UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
[ ] 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 (IRS Employer
of incorporation or organization) Identification Number)
75 Arlington Street, Boston, Massachusetts 02116
(Address, including zip code, of Registrant's principal executive office)
(617) 368-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Class A Common Stock ($.01 par value)
held by non-affiliates of the Registrant totaled $98,894,103 (based on the
closing price of the Company's Class A Common Stock on the New York Stock
Exchange on March 14, 1997). All of the Registrant's Class B Common Stock
($.01 par value) is held by an affiliate.
As of March 14, 1997 there were 16,019,918 shares outstanding of the
Company's Class A Common Stock ($.01 par value) and 4,107,355 shares
outstanding of the Company's Class B Common Stock ($.01 par value).
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 28, 1996 are incorporated by reference into
Parts I, II, and IV, of this report.
Certain parts of the Registrant's definitive Proxy Statement for its
1997 Annual Meeting to be held on June 3, 1997 are incorporated by
reference into Part III of this report.
THE BOSTON BEER COMPANY, INC.
PART 1
Item 1. Business
General
Boston Beer is the largest craft brewer by volume in the United States.
In fiscal 1996, the Company sold 1,213,000 barrels of beer, which it believes
to be more than the next five largest craft brewers combined.
The Company's net sales have grown from $29.5 million in 1991 to
$191.1 million in fiscal 1996, representing a compounded annual growth rate
of 46%. The Company's net sales increased 26% in 1996 from 1995.
In 1996, in addition to its flagship brand, Samuel Adams Boston Lager,
the Company brewed seventeen beers under the Boston Beer Company name:
Boston Ale, Lightship, Cream Stout, Honey Porter, Scotch Ale, Double Bock,
Triple Bock, Octoberfest, Winter Lager, Old Fezziwig, Cherry Wheat, Summer
Ale, Cranberry Lambic, Golden Pilsner, and three beers brewed under the
LongShot label. The Company also sells beer brewed under the Oregon
Original brand name through a separate sales organization and utilizes both
separate and shared brewing operations. The Company brews its beer under
contract at five breweries located in Pittsburgh, Pennsylvania, Lehigh
Valley, Pennsylvania, Portland, Oregon, Rochester, New York, and
Cincinnati, Ohio. Effective March 1, 1997, the Company, through an
affiliate, Samuel Adams Brewery Company, Ltd., acquired the equipment and
other brewery-related personal property of The Schoenling Brewing Company
in Cincinnati, Ohio and leased the real estate on which the brewery is
located. The Company intends to purchase the real estate of the Cincinnati
brewery once certain pre-conditions have been satisfied.
Since its founding in 1984, the Company had operated as Boston Beer
Company Limited Partnership, a Massachusetts limited partnership, through
its sole partner Boston Brewing Company, Inc., a Massachusetts corporation.
Through a Recapitalization effected November 1995, The Boston Beer Company,
Inc., a Massachusetts corporation, became the parent corporation of Boston
Beer Company Limited Partnership and Boston Brewing Company, Inc. As a
result of the Recapitalization, all of the ownership interests in Boston
Beer Company Limited Partnership are owned, directly or indirectly, by The
Boston Beer Company, Inc.
The Company's principal executive offices are located at 75 Arlington
Street, 5th Floor, Boston, Massachusetts 02116, and its telephone number
is (617) 368-5000.
Industry Background
The Company is the largest brewer by volume in the craft-brewing/micro-
brewing segment of the U.S. brewing industry. The terms craft brewer and
micro-brewer are often used interchangeably by consumers and within the
industry to mean a small, independent brewer whose predominant product is
brewed with only traditional brewing processes and ingredients. Craft
brewers include contract brewers, small regional brewers, and brewpubs.
Craft beers are full-flavored beers brewed with higher quality hops, malted
barley, yeast, and water, and without adjuncts such as rice, corn, or
stabilizers, or with water dilution used to lighten beer for mass
production and consumption. The Company estimates that in 1996 the craft
brew segment accounted for approximately 4.7 million barrels. Over the five-
year period ended December 31, 1996, craft beer shipments have grown at a
compounded annual rate of approximately 39%, while total U.S. beer industry
shipments have remained substantially level.
The primary cause for the rapid growth of craft-brewed beers is
consumers' rediscovery of and demand for more traditional, full-flavored
beers. Before Prohibition, the U.S. beer industry consisted of hundreds of
small breweries that brewed such full-flavored beers. Since the end of
Prohibition, U.S. brewers have shifted production to milder, lighter beers,
which use lower cost ingredients, and can be mass-produced to take
advantage of economies of scale in production and advertising. This shift
toward these mass-produced beers has coincided with extreme consolidation
in the beer industry. Today, three major brewers control over 75% of all
U.S. beer shipments.
Per capita beer consumption in the U.S. has declined from its peak in
the early 1980's. As consumers began to drink less beer, they focused their
consumption on more flavorful or otherwise distinctive beers. Initially,
this demand was met by imported beers from Holland, Germany, Canada, and
Mexico. Beginning in the late 1980's, domestic craft brewers began selling
heavier, more full-flavored beers, usually in small, local geographic
markets, and often through their own brewpubs. When Samuel Adams Boston
Lager entered the market in 1985, only a handful of craft breweries
existed, virtually none of which distributed outside its immediate
geographical area. In response to increased consumer demand for more
flavorful beers, the number of craft-brewed beers has increased
dramatically. Currently there are more than 500 craft brewers. In addition
to the many independent brewers and contract brewers, the three major
brewers (Anheuser-Busch, Inc., Miller Brewing Co., and Coors Brewing Co.)
have all entered this fast-growing market, either through developing their
own specialty beers or by acquiring in whole or part, or forming
partnerships with existing craft brewers. It should be noted that in the
last four months of 1996, the growth of the craft beer market has slowed
materially. This slow down in growth may be accelerating in early 1997.
Business Strategy
The Company's business strategy is to continue to lead the craft-
brewed beer market by creating and offering a wide variety of the highest
quality full-flavored beers, while increasing sales through new product
introductions and substantial trade and consumer awareness programs,
supported by a large, well trained and rapidly expanding field sales
organization. This strategy is detailed below.
Quality Assurance
The Company employs nine brewmasters and retains a world recognized
brewing authority as consulting brewmaster to monitor the Company's
contract brewers. Over 125 test, tastings, and evaluations are typically
required to ensure that each batch of Samuel Adams conforms to the
Company's standards. Its brewing department is supported by a quality
control lab at the Company's small brewery in Boston. In order to assure
that its customers enjoy only the freshest beer, the Company requires its
contract brewers to include a "freshness" date on its bottles of Samuel
Adams products. Boston Beer was among the first craft brewers to follow
this practice. For Samuel Adams products, the Company uses only higher
quality hops grown in Europe and in England.
Product Innovations
The Company is committed to developing new products in order to
introduce beer drinkers to different styles of beer and promote the Samuel
Adams product line and to remain a leading innovator in the craft beer
industry. These new products allow the Samuel Adams drinker to try new
styles of beer while remaining loyal to the Samuel Adams brand. New
products also help the Company obtain more shelf space in retail stores and
increased distributor and retailer focus on Boston Beer products. In 1996,
the Company launched a "Homebrew" line of beers, under the LongShot label,
based on selected home brewers' recipes. Other beers were developed in
1996 under the Company's joint venture with Joseph E. Seagram & Sons, Inc.
("Seagram"). The Company continues to market its line of Oregon Originals
through the Oregon Ale and Beer Company. In 1997, the Company plans to
launch a hard cider line of beverage under the trademark, "HardCore".
Contract Brewing
The Company believes that its strategy of contract brewing, which
utilizes the excess capacity of other breweries, gives the Company
flexibility as well as quality and cost advantages over its competitors.
The Company carefully selects breweries with (i1) the capability of
utilizing traditional brewing methods, and (ii) first rate quality control
capabilities throughout brewing, fermentation, finishing, and packaging. By
using the current excess capacity at other breweries, the Company has
avoided potential start up problems of bringing a new brewery on line.
Furthermore, by brewing in multiple locations, the Company can reduce its
distribution costs and deliver fresher beer to its customers than other
craft brewers with broad distribution from a single brewery. While the
Company currently plans to continue its contract-brewing strategy, it has,
as discussed above, acquired an existing brewery in Cincinnati and will
also regularly evaluate the economic and quality issues involved with
acquiring other breweries, as well as continuing with its contract brewing
arrangements. It should be noted that the acquisition of the assets of the
Cincinnati brewery and the subsequent ownership of the brewery assets will
cause an erosion of the Company's consolidated gross profit margin and that
on a line of business basis, the Cincinnati operation is expected to show a
loss.
The Company currently has contracts with five brewers, one of whom is
an affiliate of the Company, to produce its Samuel Adams lines of beers in
the U.S., each of which is described in greater detail below. The Company
believes that its current contract brewers have capacity, to which the
Company has access, to brew annually approximately one and one half times
as much of the Company's beer as the Company sold during 1996.
The Company continues to brew its Samuel Adams Boston Lager at each of
its contract brewers but does not brew each of its other products at each
contract brewer. Therefore, at any particular time, the Company may be
relying on only one supplier for its products other than Samuel Adams
Boston Lager.
In the event of a labor dispute, governmental action or other event
that causes any of the Company's contract breweries to be unable to produce
the Company's beer, the Company believes it would be able to increase
production at its other contract breweries so as to meet demand for its
beer. In such event, however, the Company may experience temporary
shortfalls in production and/or increased production or distribution costs,
the combination of which could have a material adverse effect on the
Company's results of operations.
Pittsburgh Brewing Company. Pittsburgh Brewing's facilities were
used to brew approximately 45% of the Company's beer in 1995 and
approximately 22% in 1996. The Company's agreement with Pittsburgh Brewing
expires in February 1999, subject to earlier termination as described
below. The Company is charged a per unit rate for brewing, fermenting, and
packaging, as well as the cost of raw materials. Pittsburgh Brewing has the
right of first refusal for all beer requirements for the Samuel Adams
family of beers for a specified region if it has the ability to meet the
quality standards of the Company and is financially sound. Pittsburgh
Brewing is required to maintain product liability insurance coverage for
products produced for the Company and has agreed to indemnify the Company
and its affiliates for certain losses incurred in connection with the
manufacturing or packaging of its products.
Pittsburgh Brewing was formerly owned by Pittsburgh Food & Beverage
which filed for Chapter 11 bankruptcy protection on February 24, 1995. In
November 1995, the Trustee for Pittsburgh Food & Beverage sold the assets
of Pittsburgh Brewing to Keystone Brewers, Inc. ("Keystone"), which assumed
the brewing contract with the Company. While the Company believes that
Pittsburgh Brewing, under Keystone ownership, will continue as a source of
supply for the Company, no assurance can be given that Keystone will be
able to continue the Pittsburgh operations or that it will not encounter
financial or operating difficulties, such as labor and other employee
relations problems which might disrupt its operations.
The Stroh Brewery Company. In January 1994, the Company entered into
a brewing contract with Stroh related to the production of Samuel Adams
beer products at Stroh's Allentown (Lehigh Valley), Pennsylvania brewery
(the "Lehigh Valley Brewery"). Production from the Lehigh Valley Brewery
represented approximately 32% and 29% of the Company's total beer
production in 1996 and 1995, respectively.
On or about June 30, 1996, Stroh acquired the Portland, Oregon brewery
from G. Heileman Brewing Company ("Heileman") the brewery in Portland,
Oregon (the "Portland Brewery") at which the Company had brewed certain of
its beers since 1989. As part of such acquisition, Stroh assumed the
production agreement entered into between the Company and Heileman in
December, 1995 and agreed that the existing arrangements between the
Company and Heileman would remain in effect until at least June 30, 1998.
Production from the Portland Brewery has been, and is expected to continue
to be, the principal source of supply for markets west of and including
Denver, Colorado. Production from the Portland Brewery represented
approximately 25% and 23% of the Company's beer brewed in 1996 and 1995,
respectively.
In January 1997, the Company entered into an amended brewing contract
with Stroh, which provides continuing access to the Lehigh Valley Brewery
and the Portland Brewery. At the same time, the Company and Stroh also
executed a letter agreement setting forth the terms on which the Company
may elect to make an investment to facilitate certain expansion efforts at
the Lehigh Valley Brewery. If the Company does not make the proposed
investment, the contract will expire on June 30, 1998.
Under the amended brewing contract, Stroh has committed access to
certain minimum capacity at the Stroh facilities for the Company to brew
its Samuel Adams line of products, as well as certain seasonal products.
For such access, Stroh will charge the Company a per unit rate for
production and the Company will bear the costs of raw materials, excise
taxes, deposits for case pallets and kegs, and a case unit charge for using
bulk rather than packaged glass. The contract contains provisions relating
to the reallocation of access to specific capacity in certain events.
The Genesee Brewing Company. In July, 1995, the Company entered into
a brewing contract with Genesee related to the production of Samuel Adams
beer products at its Rochester, New York brewery. The Company is charged a
per unit rate for the production of beer, as well as the costs of raw
materials and excise taxes that Genesee is obligated to pay. This agreement
caps the maximum number of barrels that Genesee is obligated to produce for
the Company. The Company commenced packaging of products at this brewery
during the fourth quarter of 1995. This agreement expires in July 2005.
However, Genesee has the right to terminate this agreement upon ten months
notice to the Company. The Company has the right to terminate immediately
with cause and, subject to the payment of a termination fee to Genesee,
without cause.
The Schoenling Brewing Company. The Company commenced brewing
arrangements with the Hudepohl-Schoenling Brewery in Cincinnati, Ohio, on a
limited basis in the fourth quarter of 1995. In May 1996, the Company
entered into a brewing contract with Schoenling Brewing Company
("Schoenling"), which owns the Hudepohl-Schoenling Brewery, related to the
production of Samuel Adams beer products at its brewery in Cincinnati, and
obtained an option to acquire the brewery assets of the Hudepohl-Schoenling
Brewery. The contract provided that the Company pay a per unit rate for the
production of the beer, as well as the costs of raw materials and excise
taxes that Schoenling was obligated to pay, as well as certain deposit
fees. Effective March 1, 1997, the Company acquired all of the equipment
and other brewery-related personal property from Schoenling and leased the
real estate on which the brewery is situated. In addition, subject to the
satisfaction of certain pre-conditions, the Company has agreed to purchase
the real estate on which the brewery is located. Schoenling produces
certain Samuel Adams beers and the Company's HardCore hard ciders.
Strong Sales and Distribution Presence
Boston Beer sells its products through a dynamic sales force, which
the Company believes is the largest of any craft brewer and one of the
largest in the domestic beer industry. The Company sells its beer through
wholesale distributors, which then sell to retailers such as pubs,
restaurants, grocery chains, package stores, and other retail outlets. The
Company's sales force has a high level of product knowledge, and is trained
in the details of the brewing process. Its sales force receives selling
skills training each year from outside training experts. Sales
representatives typically carry hops, barley, and other samples to educate
wholesale and retail buyers as to the quality and taste of its beers. The
Company has developed strong relationships with its distributors and
retailers, many of which have benefited from the Company's premium pricing
strategy and rapid growth.
Advertising and Promotion
The Company has historically invested in advertising and promotion.
The Company uses radio advertising as well as outdoor advertising and,
opportunistically, print media. In the second half of 1996, the Company
began testing its television advertising campaign, which is now being
evaluated. The Company works closely with its distributors and customers to
develop and implement innovative promotions designed to increase consumer
awareness and sales. Its on-premise promotions, where legal, include beer
tastings and extensive use of user-friendly menu cards. Off-premise
promotions include incentive contests, periodic discounts to retailers and
other programs which often combine consumer, distributor, and retailer
elements.
Products
The Company's product strategy is to create and offer a world class
variety of traditional beers and to promote the Samuel Adams product line.
At the end of 1996, the Company marketed twelve year-round and 6 seasonal
beers under the Samuel Adams and LongShot brand names. These beers and the
years in which they were first brewed or introduced are set forth below.
The Company's Samuel Adams Boston Lager has historically accounted for the
majority of the Company's sales.
Beers Year First Brewed or Introduced
Year-Round Beers
Samuel Adams Boston Lager 1984
Samuel Adams Boston Ale 1987
Boston Lightship 1987
Samuel Adams Cream Stout 1993
Samuel Adams Honey Porter 1994
Samuel Adams Triple Bock 1994
Samuel Adams Scotch Ale 1995
Samuel Adams Cherry Wheat 1995
Samuel Adams Golden Pilsner 1996
LongShot Black Lager 1996
LongShot Hazelnut 1996
LongShot American Pale Ale 1996
Seasonal Beers
Samuel Adams Double Bock 1988
Samuel Adams Octoberfest 1989
Samuel Adams Winter Lager 1989
Samuel Adams Cranberry Lambic 1989
Samuel Adams Old Fezziwig 1995
Samuel Adams Summer Ale 1996
The Company uses its Boston brewery to develop new types of innovative
and traditional beers and to supply draft beer for the local market.
Product development entails researching market needs and competitive
products, sample brewing, and market taste testing.
In 1994, the Company formed the Oregon Ale and Beer Company ("Oregon
Ale and Beer") to develop and market Pacific Northwest style beers. Oregon
Ale and Beer markets its beers under the Oregon Original brand through a
sales force separate from that which sells Samuel Adams' styles. Oregon
Original ales have been brewed in Oregon at two breweries, one in Lake
Oswego and the other in Portland.
On March 19, 1996, the Company entered into an Agreement with Seagram,
pursuant to which Seagram sells a line of beers developed jointly by it,
the Company and a third party craft brewer, under the "Devil Mountain"
name. As of December 28, 1996, the Company had spent approximately
$1,435,000 with respect to this venture. The Company expects to spend up to
an additional $750,000, principally to cover marketing expenses to aid the
introduction of these new beers and will, in return, receive royalties
commencing on the second anniversary following the date of the first
shipment of such products by Seagram. The Company will also provide certain
technical assistance. The agreement also sets forth the circumstances in
which the relationship can be terminated and the terms on which rights to
the product line will revert to the Company or may be acquired by the
Company.
Ingredients and Packaging
The Company has been successful to date in obtaining sufficient
quantities of the ingredients used in the production of its beers. These
ingredients include:
Malt. The Company currently directs the purchase of the malt used in
the production of its beer to three suppliers, although it enters into
discussions from time to time with other vendors. The two-row varieties of
barley used in the Company's malt are grown in the U.S. and Canada.
Hops. The Company currently buys principally Noble hops for its Samuel
Adams beers. Noble hops are varieties from specific growing areas usually
recognized for superior taste and aroma properties and include Hallertau-
Hallertauer, Tettnang-Hallertauer, Tettnang-Tettnauer, and Spolt-Spolter
from Germany, and Bohemian Saaz from the Czech Republic. Noble hops are
rarer and more expensive than other varieties of hops. Traditional English
hops, East Kent Goldings and English Fuggles, are used in the Company's
ales. The Company has yet to find alternative hops which duplicate the
flavor and aroma of the Noble hops and traditional English ale hops. As a
result, the Company must purchase sufficient quantities of these Noble hops
to continue to increase production. The Company has been working with its
Bavarian hops dealers to increase acreage of the Hallertau-Hallertauer
varieties of hops. The Company stores its hops in multiple cold storage
warehouses to minimize the impact of a catastrophe at a single site.
The Company purchases its hops from hops dealers, the largest of which
(Joh. Barth & Son) has over the past five years accounted for between 30%
and 61% of the hops purchased each year by the Company. The Company
generally enters into forward contracts to ensure its supply of a portion
of its requirements for up to five years.
The Company's hops contracts are denominated in German marks or
English pounds, depending on the location of the supplier. Prior to late
1996, the Company has, as a practice, not hedged the foreign currency risk
associated with these contracts. Through that date, the Company's gains and
losses from exchange rate volatility have not been material. Beginning in
late 1996, the Company began to hedge some of its currency risks.
Yeast. The Company maintains a supply of proprietary strains of
yeast that it supplies to its contract brewers. Since these yeasts would be
impossible to duplicate if destroyed, the Company maintains supplies in
several locations. In addition, the Company's contract brewers maintain a
supply of these yeasts that are reclaimed from the batches of beer brewed.
The contract brewers are obligated by their brewing contracts only to use
these yeasts to brew the Company's beers and the Company's yeasts cannot be
used without the Company's approval to brew any other beers produced at the
respective breweries.
Packaging Materials. The Company maintains multiple competitive
sources of supply of packaging materials, such as bottles and shipping
cases. Other packaging materials, such as labels, crowns. and six-pack
carriers are currently supplied by single sources, although the Company
believes that alternative suppliers of these materials are available. In
those instances where the Company can negotiate preferential pricing, the
Company enters into limited term supply agreements with these vendors.
These materials are supplied to or resold to contract brewers depending on
the arrangement.
To date, the Company has not experienced material difficulties in
obtaining timely delivery from its suppliers. Although the Company believes
there are alternate sources available for the ingredients and packaging
materials described above, there can be no assurance that the Company would
be able to acquire such ingredients or packaging materials from other
sources on a timely or cost effective basis in the event current suppliers
were unable to supply them on a timely basis. The loss of a supplier could,
in the short-term, adversely affect the Company's business until
alternative supply arrangements were secured.
Sales and Marketing
The Company's products are sold to independent distributors by a large
field sales. With few exceptions, the Company's products are not the
primary brands in the distributors portfolio. Thus, the Company, in
addition to competing with other beers for a share of the consumer's
business, competes with other beers for a share of the distributor's
attention, time, and selling efforts. The Company considers its
distributors its primary customers and is focused on the relationship it
has with its distributors.
In addition to this distributor focus, the Company has set up its
sales organization to include on-premise and retail account specialists.
This is designed to develop and strengthen relations at the chain
headquarter level, and to provide educational and promotional programs
aimed at distributors, retailers, and consumers, in each channel of
distribution.
The Company has also historically engaged in extensive media
campaigns, primarily radio. In addition, its sales force complements these
efforts by engaging in sponsorships of cultural and community events, local
beer festivals, industry-related trade shows, and promotional events at
local establishments for sampling and awareness. All of these efforts are
designed to stimulate consumer demand by educating consumers, retailers,
and distributors, on the qualities of beer. The Company uses a wide array
of point-of-sale items (banners, neons, umbrellas, glassware, display
pieces, signs, menu stands, etc.) designed to stimulate impulse sales and
continued awareness. It should be noted that this rate of increase in sales
versus prior periods is slowing for the Company as well as for the market.
Distribution
The Company distributes its beers in every state in the U.S., as well
as the District of Columbia and Puerto Rico. The Company distributes its
beer through a network of over 400 distributors. During 1996, the Company's
two largest distributors each accounted for approximately 6% of the
Company's net sales. No other distributors accounted for more than 3% of
the Company's net sales during 1996. In some states, the terms of the
Company's contracts with its distributors may be affected by laws that
restrict enforceability of some contract terms, especially those related to
the Company's right to terminate the services of its distributors.
The Company also distributes its beers to Canada, Sweden, Germany,
Hong Kong and the United Kingdom, along with select Caribbean islands.
Exports, however, represented less than 1% of 1996 revenues.
The Company typically receives orders by the tenth of a month with
respect to products to be shipped the following month. Products are shipped
within days of completion and, accordingly, there has historically not been
any significant product order backlog.
Competition
The craft-brewed and high-end segments of the U.S. beer market are
highly competitive due to continuing product proliferation from craft
brewers and the recent introduction of specialty beers by national brewers.
Recent growth in the sales of craft-brewed beers has increased competition
and, as a result, the Company's growth rate compared to the preceding years
is declining. The Company's products also compete generally with other
alcoholic beverages, including other segments of the beer industry and low
alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf
and tap space in retail establishments and for marketing focus by the
Company's distributors and their customers, all of which also distribute
and sell other beers and alcoholic beverage products. The principal methods
of competition in the craft-brewed segment of the beer industry include
product quality and taste, brand advertising, trade and consumer
promotions, pricing, packaging, and the development of new products. The
competitive position of the Company is enhanced by its uncompromising
product quality, its development of new beer styles, innovative point of
sale materials, a large motivated sales force, tactical introduction of
seasonal beers and pricing strategies generating above-average profits to
distributors and retailers.
The Company expects competition with craft brewers to increase as new
craft brewers emerge and existing craft brewers expand their capacity and
distribution. While some of the smaller micro-brewers and craft brewers
have already left the marketplace due to the intense competition in the
marketplace which they were unable to withstand with their oftentimes
limited resources, new entrants into the market continue and competition,
overall, is high. In addition, large brewers have developed or are
developing niche brands and are acquiring small brewers to compete in the
craft-brewed segment of the domestic beer market. These competitors may
have substantially greater financial resources, marketing strength, and
distribution networks than the Company.
The Company competes directly with regional specialty brewers such as
Sierra Nevada Brewing Company, Pyramid Brewing Company, Anchor Brewing
Company, other contract brewers such as Pete's Brewing Company,
Massachusetts Bay Brewing, foreign brewers such as Heineken, Molson,
Corona, Amstel, and Becks, and other regional craft brewers and brewpubs.
Niche beers produced by affiliates of certain major domestic brewers such
as Anheuser-Busch, Incorporated, Miller Brewing Co., and Coors Brewing Co.,
also compete with the Company's products.
The Company believes that with the bulk of its production of beers
being produced as a contract brewer, it has competitive advantages over the
regional craft brewers because of its higher quality, greater flexibility,
and lower initial capital costs. Its use of contract brewing frees up
capital for other uses and allows the Company to brew its beer closer to
major markets around the country, providing fresher beer to customers and
affording lower transportation costs. The Company's recent purchase of a
brewery in Cincinnati where it previously contract-brewed its beers, will
continue to provide certain logistical advantages while at the same time
providing the Company with added flexibility of production through its
ownership which complements its strategy of contract brewing. The Company
also believes that its products enjoy competitive advantages over foreign
beers, including lower transportation costs, no import charges, and
superior product freshness.
Alcoholic Beverage Regulation and Taxation
The manufacture and sale of alcoholic beverages is a highly regulated
and taxed business. The Company's operations are subject to more
restrictive regulations and increased taxation by federal, state, and local
governmental entities than are those of non-alcohol related beverage
businesses. Federal, state, and local laws and regulations govern the
production and distribution of beer. These laws and regulations govern
permitting, licensing, trade practices, labeling, advertising, marketing,
distributor relationships, and related matters. Federal, state, and local
governmental entities also levy various taxes, license fees, and other
similar charges and may require bonds to ensure compliance with applicable
laws and regulations. Failure by the Company to comply with applicable
federal, state, or local laws and regulations could result in penalties,
fees, suspension, or revocation of permits, licenses, or approvals. There
can be no assurance that other or more restrictive laws or regulations will
not be enacted in the future.
Licenses and Permits
The Company either purchases beer from one or more contract brewers or
produces beer itself and sells it to distributors pursuant to a federal
wholesaler's basic permit. Brewery and wholesale operations require various
federal, state, and local licenses, permits, and approvals. In addition,
some states prohibit wholesalers and/or retailers from holding an interest
in any supplier, such as the Company. Violation of such regulations can
result in the loss or revocation of existing licenses by the wholesaler,
retailer, and/or the supplier. The loss or revocation of any existing
licenses, permits, or approvals, and/or failure to obtain any additional or
new licenses, including those required as a result of the Recapitalization
in 1995, could have a material adverse effect on the ability of the Company
to conduct its business. On the federal level, brewers are required to file
with the Bureau of Alcohol, Tobacco, and Firearms ("ATF") an amended
Brewer's Notice every time there is a material change in the brewing
process or brewing equipment, change in the brewery's location, change in
the brewery's management, or a material change in the brewery's ownership.
Brewers must notify ATF within 30 days of any change in the wholesaler's
operations, change in the wholesaler's location, change in the wholesaler's
management or a material change in the wholesaler's ownership. The
Company's operations are subject to audit and inspection by ATF at any
time.
On the state and local level, some jurisdictions merely require notice
of any material change in the operations, management, or ownership of a
permittee or licensee. Some jurisdictions require advance approvals and
require that new licenses, permits, or approvals must be applied for and
obtained in the event of a change in the management or ownership of the
permittee or licensee. State and local laws and regulations governing the
sale of beer within a particular state by an out-of-state brewer or
wholesaler vary from locale to locale.
ATF permits and brewer's registrations can be suspended, revoked, or
otherwise adversely affected for failure to pay tax, to keep proper
accounts, to pay fees, to bond premises, to abide by federal alcoholic
beverage production and distribution regulations and to notify ATF of any
change (as described above), or if holders of 10% or more of the Company's
equity securities are found to be of questionable character. Permits,
licenses, and approvals from state regulatory agencies can be revoked for
many of the same reasons.
Because of the many and various state and federal licensing and
permitting requirements, there is a risk that one or more regulatory
authorities could determine that the Company has not complied with
applicable licensing or permitting regulations or does not maintain the
approvals necessary for it to conduct business within their jurisdictions.
There can be no assurance that any such regulatory action would not have a
material adverse effect upon the Company or its operating results.
Taxation
The federal government and each of the states levy excise taxes on
alcoholic beverages, including beer. For brewers producing no more than
2,000,000 barrels of beer per calendar year, the federal excise tax is
$7.00 per barrel on the first 60,000 barrels of beer removed for
consumption or sale during a calendar year, and $18.00 per barrel for each
barrel in excess of 60,000. For brewers producing more than 2,000,000
barrels of beer in a calendar year, the federal excise tax is $18.00 per
barrel. As the brewer of record of its beers, the Company has been able to
take advantage of this reduced tax on the first 60,000 barrels of its beers
produced. Individual states also impose excise taxes on alcoholic beverages
in varying amounts, which have also been subject to change. The state
excise taxes are usually paid by the Company's distributors.
Congress and state legislators routinely consider various proposals to
impose additional excise taxes on the production and distribution of
alcoholic beverages, including beer. Further increases in excise taxes on
beer, if enacted, could result in a general reduction of malt beverages
sales.
Trademarks
The Company has obtained U.S Trademark Registrations for the marks
Samuel Adams Boston Lager (as well as for its design logo), Boston Ale,
Lightship, Winter Lager, and other marks. The Samuel Adams Boston Lager
mark and other Company marks are also registered or pending in various
foreign countries. The Company regards its Samuel Adams Boston Lager and
other trademarks as having substantial value and as being an important
factor in the marketing of its products. The Company is not aware of any
infringing uses that could materially affect its current business or any
prior claim to the trademarks that would prevent the Company from using
such trademarks in its business. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringements of its marks.
The Company occasionally makes available its trademarks to independent
on-premise retailers of its products.
In 1996, the Company entered into a license arrangement with Whitbread
PLC, the fourth largest brewery in the United Kingdom, pursuant to which a
new hybrid brew was developed and marketed under the trademark, "Boston
Beer". The recipe was developed by Whitbread Beer Company, a subsidiary of
Whitbread PLC, with assistance from Boston Beer Company's brewers. The
Company owns the trademarks for the new product and has granted Whitbread
an exclusive license to use that trademark in Great Britain and Ireland.
Boston Beer Company receives a royalty from the sale of this new beer.
On March 19, 1996, the Company entered into a Trademark License and
Technical Assistance Agreement with Joseph E. Seagram & Sons, Inc.
("Seagram"), pursuant to which the Company licensed the "Devil Mountain"
trademarks for use by Seagram on beers which Seagram developed, with
technical assistance from the Company. The Agreement provides for stated
royalties to commence on the second anniversary following the date of the
first shipment of such products by Seagram.
In addition, the Company has licensed its trademark, "Samuel Adams
Brew House" to certain entities for purposes of establishing Samuel Adams
Brew Houses at airport locations and elsewhere. The Company does not
receive a royalty pursuant to these license arrangements.
Environmental Regulations and Operating Considerations
As the owner of a brewery in Boston, Massachusetts and, effective
March 1, 1997, of a brewery in Cincinnati, Ohio, the Company's operations
are subject to a variety of extensive and changing federal, state, and
local environmental laws, regulations, and ordinances that govern
activities or operations that may have adverse effects on human health or
the environment. Such laws, regulations or ordinances may impose liability
for the cost of remediating, and for certain damages resulting from, sites
of past releases of hazardous materials. The Company believes that it
currently conducts, and in the past has conducted, its activities and
operations in substantial compliance with applicable environmental laws,
and believes that costs arising from existing environmental laws will not
have a material adverse effect on the Company's financial condition or
results of operations. There can be no assurance, however, that
environmental laws will not become more stringent in the future or that the
Company will not incur costs in the future in order to comply with such
laws.
The Company's operations are subject to certain hazards and liability
risks faced by all brewers, such as potential contamination of ingredients
or products by bacteria or other external agents that may be wrongfully or
accidentally introduced into products or packaging. While the Company has
never experienced a contamination problem in its products, the occurrence
of such a problem could result in a costly product recall and serious
damage to the Company's reputation for product quality, as well as claims
for product liability. The Company and its contract brewers maintain
insurance which the Company believes is sufficient to cover any liability
claims which might result from a contamination problem in its products.
Employees
The Company employs approximately 350 employees. None of the Company's
employees is represented by a labor union, except for 75 of those employees
employed at the Company's newly-acquired brewery in Cincinnati, Ohio. The
Schoenling Brewing Company, from whom the Company acquired certain brewery
assets in Cincinnati, and from whom the Company hired those employees
represented by labor unions, has enjoyed a good relationship with those
labor unions. The Company has no reason to believe that a good working
relationship with those labor unions will not continue. The Company has
experienced no work stoppages and believes that its employee relations are
good.
Item 2. Properties
The Company maintains its principal corporate offices and a brewery in
Boston, Massachusetts. The Company also maintains sales and administrative
offices in California, Maryland, and Oregon. The Company leases all of its
facilities, but will buy the brewery-related real estate in Cincinnati upon
satisfaction of certain pre-conditions. The Company believes that its
facilities are adequate for its current needs and that suitable additional
space will be available on commercially acceptable terms as required.
Item 3. Legal Proceedings
In early 1996, Boston Brewing Company, Inc. ("Boston Brewing"), an
affiliate of both Boston Beer Company Limited Partnership and The Boston
Beer Company, Inc., had an action filed against it by its distributor,
Premier Worldwide Beers PLC ("Premier"), such action having been filed in a
court in England. Premier's action contains a claim to damages for alleged
breach of a Distributorship Agreement between Boston Brewing and Premier.
The action is being vigorously defended and at present is in the discovery
stage.
The Company is party to certain claims and litigation in the ordinary
course of business. The Company does not believe any of these proceedings
will result, individually or in the aggregate, in a material adverse effect
upon its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter ended December 28, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Class A Common Stock is listed for trading on the New
York Stock Exchange. The Company's NYSE symbol is SAM. For the fiscal
periods indicated, the high and low sales price for Boston Beer Company,
Inc. Class A Common Stock as reported on the New York Stock Exchange-
Composite Transaction Reporting System were as follows:
Fiscal 1996 High Low
First Quarter $24.750 $18.375
Second Quarter $24.000 $18.250
Third Quarter $23.750 $19.000
Fourth Quarter $20.375 $10.000
Fiscal 1995 High Low
First Quarter Not applicable Not applicable
Second Quarter Not applicable Not applicable
Third Quarter Not applicable Not applicable
Fourth Quarter $33.00 $21.50
There were 19,051 holders of record of the Company's Class A Common
Stock as of March 14, 1997. Included in the number of stockholders of
record are stockholders who hold shares in "nominee" or "street" name. The
closing price per share of the Company's Class A Common Stock as of March
14, 1997, as reported under the New York Stock Exchange-Composite
Transaction Reporting System, was $8.625.
The Company's Class B Common Stock is not listed for trading. However,
each share of Class B Common Stock is convertible, at any time, at the
option of the holder thereof, into one share of Class A Common Stock.
As of March 14, 1997, there was one holder of record of the Company's
Class B Common Stock.
The holders of the Class A and Class B Common Stock are entitled to
dividends, on a share-for-share basis, only when and if declared by the Board
of Directors of the Company out of funds legally available for payment
thereof. The Company does not anticipate paying dividends on the Class A
and Class B Common Stock in the foreseeable future. It should be further
noted that under the terms of the Revolving Credit Agreement, the Company
is prohibited from paying dividends.
Item 6. Selected Financial Data
THE BOSTON BEER COMPANY, INC.
SELECTED FINANCIAL DATA
Year Ended
Dec. 28 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31
1996 1995 1994 1993 1992 1991
(in thousands, except per share, per barrel and employee data)
Income Statement Data:
Sales $213,879 $169,362 $128,077 $85,758 $53,343 $32,302
Less excise taxes 22,763 18,049 13,244 8,607 5,165 2,845
-------- -------- -------- ------- ------- -------
Net sales 191,116 151,313 114,833 77,151 48,178 29,457
Cost of Sales 95,786 73,847 52,851 35,481 22,028 13,039
-------- --------- -------- ------- -------- ------
Gross Profit 95,330 77,466 61,982 41,670 26,150 16,418
Advertising,
promotional,
and selling
expenses 70,131 60,461 46,503 32,669 21,075 12,105
General and
administrative 12,042 7,585 6,593 4,105 3,306 2,247
-------- -------- ------- ------- ------- -------
Total operating
expenses 82,173 68,046 53,096 36,774 24,381 14,352
-------- -------- ------- ------- ------- -------
Operating income 13,157 9,420 8,886 4,896 1,769 2,066
Other income
(expense), net 1,714 959 199 (2) (124) 23
-------- -------- ------- -------- ------- ------
Income before
income taxes 14,871 10,379 9,085 4,894 1,645 2,089
Provision
(benefit) for
income taxes 6,486 (2,195) - - - -
-------- --------- ------- -------- ------ -----
Net income $8,385 $12,574 $9,085 $4,894 $1,645 $2,089
======== ========= ======= ======== ====== =====
Income before
income taxes $10,379 $9,085 $4,894 $1,645 $2,089
Pro forma
income taxes
(unaudited) - 4,483 3,765 2,040 691 859
-------- -------- ------- ------ ------- ------
Pro forma net
income
(unaudited) $5,896 $5,320 $2,854 $954 $1,230
======== ======= ====== ====== ====== ======
Earnings per share $0.41
Pro forma earnings
per share
(unaudited) $0.33 $.29
Weighted average
shares
outstanding 20,296 17,949 18,171
Statistical Data:
Barrels sold 1,213 961 714 475 294 174
Net sales per barrel $158 $158 $161 $162 $164 $169
Employees 253 196 138 110 87 69
Net sales per employee $755 $772 $832 $701 $554 $427
Balance Sheet Data at
period end:
Working capital $47,769 $45,266 $3,996 $8,173 $6,169 $6,053
Total assets $96,553 $76,690 $31,776 $24,054 $15,780 $11,981
Total long term debt $1,800 $1,875 $1,950 $2,000 $2,050 $2,100
Total partners/
stockholders'
equity $64,831 $54,798 $6,600 $8,854 $6,434 $5,954
Dividends - - - - - -
In 1995, the Company recorded a one-time tax benefit of $1,960,000 upon
change in tax status of the entity, and a tax benefit of $235,000 for
the period November 21, 1995 to December 31, 1995.
Reflects pro forma provisions for income taxes using statutory federal
and state corporate income tax rates that would have been applied had
the Company been required to file income tax returns during the
indicated period. See Note B of notes to the consolidated financial
statements.
Reflects weighted average number of common and common equivalent shares of
the Class A and Class B Common Stock assumed to be outstanding during
the respective periods. For the years ended December 31, 1995
and December 31, 1994, shares reflect pro forma weighted average
numbers. See Note B of notes to the consolidated financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
Effective in fiscal 1996, the Company changed its fiscal year to end
on the last Saturday in December. The impact on the current year of two
fewer days of operations was not material.
The Company's profitability has been affected principally by sales
volume, slow erosion of gross profit margin, the number of sales people
employed, and advertising expenses. As indicated in the table below under
"Quarterly Results", although the Company has historically experienced
higher sales and higher advertising expenses as a percent of sales in the
second through fourth quarters of each year compared to the first quarter
of each year, which has resulted in a higher level of profit in the first
quarter.
The Company prices its beers at a level higher than domestic mass-
produced beers but at a level consistent with other craft beers. The
Company believes that this pricing is appropriate given the quality and
reputation of its products. The Company expects that its pricing may become
subject to downward pressure as sales volume and competition increase;
however, such expectations have not yet been realized in a material way. In
1996, the Company instituted various modest price increases which to date
have had a favorable impact on the Company's revenue per barrel.
The Company's gross profit may be affected by the Company's product
mix. Seasonal beers tend to be more expensive to produce and the additional
expenses may not be fully offset by increased pricing. Increases in sales
of seasonal beers, therefore, may reduce the Company's gross profit per
barrel in certain quarters. Although the Company sells its products in
bottles and kegs, the annualized mix of the two has remained relatively
constant. A shift toward a higher proportion of keg sales versus bottle
sales may not have a negative impact on profit due to the fact that while
kegs generate lower revenue per barrel, there is generally a corresponding
reduction in the cost of producing keg products, with the exception of the
aforementioned seasonal beers.
The financial statements of the Company for the periods prior to the
Recapitalization do not include a provision for income taxes. Prior to the
Recapitalization, the Company operated solely as Boston Beer Company
Limited Partnership. As a partnership, the income of the Company was
included in the income tax returns of the Partnership's partners. For
information purposes, the statements of income include a pro forma income
tax provision on taxable income for financial statement purposes using the
effective federal and state rates that would have resulted if the
Partnership had filed corporate tax returns during those periods. The
Company had historically distributed between 40% and 50% of pre-tax income
to its partners for the purpose of funding their tax obligations. Tax
payments by the Company following the Recapitalization, therefore, have not
caused a material change to the Company's cash flow or liquidity.
Quarterly Results
The Company has historically experienced, and expects to continue
experiencing quarterly fluctuations in its sales, operating, and net
income. Historically, the Company's sales tend to be lower in the first
quarter of each year. Sales tend to increase in the third and fourth
quarters, while decreasing in the month of December. The Company has also
historically expended less on advertising, promotion, and selling expenses
in the first quarter. It should be noted that sales from distributors to
retailers are increasing, but at a decreasing rate.
Quarterly sales and quarterly spending on advertising, promotion, and
selling expenses are shown in the following table which sets forth certain
unaudited quarterly results of operations for each of the twelve quarters
ended December 28, 1996. In management's opinion, this unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future quarters.
The following is a summary of selected unaudited quarterly financial data:
Quarters Ended
March 30, June 29, Sept. 28, Dec. 28, March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1995 1995 1995 1995
Barrels Sold 275 343 294 301 197 245 246 273
Sales $48,276 $60,583 $51,598 $53,422 $34,498 $42,885 $44,512 $47,467
Less excise taxes 5,147 6,512 5,486 5,618 3,724 4,564 4,702 5,059
------- ------- ------- ------- ------- ------- ------- -------
Net sales 43,129 54,071 46,112 47,804 30,774 38,321 39,810 42,408
Cost of sales 21,865 27,065 22,901 23,955 15,154 18,212 19,249 21,232
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 21,264 27,006 23,211 23,849 15,620 20,109 20,561 21,176
Advertising,
promotional,
and selling
expenses 14,029 20,340 17,118 18,644 10,814 16,358 16,483 16,806
General and
administrative
expenses 2,983 2,867 2,402 3,790 1,632 1,906 1,670 2,377
------- ------- ------- ------- ------ -------- ------- --------
Total operating
expenses 17,012 23,207 19,520 22,434 12,446 18,264 18,153 19,183
------- ------- ------- ------- ------- -------- ------- --------
Operating income 4,252 3,799 3,691 1,415 3,174 1,845 2,408 1,993
Other income
expenses, net 434 370 437 473 49 (19) 804 125
------- ------- ------- ------- ------- -------- ------- --------
Income before
income taxes 4,686 4,169 4,128 1,888 3,223 1,826 3,212 2,118
Provision (benefit)
for income taxes 2,046 1,808 1,832 800 - - - (2,195)
------ -------- ------- ------- ------- -------- ------- ---------
Net income $2,640 $2,361 $2,296 $1,088 $3,223 $1,826 $3,212 $4,313
====== ======== ======= ======= ======= ======== ======= =========
Pro forma data:
Income before
income taxes $3,223 $1,826 $3,212 $2,118
Pro forma income tax 1,387 788 1,384 924
------- --------- ------ ---------
Pro forma net income $1,836 $1,038 $1,828 $1,194
====== ========= ======== ======= ======= ========= ====== =========
Effective tax rate 43.7% 43.4% 44.4% 42.4% 43.0% 43.2% 43.1% 43.6%
Period to Period Comparison of Results
The following table sets forth certain items included in the Company's
consolidated statements of income as a percentage of net sales:
Percentage of Net Sales
Years Ended
12/28/96 12/31/95 12/31/94
Sales 111.9% 111.9% 111.5%
Less Excise Taxes 11.9% 11.9% 11.5%
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 50.1% 48.8% 46.0%
------ ------ ------
Gross Profit 49.9% 51.2% 54.0%
Advertising,
promotional, and
selling expense 36.7% 40.0% 40.5%
General and
administrative
expenses 6.3% 5.0% 5.7%
------ ------ ------
Total operating
expenses 43.0% 45.0% 46.2%
------ ------ ------
Operating income 6.9% 6.2% 7.7%
Income before income
taxes 7.8% 8.3% 7.9%
------ ------ ------
Net income 4.4% 3.9% 4.6%
------ ------ ------
Pro forma unaudited see Note B.
Years Ended December 28, 1996 and December 31, 1995.
Sales. Volume increased by 26.2% from 961,000 barrels in 1995 to
1,213,000 barrels in 1996. Net sales increased by 26.3% from $151,313,000
in 1995 to $191,116,000 in 1996. Sales volume reflected continued growth in
Sam Adams Boston Lager, increases in the volume of seasonal beers,
increases in the Oregon Original beers, and the introduction of Golden
Pilsner, and the LongShot line of beers. The average net sales price per
barrel increased $.10 due primarily to an increase in selling prices offset
by increases in quality assurance and in customer discounts.
Gross Profit. Gross profit increased by 23.1% from $77,466,000 in 1995 to
$95,330,000 in 1996. Cost of sales per barrel increased to 50.1% of net sales
in 1996 from 48.8% of net sales in 1995. This increase was due principally to
the following: increased obsolescence expense (consisting primarily of
reserves for re-used glass and work-in-process) higher depreciation (princi-
pally on kegs) and a reduction in re-used glass savings, offset by a net
decrease in raw material cost and packaging costs.
Advertising, Promotional, and Selling. Advertising, promotional, and
selling expenses increased by 16.0% from $60,461,000 in 1995 to $70,131,000
in 1996. The per barrel expense actually decreased by $5.09 from $62.91 in
1995 to $57.82 in 1996. As a percentage of net sales, advertising, promo-
tional, and selling expenses decreased from 40.0% in 1995 to 36.7% in 1996.
The aggregate dollar increase in advertising, promotional, and selling
expenses reflected increases in purchases of point of sales materials,
advertising, and promotional expenses, freight, and salaries and related
employee benefits. These expenses include expenditures for advertising,
promotions, and selling expenses for new product introductions not related
to the Samuel Adams product line.
General and Administrative. General and administrative expenses increased
by 58.8% from $7,585,000 in 1995 to $12,042,000 in 1996. This increase of
$4,457,000 was primarily caused by an increase of $1,722,000 in bad debt
expense, which are both customer specific and general in nature, and
increases in personnel and salaries and related employee benefits, additional
leased space at the executive office, and additional costs related to the
Company becoming a public entity.
Other Income (Expense), Net. Other income, net, increased by 78.7% from
$959,000 in 1995 to $1,714,000 in 1996. This increase of $755,000 reflects
$1,480,000 increase in interest income on the proceeds of the November, 1995
stock offering, offset by the $807,000 one-time gain on the sale of distri-
bution rights sold in 1995. Interest expense remained relatively stable from
1995 to 1996. It should be noted that the interest income earned during 1995
on the proceeds from the stock offering in November, 1995 reflects a period
of approximately one and one half months versus an entire year during 1996.
Net Income. Net income decreased by 33.3% to $8,385,000 in 1996 from
$12,574,000 in 1995. The decrease is due to an income tax expense of
$6,486,000 in 1996 versus an income tax benefit of $2,195,000 in 1995. This
decrease is offset by an increase in other income of $755,000 and an increase
in operating income of $3,737,000 as discussed above.
Pro Forma Net Income. Net income increased by 42.2% to $8,385,000 in 1996
from a pro forma net income of $5,896,000 in 1995. The increase in net income
is comprised of a net increase in other income of $755,000 and a net increase
in operating income of $3,737,000, as discussed above. This increase is
somewhat offset by a $2,003,000 increase in state and federal income taxes
(reflecting the higher graduated tax brackets applicable to the higher income
before tax).
Years Ended December 31, 1995 and 1994.
Sales. Volume increased by 34.6% from 714,000 barrels in 1994 to
961,000 in 1995. Net sales increased by 31.8% from $114,833,000 in 1994 to
$151,313,000 in 1995. Sales volume reflected continued growth in Samuel
Adams Boston Lager, Honey Porter, and seasonal beers, and the introduction
of Scotch Ale. The average net sales price per barrel decreased $3.38 due
primarily to an increase in customer discounts, product mix, and expanded
sales in geographic areas where beer prices are slightly lower than in the
Company's original markets.
Gross Profit. Gross profit increased by 25.0% from $61,982,000 in 1994 to
$77,466,000 in 1995. Cost of sales increased $2.82 per barrel to 48.8% of
net sales in 1995 from 46.0% of net sales in 1994. This increase was due
principally to increased raw material costs, particularly malt; package
design for new products; logistical expenses related to the increase in
sales volume and seasonal products; abnormally high disposal of obsolete
packaging materials; and higher keg depreciation, due to the volume
increase in kegs. The per barrel increases were partially offset by
reductions in other areas, particularly glass packaging costs.
Advertising, Promotional, and Selling. Advertising, promotional, and
selling expenses increased by 30.0% from $46,503,000 in 1994 to $60,461,000
in 1995. The per barrel expense actually decreased by $2.22 from $65.13 in
1994 to $62.91 in 1995. As a percentage of net sales, advertising,
promotional, and selling expenses decreased from 40.5% in 1994 to 40.0% in
1995. The aggregate dollar increase in advertising, promotional, and
selling expenses reflected increases in purchase of point of sales
materials, advertising expenditures, promotional programs, and salaries and
related employee benefits. These expenses include expenditures for
advertising, promotions, and selling expenses for new product introductions
not related to the Samuel Adams product line.
General and Administrative. General and administrative expenses increased
by 15.0% from $6,593,000 in 1994 to $7,585,000 in 1995. This increase of
$992,000 was primarily caused by increases in personnel and salaries and
related employee benefits, increases in legal, insurance, and depreciation
and computer services due to the purchase and installation of new computer
equipment and software. These increases were partially offset by reductions
in other areas. As a percentage of net sales, general and administrative
expenses decreased from 5.7% in 1994 to 5.0% in 1995.
Other Income (Expense), Net. In 1995, the Company recorded a nonrecurring
$807,000 gain related to the sale of certain distribution rights in a major
metropolitan area. Interest income and income expense remained relatively
stable from 1994 to 1995. It should be noted that the interest income earned
during 1995 on the proceeds from the stock offering in November, 1995 reflects
a period of approximately one and one half months.
Net Income. Net income increased by 38.4% to $12,574,000 in 1995 from
$9,085,000 in 1994. The increase includes a one-time tax benefit of
$1,960,000 recorded upon the change in tax status of the entity as required
by SFAS 109, and a tax benefit of $235,000 for the period from November 21
to December 31, 1995. The balance of the increase in net income is
comprised of a net increase in other income of $760,000 and a net increase
in operating income of $534,000, as discussed above.
Pro Forma Net Income. Pro forma net income increased by 10.8% from
$5,320,000 in 1994 to $5,896,000 in 1995, due to the factors described
above. Operating income was adversely affected by net marketing investment
(advertising, promotional, and other selling expenses in excess of gross
profit generated) in the amount of $2,800,000 from two new product
initiatives not related to the Samuel Adams product line. Management
estimated that cash flows and net income would be adversely affected by
approximately $750,000 during 1996 in a transaction with Joseph E. Seagram
& Sons, Inc. The actual amount of the 1996 expense associated with the
Joseph E. Seagram & Sons, Inc. transaction was $885,000. The Company does
not expect this transaction to generate royalties until 1998. The pro forma
effective tax rate increased from 41.4% in 1994 to 43.2% in 1995. This
increase was primarily due to an increase in meals and entertainment
expenses, which are only 50% tax deductible.
Operating income increased 6.0% from $8,886,000 in 1994 to $9,420,000
in 1995. This increase was the result of an increase in gross profit of
25.0%, offset by increases in operating expenses of 28.2%.
Liquidity and Capital Resources
The Company's financial condition continued to be strong in 1996 due
primarily to the net proceeds raised by its initial public offering. The
Company is currently negotiating two unsecured bank lines of credit which
will provide for borrowings of up to $15,000,000 on one line of credit,
which is an increase of $1,000,000 on the existing $14,000,000 line of
credit, and up to $30,000,000 on the other line of credit. In addition, the
Company has obtained a $9,000,000 foreign exchange credit line. With a
substantial amount of highly liquid assets and working capital of
$47,769,000 at December 28, 1996, capital resources in conjunction with
existing lines of credit should be sufficient to meet the Company's
operating, capital, and debt service requirements over the next year.
The Company has outstanding borrowings of $1,875,000 which mature in
2007. The Company plans to make approximately $21,000,000 of total capital
expenditures in 1997, principally related to the purchase of packaging and
brewing equipment for its contract breweries and the purchase of the
Schoenling assets.
Operating activities provided cash of $15,763,000 in 1996 compared to
$2,440,000 in 1995. The primary cause of the improvement was the increase
in accounts payable, principally due to the timing of the receipt of hops,
offset somewhat by increases in inventory and other current assets,
principally due to the Company's investment in The Schoenling Brewery
Company prior to the exercise of the purchase option. Cash used in
investment activities decreased by $18,245,000, primarily due to increased
capital spending. Cash provided by financing activities primarily reflects
the tax benefit related to the exercise of employee stock options.
Assuming there is no significant change in the Company's business, the
Company believes that the existing cash and short term investments as well
as cash flows from operations and the existing lines of credit will be
sufficient to meet its working capital requirements for at least the next
twelve months.
Recent Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which is effective for fiscal years that end after December 15,
1997, including interim periods. Earlier application is not permitted.
However, an entity is permitted to disclose pro forma earnings per share
amounts computed using SFAS 128 in the notes to financial statements in
periods prior to adoption. The Statement requires restatement of all prior-
period earnings per share data presented after the effective date. SFAS
128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, "Earnings Per Share" (IAS 33).
The Company plans to adopt SFAS 128 in 1997 and has not yet determined the
impact.
Certain Factors Affecting Future Operating Results
Statements made or incorporated in this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements include, without limitation, statements
containing the words "anticipates", "believes", "expects", "intends",
"future" and words of similar import which express management's belief,
expectations, or intentions regarding the Company's future performance. The
Company's actual results could differ materially from those set forth in
the forward-looking statements.
The Company may experience significant fluctuations in future operating
results, which may be caused by many factors, including, but not limited to
(1) further slowing of the growth rate of the craft brewing segment; (2)
share-of-market erosion due to increased competition; (3) increased promo-
tional expenditures versus historical spending and versus the 1997 operating
plan; (4) higher-than-planned costs of operating the Samuel Adams brewery in
Cincinnati; (5) an unexpected increase in raw material or packaging costs
which cannot be passed along through increased prices; (6) slower-than-
planned acceptance of Hard Core cider by the trade and consumer; (7)
inability of Oregon Original beers and other Samuel Adams styles to
maintain historic growth rates.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants ............................ 19
Consolidated Financial Statements of The Boston Beer Company, Inc.
Consolidated Balance Sheets at December 28, 1996 and
December 31, 1995 ........................................ 20
Consolidated Statements of Income for the Years Ended
December 28, 1996, December 31, 1995, and
December 31, 1994 ........................................ 21
Consolidated Statements of Stockholders' Equity
For the Years Ended December 28, 1996, December 31, 1995, and
December 31, 1994 ........................................ 22
Consolidated Statements of Cash Flows for the Years Ended
December 28, 1996, December 31, 1995, and
December 31, 1994 ........................................ 23
Notes to the Consolidated Financial Statements ............. 24
Financial Statement Schedules for the years ended December 28, 1996,
December 31, 1995, and December 31,1994
All schedules are omitted because the required information is
shown in the financial statements or the notes thereto.
Page 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Boston Beer Company, Inc.
We have audited the accompanying consolidated balance sheets of The
Boston Beer Company, Inc. (formerly Boston Beer Company Limited
Partnership) as of December 28, 1996 and December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 28, 1996, December 31,
1995, and December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
The Boston Beer Company, Inc. as of December 28, 1996 and December 31,
1995, and December 31, 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
28, 1996, December 31, 1995, and December 31, 1994, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 21, 1997, except for Note O,
as to which the date is March 1, 1997.
Page 19
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 28, December 31,
1996 1995
ASSETS
Current Assets:
Cash & cash equivalents $ 5,060 $ 1,877
Short term investments 35,926 34,730
Accounts receivable 18,109 16,265
Allowance for doubtful accounts (1,930) (175)
Inventories 13,002 9,280
Prepaid expenses 674 437
Deferred income taxes 2,968 1,011
Other current assets 3,882 1,858
------------ ------------
Total current assets 77,691 65,283
Restricted investments 611 602
Equipment and leasehold improvements, at cost 21,043 9,690
Accumulated depreciation (6,412) (3,531)
Deferred income taxes 151 1,777
Other assets 3,469 2,869
------------ ------------
Total assets $ 96,553 $ 76,690
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 17,783 $ 9,793
Accrued expenses 12,064 10,149
Current maturities of long-term debt 75 75
------------ ------------
Total current liabilities 29,922 20,017
Long-term debt, less current maturities 1,800 1,875
Commitments and Contingencies (Note I) - -
Stockholders' Equity:
Class A Common Stock, $.01 par value;
20,300,000 shares authorized;
15,972,058, and 15,643,664 issued and
outstanding as of December 28, 1996 and
December 31, 1995, respectively 160 156
Class B Common Stock, $.01 par value;
4,200,000 shares authorized; 4,107,355
issued and outstanding as of December
28, 1996 and December 31, 1995,
respectively 41 41
Additional paid-in-capital 55,391 53,482
Unearned compensation (363) (509)
Unrealized loss on investments in
marketable securities (442) -
Unrealized gain on forward
exchange contract 31 -
Retained earnings 10,013 1,628
------------ ------------
Total stockholders' equity 64,831 54,798
------------ ------------
Total liabilities and stockholders'
equity $ 96,553 $ 76,690
============ ============
The accompanying notes are an integral part of the financial statements.
Page 20
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 28, December 31, December 31,
1996 1995 1994
Sales $ 213,879 $ 169,362 $ 128,077
Less excise taxes 22,763 18,049 13,244
---------- ---------- ----------
Net sales 191,116 151,313 114,833
Cost of sales 95,786 73,847 52,851
---------- ---------- ----------
Gross profit 95,330 77,466 61,982
Operating expenses:
Advertising, promotional
and selling expenses 70,131 60,461 46,503
General and administra-
tive expenses 12,042 7,585 6,593
---------- ---------- ----------
Total operating
expenses 82,173 68,046 53,096
---------- ---------- ----------
Operating income 13,157 9,420 8,886
Other income (expense):
Interest income 1,932 452 429
Interest expense (236) (250) (233)
Other income, net 18 757 3
---------- ---------- ----------
Total other income 1,714 959 199
Income before income
taxes 14,871 10,379 9,085
Provision (benefit)
for income taxes 6,486 (2,195) -
---------- ---------- ----------
Net income $ 8,385 $ 12,574 $ 9,085
========== ========== ==========
Pro forma data (unaudited) (Note B):
Income before pro forma
income taxes 10,379 9,085
Pro forma income tax
expense 4,483 3,765
---------- ----------
Pro forma net income $ 5,896 $ 5,320
========== ==========
Net income per common and
common equivalent
share $ 0.41 $ 0.33 $ 0.29
========== ========== ==========
Weighted average num-
ber of common and
common equivalent
shares 20,352 17,949 18,171
========== ========== ==========
Pro forma, see Note B.
The accompanying notes are an integral part of the financial statements.
Page 21
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 28, 1996, December 31, 1995, and
December 31, 1994
(in thousands)
General Limted Compen- Partners'
Partner Partners sation Equity
Balance Dec-
ember 31,1993 $ 803 $ 8,051 $ 8,854
Net income 2,242 6,843 9,085
Compensation
associated
with stock
options - 280 280
Partner dis-
tributions (2,813) (8,806) (11,619)
---------------------------------------
Balance Dec-
ember 31, 1994 232 6,368 6,600
Net income:Jan- 2,694 8,252 10,946
uary 1 through
November 20,
1995 allocated
to the Part-
nership;
thereafter to
the Company
Partner dis-
tributions (4,712) (14,343) (19,055)
Conversion of
incentive/
investment
stock plans
to stock
option/pur-
chase plans 4,763 (618) 4,145
Stock options
issued 141 (141) -
of unearned
compensation
expense 250 250
Contributed
capital upon
realization 1,786 (5,181) 509 (2,886)
-----------------------------------------
Balance Dec-
ember 31, 1995 - - - -
=========================================
Unreal- Total
Class A Class B Add'l Unearned ized Retain- Stock-
Common Common Paid in Comp- Gains/ ed holders'
Stock Stock Capital ensation Losses Earnings Equity
Net income
of the
Company
November
21, 1995
to Decem-
ber 31,
1995 $ 1,628 $ 1,628
Contributed
capital upon
recapital-
ization $ 125 $ 41 $ 3,822 $ (509) 3,479
Common stock
issued 31 49,660 49,691
-------------------------------------------------------------------
156 41 53,482 (509) 1,628 54,798
Net income 8,385 8,385
Unearned
comp-
ensation
on stock
options
granted 157 (157) - -
Forfeiture of
unvested
stock options (144) 144 -
Stock options
exercised 4 556 560
Tax benefit
related to
exercise of
employee
stock options 1,376 1,376
Proceeds from
sale under
stock purch-
ase plan 40 40
Repurchase of
shares under
employee
investment and
incentive share
plans (103) (103)
Amortization of
unearned comp-
ensation expense 27 159 186
Unrealized loss
on short term
investments (442) (442)
Unrealized gain
on forward
exchange con-
tract 31 31
---------------------------------------------------------------
Balance Dec-
ember 28, 1996 $ 160 $ 41 $55,391 $ (363) $ (411) $ 10,013 $ 64,831
===============================================================
The accompanying notes are an integral part of the financial statements.
Page 22
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
----------------------------------------------
December 28, December 31, December 31,
1996 1995 1994
Cash flows from
operating activities:
Net income $ 8,385 $ 12,574 $ 9,085
Adjustments to recon-
cile net income to
net cash provided by
operating activities:
Depreciation and
amortization 3,030 1,565 925
(Gain) loss on
disposal of fixed
asset (4) 38 21
Bad debt expense 1,832 (557) 391
Stock option compen-
sation expense 186 250 280
Changes in assets & liabil-
ities:
Accounts receivable (1,921) (5,473) (2,339)
Inventory (3,722) (1,525) (4,049)
Prepaids expense (237) 64 (285)
Other current assets (1,993) (753) (593)
Deferred taxes (331) (2,195) -
Other assets (743) (2,459) (172)
Accounts payable 7,990 (494) 6,353
Accrued expenses 3,291 1,405 3,673
----------- ---------- ----------
Total adjustments 7,378 (10,134) 4,205
----------- ---------- ----------
Net cash provided by
operating
activities: 15,763 2,440 13,290
----------- ---------- ----------
Cash flows for investing
activities:
Purchases of fixed assets (11,359) (4,268) (2,621)
Proceeds on disposal of
fixed assets 4 45 -
(Purchases) maturities
of government
securities 2,648 (27,027) (2,624)
Purchase of marketable
securities (4,286) - -
Purchase of restricted
investments (1,225) (612) (1,171)
Maturities of restricted
investments 1,216 615 1,145
---------- ---------- ---------
Net cash used in
investing (13,002) (31,247) (5,271)
---------- ---------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
common stock - 49,691 -
Proceeds from exercise
of stock option
plans 560 - -
Proceeds from sale under
stock purchase
plan 40 - -
Repurchase of shares under
employee
investment and incentive
share plans (103) - -
Principal payments on
long-term debt (75) (50) (50)
Partners' distributions - (19,055) (11,619)
---------- ---------- ----------
Net cash provided by
(used for)
financing activities 422 30,586 11,669
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents 3,183 1,779 (3,650)
Cash and cash equivalents
at beginning of period 1,877 98 3,748
----------- ---------- ----------
Cash and cash equivalents
at end of period $ 5,060 $ 1,877 $ 98
=========== ========== ==========
Supplemental disclosure of
cash flow information:
Interest paid $ 224 $ 252 $ 236
Taxes paid $ 5,992 - -
=========== ========== ==========
Net income for the fiscal year ended December 31, 1995 is before pro
forma income taxes. See Note B.
The accompanying notes are an integral part of the financial statments.
Page 23
THE BOSTON BEER COMPANY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
The Boston Beer Company, Inc. (the "Company"), is engaged in the business
of marketing and selling beer and ale products throughout the United States
and in select international markets. On November 20, 1995, in connection
with the initial public offering of the Company's stock effected that date,
the non-corporate limited partners transferred their respective partnership
interests to the Company and the owners of the general partner and
corporate limited partners transferred their respective ownership interests
in such entities to the Company. In exchange, the transferors received an
aggregate of 16,641,740 shares of the Company's common stock on a pro rata
basis, based on their then respective percentage equity interests in the
Partnership. The aforementioned transactions are collectively referred to
hereinafter as the "Recapitalization."
B. Summary of Significant Accounting Policies:
Fiscal Year
Effective in fiscal 1996, the Company changed its fiscal year to end on the
last Saturday in December. The impact on the current year of two fewer days
of operations was not material.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries, and the Partnership. All intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue is recognized when goods are shipped to customers. Accounts
receivable balances are reflected net of an allowance for uncollectible
accounts of approximately $1,930,000 and $175,000 at December 28, 1996 and
December 31, 1995, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and short-term, highly
liquid investments with original maturities of three months or less at the
time of purchase.
Short Term Investments and Restricted Investments
Short term investments consist primarily of U.S. Government securities and
marketable equity securities with original maturities beyond three months
and less than twelve months. All short term investments have been
classified as available-for-sale and are reported at fair value with
unrealized gains and losses included in stockholders' equity. Fair value is
based on quoted market prices as of December 28, 1996.
Restricted investments consist solely of the unexpended proceeds from the
debt as discussed in Note G. These investments, consisting of treasury
notes which mature within one year, are expected to be held to maturity and
accordingly are valued at amortized cost, which approximates fair value.
Inventories
Inventories, which consist principally of hops, bottles, and packaging, are
stated at the lower of cost, determined on a first-in, first-out (FIFO)
basis, or market.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affected the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Summary of Significant Accounting Policies (Continued):
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash, short-
term investments, and trade receivables. The Company places its temporary
cash and short-term investments with high credit quality financial
institutions. The Company sells primarily to independent beer and ale
distributors across the United States. Receivables arising from these sales
are not collateralized; however, credit risk is minimized as a result of
the large and diverse nature of the Company's customer base. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and
other information.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Expenditures for
maintenance, repairs, and renewals are charged to expense; major
improvements are capitalized. Upon retirement or sale, the cost of the
assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the
determination of net income. Provision for depreciation is computed on the
straight-line method based upon the estimated useful lives of the
underlying assets as follows:
Kegs and equipment 3 to 10 years
Office equipment and furniture 3 to 5 years
Leasehold improvements 5 years, or the life of the lease,
whichever is shorter
Deposits
The Company recognizes a liability for estimated refundable deposits in
kegs and for unclaimed deposits on bottles which are subject to state
regulations. A liability for refundable deposits (redemptions) on reusable
bottles in 1995 was not recorded, nor was there an offsetting adjustment to
inventory. As of December 28, 1996, the Company recorded an estimated liabil-
ity of $587,000, with an offsetting adjustment to cost of goods sold for
re-used glass which had not been redeemed as of the end of the year. The
Company recorded this liability to recognize that the re-used glass may not
be placed back into production in the future. Total redemptions associated
with reusable bottles during the years ended December 28, 1996, December 31,
1995, and 1994 were $3,053,000, $1,441,000, and $1,402,000 respectively.
Fair Value of Financial Instruments
The carrying amount of the Company's long term debt, including current
maturities, approximates fair value because the interest rates on these
instruments change with market interest rates. The carrying amounts for
accounts receivable and accounts payable approximate their fair values due
to the short term maturity of these instruments.
Advertising and Sales Promotions
Advertising and sales promotional programs are charged to expense during
the period in which they are incurred. Total advertising and sales
promotional expense for the years ended December 28, 1996, December 31,
1995, and 1994, were $35,730,000, $35,039,000, and $27,598,000
respectively.
Purchase Commitments
The Company recognizes losses on hops purchase commitments when amounts
from the sale price of the related product are expected to be less than the
cost of the product. The Company has not historically experienced any
losses related to hops purchase commitments.
Forward Exchange Contracts
Unrealized gains and losses on contracts designated as hedges of existing
assets and liabilities are accrued as exchange rates change and are
recorded as a component of Stockholders' Equity. Realized gains and losses
are recognized in income as contracts expire.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123"), requires the Company to either elect
expense recognition or the disclosure-only alternative for stock-based
employee compensation. SFAS 123 has been adopted in the Company's 1996
financial statements with comparable disclosures for the prior year. The
Company has reviewed the adoption and impact of SFAS 123, and has elected
to adopt the disclosure-only alternative and accordingly this standard has
no impact on the Company's results of operations or its financial position.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Summary of Significant Accounting Policies (Continued):
Income Taxes
The Company records income taxes under the liability method whereby
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by applying enacted tax rates for the taxable years in which
those differences are expected to reverse.
Pro Forma Income Taxes (unaudited)
The financial statements of the Company for the periods prior to the
Recapitalization do not include a provision for income taxes because the
taxable income of the Company, up until the effective date of the
Recapitalization, is included in the income tax returns of the
Partnership's partners and former Subchapter S corporation's shareholder.
The statements of income include a pro forma income tax provision on
taxable income for financial statement purposes using an estimated
effective federal and state income tax rate which would have resulted if
the Partnership and Subchapter S corporation had filed a corporate income
tax return during those periods.
Earnings Per Share
Earnings per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect,
if any, for stock options. Fully diluted net income per share has not been
presented as the amount would not differ significantly from those
presented.
Pro Forma Earnings Per Share (unaudited)
Pro forma earnings per share is based on the weighted average number of
common and common equivalent shares outstanding during the respective
periods (assuming a conversion of partnership units for the periods prior
to the Recapitalization), and an additional 3,109,279 shares issued during
November 1995 in connection with the Company's initial public offering. In
addition, pursuant to the rules of the Securities and Exchange Commission,
approximately 273,000 shares and 965,000 shares in 1995 and 1994,
respectively, have been included in the share calculation representing
distributions in excess of net income and, in 1994, distributions expected
to be funded by debt repaid with the proceeds from the offering. The
calculations include 686,000 and 564,000 common equivalent shares for the
years ended December 31, 1995 and 1994, respectively, using the treasury
stock method. Fully diluted earnings per share is not materially different
from primary earnings per share.
New Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which is effective for fiscal years that end after December 15,
1997, including interim periods. Earlier application is not permitted.
However, an entity is permitted to disclose pro forma earnings per share
amounts computed using SFAS 128 in the notes to financial statements in
periods prior to adoption. The Statement requires restatement of all prior-
period earnings per share data presented after the effective date. SFAS
128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, "Earnings Per Share" (IAS 33).
The Company plans to adopt SFAS 128 in 1997 and has not yet determined the
impact.
Reclassifications
Beginning in 1996, certain expenses which were previously classified as
general and administrative expenses were reclassified as advertising,
promotional, and selling expenses. All financial information has been
restated to conform with this year's presentation. Certain other prior year
amounts have also been reclassified to conform with the current year's
presentation.
C. Short Term Investments:
Short term investments consist of marketable equity securities having a
cost of $4,286,000 and a market value of $3,844,000, which resulted in an
unrealized loss of $442,000 at December 28, 1996. The Company did not have
any investments in marketable equity securities as of December 31, 1995. In
addition, the Company has investments in U.S. Government securities having
a cost of $32,082,000 and $34,730,000 at December 28, 1996 and December 31,
1995, respectively, which approximates fair value.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Inventories:
December 28, December 31,
1996 1995
(in thousands)
Raw material, principally hops $ 12,677 $ 8,543
Work in process - 518
Finished goods 325 219
-------- --------
$ 13,002 $ 9,280
========= ========
E. Equipment and Leasehold Improvements:
December 28, December 31,
1996 1995
(in thousands)
Kegs and equipment $ 16,457 $ 7,012
Office equipment and furniture 3,527 1,623
Leasehold improvements 1,059 1,055
---------- --------
$ 21,043 $ 9,690
Less accumulated depreciation 6,412 3,531
--------- --------
$ 14,631 $ 6,159
========= ========
The Company recorded depreciation expense related to these assets of
$2,886,000, $1,565,000, and $925,000 for the years ended December 28, 1996,
December 31, 1995, and December 31, 1994, respectively.
F. Accrued Expenses:
December 28, December 31,
1996 1995
(in thousands)
Advertising $ 4,019 $ 4,451
Keg deposits 1,813 1,276
Employee wages and reimbursements 1,906 1,586
Point of sale related accruals 1,288 1,000
Other accrued liabilities 3,038 1,836
--------- --------
$ 12,064 $ 10,149
========= ========
For the year ended December 28, 1996, the Company included $1,117,000 of
accrued freight costs in accounts payable. For the year ended December 31,
1995, $1,189,000 of freight costs previously recognized as a component of
accrued expenses were reclassified to accounts payable.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
G. Long-Term Debt and Line of Credit:
Long-Term Debt
During 1988, the Company entered into a $2,200,000 loan with the
Massachusetts Industrial Finance Authority ("MIFA"), which matures July 15,
2007. As of December 28, 1996, the loan requires scheduled annual
principal payments as follows:
(in thousands)
1997 ............................... $ 75
1998 ............................... 75
1999 ............................... 100
2000 ............................... 100
2001 ............................... 100
Thereafter ......................... 1,425
--------
1,875
Less: current portion 75
--------
Total long-term debt $ 1,800
========
Interest accrues at 11.5 % and is paid semiannually. The proceeds from the
MIFA loan were used to fund approximately $1,500,000 of engineering and
design efforts, which were subsequently abandoned in 1989, and to acquire
approximately $200,000 of various assets for the brewery. The unexpended
proceeds referenced in Note B were restricted to the further development of
the Company's Boston brewery, a leased facility. All assets acquired with the
proceeds of the loan are reflected as equipment or leasehold improvements.
The loan is collateralized by the related fixed assets and any unexpended
proceeds which approximated, including interest, $611,000 and $602,000 at
December 28, 1996 and December 31, 1995, respectively.
The loan agreement contains various covenants, the most restrictive of
which is that the Company's equity may not be less than $700,000 as of the
end of each fiscal year, and the debt to equity ratio of the Company may
not exceed 4 to 1 at the end of any fiscal year. As of December 28, 1996,
the Company's equity was $65,000,000 and the debt to equity ratio was .03
to 1.
Line of Credit
On May 2, 1995, the Company entered into an unsecured Revolving Line of
Credit Agreement (the "Agreement") with a bank providing for borrowings of
up to $14,000,000 at either the bank's prime rate (8.25% at December 28,
1996) or the applicable Libor Rate plus .50% for terms of 30, 60, or 90
days. The Company pays a commitment fee of .15% of the unused portion of
the line. The Agreement, which expires on May 1, 1997, requires the Company
to maintain certain financial ratios related to tangible net worth,
interest coverage, and profits, and restricts the Company's ability to
incur additional indebtedness, incur certain liens and encumbrances, make
investments in other persons, engage in a new business, or enter into sale
and leaseback transactions. The Agreement also contains certain events of
default, including the failure of the Company's president to control and be
actively engaged on a full-time basis in the business of the Company. As of
December 28, 1996 and December 31, 1995, no borrowings were outstanding
thereunder.
H. Income Taxes:
Income Taxes
Effective with the Recapitalization described in Note A, the Company became
subject to federal and state income taxes. The historical income tax
benefit reflects the recording of a one-time tax benefit of $1,960,000 upon
the change in tax status of the entity as required by SFAS 109, and a tax
benefit of $235,000 for the period from November 21 to December 31, 1995.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Income Taxes (continued):
Significant components of the Company's deferred tax assets and liabilities
as of December 28, 1996 and December 31, 1995 are as follows:
(in thousands)
1996 1995
Curr- Long- Curr- Long-
ent Term Total ent term Total
Deferred Tax Assets:
Incentive/invest-
ment unit and
option plans $ 11 $ 1,052 $ 1,063 $ 21 $ 1,856 $ 1,877
Accrued expenses not
currently deductible 943 - 943 467 - 467
Reserves 1,828 - 1,828 88 - 88
Deferred Compensation - 90 90 - 65 65
Net operating loss - - - 334 - 334
Other 250 (2) 248 101 - 101
-------- -------- ------- ------- -------- -------
Total deferred
tax assets 3,032 1,140 4,172 1,011 1,921 2,932
Deferred tax liabil-
ities:
Depreciation - (814) (814) - (144) (144)
Tax installment sale (64) (175) (239) - - -
-------- -------- ------- ------- -------- -----
Net deferred tax
assets $2,968 $ 151 $3,119 $1,011 $ 1,777 $ 2,788
========= ======= ======= ======== ======= ======
The deferred tax asset balance at December 31, 1995 includes a $593,000 net
deferred tax asset of the corporate limited partners recorded upon the
Recapitalization.
Based upon prior earnings history and expected future taxable income, the
Company does not believe that a valuation allowance is required for the net
deferred tax asset.
Significant components of the income tax provision (benefit) for income
taxes for the years ended December 28, 1996 and December 31, 1995 are as
follows:
(in thousands)
1996 1995
Current:
Federal $ 5,261 -
State 1,556 -
-------- --------
Total current 6,817 -
Deferred:
Federal (251) $ (1,667)
State (80) (528)
--------- ----------
Total deferred $ (331) $ (2,195)
--------- ----------
Total income tax expense
(benefit) $ 6,486 $ (2,195)
======== ==========
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Income Taxes (continued):
The reconciliation of income tax computed at statutory rates to actual
income tax expense for the years ended December 28, 1996 and December 31,
1995, are as follows:
1996 1995
Statutory rate 35.0% 35.0%
State income tax, net of federal benefit 6.5 (1.8)
Permanent differences 1.2 0.3
Income for the period prior to the
Recapitalization not subject to tax - (36.9)
Deferred tax asset resulting from change
in tax status - (15.9)
Other 0.9 (1.8)
----- -------
43.6% (21.1%)
====== ========
At December 31, 1995, the Company had a tax net operating loss carryforward
of approximately $765,000, which arose during the period from November 21
to December 31, 1995, which was fully utilized in 1996.
I. Commitments and Contingencies:
Purchase Commitments
In the normal course of business, the Company has entered into various
supply agreements with brewing companies. These agreements are cancelable
by the Company and by the brewing companies with advanced written notice.
Title to beer products brewed under these arrangements remains with the
brewing company until shipped by it and accordingly, the liquid is not
reflected as inventory by the Company in the accompanying financial
statements. The Company is required to reimburse the supplier for all
unused material and beer products on termination of the agreements and
under certain conditions to purchase excess materials. At December 28,
1996, there was approximately $4,468,000 of material and beer products in
process at the brewing companies which had not yet been transferred to the
Company. Purchases under these agreements for the years ended December 28,
1996, December 31, 1995, and 1994 were approximately $57,766,000,
$41,199,000, and $28,808,000, respectively.
The Company has entered into contracts for the supply of a portion of its
hops requirements. These purchase contracts, which expire at various dates
through 2003, specify both the quantities and prices the Company is
committed to. The prices are denominated in foreign currencies and the
Company does not hedge these commitments in French francs, but does in
German marks and English pound sterling. The amount of these commitments
outstanding at December 28, 1996 in U.S. dollars, is $52,530,000. Purchases
under these contracts for the years ended December 28, 1996, December 31,
1995, and 1994 were approximately $10,000,000, $5,924,000, and $6,061,000
respectively. The performance of the dealers under such contracts may be
materially affected by factors such as adverse weather, the imposition of
export restrictions and changes in currency exchange rates resulting in
increased prices.
At December 28, 1996, the Company had outstanding purchase commitments of
approximately $8,000,000 principally related to capital expenditures,
including the initial payment for the purchase of the Schoenling brewery,
and advertising expenditures through December 1997. There is a possibility
the Company could expend additional capital investments at the brewing
locations in the approximate range of $5,000,000 to $20,000,000 during
1997. It should be noted, that at this point in time, there is no
commitment to expend this additional investment.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Commitments and Contingencies (continued):
Lease Commitments
The Company has various operating lease agreements primarily involving real
estate. Terms of the leases include purchase options, renewals, and
maintenance costs, and vary by lease. These lease obligations expire at
various dates through 2001.
Minimum annual rental payments under these agreements are as follows:
(in thousands)
1997 ...................... $ 802
1998 ...................... 673
1999 ...................... 668
2000 ...................... 565
2001 ...................... 565
Thereafter ................ -
----------
$ 3,273
==========
Rent expense for the years ended December 28, 1996, December 31, 1995, and
1994 was approximately $512,000, $340,000, and $276,000 respectively.
Distribution
The Company's two largest distributors each accounted for approximately 6%
of the Company's net sales.
License Agreement
The Company signed a contract in March, 1996, with a major beverage company
with respect to a transaction in which that company will license and sell a
new craft brew beer whose trademark and trade names are owned by the
Company. The Company is expected to expense up to $750,000 in 1997 and 1998,
principally to cover marketing expenses to aid the introduction of this new
beer and will, in return, receive a royalty on sales after a certain period
of time. The Company will also provide certain technical assistance. The
agreement also sets forth the circumstances in which the relationship can
be terminated and the terms on which rights to the product will revert to
the Company or may be reacquired by the Company. There can be no assurance
that any contemplated royalty will be earned by the Company.
Litigation
In early 1996, Boston Brewing Company, Inc. ("Boston Brewing"), an
affiliate of both Boston Beer Company Limited Partnership and The Boston
Beer Company, Inc., had an action filed against it by one of its
distributors, such action having been filed in a court in England. The
action contains a claim for damages of an alleged breach of a
Distributorship Agreement between Boston Brewing and the plaintiff. The
action is being vigorously defended by the Company and at present is in the
discovery stage.
In addition, the Company is subject to legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
J. Common Stock:
Initial Public Offering
On November 20, 1995, the Company completed an initial public offering and
sold an aggregate of 3,109,279 shares of Common Stock, of which 990,000
shares were sold for $15.00 per share in a best efforts offering and
2,119,279 shares were sold for $20.00 in an underwritten offering,
resulting in net proceeds, after deducting underwriting discounts and
expenses, of $49,691,000. In addition, as described in Note A, upon
Recapitalization the owners of the general and corporate limited partners
transferred their respective ownership interests to the Company. In
exchange, the transferors received an aggregate of 16,641,740 shares of the
Company's common stock on a pro rata basis based on their then respective
equity interest in the Partnership. The total number of shares of Class A
and Class B Common Stock outstanding after completion of the offering was
19,751,019.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Common Stock (continued):
Initial Public Offering (continued):
Upon Recapitalization, the Company recognized no gain or loss upon receipt
of the units of the Partnership from individual partners, and no gain or
loss upon receipt of stock in the corporate partners from the stockholders
of the corporate partners in exchange for the Company's stock based upon an
opinion from the Company's legal counsel interpreting the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations of the Treasury
Department (the "Regulations"), and judicial opinions interpreting the
Code. The opinion is qualified by detailed and material limitations set
forth in the opinion concerning, among other things, the possibility of
Regulations being adopted with a retroactive effect. Any new legislation,
changes to and clarifications of the administrative positions of the IRS,
including by way of amendments to existing Regulations or adoption of new
Regulations, and subsequent judicial decisions including any retroactive
effects could have a material consequence to the Company.
Stock Compensation Plan
The Company's Employee Equity Incentive Plan (the "Equity Plan") was
adopted effective November 20, 1995 as the successor to the Partnership's
1995 Management Option Plan, which was, in turn, the successor to a series
of the Partnership's Incentive Share Plans. In connection with the
Recapitalization, the grants under the Partnership's Incentive Share Plans,
as adjusted for the one and one half conversion of partnerships units,
became grants to acquire Class A Common Stock.
The Plan permits the grant of management options, discretionary options,
and investment shares. The Plan is administered by the Compensation
Committee of the Board of Directors which consists of non-employee
directors. Management options are granted to selected management optionees
to acquire shares of the Company's Class A Common Stock at an exercise
price of $.01 per share. The number of shares subject to each option shall
be determined by the Committee based on the salary of each elected
management optionee, taking into consideration job performance criteria,
divided by the fair market value of shares of Class A Common Stock as of
January 1 of each year. Vesting shall be over a five year period.
The Committee may also grant to eligible employees discretionary options to
acquire shares of Class A Common Stock upon such terms and conditions,
including exercise price, as the Committee shall determine.
Information related to the options granted under the Equity Plan is as
follows:
Weighted
Average
Option Exercise
Shares Price Price
Outstanding at
December 31, 1994 - - -
Granted upon
conversion of incentive
plans to Class A
Common Stock options 310,871 $ .01 $ .01
Granted upon conversion
of Class B
partnership unit
options to Class A
Common Stock options 682,383 $ 2.00-14.00 $ 6.47
Granted 10,422 $ .01 $ .01
Canceled (999) $ .01 $ .01
Exercised - - -
----------- ------------ --------
Outstanding at
December 31, 1995 1,002,677 $ .01-14.00 $ 4.40
Granted 403,729 $ .01-25.56 $13.15
Canceled (10,749) $ .01-20.00 $ 2.19
Exercised (264,530) $ .01-20.00 $ 2.45
---------- ------------ --------
Outstanding at
December 28, 1996 1,131,127 $ .01-25.56 $ 8.00
This amount represents options to purchase partnership units which were
outstanding prior to the Recapitalization of the Company in November
1995. Compensation expense on these partnership units would have been
reflected in fiscal 1994 and as result, there is no pro forma
compensation expense recognized in fiscal 1995 related to these shares.
As of December 28, 1996, 579,341 stock options were exercisable.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Common Stock (continued):
Stock Compensation Plan (continued):
The Equity Plan also permits Company employees who have been with the
Company for at least one year to invest up to ten percent of their annual
earnings in Class A Common Stock ("Investment Shares"). The price at which
Investment Shares are issued to participating employees is at a discount
from current market value of from 0% to 40% based on the employee's tenure
with the Company. These shares vest ratably over a five year period. At
December 28, 1996 and December 31, 1995, there were 66,249 and 67,731
investment shares issued and outstanding, of which 55,269 and 40,134
shares were vested.
Prior to the Recapitalization, the Partnership had various other employee
investment unit plans in which eligible employees could purchase the
economic equivalent of partnership units at not less than 60% of the unit
value. The total expense recognized for the years ended December 31, 1995
and 1994, approximated $20,000 representing all discount amortized over the
related vesting period.
Upon Recapitalization, the investment units were replaced with 67,731
investment shares. Effective with the issuance of the shares, approximately
$411,000 of the investment unit plan accrued liability recorded was
reclassified as equity in consideration of the stock issued.
The Company has reserved 235,594 and 1,687,500 shares of Class A Common Stock
for issuance pursuant to the Equity Plan as December 28, 1996 and December
31, 1995, respectively.grant.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS is effective for periods beginning after December 15,
1995. The Company adopted the disclosure provisions of SFAS 123 in 1996 and
has applied APB Opinion 25 and related Interpretations for its stock option
plan. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as
calculated in accordance with SFAS 123, the Company's net income and
earnings per share for the years ended December 28, 1996 and December 31,
1995 would have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts)
1996 1995
Earnings Per Earnings Per
Net Income Share Net Income Share
As Reported $ 8,385 $ 0.41 $ 5,896 $ 0.33
Pro forma $ 8,305 $ 0.41 $ 5,896 $ 0.33
Pro forma, see Note B.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: an expected life of from 5.5 years to 6.5 years for stock
options, expected volatility of 45%, a dividend yield of 0%, and a risk-free
interest rate that ranges from 5.43% to 7.79%, depending upon the term of
the respective stock options. The weighted average fair value of stock options
granted in 1996 and 1995 was $7.06 and $19.80, respectively.
Because some options vest over several years and additional awards may be made
each year, the pro-forma amounts above may not be representative of the
effects on net income for future years.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. Common Stock (continued):
Stock-Based Compensation (continued):
In 1996, there 10,000 options granted with an exercise price that exceeded
fair value. The weighted average of these grants was $25.56. In 1996, net of
forfeitures, there were 8,729 options granted with an exercise price of less
than fair value, and the weighted average exercise price of these grants was
$4.82. In 1995, there were 321,293 options granted with an exercise price
less than fair value, and the weighted average exercise price of these
grants was $.01.
The following table summarizes information about stock options outstanding
at December 28, 1996:
Options Outstanding Options Exercisable
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life Exercise-Price Exercisable Exercise Price
$ .01-$ 2.00 485,744 5 years $ 1.01 439,043 $ .59
$ 9.00-$14.00 590,383 11 years $ 12.41 148,472 $11.51
$18.00-$26.00 55,000 9 years $ 21.16 16,666 $19.41
--------- ----------
Total 1,131,127 604,181
========= ==========
Under the restricted stock plan, grants were made during 1996 and 1995.
The shares granted for these years were 2,577 and 34,658, respectively.
The weighted average grant prices for grants made in 1996 and 1995 were
$15.26 and $8.90, respectively. As of December 28, 1996 and December 31,
1995, the number of restricted shares was 16,399 and 26,584, respectively.
The Company recognized compensation expense of $186,000 and $250,000 under
the described programs for the years ending December 28, 1996 and
December 31, 1995, respectively.
K. Financial Instruments
During 1996, the Company entered into a forward exchange contract to reduce
exposure to currency movements affecting existing foreign currency
denominated assets, liabilities, and firm commitments. The contract
duration matches the duration of the currency position. The future value of
the contract and the related currency position is subject to offsetting
market risk resulting form foreign currency exchange rate volatility. The
carrying amounts of the contract and the unrealized gain recognized as a
component of Stockholders' Equity totaled $1,195,000 and $31,070,
respectively, at December 28, 1996. There were no realized gains or losses
on the contract as of December 28, 1996.
L. Related Party Transactions:
At December 31, 1995, borrowings of $150,000 under a recourse note due on
December 31, 1997 from the Company's Chief Operating Officer were
outstanding. The note bears interest based on the applicable federal rate.
This note was repaid in its entirety during 1996.
The Company has a deferred compensation agreement with its Chief Operating
Officer which calls for specific payments upon retirement on or after April
1, 2000 with pro-rated annual payments called for upon early retirement.
The Company has expensed approximately $59,000, $56,000, and $49,000 for
the three years ended December 28, 1996, December 31, 1995 and 1994,
respectively.
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued):
M. 401 (k) Savings Plan:
During 1993, the Company established the Boston Beer Company 401(k) Savings
Plan (the "Plan"). The Plan is a defined contribution plan which covers
substantially all of the Company's employees. Participants may make
voluntary contributions of their annual compensation.
The Company made contributions to the Plan in each of the three years ended
December 28, 1996, December 31, 1995, and 1994 of $280,000, $175,000, and
$142,000 respectively.
N. Sale of Distribution Rights:
In September 1995, the Company sold its distribution rights to a major
metropolitan area and associated receivables and inventories for
approximately $1,200,000 and the assumption of certain deposit liabilities
and truck leases. On closing approximately $420,000 was paid in cash with
the remainder in the form of a note which is payable in equal monthly
installments of $13,000 plus interest at 10% per annum. This transaction
resulted in a gain to the Company of approximately $807,000 and is included
in other income. The sale of the distribution rights is not expected to
result in any significant change in future operations of the Company when
compared to historical results.
O. Subsequent Event
Effective March 1, 1997, the Company acquired all of the equipment and
other brewery-related personal property from the Schoenling Brewing Company
and leased the real estate on which the brewery is situated. In addition,
subject to the satisfaction of certain pre-conditions, the Company has
agreed to purchase the real estate on which the brewery is located. The
acquisition of the brewery assets and real estate will be accounted for
under the purchase method of accounting. The purchase price allocation has
not yet been determined.
P. Valuation and Qualifying Accounts:
The information required to be included in Schedule II, Valuation and
Qualifying Accounts, for the years ended December 31, 1994, 1995, and
December 28, 1996 is as follows:
Additions
Balance at Charged to Net Balance
Beginning Costs and Additions At End
of Period Expenses (Deductions) of Period
(in thousands)
Allowance for
Doubtful Accounts
1994 $ 146 47 (11) 182
1995 182 107 (114) 175
1996 175 1,832 (77) 1,930
Inventory Reserves
1994 $ 457 381 (590) 248
1995 248 782 (1,014) 16
1996 16 2,860 (386) 2,490
Deductions from allowance for doubtful accounts represent the write-off of
uncollectible balances whereas deductions from inventory reserves represent
inventory destroyed in the normal course of business.
Item 9. Changes in and Disagreements with Accountants on Financial
Disclosures
None.
PART III
Item 10. Director and Executive Officers of the Registrant
The information required by Item 10 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for
the 1997 Annual Meeting to be held on June 3, 1997.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for
the 1997 Annual Meeting to be held on June 3, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for
the 1997 Annual Meeting to be held on June 3, 1997.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for
the 1997 Annual Meeting to be held on June 3, 1997.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements of The Boston
Beer Company, Inc. are included in Item 8 of Part II of this
report:
Report of Independent Accountants on page 19 of this report
Consolidated Balance Sheets at December 28, 1996 and
December 31, 1995 on page 20 of this report
Consolidated Statements of Income for the Years Ended
December 28, 1996, December 31, 1995, and December 31,
1994 on page 21 of this report
Consolidated Statements of Stockholders' Equity for the
Years Ended December 28, 1996, December 31, 1995, and
December 31, 1994 on page 22 of this report
Consolidated Statements of Cash Flows for the Years Ended
December 28, 1996, December 31, 1995, and December 31,
1994 on page 23 of this report
Notes to Consolidated Financial Statements on pages 24 to 36
of this report
(a)(2) Financial Statement Schedule
The following financial statement schedule is included in page 36
of this report
Schedule II -- Valuation and Qualifying Accounts
The Report of Independent Accountants is included on page 19
of this report.
All other schedules for which provision is made in
Regulation S-X of the Securities and Exchange Commission,
are not required under the related instructions or are not
applicable and, therefore, have been omitted.
(a)(3) Exhibits
The following is a list of exhibits filed as part of this report:
Exhibit No. Title
3.1 Articles of Organization (incorporated
by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-96162).
3.2 By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-96162).
3.3 Restated Articles of Organization of the
Company.
3.4 Amended and Restated By-Laws of the Company.
4.1 Form of Class A Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No.
33-96164).
10.1 Revolving Credit Agreement between Fleet Bank
of Massachusetts, N.A. and Boston Beer Company
Limited Partnership (the "Partnership"), dated
as of May 2, 1995 (incorporated by reference
to Exhibit 10.2 to the Company's Registration
Statement No. 33-96162).
10.2 Loan Security and Trust Agreement, dated
October 1, 1987, among Massachusetts Industrial
Finance Agency, the Partnership and The First
National Bank of Boston, as Trustee, as amended
(incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement
No. 33-96164).
10.3 Deferred Compensation Agreement between the
Partnership and Alfred W. Rossow, Jr., effective
December 1, 1992 (incorporated by reference to
Exhibit 10.3 to the Company's Registration
Statement No. 33-96162).
10.4 The Boston Beer Company, Inc. Employee Equity
Incentive Plan, as adopted effective November
20, 1995 and amended effective February 23, 1996
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 333-1798).
10.5 Form of Employment Agreement between the
Partnership and employees (incorporated by
reference to Exhibit 10.5 to the Company's
Registration Statement No. 33-96162).
10.6 Services Agreement between The Boston Beer
Company, Inc. and Chemical Mellon Shareholder
Services, dated as of October 27, 1995.
10.7 Form of Indemnification Agreement between the
Partnership and certain employees and Advisory
Committee members (incorporated by reference to
Exhibit 10.7 to the Company's Registration
Statement No. 33-96162).
10.8 Stockholder Rights Agreement, dated as of
December, 1995, among The Boston Beer Company,
Inc. and the initial Stockholders.
+10.9 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).
+10.10 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).
+10.11 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).
10.12 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 10.13 to
the Company's Registration Statement
No. 33-96162).
+10.13 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).
+10.14 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).
10.15 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).
+10.16 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).
10.17 Services Agreement and Fee Schedule of Mellon
Bank, N.A. Escrow Agent Services for The Boston
Beer Company, Inc. dated as of October 27, 1995).
10.18 Amendment to Revolving Credit Agreement
between Fleet Bank of Massachusetts, N.A. and
the Partnership (incorporated by reference to
Exhibit 10.17 to the Company's Registration
Statement No. 33-96164).
*10.19 1996 Stock Option Plan for Non-Employee
Directors.
*+10.20 Production Agreement between The Stroh Brewery
Company and Boston Beer Company Limited
Partnership, dated January 14, 1997.
*+10.21 Letter Agreement between The Stroh Brewery
Company and Boston Beer Company Limited
Partnership, dated January 14, 1997.
*+10.22 Agreement between Boston Beer Company Limited
Partnership and The Schoenling Brewing Company,
dated May 22, 1996.
11 Schedule of Computation of Pro Forma Earnings
Per Share.
*21.1 List of subsidiaries of The Boston Beer
Company, Inc.
23.1 Consent of Coopers and Lybrand L.L.P.,
independent accountants with respect to the
Partnership, as Exhibit 24 to this report).
* 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
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
Date of Report December 24, 1996
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 01-14092 04-3284048
(State or other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification Number)
Incorporation)
75 Arlington Street, Boston Massachusetts 02116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 368-5000
Item 8. Change in Fiscal Year
On December 20, 1996, the Registrant's Board of Directors formally
approved a change in Registrant's fiscal year, commencing with fiscal year
1996, such that Registrant's fiscal year shall henceforth end on the
Saturday of the last full calendar week in December in each year, rather
than on December 31, and shall consist of 52 weeks, except that in every
fifth year the fiscal year shall consist of 53 weeks. No transition period
will result from the change.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
THE BOSTON BEER COMPANY, INC.
(Registrant)
Date: December 24, 1996 /s/ ALFRED W. ROSSOW, JR.
Chief Operating Officer, Treasurer,
Chief Financial Officer (principal financial
and accounting officer) and Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this
27th of March, 1997.
THE BOSTON BEER COMPANY, INC.
/s/ C. JAMES KOCH
-------------------------------------
C. James Koch
President
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ C. JAMES KOCH President, Chief Executive Officer,
Clerk and Director (principal
executive officer)
/s/ ALFRED W. ROSSOW, JR. Chief Operating Officer, Treasurer,
Chief Financial Officer (principal
financial and accounting officer)
and Director
/s/ RHONDA L. KALLMAN Director
/s/ CHARLES JOSEPH KOCH Director
/s/ PEARSON C. CUMMIN, III Director
James C. Kautz Director
/s/ JOHN B. WING Director
THE BOSTON BEER COMPANY, INC.
1996 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of The Boston Beer Company, Inc. 1996 Stock
Option Plan for Non-Employee Directors (the "Plan") is to
attract and retain the services of experienced and
knowledgeable independent Directors who are not employees
("Non-Employee Directors") of The Boston Beer Company, Inc.
("Boston Beer") for the benefit of Boston Beer and its
stockholders and to provide additional incentive for Non-
Employee Directors to continue to work in the best interests
of Boston Beer and its stockholders through continuing
ownership of Boston Beer common stock.
2. SHARES SUBJECT TO THE PLAN
The total number of shares of Class A Common Stock, par
value $.01 per share ("Shares"), of Boston Beer for which
options may be granted under the Plan shall not exceed
100,000 in the aggregate, subject to adjustment in
accordance with Section 9 hereof.
3. ELIGIBILITY; GRANT OF OPTION
Each of Pearson C. Cummin III, James C. Kautz, Charles
Joseph Koch and John B. Wing, who are the four current
members of the Board of Directors of Boston Beer (the
"Board") who are not otherwise employees of Boston Beer or
any subsidiary and who were reelected as Directors at the
Boston Beer Annual Meeting held on May 21, 1996, shall be
granted an option to acquire two thousand five hundred
(2,500) Shares under the Plan upon the adoption of the Plan
by the Board and shall be granted a further option for two
thousand five hundred (2,500) Shares upon each subsequent
reelection to the Board. All new Non-Employee Directors
duly elected in the ten year period commencing on the date
of the adoption of the Plan, shall be granted an option to
acquire two thousand five hundred (2,500) Shares under the
Plan upon their election to the Board and upon each
subsequent reelection. The date of grant for such options
granted to the four current Non-Employee Directors named
above shall be the date of adoption of the Plan by the
Board, but such options shall become effective as of such
date of grant only upon approval of the Plan by the holders
of Boston Beer's issued and outstanding Class B Common Stock
in accordance with Section 13 hereof. The date of the first
grant for each subsequently elected Non-Employee Director
shall be the date of election. The options shall be
non-qualified options not intended to meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
4. OPTION AGREEMENT
Each option granted under the Plan shall be evidenced
by an option agreement (the "Agreement") duly executed on
behalf of Boston Beer and by the Non-Employee Director to
whom such option is granted. Each Agreement shall (i)
comply with and be subject to the terms and conditions of
the Plan, (ii) provide that the optionee agrees to continue
to serve as a Director of Boston Beer during the term for
which he or she was elected and (iii) contain such other
provisions not inconsistent with the provisions of the Plan,
including with respect to obligations of each Non-Employee
Director not to compete with Boston Beer, as the Board may
determine.
5. OPTION EXERCISE PRICE
Subject to the provisions of Section 9 hereof, the
option exercise price for options granted under the Plan
shall be the fair market value of the Shares covered by the
option on the date of grant of the option. For the purposes
hereof and of Section 6(b), the fair market value of Shares
shall be the mean between the high and low sales prices of
the Class A Common Stock of Boston Beer on the New York
Stock Exchange as reported in the Wall Street Journal for
the date of grant, provided that if the Class A Common Stock
of Boston Beer is not listed on or actually trading on the
New York Stock Exchange, fair market value shall be
determined in good faith by the Board.
6. TIME AND MANNER OF EXERCISE OF OPTION
(a) Options granted under the Plan shall, subject to
the provisions of Section 7, be immediately exercisable in
full; provided, however, that no option granted under the
Plan may be exercised prior to approval of the Plan by the
holders of Boston Beer's issued and outstanding Class B
Common Stock, as required by Section 13.
(b) The option may be exercised in full at one time or
in part from time to time by giving written notice to Boston
Beer, signed by the person or persons exercising the option,
stating the number of Shares with respect to which the
option is being exercised, accompanied by payment in full
for such Shares, which payment may be in cash or in whole or
in part in Shares of the Class A Common Stock of Boston Beer
already owned for a period of at least six months by the
person or persons exercising the option, valued at fair
market value, as determined under Section 5 hereof, on the
date of exercise; provided, however, that there shall be no
such exercise at any one time as to fewer than two hundred
fifty (250) Shares or all of the remaining Shares then
purchasable by the person or persons exercising the option,
if fewer than two hundred fifty (250) Shares. Upon such
exercise, delivery of a certificate for paid-up
non-assessable Shares shall be made at the principal
Massachusetts office of Boston Beer to the person or persons
exercising the option at such time, during ordinary business
hours, not more than thirty (30) days from the date of
receipt of the notice by Boston Beer , as shall be
designated in such notice, or at such time, place and manner
as may be agreed upon by Boston Beer and the person or
persons exercising the option.
7. TERM OF OPTIONS
(a) Each option shall expire ten (10) years from the
date of the granting thereof, but shall be subject to
earlier termination as herein provided.
(b) In the event of the death of an optionee, the
option granted to such optionee may be exercised by the
estate of such optionee or by any person or persons who
acquired the right to exercise such option by bequest or
inheritance or otherwise by reason of the death of such
optionee. Such option may be exercised at any time within
one (1) year after the date of death of such optionee, at
which time the option shall terminate, or prior to the date
on which the option otherwise expires by its terms,
whichever is earlier.
(c) In the event that an optionee ceases to be a
Director of Boston Beer the option granted to such optionee
may be exercised by him or her, any time within three (3)
months after the date such optionee ceases to be a Director
of Boston Beer, at which time the option shall terminate,
but in any event prior to the date on which the option
expires by its terms, whichever is earlier, unless
termination as a Director (i) was by Boston Beer for cause,
in which case the option shall terminate immediately at the
time the optionee ceases to be a Director of Boston Beer ,
(ii) was because the optionee has become disabled (within
the meaning of Section 22(e)(3) of the Code), or (iii) was
by reason of the death of the optionee. In the case of
death, see Section 7(b) above. In the case of disability,
the option may be exercised at any time within one (1) year
after the date of termination of the optionee's directorship
with Boston Beer, at which time the option shall terminate,
but in any event prior to the date on which the option
otherwise expires by its terms, whichever is earlier.
8. OPTIONS NOT TRANSFERABLE
The right of any optionee to exercise an option granted
to him or her under the Plan shall not be assignable or
transferable by such optionee otherwise than by will or the
laws of descent and distribution, or pursuant to a qualified
domestic relations order as defined by the Code or Title I
of the Employee Retirement Income Security Act, or the rules
thereunder. Any option granted under the Plan shall be
exercisable during the lifetime of such optionee only by him
or her. Any option granted under the Plan shall be null and
void and without effect upon the bankruptcy of the optionee,
or upon any attempted assignment or transfer, except as
herein provided, including without limitation any purported
assignment, whether voluntary or by operation of law,
pledge, hypothecation or other disposition, attachment,
trustee process or similar process, whether legal or
equitable, upon such option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event that the outstanding shares of the Class A
Common Stock of Boston Beer are changed into or exchanged
for a different number or kind of shares or other securities
of Boston Beer or of another corporation by reason of any
reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination of shares or
dividends payable in capital stock, appropriate adjustment
shall be made in the number and kind of shares as to which
outstanding options, or portions thereof then unexercised,
shall be exercisable, to the end that the proportionate
interest of the optionee shall be maintained as before the
occurrence of such event, and such adjustment in outstanding
options shall be made without change in the total price
applicable to the unexercised portion of such options and
with a corresponding adjustment in the option price per
share.
10. RESTRICTIONS ON ISSUE OF SHARES
Notwithstanding the provisions of Section 6 hereof,
Boston Beer may delay the issuance of Shares covered by the
exercise of any option granted under the Plan and the
delivery of a certificate for such Shares until one of the
following conditions shall be satisfied:
(i) the Shares with respect to which an option
has been exercised are at the time of the issue of such
Shares effectively registered under applicable Federal and
state securities acts now in force or hereafter amended; or
(ii) counsel for Boston Beer shall have given an
opinion, which opinion shall not be unreasonably conditioned
or withheld, that such Shares are exempt from registration
under applicable Federal and state securities acts now in
force or hereafter amended.
It is intended that all exercises of options granted
under the Plan shall be effective. Accordingly, Boston Beer
shall use its best efforts to bring about compliance with
the above conditions within a reasonable time, except that
Boston Beer shall be under no obligation to cause a
registration statement or a post-effective amendment to any
registration statement to be prepared at its expense solely
for the purpose of covering the issue of Shares in respect
of which any option may be exercised, except as otherwise
agreed to by Boston Beer in writing.
11. RIGHTS OF HOLDER ON PURCHASE FOR INVESTMENT;
SUBSEQUENT REGISTRATION
Unless the Shares to be issued upon exercise of an
option granted under the Plan have been effectively
registered under the Securities Act of 1933 (the
"1933 Act"), as now in force or hereafter amended, Boston
Beer shall be under no obligation to issue any Shares
covered by any option unless the person who exercises such
option, in whole or in part, shall give a written
representation and undertaking to Boston Beer which is
satisfactory in form and scope to counsel to Boston Beer and
upon which, in the opinion of such counsel, Boston Beer may
reasonably rely, that he or she is acquiring the Shares
issued to him pursuant to such exercise of the option for
his or her own account as an investment and not with a view
to, or for sale in connection with, the distribution of any
such Shares, and that he or she will make no transfer of the
same except in compliance with any rules and regulations in
force at the time of such transfer under the 1933 Act, or
any other applicable law, and that if Shares are issued
without such registration a legend to this effect may be
endorsed upon the securities so issued. In the event that
Boston Beer shall, nevertheless, deem it necessary or
desirable to register under the 1933 Act or other applicable
statutes any Shares with respect to which an option shall
have been exercised, or to qualify any such Shares for
exemption from the 1933 Act or other applicable statutes,
then Boston Beer shall take such action at its own expense
and may require from each optionee such information in
writing for use in any registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably
necessary for such purpose and may require reasonable
indemnity to Boston Beer and its Officers and Directors from
such holder against all losses, claims, damages and
liabilities arising from such use of the information so
furnished and caused by any untrue statement of any material
fact therein or caused by the omission to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading in light of the
circumstances under which they were made.
12. LOANS PROHIBITED
Boston Beer shall not, directly or indirectly, lend
money to an optionee or to any person or persons entitled to
exercise an option by reason of the death of an optionee for
the purpose of assisting any of them in the acquisition of
Shares covered by an option granted under the Plan.
13. APPROVAL OF STOCKHOLDERS
The Plan shall be subject to approval by the
affirmative vote of the holders of a majority of the issued
and outstanding shares of the Class B Common Stock of Boston
Beer present or represented and entitled to vote at a duly
held stockholders' meeting, or by written consent of all of
the holders of such Class B Common Stock, and shall take
effect immediately as of its date of adoption upon such
approval.
14. EXPENSES OF THE PLAN
All costs and expenses of the adoption and
administration of the Plan shall be borne by Boston Beer ,
and none of such expenses shall be charged to any optionee.
15. TERMINATION AND AMENDMENT OF PLAN
Unless sooner terminated as herein provided, the Plan
shall terminate ten (10) years from the date upon which the
Plan was duly approved by the holders of Boston Beer's
issued and outstanding Class B Common Stock. The Board may
at any time terminate the Plan or make such modification or
amendment thereof as it deems advisable; provided, however,
that, except as provided in Section 9 hereof, no
modification or amendment to the provisions of the Plan may
be made more than once every six (6) months other than to
comport with changes in the Code, the Employee Retirement
Income Security Act, or the rules thereunder, if the effect
of such amendment or modification would be to change (i) the
requirements for eligibility under the Plan, (ii) the timing
of the grants of options to be granted under the Plan or the
exercise price thereof, or (iii) the number of Shares
subject to options to be granted under the Plan either in
the aggregate or to one Director. Any amendment to the
provisions of the Plan which (i) materially increases the
number of Shares which may be subject to options granted
under the Plan, (ii) materially increases the benefits
accruing to Non-Employee Directors under the Plan, or (iii)
materially modifies the requirement for eligibility to
participate in the Plan, shall be subject to approval by the
holders of Boston Beer's Class B Common Stock obtained in
the manner stated in Section 13 hereof. Termination or any
modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an
option previously granted to him or her.
16. LIMITATION OF RIGHTS IN THE OPTION SHARES
An optionee shall not be deemed for any purpose to be a
stockholder of Boston Beer with respect to any of the
options except to the extent that the option shall have been
exercised with respect thereto and, in addition, a
certificate shall have been issued theretofore and delivered
to the optionee.
17. NOTICES
Any communication or notice required or permitted to be
given under the Plan shall be in writing, and mailed by
registered or certified mail or delivered by hand, if to
Boston Beer , to its principal place of business, Attention:
President, and, if to an optionee, to the address as
appearing on the records of Boston Beer .
18. COMPLIANCE WITH RULE 16b-3.
It is the intention of Boston Beer that the Plan comply
in all respects with Rule 16b-3 promulgated under Section
16(b) of the Securities Exchange Act of 1934 (the
"1934 Act") and that Participants remain disinterested
persons for purposes of administering other employee benefit
plans of Boston Beer and having transactions under such
other plans be exempt from Section 16(b) of the 1934 Act.
Therefore, if any Plan provision is found not to be in
compliance with Rule 16b-3 or if any Plan provisions would
disqualify Participants from remaining disinterested
persons, that provisions shall be deemed null and void, and
in all events the Plan shall be construed in favor of its
meeting the requirements of Rule 16b-3.
ADOPTED BY THE BOARD OF DIRECTORS ON MAY 21, 1996
APPROVED BY THE SOLE HOLDER OF THE CLASS B COMMON STOCK ON
MAY 21, 1996.
67334-1
EXHIBIT 10.20
* denotes expurgated
information
PRODUCTION AGREEMENT
BETWEEN
THE STROH BREWERY COMPANY
AND
BOSTON BEER COMPANY LIMITED PARTNERSHIP
AGREEMENT entered into this 14th day of January, 1997, by
and between THE STROH BREWERY COMPANY, an Arizona corporation
("Stroh"), and BOSTON BEER COMPANY, LIMITED PARTNERSHIP, a
Massachusetts limited partnership ("Boston Beer"). Boston Beer
and Stroh are sometimes referred to herein individually as a
"Party" and collectively as the "Parties."
Stroh and Boston Beer are currently parties to an Agreement dated
as of January 31, 1994, as amended, pursuant to which Stroh has
agreed to brew, package and sell certain Boston Beer products to
Boston Beer at Stroh's Allentown (Lehigh Valley), Pennsylvania
brewery. Stroh also produces products for Boston Beer at the
Portland, Oregon brewery acquired by Stroh from G.Heileman
Brewing Company ("Heileman") on or about June 30, 1996, pursuant
to the December, 1995 agreement between Boston Beer and Heileman
which was assumed by Stroh. Stroh has further agreed that these
existing production arrangements shall remain in effect until at
least June 30, 1998. Stroh and Boston Beer now desire to enter
into a new production agreement, effective as of January 1, 1997,
to supersede the existing arrangements, and which will govern the
production of products by Stroh for Boston Beer, provide Boston
Beer with greater control over the production process, and give
Boston Beer access to * , which are the principal focus
of this Agreement, are sometimes referred to herein individually
as a "Brewery" and collectively as the "Breweries" and other
breweries owned by Stroh at which Beer Products may from time to
time be produced are sometimes referred to individually as an
"Other Brewery" and collectively as "Other Breweries".]
Production under this Agreement shall be deemed to take effect on
the Effective Date, as defined in Section 12.
ACCORDINGLY, in consideration of the mutual agreements
contained in this Agreement, the Parties, intending to be legally
bound, hereby agree as follows:
1. Scope of Agreement.
During the Term, as defined in Section 5, and in accordance with
the terms and conditions set forth herein, Stroh shall give
Boston Beer access to Stroh's production facilities and make
available to Boston Beer Stroh's production personnel to allow
Boston Beer to produce Boston Beer's proprietary Beer Products.
For purposes of this Agreement, Boston Beer's "Beer Products"
shall include Samuel Adams Boston Lager ("Samuel Adams Lager");
Boston Lightship Lager ("Lightship Lager"); Samuel Adams Cream
Stout ("Samuel Adams Stout"); and Samuel Adams Boston Ale
("Samuel Adams Ale"), other products introduced under the "Samuel
Adams" line, all products produced and sold under the "Oregon
Original" line, certain specially ordered and seasonal malt
beverage products identified as such by Boston Beer ("Special
Orders and Seasonals") and such other beer products as Boston
Beer may introduce from time to time. Boston Beer shall
periodically provide to Stroh an updated schedule of all Boston
Beer products which Boston Beer deems to be Beer Products,
subject to this Agreement. [Boston Beer agrees, however, that
Stroh need not permit in excess of * wort streams at
the * Brewery, * wort streams at the *
Brewery, and * wort streams at the * Brewery,
except as the Parties may subsequently agree.]
2. Control of Production of Beer Products: Public
Statements.
(a) All Beer Products shall be brewed and packaged
according to Boston Beer's specifications, including the
maintenance of standards and quality control programs. Boston
Beer shall have ultimate responsibility and authority over every
detail of the production process for Beer Products at each of the
Breweries, with such responsibility and authority as to those
parameters affecting beer taste and quality to be the same as if
Boston Beer were the owner of the Brewery. Boston Beer shall have
the right, at any time, to monitor and review the practices and
procedures of Stroh in the production and packaging of Beer
Products and inspect each of the Breweries and any Other Brewery
at which it is proposed that Beer Products be produced. If a
decision made by Boston Beer in the exercise of its authority
under this Section 2(a) results in unavoidable incremental costs
to Stroh not envisioned by the Parties in the negotiations of the
pricing provisions contained in Section 4, Stroh shall be
entitled to be reimbursed by Boston Beer for such incremental
costs. In addition, in the exercise of its authority under this
Section 2(a), Boston Beer shall not interfere with Stroh's
production processes for its own proprietary brands.
(b) Consistent with the provisions of paragraph (a),
Stroh and Boston Beer will, * .
3. Committed Capacity.
(a) Production. During the Term, Stroh shall, except
as otherwise provided herein, make the following minimum
production capacities available to Boston Beer for the production
of Beer Products
Brewery Committed Capacity
* * barrels per month
-2
* up to * barrels per
month through
* and up to *
barrels
per month thereafter
* up to * barrels per
month
The Committed Capacity at each Brewery is based on
anticipated tank usage and availability and shall be increased or
decreased in inverse proportion to the extent that actual average
tank usage varies from four and one-half weeks per storage cycle.
Boston Beer shall be under no obligation to avail itself fully of
the Committed Capacity at each Brewery in any month. Boston Beer
will, however, provide Stroh with fifty (50) days' advance
written notice of any expected increase or decrease in its
expected production requirements which varies more than *
from any previously submitted monthly forecasts for the period in
question, in order to allow Stroh to plan its capacity
utilization at any Brewery. Beer Products shall primarily be
produced in units consisting of (i) twenty-four 12-ounce bottles
(a "12-oz. Case Unit"), (ii) twelve 22-ounce bottles (a "22-oz.
Case Unit"), (iii) 7.75 U.S. Gallons (a "Half-Keg"), and (iv)
15.50 U.S. gallons (a "Keg").
(b) Packaging. Stroh shall use all commercially reasonable
efforts to accommodate Boston Beer's requested use of Stroh's
* packaging facilities at the * Brewery for up to
* cases of one or more beer styles per month through *
, for which Stroh shall be entitled to be paid * per
case.
(c) Reallocation of Capacity. Stroh may elect to close one
or more of the Breweries and thereafter satisfy its obligations
under paragraph (a), above, by * .
-3-
(d) * and Other Non-Stroh Breweries. Boston Beer
anticipates entering into production arrangements for the
production of Beer Products at the brewery (the " *
Brewery") in * owned by * . Stroh hereby
agrees that, (i) if the * Brewery is closed or sold and
the buyer is unwilling to continue production arrangements with
Boston Beer on terms that are acceptable to Boston Beer, Stroh
will make a like amount of production capacity available to
Boston Beer at an Other Brewery located in * (a "
* Brewery"), to the extent that Stroh has capacity then
available in its Brewery system for Stroh's own proprietary
brands which would be displaced from a * Brewery, on
the same terms and conditions as otherwise then apply hereunder;
provided that * , incurred by Stroh directly as a result
of relocating the production of Stroh products from the *
Brewery in question, to the extent then mutually agreed by the
Parties, and (ii) in the event that Stroh acquires the *
Brewery, it shall assume all then existing obligations of *
(or any successor in interest) to Boston Beer with respect to the
production of Beer Products at the * Brewery.
Similarly, Stroh hereby agrees that it will assume all production
obligations to Boston Beer, if any, of any other breweries
hereafter acquired by Stroh. Notwithstanding the foregoing, Stroh
shall be relieved of its obligations under clause (i) of this
paragraph (d) to the extent that compliance in full would require
it to keep in operation any brewery that it would otherwise in
the normal course of managing its business elect to close.
4. Price and Manner of Payment.
(a) Boston Beer shall pay Stroh for Beer Products an
amount (the "Price") equal to the sum of (i) a processing charge
(the "Fixed Charge") of * .
(b) The Price is F.O.B. the carrier's trucks at
Stroh's dock (i.e., the Price includes the cost and risk of
loading trucks at Stroh's dock) and includes labor, overhead,
profit, and other costs incurred in the production of packaged
Beer Products suitable for shipment by truck.
-4-
(c) The Price excludes any federal and state excise taxes,
which Stroh may pass along to Boston Beer, if Stroh pays such
taxes in compliance with Federal and state laws. In addition,
Stroh shall be entitled to * , at a rate equal to *
.
(d) The Price also excludes any charge for Boston Beer's
use of pallets owned by Stroh. Stroh shall invoice Boston Beer on
a quarterly basis within thirty (30) days after the end of each
calendar quarter for Boston Beer's proportionate share based on
pallets shipped) of the cost of pallets incurred at each Brewery
during such prior calendar quarter. Such invoices shall be paid
by Boston Beer promptly in the ordinary course.
(e) Stroh will invoice Boston Beer daily for the Price of
Beer Products shipped on the previous day and Boston Beer shall
pay such invoices on Friday of each week for the prior week's
invoices by wire or other mutually agreed upon method. All other
amounts otherwise chargeable to Boston Beer hereunder shall be
invoiced by Stroh reasonably promptly in accordance with normal
business practices following the month in which incurred by
Stroh. Such timely invoices shall similarly be paid by Boston
Beer promptly in the ordinary course in accordance with normal
business practices.
(f) Stroh shall have the right to * . Other
pricing and payment terms for Special Orders or Seasonals shall
be in accordance with the foregoing provisions of this Section 4,
including the timely invoicing requirements of paragraph (e).
(g) Boston Beer shall be entitled to * .
(h) Boston Beer shall also be entitled to a *
contemplated by Section 12 hereof, if made by Boston Beer.
5. Term.
The term of this Agreement (the "Term") shall commence on
January 1, 1997 and continue until terminated pursuant to Section
6 hereof. The Parties acknowledge that either Party's obligtions
pursuant to this Agreement to make paymets to the other Party and
the Parties respective obligations under Sections 6(c), 13 and
14, and Stroh's obligations under Sections 12 and 28 shall
survive the termination of this Agreement.
6. Termination.
(a) Except as the Parties may then otherwise agree, the
Term shall expire on June 30, 1998 in the event that Boston Beer
elects not to make the Investment.
(b) Either Party may terminate this Agreement for any
reason whatsoever on not less than twenty-four (24) months' prior
written notice to the other Party, effective at any time on or
after * .
(c) Boston Beer may also terminate this Agreement effective
immediately upon written notice in the event that Stroh is in
default of any of its obligations to brew, package and ship any
Beer Products, which default continues for a period of ten (10)
business days following receipt by Stroh of written notice from
Boston Beer regarding such default. [Such a default is
hereinafter referred to as a "Stroh Production Default".) Stroh
shall not be deemed to be in default of its obligations for
purposes of this Section 6(c), if it is in good faith both
seeking to correct the circumstances giving rise to its failure
to brew, package and ship Beer Products' and honoring its
obligations under Section 13 hereof, to the extent applicable.
(d) Stroh may terminate this Agreement on thirty (30) days
prior written notice to Boston Beer, in the event that Boston
Beer is in arrears in payment of undisputed amounts representing
in excess of one (1) month's production and such arrearage has
remained outstanding for in excess of one (1) month after written
demand for payment was made by Stroh. Normal credit terms are as
defined in Section 4(e).
(e) Stroh may also terminate this Agreement on thirty-six
(36) months' prior written notice, in the event of * .
(f) Upon termination of this Agreement, Boston Beer shall
(i) promptly pay to Stroh all unpaid invoices in full and all
unpaid costs incurred by Stroh pursuant to this Agreement in the
brewing, packaging, shipping and storage of Beer Products, and
(ii) purchase from Stroh at Stroh's cost all Stroh's inventory of
(i) work in process of Beer Products, (ii) ingredients and raw
materials unique to the Beer Products, and (iii) Packaging
Materials. Stroh will use all reasonable efforts to minimize
such costs upon termination and Boston Beer will have the right
to review documentation evidencing such costs.
-6-
7. Packaging. Deposits. and Minimum Orders.
(a) Packaging of Beer Products shall consist of twelve
ounce (12 oz.) bottles, twenty-two ounce (22 oz.) bottles, Half-
Kegs and Kegs, and such other units as Boston Beer may from time
to time require, exclusive of any units which are proprietary to
Stroh and which are not then being produced for Boston Beer by
Boston Beer or any third party. In that regard, Stroh agrees that
Boston Beer may make use of * . Except for one way
pallets paid for by Boston Beer, a deposit per pallet and per keg
as set forth in Section 4(a) hereof shall be charged to Boston
Beer with corresponding credit applied upon the safe return in
good working order of the pallets or kegs to Stroh. Boston Beer
shall also, at Stroh's request, * to the extent
necessary as a result of Stroh shipping Beer Products to the
* from the * Brewery. Boston Beer has the right,
subject to the approval of Stroh, which approval will not be
unreasonably withheld, to make changes in the packaging used to
produce the Beer Products or the Seasonals, including but not
limited to the packaging of the Beer Products or Seasonals in can
units. The price for * will be adjusted by the
difference in costs between * .
(b) Boston Beer shall order at any given time not less than
one production run (at present * ). Boston Beer
acknowledges and agrees that the minimum order applies to *
; provided, however, that orders for the * of the Beer
Products * , except that for * bottles, an
order may be comprised of as many as * .
8. Packaging Material and Hops.
Crowns, bottles, labels, six-packs, cases, partitions and
other packing materials for Beer Products (collectively
"Packaging Materials"), or any applicable federal or state taxes
(but specifically excluding any taxes in the nature of a tax on
income or profits) are not included in the Fixed Charge and shall
be borne directly by Boston Beer. All Packaging Materials and
all hops to be used in the brewing of Beer Products ("Hops")
shall be (i) purchased directly by Boston Beer at its cost for
delivery to Stroh, (ii) the property solely and exclusively of
Boston Beer, and (iii) segregated and identified as such. Boston
Beer shall be responsible for the storage of Hops and shall
release Hops to Stroh for production on a bi-weekly basis. Stroh
acknowledges that Boston Beer shall be afforded unrestricted 24-
hour access to all Packaging Materials and Hops when under Stroh
control for purposes of removal or otherwise. Delivery of
Packaging Materials and Hops (on such bi-weekly basis) to Stroh
shall be coordinated between Stroh and Boston Beer, provided that
Stroh shall be ultimately responsible for coordinating the timely
delivery of Packaging Materials and Hops to the appropriate
Breweries and Other Breweries. Boston Beer shall invoice Stroh
for all Hops delivered to Stroh hereunder upon delivery and all
such invoices shall be payable withi thirty (30) days of
invoicing. All vendors shall be selected by Boston Beer in its
discretion, subject only to meeting Stroh's customary quality and
performance requirements.
9. Risk of Loss
Stroh and Boston Beer acknowledge and agree that, consistent
with the F.O.B. pricing terms, the risk of loss in loading the
carrier's trucks shall be borne by Stroh. However, the carrier's
driver shall have the right to inspect each shipment for damage
prior to leaving the loading dock and, accordingly, Boston Beer
shall bear the risk of loss on any shipment of Beer Products,
once the carrier's truck leaves Stroh's loading dock.
10. Brewery of Record.
(a) To the extent requested by Boston Beer and consistent
with applicable laws and regulations, Stroh shall provide all
Beer Products brewed hereunder under the name of "The Boston Beer
Company" as the Brewer of Record. Stroh shall, to the fullest
extent permissible, secure any permits, licenses, approvals and
the like related to the production of beer, required by any
federal, state or local governmental agency on behalf of Boston
Beer. Boston Beer agrees to reimburse Stroh promptly for any out-
of-pocket costs, including, without limitation, legal expenses
and increased clerical costs, incurred in connection therewith.
(b) To the extent requested by Boston Beer, Stroh shall use
all commercially reasonable efforts to establish an alternating
proprietorship at each of the Breweries and at such Other
Breweries to which production of Beer Products has been
transferred, if necessary, and, subject to and in compliance with
all applicable federal, state, or local laws, rules and
regulations, to identify Boston, Massachusetts, as the sole label
source for Beer Products. Boston Beer agrees to reimburse Stroh
for its out-of-pocket costs, including, without limitation, legal
expenses and increased clerical costs, incurred in connection
therewith.
11. * .
The Price shall include * .
12. * .
*
13. Force Majeure.
(a) If Stroh is unable, by reason of a labor dispute,
governmental action, act of God or the like, to produce Beer
Products at any Brewery to the extent contemplated by this
Agreement, it shall, in any event, to the extent it is still able
to maintain production at such Brewery, continue to produce Beer
Products at such Brewery in proportion to the capacity at such
Brewery dedicated to beer Products prior to the occurrence of the
event in question. In addition, Stroh shall advise Boston Beer
of the terms on which Stroh is then willing to produce Beer
Products at Other Breweries while the reduction in capacity at
the affected Brewery continues.
(b) If Boston Beer is unable, by reason of a labor dispute,
governmental action, act of God or the like, to produce Beer
Products at any brewery not owned by Stroh but at which from time
to time Boston Beer produces Beer Products, and at that time
Stroh has available production capacity at any of its Breweries,
Stroh shall make such production capacity available to Boston
Beer at a price equal to Stroh's * under this Agreement
for such production.
14. * .
*
15. Agency and Indemnification.
Stroh and Boston Beer understand and agree that each party is
not, by this Agreement or anything herein contained, including
Stroh's affixing to Beer Products or Seasonals and/or registering
the name of "The Boston Beer Company" or "Boston Beer Company",
constituted or appointed the agent of each other for any purpose
whatsoever, nor shall anything herein contained be deemed or
construed as granting Boston Beer or Stroh any right or authority
to assume or to operate any obligation or responsibility, express
or implied, for or on behalf of or in the name of the other, or
to bind the other in any manner or way whatsoever. Boston Beer
shall indemnify and hold harmless Stroh from and against any and
all claims, expenses, causes of action or liabilities of any
nature whatsoever (collectively "Damages"), to the extent that
Damages arise from the independent conduct of Boston Beer;
provided that Damages shall not include any loss, liability, cost
or expense incurred by Stroh as a consequence of an exercise by
Boston Beer of any of its rights under this Agreement.
16. Product Liability"'.
(a) Stroh and Boston Beer shall each maintain product
liability insurance of not less than * and in the
amount of * combined single limit in the aggregate
relating to the Beer Products produced by Stroh for Boston Beer.
(b) Stroh shall indemnify and hold harmless Boston Beer and
all of its affiliates from and against any and all loss,
liability, cost or expense of any nature whatsoever, including
reasonable attorney's fees (collectively, "Product Liability
Damages"), arising out of or associated with all claims made
against Boston Beer by any party or parties for personal injury
or property damage caused by impurities, defects, or adulteration
of any kind in the Beer Products manufactured and packaged by
Stroh, regardless of when manufactured or packaged; except that
Stroh shall have no such indemnification obligations with respect
to (i) Product Liability Damages were caused by (i) Boston Beer's
improper storage, handling, or alteration of the Beer Products in
question or (ii) Packaging Materials or ingredients purchased,
specified or otherwise approved by Boston Beer subsequent to
written notice from Stroh reasonably advising that such Packaging
Materials or ingredients should not be used in the Beer Products
for health and safety reasons, it being understood that Stroh's
sole obligation with respect to providing any such notice shall
be to inform Boston Beer of matters which come to Stroh's
attention and Stroh shall have no independent duty to analyze any
Boston Beer Packaging Materials, ingredients or specifications,
and (iii) Product Liability Damages resulting from inherent
properties and/or characteristics of the Beer Products,
including, by way of example and not of limitation, health and
intoxicating effects of the Beer Products.
10 -
(c) Boston Beer shall indemnify and hold Stroh
and all of its affiliates harmless from and against any and all
Product Liability Damages to the extent arising out of the
courses excepted from Stroh's indemnification obligations under
paragraph (b), above.
(d) Notwithstanding the provisions of subparagraphs
(b) and (c) of this Paragraph 12, in no event shall either Party
be liable to indemnify the other Party for consequential damages
other than consequential damages arising out of willful
managerial misconduct suffered by the other Party and even in
such latter event not in an amount greater than * .
17. Recipe and Quality.
(a) Stroh shall produce the Beer Products using the
ingredients and brewing procedures specified by Boston Beer or
its appointee. Boston Beer has the right to change ingredients
and/or to specify brewing procedures provided that (i) *
, (ii) the specified ingredients are readily available in the
necessary time frame, and (iii) if the brewing time and/or the
tank storage time required for fermentation or aging materially
exceeds that required for Samuel Adams Lager, Boston Beer will
negotiate in good faith with Stroh * at the affected
Brewery or Breweries.
(b) Stroh shall use its best efforts to meet all of
the specifications for each of the Beer Products. Boston Beer has
the right to reject batches of beer which it determines to taste
or look materially different from a representative sample of the
Beer Products or Seasonals, such rejection not to be arbitrary or
unreasonable. Any rejected batches may be blended by Stroh into
any other Beer Product only in accordance with all applicable
regulations and with Boston Beer's prior consent, such consent
not to be unreasonably withheld.
18. Trademarks.
(a) Stroh acknowledges that no trademark or trade name
rights in any of the trademarks, trade names, service marks, or
logos owned by Boston Beer, including specifically but without
limitation those identified on the Trademark Schedule attached
hereto (collectively, the "Trademarks") are granted by this
Agreement.
(b) Boston Beer hereby represents, warrants and
covenants to that it has and will maintain the right to use the
Trademarks and will indemnify and hold harmless Stroh from any
claim of alleged infringement brought by any party against Stroh,
including, but not limited to, Stroh's reasonable costs of legal
expenses.
- 11 -
19. Successors and Assigns.
The Agreement shall be binding upon and inure to the benefit
of the successors and assigns of the Parties, but shall not be
assigned by any Party without the prior written consent of the
other Parties, which consent will not be unreasonably withheld.
No failure of Boston Beer to consent to a proposed assignment of
this Agreement by Stroh shall be deemed unreasonable if Boston
Beer believes in good faith that the proposed assignee is not
capable of performing the production obligations of Stroh
hereunder. No assignment of this Agreement by Stroh shall relieve
it of its financial obligations hereunder, including its
indemnification obligations, or its obligation to * to
the extent required under Section 12, if the assignee defaults in
the performance of its obligations hereunder, or if an assignee
of Stroh's assets generally elects not to assume Stroh's
obligations hereunder. *
20. Governing Law.
This agreement shall be interpreted and construed in accordance
with the laws of the State of New York.
21. Arbitration.
Any disagreement, dispute, controversy or claim with respect
to the validity of this Agreement or arising out of or in
relation to the Agreement, or breach hereof, shall be finally
settled by arbitration in New York, New York, in accordance with
articles of the American Arbitration Association for Commercial
Arbitration. The arbitrator(s) shall have the right to assess
costs, including legal expenses, in favor of the prevailing
Party, including, if applicable, Stroh travel costs.
Notwithstanding the foregoing, the parties may have recourse to
the courts of the United Sates of America for the purpose of
obtaining preliminary injunctive relief, including spec ifically
in the case of Boston Beer enforcing its rights under Section 12
in the event of a Stroh Production Default.
22. Execution in Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which
together shall constitute one and the same document.
- 12 -
23. Amendment.
No Amendment, change, or modification of any of the terms,
provisions or conditions of this Agreement shall be effective
unless made in writing and signed or initialed on behalf of the
parties hereto by their duly authorized representatives.
24. No Third Party Beneficiaries.
Stroh and Boston Beer agree that this Agreement is solely
for their benefit and does not nor is it intended to create any
rights in favor of, or obligations owing to, any person not a
party to this Agreement.
25. Merger: Separability.
Subject to the provisions of Section 26(a), below, this
Agreement terminates and supersedes all prior formal or informal
understandings among the parties with respect to the subject
matter contained herein, except the Letter of Intent, which also
remains in full force and effect. Should any provision or
provisions of this Agreement be deemed ineffective or void for
any reason whatsoever, such provision or provisions shall be
deemed separable and shall not effect the validity of any other
provision.
26. Current Practice: Cooperation.
(a) Except as set forth in this Agreement, the Parties
agree to continue their current business practices with respect
to the Beer Products produced by Stroh for Boston Beer, subject
to modification from time to time as the parties, exercising
reasonable business judgment, shall mutually agree in writing.
(b) *
(c) The Parties also agree to cooperate with one another,
consulting on a regular basis, with a view to achieving further
financial economies, e.g. * , whether at a Brewery, an
Other Brewery or otherwise. In addition, Stroh agrees to advise
Boston Beer of opportunities of which Stroh becomes aware to
purchase from Stroh breweries or brewing, * .
(d) All publicity concerning this Agreement shall be
subject to the restrictions on disclosure set forth in the Letter
of Intent.
- 13 -
27. Lab Tests.
Stroh will perform at its expense all lab tests currently
performed by Stroh for
Boston Beer on all Beer Products.
28. Non-Exclusive Nature of Agreement.
Nothing contained in this Agreement shall require Boston
Beer to avail itself of the Committed Capacity or preclude Boston
Beer from engaging any other brewer for the purpose of producing
and distributing Beer Products.
29. * .
(a) For so long as this Agreement remains in effect,
without the prior written consent of Boston Beer, Stroh shall
not, on behalf of any unaffiliated person, * .
(b) Boston Beer acknowledges that Stroh's business
includes brewing craft and specialty malt beverage products,
including products that may compete directly with, use the same
brewing ingredients and formulae as, and/or are of the same style
as one or more of the Beer Products. Boston Beer agrees that
nothing contained in this Section 29 shall in any manner prevent,
limit, restrict or otherwise affect Stroh's right to continue and
expand such aspect of its business, including by introducing new
products that compete directly with existing Beer Products, so
long as Stroh does not intentionally (i) copy the identical
brewing formulae and ingredients of any Beer Product, (ii) use
any proprietary yeast specifically supplied to Stroh by Boston
Beer solely for use in producing Beer Products, or (iii) use
labeling or other packaging. which infringes any of Boston Beer's
Trademarks or copies Boston Beer's marketing position and
strategy.
30. Yeast Strains.
Stroh will not use yeast strains supplied by Boston Beer to
brew any beers other than the Beer Products. The obligations of
Stroh under this Section 30 shall survive any termination of this
Agreement.
31. Notices.
All notices required herein shall be given by registered
airmail, return receipt requested, or by overnight courier
service, to the following addresses (unless change thereof has
previously been given to the party given notice) and shall be
deemed effective when received:
If to Boston Beer:
C. James Koch, President,
Alfred W. Rossow, Jr., C.O.O. and
Martin Roper, Vice President
The Boston Beer Company, Inc.
75 Arlington Street, Fifth Floor
Boston, MA 02116
With a copy to:
Frederick H. Grein, Jr., Esq.
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, MA 02110
if to Stroh:
James R. Avery, Executive V. Pres.-Operations
and Christopher T. Sortwell, Executive V. Pres. and
Chief Financial Officer
The Stroh Brewery Company
100 River Place
Detroit, MI 48207
With a copy to:
George E. Kuehn, Executive V. Pres. and General Counsel
The Stroh Brewery Company
100 River Place
Detroit, MI 48207
32. Rights of Offset.
Stroh and Boston Beer agree that, to the extent that
either of them is at any time owed money by the other Party,
including on regular invoices sent as provided herein, such Party
may set off such amount against any undisputed monies owed by it
to such Party from time to time, any such set off to be
accomplished by written notice to the owing Party, effective upon
being sent.
33. Deliveries to * .
To the extent permitted by applicable law, if so
requested by Boston Beer, Stroh will * .
34. Adverse Product Statements.
Each Party agrees to take all commercially reasonable steps to
prevent any of its personnel from making disparaging or otherwise
adverse remarks about the products of the other Party.
35. Limitation on Period of Claims.
All claims hereunder must be brought no later than one year
after such claim arose or the Party having such claim shall be
deemed to have waived and forever released it; provided that, for
purposes of this Section 34, a claim shall be deemed to have
arise at the time that the Party asserting a claim first became
aware of it.
IN WITNESS WHEREOF, Stroh and Boston Beer have executed this
Agreement as of the date first above written.
BOSTON BEER COMPANY LIMITED
PARTNERSHIP
By: Boston Brewing Company, Inc.,
its
General Partner
By: C. JAMES KOCH, President
THE STROH BREWERY COMPANY
By: CHRISTOPHER T. SORTWELL,
Executive Vice President
and Chief Financial Officer
EXHIBIT 10.21
* denotes expurgated
information
January 14, 1997
THE STROH BREWERY COMPANY
100 River Place
Detroit, Michigan 48207
ATTENTION: Christopher T. Sortwell
Senior Vice President, Finance
Ladies and Gentlemen:
The Boston Beer Company, Inc., a Massachusetts corporation,
for itself and its affiliates ("Boston Beer") hereby confirms its
proposal with respect to long-term production arrangements
between Boston Beer and The Stroh Brewery Company ("Stroh"), to
become effective if Boston Beer elects to make an investment (the
"Investment") in Stroh's brewery located in Allentown,
Pennsylvania, known as the "Lehigh Valley Brewery". If it elects
to make the Investment, Boston Beer would invest up to *
(sometimes referred to as the "Project"). The Project entails
* in the brewing and packaging of beer products, a
preliminary schedule of which is attached hereto as Exhibit A
(the " * "). Boston Beer's proposal is as follows:
1. Existing Production Arrangements. Boston Beer and Stroh
are parties to certain existing arrangements, pursuant to which
beer products are produced by Boston Beer at the Lehigh Valley
Brewery under an alternating proprietorship, and at a brewery in
Portland, Oregon (the "Portland Brewery"), acquired by Stroh from
G. Heileman Brewing Company on or about July 1, 1996. Such
existing arrangements are currently intended to remain in effect
until * and are hereby ratified and confirmed by Boston
Beer and Stroh, except as hereinafter provided.
2. Investment: Modification of Existing Arrangements.
Boston Beer, in consideration for * , hereby agrees to
* in accordance with the Schedule of * Production
Requirements attached hereto as Exhibit B, and further agrees
that * .
THE STROH BREWERY COMPANY
January 14, 1997
Page 2
3. New Production Arrangements. Upon the execution of this
Letter of Intent, Boston Beer and Stroh shall enter into the
written contract (the "Production Agreement"), attached hereto as
Exhibit C, pursuant to which such beer products as are requested
from time-to-time by Boston Beer shall be produced by Boston Beer
at the * Brewery under an alternating proprietorship,
the * Brewery and the brewery * (the " *
Brewery"), subject to the conditions and limitations set forth in
the Production Agreement, for a term of up to * years,
commencing effective as of * .
4. Investment by Boston Beer. If Boston Beer elects to
* , it shall, in consideration of the Production Agreement,
invest up to * in the * Brewery, subject to
the following provisions of this Section 4:
(a) Boston Beer shall reimburse Stroh for *
of the * Brewery and the * ,
including installation costs, up to a total
reimbursement of * .
(b) Boston Beer shall be entitled to * .
(c) Stroh shall invoice Boston Beer monthly for
amounts expended by Stroh in the immediately
preceding month for approved Project expenditures.
Each invoice shall be accompanied by a Project
status report and copies of all relevant third
party invoices. Unless challenged in writing prior
thereto, all such invoices shall be payable within
30 days of receipt.
(d) Boston Beer shall have the right on reasonable
notice and during normal business hours to inspect
(i) the status of the Project and (ii) Stroh's
books and records relating to the Project. Such
inspection shall be at the expense of Boston Beer
and may be conducted by such experts and other
representatives of Boston Beer, as Boston Beer
shall select in its sole discretion.
(e) As provided in the Production Agreement, in the
event of a material default by Stroh in the
performance of its obligations to Boston Beer
thereunder,
THE STROH BREWERY COMPANY
January 14, 1997
Page 3
Boston Beer shall be entitled to * .
5. Possible * Investment. The Production
Agreement contains provisions with respect to Stroh's continuing
obligations to provide access to capacity * . In the
event that Boston Beer requests access to * capacity
beyond that called for by the Production Agreement at a time when
Stroh reasonably believes that meeting such request is not
possible, given Stroh's then capacity constraints, Stroh, if so
requested by Boston Beer, will promptly undertake an evaluation
of the cost and feasibility of expanding Stroh's *
production capacity for the benefit of Boston Beer and submit to
Boston Beer for consideration a written * shall be
subject to the terms and conditions then in effect under the
Production Agreement.
6. Access to Information: Conditions. Stroh shall give
Boston Beer access to such information concerning Stroh and the
* Brewery as Boston Beer may reasonably request to assist
Boston Beer in determining * . In addition, if Boston
Beer elects to make the * , its obligations to proceed
with the transactions outlined above are further subject to the
following conditions being met or waived by Boston Beer in its
discretion prior to * :
(a) Stroh shall have executed the Production
Agreement.
(b) Boston Beer shall have received all requisite
governmental and other third-party approvals, as
may be necessary for Boston Beer and Stroh to
enter into and perform the Production Agreement.
7. Exclusivity. From the date of this Letter of Intent
until the earlier of * or the termination of this
Letter of Intent, Stroh shall * , to the extent that
Stroh's obligations under any such agreement might materially
adversely affect Stroh's obligations to Boston Beer under this
Letter of Intent or under the Production Agreement.
8. Binding Intent. It is the intention of Boston Beer and
Stroh that this Letter of Intent shall be and be deemed to
constitute their respective legally binding and enforceable
obligations, with respect to the matters discussed herein. Any
other legally binding obligation with respect to the transactions
contemplated hereby shall arise only upon the execution and
delivery of the Production Agreement. All other obligations or
commitments to proceed with the
THE STROH BREWERY COMPANY
January 14, 1997
Page 4
transactions contemplated hereby shall be only those obligations
as are set forth in the Production Agreement.
9 No Publicity. Neither Boston Beer nor Stroh shall make
any public disclosure relating to the transactions contemplated
hereby or indicate that discussions are taking place between them
regarding * , without first notifying the other party of
the intended disclosure in writing.
10. No Brokers Each party represents and warrants to the
other that it has not made any agreement or taken any action
which might cause any broker or third-party to become entitled to
a finder's fee or brokerage commission as a result of the
transactions contemplated by this Letter of Intent.
11. Expiration of Letter of Intent. This Letter of Intent is
conditioned on your acceptance hereof not later than 5:00 P.M.
EST on Friday, January 17, 1997.
Very truly yours,
THE BOSTON BEER COMPANY, INC.
BY: C. JAMES KOCH, President
ACCEPTED:
THE STROH BREWERY COMPANY
BY: CHRISTOPHER T. SORTWELL, Senior Vice president
EXHIBIT A
TO THE LETTER AGREEMENT DATED JANUARY 14,1997
BETWEEN
THE BOSTON BEER COMPANY, INC.
AND
THE STROH BREWERY COMPANY
PRELIMINARY SCHEDULE OF *
*
EXHIBIT B
TO THE LETTER AGREEMENT DATED JANUARY 14,1997
BETWEEN
THE BOSTON BEER COMPANY, INC.
AND
THE STROH BREWERY COMPANY
*
EXHIBIT C
TO THE LETTER AGREEMENT DATED JANUARY 14,1997
BETWEEN
THE BOSTON BEER COMPANY, INC.
AND
THE STROH BREWERY COMPANY
PRODUCTION AGREEMENT
EXHIBIT 10.22
* denotes expurgated
information
AGREEMENT BETWEEN
BOSTON BEER COMPANY LIMITED PARTNERSHIP
AND
THE SCHOENLING BREWING COMPANY
AGREEMENT entered into effective as of the 22nd day of May,
1996 (the "Effective Date") by and between BOSTON BEER COMPANY
LIMITED PARTNERSHIP, d/b/a THE BOSTON BEER COMPANY, a
Massachusetts limited partnership ("Boston Beer"), and THE
SCHOENLING BREWING COMPANY, an Ohio corporation ("Schoenling").
Schoenling and Boston Beer are sometimes referred to herein
individually as a "Party" and collectively as the "Parties".
Schoenling and Boston Beer desire to enter into an agreement
pursuant to which Schoenling shall supply to Boston Beer and
Boston Beer shall purchase from Schoenling on an as ordered
basis, proprietary beer products developed and marketed from time
to time by Boston Beer ("Products").
ACCORDINGLY, for and in consideration of the mutual
agreements contained herein, the Parties, intending to be legally
bound, hereby agree as follows:
SCOPE OF AGREEMENT
During the term of this Agreement as set forth in
Paragraph 4 hereof and in accordance with the terms set forth
herein, Schoenling agrees to brew, package and sell Products to
Boston Beer and Boston Beer agrees to purchase Products from
Schoenling. Brewing of Products shall commence for commercial
purposes promptly after Boston Beer reasonably approves test
brews of Products produced by Schoenling to Boston Beer's
specifications.
PRICE AND MANNER OF PAYMENT: ANNUAL FEE.
(a) Except as otherwise provided in the following
subparagraphs of this Paragraph 2, Boston Beer shall pay
Schoenling for Products an amount (the "Unit Price") equal to:
(i) with respect to Products packaged in bottles, a "Fixed
Charge" of * per unit of twenty-four 12-ounce bottles
or twelve 22-ounce bottles (in either instance, a "Case Unit"; it
being the intent that the Fixed Charge for other 22 ounce package
configurations produced by Schoenling be prorated), or (ii) with
respect to Products packaged in kegs, a Fixed Charge of *
per unit of one-half barrel consisting of 15.5 U.S. gallons (a
"Keg"), plus (iii) in both cases, the net cost to Schoenling of
all Brewing Ingredients (as defined in Paragraph 3(a)) purchased
by Schoenling and used in producing Products; all federal, state
and local excise taxes attributable to Products that are paid by
Schoenling; and a deposit charge of * per pallet. For
this purpose, "net cost to Schoenling" shall include purchase
discounts, but not discounts resulting from credit terms.
(b) Unit Prices are F.O.B. the carrier's trucks at
Schoenling's docks (i.e., the Unit Price includes the cost and
risk of loading trucks at Schoenling's dock) and include
Schoenling's labor costs, overhead, profit and other costs
incurred in the brewing and packaging of Products.
(c) Schoenling will invoice Boston Beer for the Fixed
Charge, all applicable Brewing Ingredients purchased by
Schoenling attributable to Products shipped, all federal, state
and local excise taxes attributable to Products that are paid by
Schoenling, and the pallet deposit charged on the date Products
are shipped. All invoices will be sent to Boston Beer by
telecopier and Boston Beer will pay on each Friday by electronic
funds transfer all invoices received by Monday that relate to the
previous week. If Schoenling should elect, in its sole
discretion, to utilize electronic invoicing, Boston Beer will pay
on each Wednesday all invoices received by Monday that relate to
the previous week.
(d) Schoenling shall be entitled to such price
increases, as are negotiated in good faith from time-to-time by
Schoenling and Boston Beer. When negotiating production price
increases, the parties shall analyze the historical financial
information accumulated for Schoenling's production and packaging
operations and attempt to determine pricing levels for Boston
Beer products and for Schoenling proprietary products which will
fairly recover normal and necessary costs and provide a level of
operating income which will allow prudent, stable reinvestment in
Schoenling's real property located in Cincinnati, Ohio (the "Real
Property") and Schoenling's fixed assets and equipment as are
used or useable in the brewing and packaging of beer products or
in the administration of such operations ("Production
Equipment"). It is not intended, however, that Boston Beer pay a
price for Products which guarantees a fixed or minimum level of
facility profitability nor replace dollar-for-dollar the margins
formerly generated by other contract customers, whether or not
Boston Beer avails itself of production capacity previously
dedicated to former third-party customers. Boston Beer and
Schoenling agree to consult and cooperate with one another to
achieve cost reductions or to minimize cost increases to the
extent possible, especially with respect to the cost of raw
materials and packaging materials.
(e) Boston Beer shall also pay to Schoenling an annual
administrative fee equal to * , the first such fee to be
due and payable upon the execution of this Agreement and
thereafter on April 1 in each year during which this Agreement
remains in effect.
3. BREWING INGREDIENTS. PACKAGING MATERIALS AND
BREWING SUPPLIES
(a) For purposes of this Agreement, "Brewing
Ingredients" shall be defined as all malt, yeast and hops used to
produce Products. Brewing Ingredients shall be purchased and
supplied as follows:
(i) All malt used in the brewing of Products
shall be purchased by Schoenling directly from commercial malt
suppliers. Schoenling and Boston Beer will use their best efforts
to agree upon malt specifications for malt that will allow
Schoenling to commingle storage of malt used to produce Products
with malt used by Schoenling to produce other products. If
Schoenling and Boston Beer cannot agree upon standard malt
specifications, the Fixed Charge shall be increased to reflect
any additional cost incurred by Schoenling for separate handling
and storage of malt used in Products.
(ii) All hops used in the brewing of Products
shall be purchased by Schoenling from Boston Beer. Delivery of
hops shall be coordinated between Schoenling and Boston Beer.
(iii) All yeast used in the brewing of Products shall
be supplied by Boston Beer at no charge to Schoenling. All yeast
supplied by Boston Beer shall remain the property solely and
exclusively of Boston Beer and shall be segregated and identified
by Schoenling as such. Delivery of yeast to Schoenling shall be
coordinated between Schoenling and Boston Beer.
(b) For purposes of this Agreement, "Packaging
Materials" shall be defined as all bottles, crowns, labels,
cases, cartons, kegs, tap covers, pallets and dust covers and the
like used in the packaging and shipment of Products. Packaging
Materials shall be purchased and supplied as follows:
(i) Bottles, crowns, labels, cases, cartons, tap covers and
the like shall be purchased by Boston Beer and supplied to
Schoenling as needed to meet the Packaging Schedule for Products.
(ii) Kegs, pallets and dust covers in quantities adequate
for the volume of Products to be packaged under this Agreement
shall be purchased by Boston Beer and supplied to Schoenling from
time to time. All such kegs, pallets and dust covers shall be
returned and reused in accordance with Schoenling's standard
policies for keg and pallet return and reuse. From time to time
during the term of this Agreement, Boston Beer shall purchase and
supply to Schoenling additional kegs, pallets and dust covers in
numbers adequate to replace kegs, pallets and dust covers lost or
otherwise rendered unusable. All kegs, pallets and dust covers
shall conform to the specifications of kegs, pallets and dust
covers used by Schoenling in packaging and shipping its own
products. Upon each delivery to Schoenling of new pallets
purchased by Boston Beer, Schoenling shall issue to Boston Beer a
credit of * per pallet and the pallets shall thereafier
be the property of Schoenling.
(iii) Schoenling shall purchase and supply at its own
cost Lock n' Pop, shrink wrap, label adhesive, hot melt glue and
bungs used in packaging and shipping of Products.
(c) For purpose of this Agreement, "Brewing
Supplies" shall be defined as * . Schoenling shall
purchase and supply at its own cost all Brewing Supplies used in
the brewing of Products.
(d) Boston Beer shall have sole responsibility
for the selection and approval of all Brewing Ingredients,
Packaging Materials and Brewing Supplies used to produce
Products. Boston Beer shall have sole responsibility for the
content and design of all labels, tap covers, crowns, cartons,
cases and other Packaging Materials.
(e) Upon the termination of this Agreement for any reason:
(i) Boston Beer will purchase from Schoenling (x) all finished
Products at the Fixed Charge, (y) all inventory of work in
process of Products at Schoenling's cost, and (z) all inventory
of Brewing Ingredients, Packaging Materials and Brewing Supplies
purchased by Schoenling that are not reasonably useable by
Schoenling in its own products at Schoenling's cost; and (ii)
Schoenling will make available for pick up by Boston Beer at
Schoenling's dock all finished Products and all Brewing
Ingredients, Packaging Materials and Brewing Supplies referred to
in Subparagraph 3(e)(i) hereof. In the event sales of Products
are substantially less than forecasted by Boston Beer resulting
in abnormally excess inventories of Brewing Ingredients,
Packaging Materials and Brewing Supplies purchased by Schoenling,
Boston Beer will purchase such excess from Schoenling at
Schoenling's cost.
4. TERM
(a) The term of this Agreement shall be * years
beginning on the Effective Date, unless sooner terminated
pursuant to Paragraph 5 hereof. The Parties acknowledge that
Boston Beer's obligations pursuant to this Agreement to make
payments to Schoenling and the Parties' respective rights and
obligations under Paragraphs 3(e), 11, 12, 14, 16(a), 16(c), 17
and 26 shall survive the termination of this Agreement.
5. TERMINATION
(a) Either Party may terminate this Agreement effective
immediately upon written notice to the other Party in the event
that the other Party is in default of any of its obligations
under this Agreement, which default continues for a period of
thirty (30) days following receipt of written notice of such
default.
(b) Either Party may terminate this Agreement effective
immediately upon written notice to the other Party in the event
that: (i) the other Party makes an assignment for the benefit of
creditors or files a voluntary bankruptcy, insolvency,
reorganization or similar petition seeking protection from
creditors petition; (ii) the other Party fails to vacate any
involuntary banknuptcy, insolvency or reorganization petition
filed against such Party within sixty (60) days after the filing
of such petition; or (iii) the other Party liquidates, dissolves
or ceases to do business as a going concern.
(c) Schoenling may terminate this Agreement, if Boston Beer
fails to meet certain minimum purchase requirements, as specified
in Section 6(b).
(d) Schoenling may terminate this Agreement effective upon
the termination of the Option Agreement (the "Option Agreement")
of even date herewith pursuant to which Schoenling granted to
Boston Beer an option (the "Option") to acquire the Real Property
and certain of the Production Equipment.
(e) Upon termination of this Agreement pursuant to this
Paragraph 5, Boston Beer shall promptly pay to Schoenling all
unpaid invoices in full and all unpaid costs incurred by
Schoenling pursuant to this Agreement in the brewing, packaging,
shipping and storage for Products. Schoenling will use all
reasonable efforts to minimize such costs upon termination and
Boston Beer will have the right to review documentation
evidencing such costs. Also upon termination, Schoenling shall
have the right to terminate the Option, as provided in the Option
Agreement.
6. PACKAGING. DEPOSITS AND MINIMUM ORDERS
(a) Packaging of Products shall consist of Kegs and twelve
ounce (12 oz.) and twenty-two ounce (22 oz.) bottles. Except for
one-way pailets paid for by Boston Beer, a deposit per pallet, as
set forth in Paragraph 2(a) hereof, shall be charged to Boston
Beer with a corresponding credit applied upon the safe return in
good working order of the pallets to Schoenling. Boston Beer has
the right, subject to the approval of Schoenling which approval
will not be unreasonably withheld, to make changes in the
Packaging Materials, including but not limited to packaging
Products in can units in quantities consistent with Schoenling's
operational capacities. Costs incurred by Schoenling in making
such changes shall be paid by Boston Beer.
(b) Boston Beer shall purchase not less than *
barrels of Products from Schoenling during the balance of
calendar year 1996. Minimum production/purchase requirements for
1997 and beyond shall be determined based on 6-month planning
cycles, with, for example, proposed commitments for the period
January 1 through June 30, 1997 to be submitted to Schoenling by
Boston Beer on or about July 1, 1996. Minimum requirements for
1997 and 1998 shall in any event be * barrels and
* barrels, respectively. Minimum requirements for 1999 and
subsequent years shall also be * barrels. If Boston
Beer fails to meet such minimum purchase requirements starting in
1999, Schoenling shall have the right to terminate the Supply
Contract, as follows:
(i) If Boston Beer fails to
purchase at least * barrels in any six
(6) month period January through June and *
barrels in any six (6) month period July through
December, Schoenling may give written notice to
Boston Beer of its intention to terminate the
Supply Contract if the shortfall iS not made up
during the succeeding six (6) month period (the
"Make-Up Period"). Any such notice of intention to
terminate must be given prior to the end of the
first month of the Make-Up Period.
(ii) If Boston Beer does not
purchase sufficient quantities of beer products
during the Make-Up Period such that for the twelve
(12) month period ending on the last day of the
Make-Up Period, Boston Beer shall have met its
minimum purchase requirements, Schoenling shall
have the right to terminate the Supply Contract on
one hundred twenty (120) days prior written
notice, given at any time prior to the expiration
of thirty (30) days after in the end of the Make-
Up Period.
(iii) If Schoenling terminates the Supply
Contract pursuant to clauses (i) and (ii), it
shall also have the right to terminate the Option,
effective on termination of the Supply Contract.
Boston Beer's commitments are inclusive of any beer products
produced for * , other Boston Beer licensees and other
parties brought to Schoenling by Boston Beer. Boston Beer shall
have the right to avail itself of all of Schoenling's production
capacity, excepting only such capacity as is identified on
Schedule B attached hereto, such other third-party commitments as
shall be approved in advance by Boston Beer, which approval shall
not be unreasonably withheld, except that it shall not be
unreasonable for Boston Beer to withhold approval if the proposed
commitment involves competing products as defined in Section
16(b) hereof, and up to * (or such increased amount as
may from time to time be approved in advance by Boston Beer,
which approval shall not be unreasonably withheld) cases per year
of production of Schoenling's own proprietary alcoholic and non-
alcoholic products. Notwithstanding the foregoing, Schoenling
shall be entitled to utilize its facilities for third-party
products marketed by Schoenling (e.g., * ale), provided
that to the extent such products utilize Schoenling's production
capacity, they will be included within the * case
capacity (as such amount may be increased from time to time in
accordance with the preceding sentence of this subsection (b))
reserved for Schoenling's proprietary products.
(c) Prior to commencing brewing of Products for
commercial purposes and on a weekly basis thereafter, Boston Beer
shall provide Schoenling with a twelve (12) week Production Plan
for Products (the "Production Plan"). The Production Plan shall
be a rolling twelve week schedule setting forth brewing and
packaging requirements for Products for each week during the
twelve weeks covered by the Production Plan. All brewing
requirements for Products during the first six weeks of the
Production Plan shall constitute firm orders by Boston Beer. All
brewing requirements for Products during the second six weeks of
the Production Plan and all packaging requirements set forth in
the Production Plan shall be a forecast of Boston Beer's best
estimate of brewing and packaging requirements for Products and
shall be used by Schoenling for capacity planning purposes.
Boston Beer shall update the Production Plan each week by
providing its best estimate of brewing and packaging requirements
for the twelfth week and by revising the schedule for brewing and
packaging requirements in the sixth through eleventh weeks of the
Production Plan. The brew size that Boston Beer shall utilize in
the Production Plan shall be Schoenling's maximum brew based on
Schoenling's current brewing vessels, currently estimated to
yield approximately * barrels of Products (a "Brew").
The minimum brewing requirement that Boston Beer may specify
during any week in which it elects to brew shall be *
Brews. Schoenling shall have the right, in its sole discretion,
to set the actual time and date on which each Brew shall be
brewed, provided that Schoenling shall use its best efforts to
minimize the length of time that Products remains in storage
prior to packaging.
(d) Boston Beer shall place all orders for packaging
and shipment of Products by the eighth business day of each month
(the "Packaging Schedule"). The Packaging Schedule shall set
forth the quantity of Products by package type and the week in
which each order shall be shipped in the following month.
Packaging shall be scheduled in increments of * cases
for 22 oz. boffles and * cases for 12 oz. bottles in
new glass. The minimum order for packaging Products in Kegs shall
be * Kegs.
7. RISK OF LOSS
Boston Beer shall have sole responsibility for
selecting carriers and making all arrangements for shipment of
Products to its customers. Boston Beer shall pay for all costs
associated with shipment of Products from Schoenlingts facility.
Schoenling and Boston Beer acknowledge and agree that, consistent
with the F.O.B. pricing terms, the risk of loss in loading the
carrier's trucks shall be borne by Schoenling. However, the
carrier's driver shall have the right to inspect each shipment
for damage prior to leaving the loading dock and, accordingly,
Boston Beer shall bear the risk of loss on any shipment of
Products, once the carrier's truck leaves loading dock.
8. BREWERY OF RECORD
(a) Schoenling shall provide all Products brewed
hereunder under the narne of "The Boston Beer Company," as the
Brewery of Record. Schoenling shall secure and maintain any
permits, licenses, approvals and the like required by any
federal, state or local governmental agency on behalf of Boston
Beer. Boston Beer agrees to reimburse Schoenling promptly for
any out-of-pocket costs, including, without limitation, legal
expenses, incurred in connection therewith.
(b) Schoenling shall, to the extent reasonably
possible, by establishing and maintaining an alternating
proprietorship if necessary, but subject to and in compliance
with all applicable federal, state or local laws, rules and
regulations, identfy Boston, Massachusetts, as the sole label
source for Products. Boston Beer agrees to reimburse Schoenling
for its out-of-pocket costs, including, without limitation, legal
expenses, incurred in connection therewith.
9. FORCE MAJEURE
(a) Schoenling shall not be liable to Boston Beer in
the event that Schoenling shall delay in or fail to deliver
Products to Boston Beer hereunder for any reason or cause beyond
its control, including but not limited to a slowdown, stoppage or
reduction of Schoenling's production or delivery due to strikes,
fire, flood, labor stoppage or slowdown, inability to obtain
materials or packages, shortage of energy, acts of God, a
limitation or restriction of its-production by action of any
military or governmental authority, or any other such causes.
(b) In the event of any such slowdown, stoppage or
reduction of Schoenling's production or deliveries, Schoenling
will allocate its remaining capacity pro rata between Products
and other products then produced by Schoenling, provided that
Boston Beer shall use reasonable efforts to move production of
Products to its other suppliers for the duration of any such
slowdown, stoppage or reduction so as to minimize the amount of
Products that Schoenling is required to produce for Boston Beer
during such slowdown, stoppage or reduction. If the event
causing slowddown, stoppage or reduction of Schoenling's
production or delivery shall occur within two hundred seventy
(270) days after the beginning of commercial brewing of Products,
then the pro rata allocation of Schoenling's remainig production
capacity shall be based on the proportionate volume of other
products produced by Schoenling during the six (6) month period
immediately preceding the month in which occurred the event which
gave rise to the slowdow, stoppage or reduction and two (2) times
the volume of Products produced by Schoenling during the three
(3) month period immediately preceding the month in which
occurred the event which gave rise to the slowdow, stoppage or
reduction. If the event causing the slowdow, stoppage or
reduction of Schoenling's production or delivery shall occur more
than two hundred seventy (270) days after the beginning of
commercial production of Products, then the pro rata allocation
of Schoenling's remaining production capacity shall be based on
the proportionate volume of Products and other products produced
by Schoenling during the six (6) month period immediately
preceding the month in which occurred the event which gave rise
to the slowdown, stoppage or reduction of Schoenling's production
or delivery.
10. CHANGE PARTS AND BREWERY MODIFICATIONS
Boston Beer will pay for * , provided that
Schoenling notifies Boston Beer in advance of making any such
expenditures; and provided further that Boston Beer hereby
acknowledges its obligations to pay for such expenses incurred by
Schoenling prior to the Effective Date. Boston Beer shall own all
* paid for by Boston Beer and Schoenling shall allow Boston
Beer to remove all such * at the termination or
expiration of this Agreement, provided that Boston Beer shall
restore, or reimburse Schoenling for its cost to restore
Schoenling's equipment or facilities to their condition prior to
the installation of such * , ordinary wear and tear
excluded. The cost and ownership of any change parts or brewery
modifications that can also be used by Schoenling to produce its
own products shall be allocated between Schoenling and Boston
Beer by prior written agreement. Schoenling agrees to execute an
appropriate UCC financing statement to reflect Boston Beer's
ownership of any change parts or brewery modifications owned by
Boston Beer. Schoenling shall have no obligation to make any
modifications to its equipment or facilities to accommodate the
production of Products unless agreed to by Schoenling in writing.
11. AGENCY AND INDEMNIFICATION
Schoenling and Boston Beer understand and agree that
neither Party is, by virtue of this Agreement or anything
contained herein, including Schoenling affixing to any Products
and/or registering the name of "The Boston Beer Company" or
"Boston Beer Company," constituted or appointed the agent of the
other Party for any purpose whatsoever, nor shall anything herein
contained be deemed or construed as granting Boston Beer or
Schoenling any right or authority to assume or to create any
obligation or responsibility, express or implied, for or on
behalf of or in the name of the other, or to bind the other in
any manner or way whatsoever. Boston Beer shall indemnify and
hold harmless Schoenling from and against any and all claims,
expenses, causes of action or liabilities of any nature
whatsoever (collectively, "Damages"), to the extent that Damages
arise from the independent conduct of Boston Beer; provided that
Damages shall not include any loss, liability, cost or expense
incurred by Schoenling as a consequence of the exercise by Boston
Beer of any of its rights under this Agreement.
12. PRODUCT LIABILITY
(a) Schoenling and Boston Beer shall each malntain
products liability insurance coverage in the respective amounts
of not less than * per occurrence and *
combined single limit, and in the amount of not less than *
combined single limit in the aggregate relating to Products
produced by Schoenling for Boston Beer hereunder.
(b) Schoenling shall indernnify and hold harmless
Boston Beer and all of its affiliates from and against any and
all loss, liability, cost or expense of any nature whatsoever,
including reasonable attorney's fees (collectively, "Products
Liability Damages"), arising out of or associated with the
manufacture and/or packaging of Products by Schoenling,
regardless of when manufactured or packaged, and whether under
this Agreement or otherwise, except to the extent that (i)
Products Liability Damages were caused by improper storage,
handling or alteration of Products after delivery to Boston Beer,
(ii) Products Liability Damages are based on or result from a
claim that any Products are inherently defective, or (iii)
Products Liability Damages were caused by Brewing Ingredients,
Packaging Materials or Brewing Supplies specified or otherwise
approved by Boston Beer.
(c) Boston Beer shall indemnily and hold harmless
Schoenling and all of its affiliates from and against any and all
Products Liability Damages to the extent arising out of the
causes excepted from Schoenling's duty to indemnify Boston Beer
under clauses (i), (ii) and (iii) of subparagraph (b) of this
Paragraph 12.
(d) Notwithstanding the provisions of subparagraphs
(b) and (c) of Paragraph 12, in no event shall either Party be
liable to indemnily the other Party for product liability-related
consequential damages suffered by the other Party in an amount
greater than the lesser of (i) * or (ii) *
plus * by Boston Beer for all Products during the
twelve (12) months preceding the month in which occurred the
event giving rise to the claim for indemnification.
13. RECIPE AND QUALITY
(a) Schoenling shall produce Products using the
ingredients and brewing formula and procedures specified from
time-to-time by Boston Beer. Boston Beer shall have the right to
change ingredients and/or brewing formula and procedures upon
reasonable prior written notice, provided that the cost of any
such change shall be borne by Boston Beer and, provided further,
that the specified ingredients are readily available in the
necessary time frame.
(b) Schoenling shall use its best efforts to meet the
specifications for Products attached hereto as Schedule A. Boston
Beer has the right to reject batches of Products which it
determines to taste materially different from representative
sample of Products, such rejection not to be arbitrary or
unreasonable. Any rejected batches may be blended by Schoenling
into other runs of Products.
14. TRADEMARKS
(a) Schoenling acknowledges that no trademark or trade
name rights in "Samuel Adams Cream Stout", "Samuel Adams Boston
Ale", "Samuel Adams Boston Lager," "Boston Lightship Lager," and
"The Boston Beer Company" and any other trademarks, trade names,
service marks or logos owned by Boston Beer (collectively, the
"Trademarks") are granted by this Agreement.
(b) Boston Beer hereby represents, warrants and
covenants to Schoenling that it has and will maintain its right
to use the Trademarks and will indemnify and hold harmless
Schoenling from any alleged infringement by any Party against
Schoenling including, but not limited to, Schoenling's reasonable
costs of legal expenses.
15. TEST BREWING
Notwithstanding anything to the contrary in this
Agreement, Boston Beer may, at any time after notice to
Schoenling engage any other brewer for the purpose of conducting
test production and distribution of Products in order to ensure
the delivery of Products following termination of this Agreement.
16. COMPETING PRODUCTS
(a) Schoenling will not at anytime use the brewing
formula for Products for which Boston Beer has supplied brewing
formulas to Schoenling or any yeast supplied to Schoenling by
Boston Beer to produce a malt beverage product for itself (or any
of its affiliates) or on behalf of any unaffiliated person.
(b) For so long as this Agreement remains in effect,
Schoenling shall not, without the prior written consent of Boston
Beer, which consent may be withheld by Boston Beer in its
discretion, produce for or on behalf of any person unaffiliated
with, Schoenling or Boston Beer a malt beverage product for sale
in the United States which (i) has a wholesale F.O.B. price that
is within * of the average of the ten (10) highest then
current wholesale F.O.B. prices charged by Boston Beer for
Products, and (ii) is part of a family of malt beverage products
having aggregate sales volume for the past twelve (12) months in
excess of * of Boston Beer's aggregate sales volume
during the same twelve (12) months, except for those malt
beverage products being produced by Schoenling pursuant to the
arrangements disclosed on Schedule C attached hereto, and except
for products marketed by Schoenling, as provided in the last
sentence of Section 6(b) hereof.
(c) Boston Beer acknowledges that Schoenling is
currently in the business of brewing craft and specialty malt
beverage products that are sirnilar to and compete with Products,
and Boston Beer agrees that nothing in this Agreement shall
prevent Schoenling from continuing or expanding its craft and
specialty business, provided that Schoenling shall not
intentionally copy the brewing formula for Products or use any
yeast supplied to Schoenling by Boston Beer to produce craft and
specialty products for itself or any of its affiliates. All
Products produced by Schoenling for purposes of this Agreement,
including all work in process, shall be produced solely for the
benefit of Boston Beer and used for no other purpose.
17. RIGHTS OF OFFSET
The parties acknowledge and agree that, to the
extent a Party is at any time owed money by the other Party, such
Party may set off such amount against any monies owed by such
Party from time to time to such other Party, said set-off to be
accomplished by written notice to such other Party effective upon
being sent.
18. NOTICES
All notices required herein shall be given by
registered airmail, return receipt requested, or by overnight
courier service, in both cases with a copy also sent by
telecopier, to the following addresses (unless change thereof has
previously been given to the Party giving the notice) and shall
be deemed effective when received:
If to Boston Beer: C. James Koch, President
and Alfred W. Rossow, Jr., COO
The Boston Beer Company
75 Arlington Street, Fifth Floor
Boston, Massachusetts 02116
Telecopier: (617) 728-4137
with a copy to: Frederick H. Grein, Jr., Esq.
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, Massachusetts 02110
Telecopier: (617) 951-1295
If to Schoenling: Kenneth Lichtendahl, President
Schoenling Brewing Company
1625 Central Parkway
Cincinnati, OH 45214
Telecopier: (513) 357-5215
with a copy to: Thomas J. Westerfield, Esquire
Cors & Bassett
1200 Carew Tower
Cincinnati, OH 45202-2990
Telecopier: (513) 852-8222
19. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Parties, but shall
not be assigned by any Party, whether by merger, consolidation,
reorganization, operation of law or otherwise, without the prior
written consent of the other Party, which consent will not be
unreasonably withheld. Notwithstanding the foregoing, Boston Beer
may assign this Agreement without the consent of Schoenling to
its successor corporation or other successor entity in the event
of any reorganization, public offering or change in the form of
entity of Boston Beer, provided that Boston Beer or its current
stockholders shall own and control at least * of the
outstanding stock of the successor corporation or other successor
entity taking assignment of this Agreement. No failure of a Party
to consent to a proposed assignment of this Agreement by the
other Party shall be deemed unreasonable if such Party believes
in good faith that the proposed assignee is not capable of
performing the financial or production obligations of the Party
proposing to assign this Agreement. Assignment of this Agreement
shall not relieve the assigning Party of its financial
obligations hereunder, including its indemnification obligations
hereunder.
20. GOVERNING LAW
This Agreement shall be interpreted and construed
in accordance with the laws of the Commonwealth of Massachusetts.
21. DISPUTE RESOLUTION
Any disagreement, dispute, controversy or claim with respect to
the validity of this Agreement or arising out of or in relation
to the Agreement, or breach hereof, shall be submitted to
arbitration in Boston, Massachusetts, in accordance with articles
of the American Arbitration Association for Commercial
Arbitration. The arbitrator(s) shall have the right to assess
costs including legal expenses, in favor of the prevailing parry,
including, if applicable, Schoenling's travel costs. The decision
of the arbitrator(s) shall be final and binding on both Parties.
Notwithstanding the foregoing, the Parties may, prior to
submitting a dispute to arbitration, have recourse to the courts
of the United States of America or the Commonwealth of
Massachusetts for the purpose of obtaining a temporary
restraining order or other preliminary injunctive relief. In
particular, in the event of an unsettled dispute between the
parties to this Agreement, Boston Beer shall have recourse to the
Courts of the Commonwealth of Massachusetts for the purpose of
obtaining a temporary restraining order or other preliminary
injunctive relief to require Schoenling to continue to brew,
package and ship any Products ordered by Boston Beer under this
Agreement until Boston Beer shall have secured a new source for
production of its Products; provided that under such
circumstances Schoenling shall be entitled to payment in advance
of production.
22. EXECUTION IN COUNTERPARTS
This Agreement rnay be executed in one or more
counterparts each of which shall be deemed to be an original but
all of which together shall constitute one and the same document.
23. AMENDMENTS
No amendment, change or modification of any of the
terms, provisions or conditions of this Agreement shall be
effective unless made in writing and signed or initialed on
behalf of the parties hereto by their duly authorized
representatives.
24. NO THIRD-PARTY BENEFICIARIES
Schoenling and Boston Beer agree that this
Agreement is solely for their benefit and it does not nor is it
intended to create any rights in favor of, or obligations owing
to, any person not a Party to this Agreement.
25. MERGER; SEPARABILITY
This Agreement terminates and supersedes all prior
formal or informal understandings between the Parties with
respect to the subject matter contained herein, provided that the
confidentiality and all other obligations of the parties under
(i) the Confidentiality Agreement dated March 7, 1995, (ii) the
letter agreement between the parties dated March 7, 1996 and
(iii) the Option Agreement shall remain in full force and effect
in accordance with the terms thereof. Should any provision or
provisions of this Agreement be deemed ineffective or void for
any reason whatsoever, such provision or provisions shall be
deemed separable and shall not effect the validity of any other
provision.
26. LIMITATION PERIOD ON CLAIMS
All claims hereunder must be brought no later than
one (1) year after such claims arose or the Party having such
claim shall be deemed to have waived and forever released it:
provided that for this purpose, a claim will be deemed to have
arisen at the time the Paty asserting the claim first became
aware of it.
IN WITNESS WHEREOF, the parties hereto enter into
this Agreement as of the date first above written.
BOSTON BEER LIMITED PARTNERSHIP
d/b/a The Boston Beer Company, Inc.
By: Boston Brewing Company, Inc.
its General Partner
Witness:
By: C. JAMES KOCH, President
_________________________________
THE SCHOENLING BREWING COMPANY
Witness:
By: KENNETH LICHTENDAHL, President
_________________________________
SCHEDULE A
TO
SUPPLY CONTRACT BETWEEN
BOSTON BEER COMPANY LIMITED PARTNERSHIP
AND
THE SCHOENLING BREWING COMPANY
Product Specifications
As determined from time to time by Boston
Beer and submitted by Boston Beer to Schoenling.
SCHEDULE B
TO
SUPPLY CONTRACT BETWEEN
BOSTON BEER COMPANY LIMITED PARTNERSHIP
AND
THE SCHOENLING BREWING COMPANY
CURRENT PRODUCTION COMMITMENTS
*
Exhibit 11.
THE BOSTON BEER COMPANY, INC.
STATEMENT REGARDING COMPUTATION OF NET EARNINGS PER SHARE
(in thousands, except per share data)
Year ended
---------------------------------------------
December 28, December 31, December 31,
1996 1995 1994
Weighted average number of
common shares outstanding 19,969,633 16,991,001 16,641,740
Add:Common equivalent shares
representing shares
issuable upon conversion
of stock options
(using the treasury
stock method) 382,363 685,511 563,571
Add:Common equivalent shares per
SAB Topic 1B - 272,884 965,467
----------- ---------- ----------
Weighted average number of common
and common equivalent shares 20,351,996 17,949,396 18,170,778
=========== ========== ==========
Net income $8,385 $5,896 $5,320
=========== ========== ==========
Primary and fully diluted
earnings per share $0.41 $0.33 $0.29
=========== ========== ==========
Pro forma, see Note B on the accompanying Notes to Conolidated Financial Statements.
(1)
Pro
forma
, see
Note
B on
the
accom
panyi
ng
Notes
to
the
Conso
lidat
ed
Finan
cial
State
ments
.
5
1,000
US DOLLAR
12-MOS
DEC-28-1996
JAN-01-1996
DEC-28-1996
1.000
5060
35926
18109
1930
13002
77691
21043
6412
96553
29922
1800
0
0
201
64630
96553
213879
191116
95786
177959
0
0
236
14871
6486
13157
0
0
0
8385
.41
.41
EXHIBIT 21.1
List of Subsidiaries
The Boston Beer Company, Inc.
(a Massachusetts corporation)
Boston Brewing Company, Inc.
(a Massachusetts corporation)
BBC Mass, Inc. (formerly H & Q Beverage Co., Inc.)
(a Massachusetts corporation)
The Wing Beer Co., Inc.
(a Texas corporation)
Sam Adams Investors, Inc.
(a Massachusetts corporation)
KJW Holdings, Inc.
(a Texas corporation)
Back Bay Beverage Company, Inc.
(a Delaware corporation)
BBC Del, Inc. (formerly Consumer Venture Beverage Co.)
(a Delaware corporation)
The following are subsidiaries of Boston Beer Company Limited
Partnership, owned directly and indirectly (through Boston
Brewing Company, Inc.) by The Boston Beer Company, Inc.
Oregon Beer and Brewing Co., Inc. I
(an Oregon corporation)
SBCC Company, Inc.
(a Delaware corporation)
Samuel Adams Brewery Company, Ltd.
(an Ohio limited liability company)
