there have been no significant changes in the Company's exposures to interest rate or foreign currency rate fluctuations. The Company currently does not enter into derivatives or other market risk sensitive instruments for the purpose of hedging or for trading purposes. FORWARD-LOOKING STATEMENTS In this Form 10-Q and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "designed" and similar expressions, are intended to identify forward- looking statements regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date factor that may emerge, forward- looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or unanticipated. Such risks and uncertainties include the factors set forth below in addition to the other information set forth in this Form 10-Q. 13
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 Not Applicable Item 5. OTHER INFORMATION Not Applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Index Exhibit No. Title ----------- ----- 3.1 Amended and Restated By-Laws of the Company, dated June 2, 1998 (incorporated by reference to Exhibit 3.5 to the Company's Form 10-Q filed on August 10, 1998). 3.2 Restated Articles of Organization of the Company, dated July 21, 1998 (incorporated by reference to Exhibit 3.6 to the Company's Form 10-Q filed on August 10, 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). 14
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). 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 10.15 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 10.16 to the Company's Registration Statement No. 33-96162). 15
Exhibit No. Title ----------- ----- 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 Exhibit 10.17 to the Company's Registration Statement No. 33-96164). 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 27, 1998). +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 27, 1998). +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 27, 1998). +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 27, 1998). 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). 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 March 27, 1998). +10.30 Glass Supply Agreement between The Boston Beer Company and Owens' Brockway Glass Container Inc., dated April 30, 1998 (incorporated by reference to the Company's Form 10-Q, filed on August 10, 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. (incorporated by reference to the Company's Form 10-Q, filed on August 10, 1998). 16
Exhibit No. Title ----------- ----- 10.32 Extension letters, dated July 31, 1998, August 28, 1998, September 28, 1998, October 13, 1998, October 20, 1998 and October 23, 1998 between The Stroh Brewery Company and Boston Brewing Company, Inc. (incorporated by reference to the Company's Form 10-Q, filed on November 4, 1998). +10.33 Amended and Restated Production Agreement between The Stroh Brewery Company and Boston Beer Company Limited Partnership, dated November 1, 1998 (incorporated by reference to the Company's Form 10-K, filed on March 25, 1999). 10.34 Agreement between Boston Beer Company Limited Partnership, Pabst Brewing Company and Miller Brewing Company, dated February 5, 1999 (incorporated by reference to the Company's Form 10-K, filed on March 25, 1999). *10.35 Amendment to Revolving Credit Agreement between Fleet Bank of Massachusetts, N.A. and The Boston Beer Company, Inc., dated March 30, 1999. *+10.36 Agreement between Boston Beer Company Limited Partnership and Landstar Logistics and Transportation, dated January 9, 1999. *11.1 The information required by exhibit 11 has been included in Note E 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). *27.1 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 no reports on Form 8-K with the Securities and Exchange Commission during the quarter ended March 27, 1999. 17
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: May 10, 1999 By: /s/ C. James Koch ------------------------------------- C. James Koch President and Chief Executive Officer, (principal executive officer) Date: May 10, 1999 By: /s/ Alfred W. Rossow, Jr. ------------------------------------ Alfred W. Rossow, Jr. Chief Financial Officer (principal financial officer) Date: May 10, 1999 By: /s/ Richard P. Lindsay ------------------------------------ Richard P. Lindsay Vice President - Finance (principal accounting officer) 18