The Boston Beer Company (A) Jim Koch, president and founder of the Boston Beer Company, of Boston, Massachusetts, prepared his thoughts before a meeting with the company's investment bankers in early November, 1995. On August 24, 1995, Boston Beer, the maker of Samuel Adams brand beer and the beer industry's leading craft brewer, had led a registration statement with the US. Securities and Exchange Commission (SEC) for an initial public stock offering that aimed to raise between $26 million and $34 million. Koch could not restrict his optimism for the IPO's success, given the stock market's recent appetite for new beer issues and the market's overwhelming subscription response to Boston Beer's proposed stock. Competitors Redhook Ale Brewery and Pete's Brewing Company had each conducted very successful IPOs in the previous three months. The two beer stocks went public at $17 and $18 per share, respectively, and had since maintained share prices in the mid- $20s. Koch's thoughts centered on the price at which Boston Beer should go public. The company's bankers initially had set a price range of $10 to $15 per share. Koch wanted to be sure that the share price established by the bankers reected the appropriate market value of his company. Exhibit 3 Income Statement and Key Statistics for Boston Beer Company, 1990-94 In thousands, except per share, per barrel, and employees 12/3190 12/31/91 12/31/92 12/31/93 12/31/94 9/30/94 9/30/95 Income Statement Data Gross sales $21,222 $32,302 $53,343 $85,758 $128,077 $91,098 Less excise taxes 2,300 2,845 5,165 8,607 13,244 9.478 12,990 Net sales 18,922 29,457 48,178 77,151 114,833 81,620 108,905 Cost of goods sold 8,109 13,039 22,028 35,481 52,851 37,546 52,615 Gross profit 10,813 16,418 26,150 41,670 61,982 44,074 56,290 Adv., promotional, selling expenses 8,981 12,105 21,075 32,669 46,303 31,734 43,408 General & administrative expenses 1,817 2,247 3,306 4,105 6,793 4,316 5,455 Total operating expenses 10,798 14,352 24,381 36,774 53,096 36.050 48.863 Operating income 15 2,066 1,769 4,896 8,886 8,024 7,427 Other income (expense) net 276 23 -124 -2 199 85 834 Net income (1) 291 2,089 1,645 4,894 9,085 8,109 8,261 Pro forma taxes (2) 130 859 691 2,040 3.765 3,360 3,559 Pro forma net income (3) 161 1,230 954 2,854 5,320 4,749 4,702 Pro forma earnings per share (3) (4) 0.29 0.26 Weighted avg. shares outstanding (4) 18,268 18,273 Statistical Data Barrels sold 121 174 294 475 714 510 688 Net sales per barrel 156 169 164 162 161 160 158 Employees 65 69 87 110 138 124 174 Net sales per employee 291 427 554 701 832 658 626 Balance Sheet Data at Period End Working capital 6,304 6,053 6,169 8, 173 3,996 9,143 9,451 Total assets 11,270 11,981 15,780 24,054 31,776 35,151 33,398 Total debt 2,200 2,150 2,100 2,050 2,000 2,000 1,950 Total partners'/Stockholders' equity 5,907 5,954 6,434 8,854 6,600 11,351 13,229Exhibit 4 Balance Sheet for Boston Beer Company Before the Initial Public Offering, 1993-94 Pro forma\" In thousands 12/31/93 12/3194 9/30/95 9/30/95 Assets Cash and cash equivalents $8,827 $7,801 $1,552 - Accounts receivable 8,112 10,060 15,073 15,073 Inventory 3,706 7,755 8,485 8,485 Prepaid expenses 216 501 907 907 Other current assets m 1,105 1,703 1,703 Total current assets 21,373 27,222 27,720 26,168 Restricted investments 579 605 602 602 Equipment, leasehold improvements 1,864 3,539 3,963 3,963 Other assets m 1,113 1,113 Total assets 24,054 31,776 33,398 31,846 Liabilities and Partners' Eguity Accounts payable $2,917 $9,270 $6,539 $6,539 Accrued expenses 10,233 13,906 1 1,680 1 1,680 Current maturities of long-term debt E E E E Total current liabilities 13 ,200 23 ,226 18,269 18,269 Long-term debt - current LTD mat. 2,000 1,950 1,900 12,848 Partners' equity 8,854 6,600 13,229 729 Total liabilities and partners' equity 24,054 31,; Z6 33 3 8 31,846 * Unaudited pro forma balance sheet after the dissolution of the partnership, but before the IPO Exhibit 6 Comparable Initial Public Stock Offering Transactions IPO IPO Market IPO First Estimated Company Date Share Price Day High 1995 EPS Redhook Ale Brewing Co. 8/17/95 $17.00 $27.00 $0.45 Pete's Brewing Co. 11/6/95 $18.00 $25.25 $0.15 Exhibit 7 Betas, Capitalization, and Taxes of Publicly-Held Breweries Income Company Beta Debt Equity Tax Rate Adolph Coors 0.35 16% 84% 43.0% Anheuser-Busch 1.05 40% 60% 39.5% Bass PLC 0.77 26% 74% 33.9% Molson Cos. 0.70 28% 72% 29.0% Source: Standard & Poor's Stock Reports, Third Quarter 1995. Reprinted with permission of Standard & Poor's, a division of The McGraw-Hill Companies. Exhibit 8 Financial Market Statistics, Week-End November 21, 1995 Treasury Security Yield 3-month T-bills 5.55% 10-year T-bonds 5.72% 30-year T-bonds 6.29% Source: Business Week, November 27, 1995.Exhibit 9 Boston Beer Company, Proposed Share Offering Outstanding Authorized Shares Shares after IPO Class A Common Stock offered by the Company 990,000 in the Consumer Offering Class A Common Stock offered by the Company 1,550,379 in the Underwritten Offering Class A Common Stock offered by the Selling 1,443,836 Stockholders in the Underwritten Offering Class A Common Stock offered in the 3,984,215 Underwritten Offering Class A Common Stock not offered by the 11,090,549 Selling Stockholders in the Underwritten Offering Class A Common Stock to be outstanding after 20,300,000 15,074,764 the Offerings Class B Common Stock 4,200,000 4 107 355 Class A and Class B Common Stock to be 24,500,000 19,182,119 outstanding after the Offerings Source: Company documents, 1995. Discuss financial performance of the company. Include growth, margins, significant ratios you think are important, Debt/Equity compared to peers(post IPO). What might you assign as Beta for Boston Beer based on comearables? Why?l Capital Structure: At the time of the deal, Boston Beer will dissolve its partnership to for the new company shares and repay Fleet Bank. How much will they pay the bank? Do you think prior to the IPO they were more reliant on debt? What might the D/E ratio be after the IPO? (Hint, use Exhibit 4 LTD of $18,269). What is the weighting of Debt and the Weighting of Equity? (Note: no preferred shares).+' What is the implied cost of equity at the midpoint of the IPO range($12.50)?