UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended
SEPTEMBER 25, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ..........to..........
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3284048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 ARLINGTON STREET, BOSTON, MASSACHUSETTS
(Address of principal executive offices)
02116
(Zip Code)
(617) 368-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of November 2, 1999:
CLASS A COMMON STOCK, $.01 PAR VALUE 16,425,295
CLASS B COMMON STOCK, $.01 PAR VALUE 4,107,355
(Title of each class) (Number of shares)
THE BOSTON BEER COMPANY, INC.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 25, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 25, 1999 and December 26, 1998 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 25, 1999 and
September 26, 1998 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 25, 1999 and
September 26, 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14-17
SIGNATURES 18
2
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 25, December 26,
1999 1998
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,810 $ 8,650
Short-term investments 44,147 45,256
Accounts receivable, net of the allowance for
doubtful accounts of $1,313 and $1,309, respectively 14,291 12,062
Inventories 19,152 15,835
Prepaid expenses 515 1,125
Deferred income taxes 4,511 4,511
Other current assets 1,170 2,037
------------- -------------
Total current assets 91,596 89,476
Equipment and leasehold improvements, net of
accumulated depreciation of $19,631 and $15,460,
respectively 25,701 28,165
Other assets 4,494 5,048
------------- -------------
Total assets $121,791 $122,689
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,940 $ 13,194
Accrued expenses 15,990 12,908
Current maturities of long-term debt - 10,000
------------- -------------
Total current liabilities 23,930 36,102
Long-term deferred taxes 1,116 1,116
Other long-term liabilities 4,936 3,443
Stockholders' Equity:
Class A Common Stock, $.01 par value;
22,700,000 shares authorized; 16,425,967 and
16,394,245 issued and outstanding as of September
25, 1999 and December 26, 1998, respectively 164 164
Class B Common Stock, $.01 par value;
4,200,000 shares authorized; 4,107,355 issued and
outstanding 41 41
Additional paid-in-capital 56,683 56,548
Unearned compensation (187) (219)
Unrealized loss on short-term investments - (1)
Retained earnings 35,108 25,495
Total stockholders' equity 91,809 82,028
------------- -------------
Total liabilities and stockholders' equity $121,791 $122,689
============= =============
The accompanying notes are an integral part of the consolidated financial
statements
3
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
-------------------------------------------------------------------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
--------------- ------------- ------------- ----------------
Sales $49,336 $52,205 $147,443 $157,674
Less excise taxes 5,188 5,341 15,257 16,523
--------------- ------------- ------------- ----------------
Net sales 44,148 46,864 132,186 141,151
Cost of sales 18,759 22,686 57,344 68,853
--------------- ------------- ------------- ----------------
Gross profit 25,389 24,178 74,842 72,298
Operating expenses:
Advertising, promotional and selling expenses 18,339 17,382 51,097 49,316
General and administrative expenses 2,819 2,842 8,695 9,280
--------------- ------------- ------------- ----------------
Total operating expenses 21,158 20,224 59,792 58,596
--------------- ------------- ------------- ----------------
Operating income 4,231 3,954 15,050 13,702
--------------- ------------- ------------- ----------------
Other income (expense):
Interest income 575 599 1,663 1,550
Interest expense - (159) (148) (486)
Other income (expense), net (34) (14) (23) (1,732)
--------------- ------------- ------------- ----------------
Total other income (expense), net 541 426 1,492 (668)
--------------- ------------- ------------- ----------------
Income before provision for income taxes 4,772 4,380 16,542 13,034
Provision for income taxes 2,004 1,743 6,929 5,989
--------------- ------------- ------------- ----------------
Net income $ 2,768 $ 2,637 $ 9,613 $ 7,045
=============== ============= ============= ================
Earnings per share - basic $0.13 $0.13 $0.47 $0.34
=============== ============= ============= ================
Earnings per share - diluted $0.13 $0.13 $0.47 $0.34
=============== ============= ============= ================
Weighted average shares - basic 20,531 20,495 20,523 20,481
=============== ============= ============= ================
Weighted average shares - diluted 20,579 20,573 20,571 20,579
=============== ============= ============= ================
The accompanying notes are an integral part of the consolidated financial
statements
4
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
----------------------------------------------
September 25, September 26,
1999 1998
------------------- --------------------
Cash flows from operating activities:
Net income $ 9,613 $ 7,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,314 3,920
Gain on disposal of fixed assets (12) -
Loss on write-down of marketable equity security - 1,435
Bad debt expense - 325
Stock option compensation expense 83 152
Changes in assets and liabilities:
Accounts receivable (2,300) (721)
Inventory (3,317) (4,589)
Prepaid expenses 610 2,593
Other current assets 891 209
Other assets 59 253
Accounts payable (5,254) 1,113
Accrued expenses 3,082 3,518
Other long-term liabilities 1,892 2,250
--------------- --------------------
Net cash provided by operating activities 9,661 17,503
--------------- --------------------
Cash flows from investing activities:
Purchases of fixed assets (1,769) (4,770)
Purchases of short-term investments (42,306) (10,134)
Proceeds from the maturities of short-term investments 43,415 6,000
Proceeds from the sale of a marketable equity security - 2,851
Proceeds from the sale of fixed assets 100 -
--------------- --------------------
Net cash used in investing activities (560) (6,053)
--------------- --------------------
Cash flows from financing activities:
Proceeds from exercise of management incentive options - 37
Proceeds from sale of common stock under stock purchase plan,
net of repurchases 59 72
Repayment of debt (10,000) -
--------------- --------------------
Net cash (used in) / provided by financing activities (9,941) 109
--------------- --------------------
Net (decrease) / increase in cash and cash equivalents (840) 11,559
Cash and cash equivalents at beginning of period 8,650 13
--------------- --------------------
Cash and cash equivalents at end of period $ 7,810 $ 11,572
=============== ====================
Supplemental disclosure of cash flow information:
Interest paid $ 276 $ 513
=============== ====================
Income taxes paid $ 2,135 $ 3,629
=============== ====================
The accompanying notes are an integral part of the consolidated financial
statements
5
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The Boston Beer Company, Inc. (the "Company") is engaged in the business of
brewing and selling beer, ale and cider products throughout the United States
and select international markets. The accompanying consolidated financial
position as of September 25, 1999 and the results of its consolidated operations
and consolidated cash flows for the three and nine months ended September 25,
1999 and September 26, 1998 have been prepared by the Company, without audit, in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required for complete financial statements by generally accepted
accounting principles and should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 26, 1998.
MANAGEMENT'S OPINION
In the opinion of the Company's management, the Company's unaudited consolidated
financial position as of September 25, 1999 and the results of its consolidated
operations and consolidated cash flows for the interim periods ended September
25, 1999 and September 26, 1998, reflect all adjustments (consisting only of
normal and recurring adjustments) necessary to present fairly the results of the
interim periods presented. The operating results for the interim periods
presented are not necessarily indicative of the results expected for the full
year.
B. SHORT-TERM INVESTMENTS
At September 25, 1999, short-term investments consisted of investments in high-
quality money market instruments, United States agency securities, United States
Treasury bills and high-grade commercial paper. The cost of short-term
investments of $44.1 million as of September 25, 1999 and $45.3 million as of
December 26, 1998, approximates fair market value.
C. INVENTORIES
Inventories, which consist principally of hops, brewery materials and packaging,
are stated at the lower of cost, determined on a first-in, first-out (FIFO)
basis, or market.
Inventories consist of the following (in thousands):
September 25, December 26,
1999 1998
------------- ------------
Raw materials, principally hops $16,684 $14,464
Work in process 677 778
Finished goods 1,791 593
------------- ------------
$19,152 $15,835
============= ============
D. INCOME TAXES
The Company's effective tax rate increased to 42.0% for the three months ended
September 25, 1999 from 39.8% for the three months ended September 26, 1998.
For the nine months ended September 25, 1999, the Company's effective tax rate
was 41.9%, as compared to 45.9% for the nine months ended September 26, 1998.
The 1998 effective tax rates reflect the write-down and subsequent disposition
of a marketable equity security held for sale. The write-down was recorded in
the first quarter and partially recovered in the second quarter of 1998, when
the security was sold at a higher than expected price. The disposition of the
security resulted in the realization of a capital loss, from which the Company
does not expect to fully realize the tax benefit. There was no such activity
during 1999.
6
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. CREDIT FACILITY
As of March 31, 1999, the Company amended its credit facility and repaid the
entire $10.0 million in borrowings outstanding on its then existing facility.
As now in effect, the facility provides a $15.0 million revolving line of credit
(which expires on March 31, 2004) and an additional $30.0 million facility,
borrowings under which convert to a term loan on March 31, 2002. The Company
incurs an annual commitment fee of 0.15% on the unused portion of the facility
and is obligated to meet certain financial covenants, including the maintenance
of specified levels of tangible net worth and net income. The Company was in
compliance with all such covenants as of September 25, 1999.
F. LEASE COMMITMENTS
During the second quarter, The Company opted not to exercise its right to
terminate the lease for its Boston-based brewery. As a result, the lease was
automatically extended for a period of ten years, commencing January 1, 2000
and ending on December 31, 2009. Minimum lease payments over the ten year term
total $1.1 million.
G. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share in accordance with Statement of Financial Accounting Standard No. 128.
For the three months ended For the nine months ended
(in thousands, except per share data) (in thousands, except per share data)
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
----------------- ---------------------- ------------------ ----------------------
Net income $ 2,768 $ 2,637 $ 9,613 $ 7,045
Shares used in earnings per common share - basic 20,531 20,495 20,523 20,481
Dilutive effect of common equivalent shares 48 78 48 98
----------------- ---------------------- ------------------ ----------------------
Shares used in earnings per common share - 20,579 20,573 20,571 20,579
diluted
================= ====================== ================== ======================
Earnings per common share - basic $ 0.13 $ 0.13 $ 0.47 $ 0.34
================= ====================== ================== ======================
Earnings per common share - diluted $ 0.13 $ 0.13 $ 0.47 $ 0.34
================= ====================== ================== ======================
H. COMPREHENSIVE INCOME
Comprehensive income calculated in accordance with Statement of Financial
Accounting Standard No. 130 is as follows:
For the three months ended
(in thousands)
-------------------------------------------------
September 25, September 26,
1999 1998
-------------------------------------------------
Net income $2,768 $2,637
------ ------
Other comprehensive income, net of tax:
Foreign currency translation adjustments - 8
Unrealized loss on security:
Unrealized holding loss arising during - -
period
Plus: reclassification adjustments for
capital
gains included in net income - - - -
------- ------ ------- ------
Other comprehensive income - 8
------ ------
Comprehensive income $2,768 $2,645
====== ======
7
THE BOSTON BEER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. COMPREHENSIVE INCOME (CONTINUED)
For the nine months ended
(in thousands)
------------------------------------------------------------------
September 25, September 26,
1999 1998
------------------------------------------------------------------
Net income $9,613 $7,045
------------- -------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments - 290
Unrealized loss on security:
Unrealized holding loss arising during - 788
period
Plus: reclassification adjustments for
capital
losses included in net income 1 1 1,435 2,223
------------------------------- -------------------------------
Other comprehensive income 1 2,513
------------- -------------
Comprehensive income $9,614 $9,558
============= =============
Accumulated other comprehensive income calculated in accordance with Statement
of Financial Accounting Standard No. 130 is as follows:
For the three months ended For the nine months ended
(in thousands) (in thousands)
------------------------------------------------------------------------------------
September 25, 1999 September 26, 1998 September 25, 1999 September 26, 1998
---------------------------------------- -----------------------------------------
Beginning Balance $ - $ (8) $(1) $(2,513)
Unrealized gain on forward exchange contract - 8 - 290
Unrealized gain on marketable equity security - - 788
Realized loss (gain) on marketable equity
security - 1 1,435
--------------------------------------- -----------------------------------------
Ending balance $ - $ - $ - $ -
======================================= =========================================
I. TRANSACTION BETWEEN STROH BREWERY COMPANY, PABST BREWING COMPANY AND MILLER
BREWING COMPANY
Effective April 30, 1999, the Stroh Brewery Company ("Stroh") sold a majority of
its beer brands and its Allentown, Pennsylvania, brewery (the "Allentown
Brewery") to Pabst Brewing Company ("Pabst") and certain brands to Miller
Brewing Company ("Miller") (collectively, the "Stroh Transactions"). Pabst has
agreed to assume Stroh's obligations under the existing brewing contract between
the Company and Stroh; Miller has agreed to guarantee Pabst's performance. The
Company's volume brewed at the Allentown Brewery is anticipated to remain
substantially unchanged as a result of the Stroh Transactions. As anticipated,
Stroh closed its Portland, Oregon brewery during the third quarter 1999. The
Company's volume which was historically brewed at the Portland Brewery was
transferred to a brewery in Tumwater, Washington (the "Tumwater Brewery").
Miller purchased the Tumwater Brewery from Pabst during the third quarter and
has confirmed that it will assume Pabst's obligations to brew the Company's
products at the Tumwater Brewery. The Company experienced shipping delays
during the transition which resulted in approximately 7,000 barrels that were
not shipped until the fourth quarter and accordingly will be reflected in the
Company's results of operations for the quarter ending December 25, 1999. In
addition, the Company expects to incur higher freight costs and increased
capital expenditures as a result of the move, but does not believe that the
effect on its results of operations, statement of financial position or
statement of cash flows for the year ending December 25, 1999 will be material.
J. SUBSEQUENT EVENTS
Effective October 15, 1998, the Board authorized management to implement a
stock repurchase, subject to an aggregate expenditure limitation of $10.0
million. On November 5, 1999 the Company repurchased 51,500 shares under this
program.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three and nine-month periods ended September
25, 1999 as compared to the three and nine-month period ended September 26,
1998. This discussion should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Consolidated Financial Statements of the Company and Notes thereto included in
the Form 10-K for the fiscal year ended December 26, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 25, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
26, 1998
For purposes of this discussion, Boston Beer's "core brands" include all
products sold under Samuel Adams(R), Oregon Original(TM) or HardCore(R)
trademarks. "Core brands" do not include the products brewed at the Cincinnati
Brewery under contract arrangements for third parties. Volume produced under
contract arrangements is referred to below as "non-core products".
NET SALES. Net sales decreased by $2.7 million or 5.8% to $44.1 million for the
three months ended September 25, 1999 as compared to the three months ended
September 26, 1998. The decline is primarily due to a decrease in volume.
Volume. Volume decreased by 13,000 barrels or 4.2% to 297,000 barrels in the
three months ended September 25, 1999 from 310,000 barrels in the three months
ended September 26, 1998. This decrease was primarily due to a decline in sales
of certain year-round beer styles and a decline in the production of non-core
products.
Total volume for Boston Beer's core brands decreased by 9,000 barrels or 3.1% to
283,000 barrels for the three months ended September 25, 1999 as compared to
292,000 barrels for the three months ended September 26, 1998. Nearly 7,000
barrels of this shortfall is attributed to brewery transition related issues
related to the sale of the Stroh brewery in Portland, and trucking delays in
Rochester due to equipment availability.
Volume relating to non-core products declined approximately 23%, representing
approximately 30% of the total decline. Volume relating to non-core products
was 14,000 barrels for the three months ended September 25, 1999 as compared to
18,000 barrels for the three months ended September 25, 1998. Management
anticipates a continued decline in volume relating to non-core products.
Net Selling Price. The net selling price per barrel decreased by $2.48 or 1.6%
to $148.88 per barrel for the three months ended September 25, 1999. Despite
moderate unit price increases in certain markets, changes in the packaging mix
of core brands and increased allowances for aged products have resulted in a
decline of net selling price per barrel.
The Company packages its core brands in bottles and kegs. Keg sales as a
percentage of total equivalent barrels of core brands were 29.7% for the three
months ended September 25, 1999 as compared to 28.5% for same period last year.
As the selling price per barrel is lower for kegs than bottles, this shift
effectively decreased revenue per barrel.
GROSS PROFIT. Gross profit increased to 57.5% as a percentage of net sales or
$85.62 per barrel for the three months ended September 25, 1999, as compared to
51.6% as a percentage of net sales or $78.09 per barrel for the three months
ended September 26, 1998. The increase in gross profit is due primarily to a
decline in cost of sales. Cost of sales decreased by $10.01 per barrel to 42.5%
as a percentage of net sales or $63.26 per barrel for the three months ended
September 25, 1999, as compared to 48.4% as a percentage of net sales or $73.27
per barrel for the three months ended September 26, 1998. This is primarily due
to lower costs of certain raw materials, improvements in the production
efficiency and utilization of the Cincinnati Brewery, a change in the packaging
mix as described above and a decline in barrels shipped related to non-core
products. Raw material costs were lower due to new contracts with certain
vendors, and continued favorable prices on cyclical items such as corrugated
material and malt.
ADVERTISING, PROMOTIONAL AND SELLING. Advertising, promotional and selling
expenses increased by $1.0 million or 5.5% to $18.3 million for the three months
ended September 25, 1999 as compared to $17.4 million for the three months ended
September 26, 1998. As a percentage of net sales, advertising, promotional and
selling expenses increased to 41.5% for the three months ended September 25,
1999 as compared to 37.1% for the same period last year. This is primarily due
to a
9
significant increase in outdoor advertising expenditures and increases in radio
advertising and market research. Increases in advertising expenditures were
partially offset by a decline in point of sale expenditures. The Company
experienced a sharp increase in point of sale expenditures during the second
half of 1998 due to the introduction of the Company's new logo in the prior
year.
INTEREST EXPENSE. The Company incurred no interest expense for the three months
ended September 25, 1999 as compared to $159,000 for the three months ended
September 26, 1998, as a result of the repayment on March 31, 1999 of the $10.0
million outstanding balance under the then existing lines of credit. At
September 26, 1998, $10.0 million was outstanding on the then-existing $30.0
million line of credit. See footnote E to the Consolidated Financial Statements
for further explanation.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to 42.0%
for the three months ended September 25, 1999 from 39.8% for the three months
ended September 26, 1998. The 1998 effective tax rates reflect the write-down
and subsequent disposition of a marketable equity security held for sale. The
disposition of the security resulted in the realization of a capital loss, from
which the Company does not expect to fully realize the tax benefit. There was
no such activity during 1999. See footnote D to the Consolidated Financial
Statements for further explanation.
NINE MONTHS ENDED SEPTEMBER 25, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 26,
1998
NET SALES. Net sales decreased by $9.0 million or 6.4% to $132.2 million for
the nine months ended September 25, 1999 as compared to the nine months ended
September 26, 1998. The decline is primarily due to a decrease in volume.
Volume. Volume decreased by 68,000 barrels or 7.2% to 875,000 barrels in the
nine months ended September 25, 1999 from 943,000 barrels in the nine months
ended September 26, 1998. This decrease was primarily due to a decline in sales
of year-round beer styles (partially offset by an increase in seasonal beer
styles) and a decline in the sale of non-core products.
Total volume for Boston Beer's core brands decreased by 5.0% to 838,000 barrels
for the nine months ended September 25, 1999 as compared to 882,000 barrels for
the nine months ended September 26, 1998. The decline in volume is a function
of both increased competition from "better beers" and a more mature market that
is less inclined to sample new styles. The Company continuously evaluates the
performance of its various beer and cider brands in order to rationalize its
product line, as a whole. As a result of this evaluation process, the Company
discontinued certain year-round beer styles during the previous twelve months,
thereby contributing to the decline in volume.
Volume relating to non-core products was 38,000 barrels for the nine months
ended September 25, 1999 as compared to 61,000 barrels for the nine months ended
September 26, 1998, representing approximately 35% of the total decline in
volume.
Net Selling Price. The net selling price per barrel increased by $1.36 or less
than 1% to $150.99 per barrel for the nine months ended September 25, 1999.
This is due to a decline in sales of non-core products which have a lower
selling price than core brands and normal price increases. These increases were
partially offset by changes in the packaging mix of core brands.
GROSS PROFIT. Gross profit increased to 56.6% as a percentage of net sales or
$85.49 per barrel for the nine months ended September 25, 1999, as compared to
51.2% as a percentage of net sales or $76.64 per barrel for the nine months
ended September 26, 1998. The increase in gross profit is primarily due to a
decline in cost of sales. Cost of sales decreased by $7.49 per barrel to 43.4%
as a percentage of net sales or $65.50 per barrel for the nine months ended
September 25, 1999, as compared to 48.8% as a percentage of net sales or $72.99
per barrel for the nine months ended September 26, 1998. This is primarily due
to lower costs of certain raw materials, improvements in the production
efficiency and utilization of the Cincinnati Brewery and a decline in barrels
shipped of non-core products.
Raw material costs were lower due to new contracts with certain vendors, and
continued favorable prices on cyclical items such as corrugated materials and
malt. Expenses related to excess hops inventory and purchase commitment
contracts amounted to $1.2 million for the nine months ended September 25, 1999
as compared $2.2 million for the same period last year. See "Hops Purchase
Commitments" below for further discussion.
The gross profit margin on non-core products is lower than for core brands.
Therefore, a decline in the non-core product volume increased gross profit per
equivalent barrel for the Company as a whole. The decline in volume relating to
non-core products resulted in an increase in gross profit as a percentage of net
sales of less than 1%.
10
ADVERTISING, PROMOTIONAL AND SELLING. Advertising, promotional and selling
expenses increased by $1.8 million to $51.1 million for the nine months ended
September 25, 1999 as compared to $49.3 million for the nine months ended
September 26, 1998. As a percentage of net sales, advertising, promotional and
selling expenses increased to 38.7% for the nine months ended September 25, 1999
as compared to 34.9% for the same period last year, primarily due to higher
advertising and point of sale expenditures, which were partially offset by lower
expenditures in packaging redesign. The Company invested an increased amount in
outdoor advertising expenditures and market research and shifted spending
towards radio from television during the nine months ending September 25, 1999.
Increased point of sale expenses is largely due to the timing of the change in
the Company's logo during 1998. The anticipation of the logo change resulted in
a significant decline in purchases of promotional items during the first half of
1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$585,000 or 6.3% to $8.7 million for the nine months ended September 25, 1999 as
compared to the same period last year. The decrease is primarily due to
declines in bad debt expense and legal expenses.
INTEREST EXPENSE. Interest expense declined by $338,000 to $148,000 for the
nine months ended September 25, 1999 as compared to $486,000 for the nine months
ended September 26, 1998. The decline in interest expense is due to the
repayment of the $10.0 million outstanding balance under the then existing lines
of credit on March 31, 1999. At September 26, 1998, $10.0 million was
outstanding under the then existing $30.0 million portion of the lines of
credit. See footnote E to the Consolidated Financial Statements for further
explanation.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased by $1.7
million to expense of $23,000 for the nine months ended September 25, 1999 as
compared to an expense of $1.7 million for same period last year. The
significant expense recognized in the prior year was due to a $1.4 million loss
realized on the disposition of a marketable equity security and $300,000 in
losses incurred on the revaluation of foreign exchange forward contracts. There
were no such activities during 1999.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to 41.9%
for the nine months ended September 25, 1999 from 45.9% for the nine months
ended September 26, 1998. The 1998 effective tax rate reflects a $1.4 million
loss realized on the sale of a marketable equity security during the second
quarter 1998; the Company does not expect to fully realize the tax benefit
associated with this capital loss. There was no such activity during 1999. See
footnote D to the Consolidated Financial Statements for further explanation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition continued to be strong during the first nine
months of 1999. Cash and short-term investments decreased to $52.0 million as
of September 25, 1999 from $53.9 million as of December 26, 1998. This decrease
was primarily due to the pay down of $10.0 million in bank debt on March 31,
1999, and offset by cash provided by operating activities of $9.7 million. Cash
provided by operating activities decreased to $9.7 million for the nine months
ended September 25, 1999 as compared to $17.5 million for the nine months ended
September 26, 1998. This decline is primarily due to a decrease in accounts
payable of $5.2 million for the nine months ended September 25, 1999 as compared
to an increase of $1.1 million for the same period last year coupled with an
increase in accounts receivable. The increase in accounts receivable is due to
the timing of sales; the accounts receivable turnover is consistent with the
prior year.
Effective October 15, 1998, the Board authorized management to implement a stock
repurchase, subject to an aggregate expenditure limitation of $10.0 million.
There were no stock repurchases under this program as of September 25, 1999. On
November 5, 1999 the Company repurchased 51,500 shares under this program.
With working capital of $67.7 million and $45.0 million in unused bank lines of
credit as of September 25, 1999, the Company believes that its existing
resources should be sufficient to meet the Company's short-term and long-term
operating and capital requirements.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
YEAR 2000
As has been widely publicized, many computer systems and microprocessors are not
programmed to accommodate dates beyond the year 1999. The Company's exposure to
this year 2000 ("Y2K") problem comes not only from its own internal computer
systems and microprocessors, but also from the systems and microprocessors of
its key vendors, including by way of illustration
11
its contract breweries, raw material suppliers, utility companies, payroll
services and banks, and its distributors and other customers. A failure of any
of these internal or external systems could adversely affect the Company's
ability to brew, package, sell, ship and bill for products and to collect on
invoices and account for collections. In effect, any significant computer
failure could have a material adverse effect on the Company's operations.
The Company currently believes that all of its internal systems are Y2K
compliant as of November 8, 1999. This belief is based on its own internal
evaluations and testing and on assurances from its systems vendors. Current
estimates are that the total cost to achieve full internal year 2000 compliance
is estimated not to exceed $50,000, exclusive of amounts to be expended on
contingency plans. Approximately $12,000 of this amount has been spent through
September 25, 1999. This $50,000 anticipated upgrade cost is in addition to
other planned information technology ("IT") projects. While the intensive
effort expected to achieve Y2K compliance has caused and may continue to cause
delays in other IT projects, the Company does not expect that any of these
delays will have a significant effect on the Company's business or that any of
the Company's other IT projects will be canceled or postponed to pay for the Y2K
upgrades. The Company continues to evaluate and test all Cincinnati Brewery
equipment. Process controls at the Cincinnati Brewery are integral to the
brewery's operations. A failure of any of these controls could adversely affect
the Company's ability to continue brewing operations; however, because many of
the brewing processes can be controlled manually, the actual risk that the
Company will be unable to brew is low.
The Company relies extensively on its suppliers and contract breweries. Because
their systems are not directly under the Company's control, the Company is at
risk that all required external Y2K compliance efforts will not be completed on
time and significant business disruptions will result. The Company has formed a
committee to assure that all vendor and other relationship Y2K issues are
analyzed and addressed. Under the direction of this committee, the Company
compiled a list of all of its vendors and, as to each vendor, assessed the
impact that a Y2K failure would likely have on the Company's business and
operations. The Company then sent a Y2K questionnaire to each vendor believed
to present a possible critical risk, in order to ascertain the Y2K compliance
status of each. The Company is currently in the process of compiling and
analyzing the information submitted by these vendors. To date, questionnaires
have been sent to 37 critical vendors, all of whom have responded and all have
asserted that they are addressing the Y2K problem or are already in compliance.
The Company intends to continue to identify potential critical vendors and to
monitor the progress toward compliance of those not yet compliant. The Company
has also issued questionnaires to non-critical vendors and is conducting the
same analysis with them.
In addition to obtaining and assessing information concerning vendor Y2K status,
the Company is requiring all new vendors and all existing vendors entering into
new contracts with the Company to warrant Y2K compliance. Management
understands the potentially serious consequences of a system failure and also
understands that not all vendors may be Y2K compliant prior to January 1, 2000.
For this reason, the Company is developing contingency plans for all critical
services and supplies. As part of this contingency planning, the Company is
assessing the cost of vendor shutdown, understanding that, because of the
complex nature of the Company's supply chain and the lack of clarity as to the
effect of multiple vendor failure, any assessment process is imprecise.
In the unlikely event that the Company is unable to produce or ship any product
(the "Worst Case Scenario"), the Company estimates its financial exposure to be
in the range of $3.5 million per week of lost net revenue, over the short term.
Using forward planning ratios, this lost revenue translates into lost variable
gross profit, in the absence of mitigating cost cutting, of $1.8 million per
week. A production disruption for an extended period is likely to affect the
availability of the Company's products to consumers, leading to a decline in
brand equity, the financial consequences of which are not susceptible to
estimation. The Company does not expect to encounter the Worst Case Scenario.
The financial consequences of a less significant disruption are difficult to
predict, as they will depend on the exact circumstances and duration of the
disruption.
It is possible that the conclusions reached by the Company from its analysis to
date will change, and as such the cost estimates and target completion dates
outlined above may change. The Company will continue to explore contingency
plans, so as to be in a position to mitigate the consequences of any disruption
resulting from the Y2K issue.
BREWERY-RELATED TRANSACTIONS
Effective April 30, 1999, Stroh sold a majority of its beer brands and its
Allentown, Pennsylvania, brewery (the "Allentown Brewery") to Pabst and certain
brands to Miller (collectively, the "Stroh Transactions"). Pabst has agreed to
assume Stroh's obligations under the existing brewing contract between the
Company and Stroh; Miller has agreed to guarantee Pabst's performance. The
Company's volume brewed at the Allentown Brewery is anticipated to remain
substantially unchanged as a result of the Stroh Transactions. As anticipated,
Stroh closed its Portland, Oregon brewery during the third quarter 1999. The
Company's volume which was historically brewed at the Portland Brewery was
transferred to a brewery in Tumwater,
12
Washington (the "Tumwater Brewery"). Miller purchased the Tumwater Brewery from
Pabst during the third quarter and has confirmed that it will assume Pabst's
obligations to brew the Company's products at the Tumwater Brewery. The Company
experienced shipping delays during the transition which resulted in
approximately 7,000 barrels that were not shipped until the fourth quarter and
accordingly will be reflected in the Company's results of operations for the
quarter ending December 25, 1999.
Among other factors, the Company attempts to minimize freight expenditures when
determining optimal production levels at each brewery. The Company expects to
incur higher freight costs and increased capital expenditures as a result of the
move to the Tumwater Brewery, but does not believe that the effect on its
results of operations, statement of financial position or statement of cash
flows for fiscal years 1999 or 2000 will be material.
Effective March 31, 1999, the brewing contract between the Company and
Pittsburgh Brewing Company expired and as such, the Company shifted production
to other plants. The Company does not expect that the resulting shift in
production will have a material impact on its results of operations, statement
of financial position or cash flows during the short-term or the long-term.
HOPS PURCHASE COMMITMENTS
The Company enters into purchase commitments for hops based on forecasted future
requirements, among other factors. As a result of recent declines in sales
growth, existing hops inventory and purchase commitments may exceed projected
future needs. The Company evaluates its hop inventory levels and existing
purchase commitments on a quarterly basis in order to assess the reserve
required for excess amounts. In efforts to manage hop inventory levels, the
Company continues to cancel certain hops purchase commitments. The provision
for excess hops inventory and purchase commitments is adjusted accordingly.
During the nine months ended September 25, 1999, the Company recorded a $1.2
million charge associated with the provision for excess inventory on-hand and
purchase commitment contracts as compared to $2.2 million for the same period
last year.
The computation of the excess purchase commitment reserve requires management to
make certain assumptions regarding future sales growth, product mix,
cancellation costs and supply, among others. Actual results may materially
differ from management's estimates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 26, 1998, there have been no significant changes in the Company's
exposures to interest rate or foreign currency rate fluctuations. The Company
currently does not enter into derivatives or other market risk sensitive
instruments for the purpose of hedging or for trading purposes.
FORWARD-LOOKING STATEMENTS
In this Form 10-Q and in other documents incorporated herein, as well as in oral
statements made by the Company, statements that are prefaced with the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend," "designed" and similar expressions, are intended to identify forward-
looking statements regarding events, conditions, and financial trends that may
affect the Company's future plans of operations, business strategy, results of
operations and financial position. These statements are based on the Company's
current expectations and estimates as to prospective events and circumstances
about which the Company can give no firm assurance. Further, any forward-
looking statement speaks only as of the date on which such statement is made,
and the Company undertakes no obligation to update any forward-looking statement
to reflect events or circumstances after the date factor that may emerge,
forward-looking statements should not be relied upon as a prediction of actual
future financial condition or results. These forward-looking statements, like
any forward-looking statements, involve risks and uncertainties that could cause
actual results to differ materially from those projected or unanticipated. Such
risks and uncertainties include the factors set forth below in addition to the
other information set forth in this Form 10-Q.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain claims and litigation in the
ordinary course of business. The Company does not believe any of
these proceedings will result, individually or in the aggregate, in
a material adverse effect upon its financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO. TITLE
----------- -----
3.1 Amended and Restated By-Laws of the Company, dated June 2, 1998
(incorporated by reference to Exhibit 3.5 to the Company's
Form 10-Q filed on August 10, 1998).
3.2 Restated Articles of Organization of the Company, dated
July 21, 1998 (incorporated by reference to Exhibit 3.6 to the
Company's Form 10-Q filed on August 10, 1998).
4.1 Form of Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement No. 33-96164).
10.1 Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and Boston Beer Company Limited
Partnership (the "Partnership"), dated as of May 2, 1995
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement No. 33-96162).
10.2 Loan Security and Trust Agreement, dated October 1, 1987, among
Massachusetts Industrial Finance Agency, the Partnership and
The First National Bank of Boston, as Trustee, as amended
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement No. 33-96164).
10.3 Deferred Compensation Agreement between the Partnership and
Alfred W. Rossow, Jr., effective December 1, 1992
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement No. 33-96162).
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).
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) Exhibits (continued)
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. TITLE
----------- -----
10.5 Form of Employment Agreement between the Partnership and
employees (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement No. 33-96162).
10.6 Services Agreement between The Boston Beer Company, Inc. and
Chemical Mellon Shareholder Services, dated as of October 27,
1995 (incorporated by reference to the Company's Form 10-K,
filed on April 1, 1996).
10.7 Form of Indemnification Agreement between the Partnership and
certain employees and Advisory Committee members (incorporated
by reference to Exhibit 10.7 to the Company's Registration
Statement No. 33-96162).
10.8 Stockholder Rights Agreement, dated as of December, 1995, among
The Boston Beer Company, Inc. and the initial Stockholders
(incorporated by reference to the Company's Form 10-K, filed
on April 1, 1996).
+10.10 Agreement between Boston Brewing Company, Inc. and The Stroh
Brewery Company, dated as of January 31, 1994 (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement No. 33-96164).
+10.11 Agreement between Boston Brewing Company, Inc. and the
Genesee Brewing Company, dated as of July 25, 1995
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement No. 33-96164).
+10.12 Amended and Restated Agreement between Pittsburgh Brewing
Company and Boston Brewing Company, Inc. dated as of February
28, 1989 (incorporated by reference to Exhibit 10.11 to the
Company's Registration Statement No. 33-96164).
10.13 Amendment to Amended and Restated Agreement between
Pittsburgh Brewing Company, Boston Brewing Company, Inc., and
G. Heileman Brewing Company, Inc., dated December 13, 1989
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement No. 33-96162).
+10.14 Second Amendment to Amended and Restated Agreement between
Pittsburgh Brewing Company and Boston Brewing Company, Inc.
dated as of August 3, 1992 (incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement No. 33-
96164).
+10.15 Third Amendment to Amended and Restated Agreement between
Pittsburgh Brewing Company and Boston Brewing Company, Inc.
dated December 1,1994 (incorporated by reference to Exhibit
10.14 to the Company's Registration Statement No. 33-96164).
10.16 Fourth Amendment to Amended and Restated Agreement between
Pittsburgh Brewing Company and Boston Brewing Company, Inc.
dated as of April 7,1995 (incorporated by reference to Exhibit
10.15 to the Company's Registration Statement No. 33-96162).
+10.17 Letter Agreement between Boston Beer Company Limited
Partnership and Joseph E. Seagram & Sons, Inc. (incorporated
by reference to Exhibit 10.16 to the Company's Registration
Statement No. 33-96162).
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
(a) Exhibits (continued)
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. TITLE
----------- -----
10.18 Services Agreement and Fee Schedule of Mellon Bank, N.A.
Escrow Agent Services for The Boston Beer Company, Inc. dated
as of October 27, 1995 (incorporated by reference to Exhibit
10.17 to the Company's Registration Statement No. 33-96164).
10.19 Amendment to Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and the Partnership (incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement No. 33-96164).
10.20 1996 Stock Option Plan for Non-Employee Directors
(incorporated by reference to the Company's Form 10-K, filed
on March 27, 1998).
+10.21 Production Agreement between The Stroh Brewery Company and
Boston Beer Company Limited Partnership, dated January 14,
1997 (incorporated by reference to the Company's Form 10-K,
filed on March 27, 1998).
+10.22 Letter Agreement between The Stroh Brewery Company and Boston
Beer Company Limited Partnership, dated January 14, 1997
(incorporated by reference to the Company's Form 10-K, filed
on March 27, 1998).
+10.23 Agreement between Boston Beer Company Limited Partnership and
The Schoenling Brewing Company, dated May 22, 1996
(incorporated by reference to the Company's Form 10-K, filed
on March 27, 1998).
10.24 Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and The Boston Beer Company, Inc., dated
as of March 21, 1997 (incorporated by reference to the
Company's Form 10-Q, filed on May 12, 1997).
+10.25 Amended and Restated Agreement between Boston Brewing
Company, Inc. and the Genesee Brewing Company, Inc. dated
April 30, 1997 (incorporated by reference to the Company's
Form 10-Q, filed on August 11, 1997).
+10.26 Fifth Amendment, dated December 31, 1997, to Amended and
Restated Agreement between Pittsburgh Brewing Company and
Boston Brewing Company, Inc. (incorporated by reference to the
Company's Form 10-K, filed on March 27, 1998).
10.27 Extension letters, dated August 19, 1997, November 19, 1997,
December 19, 1997, January 22, 1998, February 25, 1998 and
March 11, 1998 between The Stroh Brewery Company and Boston
Brewing Company, Inc. (incorporated by reference to the
Company's Form 10-K, filed on March 27, 1998).
+10.28 Employee Equity Incentive Plan, as amended and effective on
December 19, 1997 (incorporated by reference to the Company's
Form 10-K, filed on March 27, 1998) .
+10.29 1996 Stock Option Plan for Non-Employee Directors, as amended
and effective on December 19, 1997 (incorporated by reference
to the Company's Form 10-K, filed March 27, 1998)..
+10.30 Glass Supply Agreement between The Boston Beer Company and
Owens' Brockway Glass Container Inc., dated April 30, 1998
(incorporated by reference to the Company's Form 10-Q, filed
on August 10, 1998).
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) Exhibits (continued)
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. TITLE
---------- -----
10.31 Extension letters, dated April 13, 1998, April 27, 1998, June
11, 1998, June 25, 1998 and July 20, 1998 between The Stroh
Brewery Company and Boston Brewing Company, Inc. (incorporated
by reference to the Company's Form 10-Q, filed on August 10,
1998).
10.32 Extension letters, dated July 31, 1998, August 28, 1998,
September 28, 1998, October 13, 1998, October 20, 1998 and
October 23, 1998 between The Stroh Brewery Company and Boston
Brewing Company, Inc. (incorporated by reference to the
Company's Form 10-Q, filed on November 4, 1998).
+10.33 Amended and Restated Production Agreement between The Stroh
Brewery Company and Boston Beer Company Limited Partnership,
dated November 1, 1998 (incorporated by reference to the
Company's Form 10-K, filed on March 25, 1999).
10.34 Agreement between Boston Beer Company Limited Partnership,
Pabst Brewing Company and Miller Brewing Company, dated
February 5, 1999 (incorporated by reference to the Company's
Form 10-K, filed on March 25, 1999).
10.35 Amendment to Revolving Credit Agreement between Fleet Bank of
Massachusetts, N.A. and The Boston Beer Company, Inc., dated
March 30, 1999 (incorporated by reference to the Company's
Form 10-Q, filed on May 10, 1999).
+10.36 Agreement between Boston Beer Company Limited Partnership and
Landstar Logistics and Transportation, dated January 9, 1999
(incorporated by reference to the Company's Form 10-Q, filed
on May 10, 1999).
*11.1 The information required by exhibit 11 has been included in
Note G of the notes to the consolidated financial statements.
21.1 List of subsidiaries of The Boston Beer Company, Inc.
(incorporated by reference to the Company's Form 10-K, filed
on March 28, 1997).
*27.1 Financial Data Schedule (electronic filing only).
* Filed with this report.
+ Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed with
the Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 25, 1999.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
THE BOSTON BEER COMPANY, INC.
(Registrant)
Date: November 8, 1999 By: /s/ James Koch
--------------------------------------
C. James Koch
President and Chief Executive Officer,
(principal executive officer)
Date: November 8, 1999 By: /s/ Richard P. Lindsay
--------------------------------------
Richard P. Lindsay
Chief Financial Officer (principal
financial and accounting officer)
18
5
1,000
9-MOS
DEC-26-1998
DEC-27-1998
SEP-25-1999
7,810
44,147
15,604
(1,313)
19,152
91,596
45,332
(19,631)
121,791
23,930
0
0
0
205
91,604
121,791
147,443
132,186
57,344
117,136
1,492
0
148
16,542
6,929
9,613
0
0
0
9,613
.47
.47
THIS NUMBER INCLUDES 16,425,967 SHARES OF CLASS A COMMON STOCK WITH A PAR VALUE
OF $164,000 AND 4,107,355 SHARES OF CLASS B STOCK WITH A PAR VALUE OF $41,000.
