e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 30, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 1-14092
The Boston Beer Company,
Inc.
(Exact name of registrant as
specified in its charter)
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Massachusetts
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04-3284048
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Design Center Place, Suite 850, Boston,
Massachusetts
(Address of principal executive
offices)
02210
(Zip Code)
(617) 368-5000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Class A Common Stock
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NYSE
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K is not contained
herein, and will not be contained, to the best of the
registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Exchange Act)
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Class A Common Stock
($.01 par value) held by non-affiliates of the registrant
totaled $212,092,411 (based on the average price of the
Companys Class A Common Stock on the New York Stock
Exchange on July 1, 2006). All of the registrants
Class B Common Stock ($.01 par value) is held by an
affiliate.
As of March 9, 2007, there were 10,161,316 shares
outstanding of the Companys Class A Common Stock
($.01 par value) and 4,107,355 shares outstanding of
the Companys Class B Common Stock ($.01 par
value).
DOCUMENTS
INCORPORATED BY REFERENCE
Certain parts of the registrants definitive Proxy
Statement for its 2007 Annual Meeting to be held on May 31,
2007 are incorporated by reference into Part III of this
report.
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
FORM 10-K
For The
Period Ended December 30, 2006
1
PART I
General
The Boston Beer Company, Inc. (Boston Beer or the
Company) is the largest craft brewer and the sixth
largest brewer overall in the United States. In fiscal 2006,
Boston Beer sold 1,581,000 barrels of its proprietary
products (core brands) and brewed
31,000 barrels under contract (non-core
products) for third parties.
During 2006, the Company sold over twenty beers under the Samuel
Adams®
or the Sam
Adams®
brand names, four flavored malt beverage products under the
Twisted
Tea®
brand name, and one hard cider product under the
HardCore®
Cider brand name. Boston Beer produces malt beverages and hard
cider products at Company-owned breweries and under contract
arrangements at other brewery locations. The Company-owned
breweries are located in Cincinnati, Ohio and Boston,
Massachusetts. During 2006, the Company brewed beer under
contract at breweries located in Eden, North Carolina,
Rochester, New York, and La Crosse, Wisconsin.
The Companys principal executive offices are located at
One Design Center Place, Suite 850, Boston, Massachusetts
02210, and its telephone number is
(617) 368-5000.
Beer
Industry Background
Before Prohibition, the United States beer industry consisted of
hundreds of small breweries that brewed full-flavored beers.
Since the end of Prohibition, most domestic brewers have shifted
production to less flavorful, 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 towards mass-produced beers has coincided with
consolidation in the beer industry. Today, three major brewers
(Anheuser-Busch, Inc., SAB Miller PLC, and Molson-Coors
Brewing Company) comprise over 90% of all United States
domestic beer production, excluding imports. Further, these
three major brewers have all entered the Better Beer category
recently, either by developing their own beers, acquiring, in
whole or part, existing craft brewers or by importing and
distributing foreign brewers brands.
The Companys beer products are primarily positioned in the
Better Beer category of the beer industry, which
includes craft (small, independent and traditional) brewers as
well as specialty beers and most imports. Better Beers are
determined by higher price, quality, image and taste, as
compared with regular domestic beers. Samuel
Adams®
is the third largest brand in the Better Beer category of the
United States brewing industry, trailing only the imports,
Corona®
and
Heineken®.
The Company estimates that the Better Beer category grew 11 to
12% in 2006 and that the craft beer category grew approximately
12%, while the beer industry as a whole grew approximately 2%.
The Company believes that the Better Beer category is
approximately 18% of United States beer consumption.
The domestic beer industry, excluding Better Beers, has
experienced a slight decline in shipments over the last ten
years. The Company believes that this decline is due to
declining alcohol consumption per person in the population,
drinkers trading up to drink high quality more flavorful beers
and increased competition from wine and spirits companies.
During the past 10 years, domestic light beers, which are
beers with fewer calories than the brewers traditional
beers, have experienced significant growth within the category,
and now have a higher market share than traditional beers.
The Companys Twisted
Tea®
product line competes primarily within the alternative malt
beverage or Malternative category of the beer
industry. Malternatives, such as Twisted
Tea®,
Smirnoff
Ice®,
BacardiSilver®
and Mikes Hard
Lemonade®,
are flavored malt beverages that are typically priced
competitively with Better Beers. The Company believes that the
Malternative category comprises approximately 2% of United
States beer consumption. The Company believes that the
Malternative category was essentially flat in 2006.
2
Narrative
Description of Business
The Companys business goal is to become the leading brewer
in the Better Beer category by creating and offering high
quality full-flavored beers. With the support of a large,
well-trained sales organization, the Company strives to achieve
this goal by increasing brand availability and awareness through
advertising,
point-of-sale
and promotional programs.
Products
Marketed
The Companys product strategy is to create and offer a
world-class variety of traditional beers and other alcoholic
beverages with a focus on promoting the Samuel
Adams®
product line. In most markets, the Company focuses its
advertising and promotional dollars on Samuel Adams Boston
Lager®,
Sam Adams
Light®
and Samuel
Adams®
Seasonal Beers.
The Samuel
Adams®
Brewmasters Collection is an important part of the
Companys portfolio and heritage, and receives limited
promotional support. The Twisted
Tea®
brand family has grown each year since the product was first
introduced and has established a strong drinker following in
several markets. The Company plans to grow the brand further by
continuing to promote the Twisted
Tea®
brand in these markets and expand into new markets. The Limited
Edition Beers are produced at select times during the year in
limited quantities and are sold at a higher price than the
Companys other products. The following is a list of
significant continuing styles as of December 30, 2006:
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Year First Introduced
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Core Focus
Beers
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Samuel Adams Boston
Lager®
(Flagship brand)
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1984
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Sam Adams
Light®
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2001
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Seasonal Beers
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Samuel
Adams®
Double Bock
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1988
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Samuel
Adams®
Octoberfest
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1989
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Samuel
Adams®
Winter Lager
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1989
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Samuel
Adams®
Summer Ale
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1996
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Samuel
Adams®
White Ale
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1997
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Brewmasters
Collection
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Samuel
Adams®
Boston Ale
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1987
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Samuel
Adams®
Cream Stout
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1993
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Samuel
Adams®
Honey Porter
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1994
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Samuel Adams Cherry
Wheat®
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1995
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Samuel
Adams®
Pale Ale
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1999
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Samuel
Adams®
Hefeweizen
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2003
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Samuel
Adams®
Black Lager
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2005
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Limited Edition
Beers
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Samuel
Adams®
Triple
Bock®
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1994
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Samuel Adams
Utopias®
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2001
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Samuel
Adams®
Chocolate Bock
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2003
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Samuel
Adams®
Imperial Pilsner
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2005
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Flavored Malt
Beverages
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Twisted
Tea®
Hard Iced Tea
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2001
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Twisted
Tea®
Raspberry Hard Iced Tea
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2001
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Twisted
Tea®
Half Hard Iced Tea & Half Hard Lemonade
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2003
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Twisted
Tea®
Peach Hard Iced Tea
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2005
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Hard Cider
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HardCore®
Crisp Hard Cider
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1997
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Specialty
Beers
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Koggentm
Hefe-Weizen
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2005
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Certain products may be produced at select times during the year
solely for inclusion in the Companys variety packs. During
2006, Samuel
Adams®
Cranberry Lambic, Samuel
Adams®
Old
Fezziwig®
Ale and Samuel
Adams®
Holiday Porter were brewed and included in the Samuel
Adams®
Winter Classics variety pack, and Samuel
Adams®
Scotch Ale was brewed and included in the Samuel
Adams®
Brewmasters Collection Mix Pack.
The Company continually evaluates the performance of its various
beers, flavored malt beverages, and hard cider styles and the
rationalization of its product line, as a whole.
Product
Innovations
The Company is committed to remaining a leading innovator in the
Better Beer category by developing new products that allow the
Samuel
Adams®
drinker to try new styles of malt beverages. To that end, the
Company continually test brews different beers and occasionally
sells them in market under various brand labels, for example the
Koggentm
Hefe-Weizen that was introduced in September 2005, for
evaluation of drinker interest.
Sales,
Distribution and Marketing
The Company sells its products to a network of approximately 400
wholesale distributors, who then sell to retailers such as pubs,
restaurants, grocery chains, package stores, stadiums and other
retail outlets. With few exceptions, the Companys products
are not the primary brands in distributors portfolios.
Thus, the Company, in addition to competing with other malt
beverages for a share of the consumers business, competes
with other brewers for a share of the distributors
attention, time and selling efforts.
The Company sells its products predominantly in the United
States, but also has markets in Canada, Europe, Israel, the
Caribbean and the Pacific Rim. During 2006, the Companys
largest distributor accounted for approximately 5% of the
Companys net sales. The top three distributors accounted
for approximately 10%, collectively. In some states, the terms
of the Companys contracts with its distributors may be
affected by laws that restrict the enforcement of some contract
terms, especially those related to the Companys right to
terminate the services of its distributors.
The Company typically receives orders in the first week of a
month for 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.
During 2006, Boston Beer sold its products through a sales force
in excess of 200 people, which the Company believes is one
of the largest in the domestic beer industry. The Companys
sales organization is designed to develop and strengthen
relations at each level of the three-tier distribution system by
providing educational and promotional programs encompassing
distributors, retailers and drinkers. The Companys sales
force has a high level of product knowledge and is trained in
the details of the brewing and selling processes. Sales
representatives typically carry hops, barley, and other samples
to educate wholesale and retail buyers about the quality and
taste of the Companys beers. The Company has developed
strong relationships with its distributors and retailers, many
of which have benefited from the Companys premium pricing
strategy and growth.
The Company has also engaged in media campaigns, primarily
television, radio, billboards and print. These media efforts are
complemented by participation in sponsorships of cultural and
community events, local beer festivals, industry-related trade
shows, and promotional events at local establishments, to the
extent permitted under local laws and regulations. The Company
uses a wide array of
point-of-sale
items (banners, neons, umbrellas, glassware, display pieces,
signs, and menu stands) designed to stimulate impulse sales and
continued awareness.
4
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 two-row varieties of barley used in
the Companys malt are grown in the United States and
Canada. In 2006, the barley crop in the United States and Canada
was below average when compared with ten-year averages overall,
with below average output in terms of quality of crop in the
United States and average to slightly below average in terms of
quality in Canada. The 2006 crop was purchased at prices
significantly higher than previous years due to changes in
exchange rates, reduced crop yields in a number of markets and
increased demand due to other uses for the barley. The Company
purchased most of the malt used in the production of its beer
from one major supplier during 2006. The Company believes that
there are other malt vendors available that are capable of
supplying its needs.
Hops. The Company uses Noble hops for its
Samuel
Adams®
lagers. Noble hops are varieties from several specific growing
areas recognized for growing hops with superior taste and aroma
properties and include Hallertau-Hallertauer,
Tettnang-Tettnanger and Spalt-Spalter from Germany. Noble hops
are rare and more expensive than most other varieties of hops.
Traditional English hops, namely, East Kent Goldings and English
Fuggles, are used in the Companys ales. The Company enters
into grower-specific purchase commitments with two hops dealers,
based on the Companys projected future volumes and brewing
needs. The dealers then contract with farmers to ensure that the
Companys needs are met. The contracts with the hop dealers
are denominated in Euros for the German hops and in Pounds
Sterling for the English hops. The Company does not currently
hedge these forward currency commitments. The crops harvested in
2006 were below the
20-year
historical averages in terms of both quality and quantity for
all hop varieties from Germany and the UK and resulted in under
delivery of hops for the Companys needs. While the Company
typically maintains over one years supply of essential hop
varieties on-hand in order to limit the risk of an unexpected
reduction in supply, the Companys current hop inventory is
lower than it would like and further years of under delivery
could require the Company to evaluate other hops sources. The
Company stores its hops in multiple cold storage warehouses to
minimize the impact of a catastrophe at a single site.
Yeast. The Company maintains a supply of
proprietary strains of yeast used in its breweries and supplies
them to its contract brewers. Since these yeasts would be
impossible to duplicate if destroyed, the Company maintains
secure supplies in several locations and the strains are stored
and protected at an outside laboratory. In addition, the
Companys contract brewers maintain a supply of the yeasts
that are reclaimed from the batches of brewed beer. The contract
brewers are obligated by their production contracts to use the
Companys proprietary strains of yeasts only to brew the
Companys beers and such yeasts cannot be used without the
Companys approval to brew any other beers produced at the
respective breweries.
Other Ingredients. The Company maintains
competitive sources for the supply of other ingredients used in
some of its specialty malt-based and cider products.
Packaging Materials. The Company maintains
competitive sources for the supply of certain packaging
materials, such as shipping cases, six-pack carriers and crowns.
Currently, glass and labels are each supplied by a single
source, although the Company believes that alternative suppliers
are available. The Company enters into limited term supply
agreements with certain vendors in order to receive preferential
pricing.
The Company initiates bottles deposits and reuses some of the
glass bottles that are returned pursuant to certain state bottle
recycling laws and derives some economic benefit from this
practice. The cost associated with reusing the glass varies,
based on the costs of collection, sorting and handling,
including arrangements with retailers, wholesalers and dealers
in recycled products. There is no guarantee that the current
economics relating to the use of returned glass will continue or
that the Company will continue to reuse returnable bottles.
Quality
Assurance
As of December 30, 2006, the Company employed eight
brewmasters to monitor the Companys non-owned brewing
operations and control the production of its beers. Over 125
tests, tastings and evaluations are
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typically required to ensure that each batch of Samuel
Adams®
beer, Twisted
Tea®
flavored malt beverage, and
Hardcore®
hard cider conforms to the Companys standards. The
Company has
on-site
quality control labs at each brewery.
In order to ensure that its customers enjoy only the freshest
beer, the Company includes a clearly legible
freshness code on every bottle and keg of its Samuel
Adams®
products. Boston Beer was the first American brewer to use this
practice.
Brewing
Strategy
The Company continues to pursue its strategy of combining
brewery ownership with production arrangements at breweries
owned by third parties. The Company-owned breweries are located
in Cincinnati, Ohio and Boston, Massachusetts and the Company
currently has brewing services arrangements with Miller Brewing
Company, High Falls Brewing Company, LLC and City Brewing
Company, LLC to produce its products at breweries in Eden, North
Carolina, Rochester, New York; Latrobe, Pennsylvania, and
La Crosse, Wisconsin, respectively. The Company carefully
selects breweries with (i) the capability of utilizing
traditional brewing methods and (ii) first-rate quality
control capabilities throughout brewing, fermentation, finishing
and packaging. Under its non-owned brewing arrangements, the
Company is charged a per unit rate for its products that are
produced at each of the breweries and bears the costs of raw
materials, excise taxes and deposits for pallets and kegs and
specialized equipment required to brew the Companys beers.
The brewing services arrangements with breweries owned by others
have historically allowed the Company to utilize the excess
capacity, providing the Company flexibility, as well as quality
and cost advantages over its competitors while maintaining full
control over the brewing process for the Companys beers.
As the number of available breweries declines, the risks of
disruption increases, and the dynamics of the brewery strategy
of ownership versus brewing in non-owned breweries changes The
Company believes that an ownership strategy could produce some
improvement in operating and freight costs. The Company
continually evaluates these factors and others in its evaluation
of ownership versus brewing in non-owned breweries.
The Company continues to assess the viability of constructing a
brewery in the Northeast and has secured an option on a site in
Freetown, Massachusetts. The Company is working through a
thorough evaluation of this site including obtaining the
required permits, which the Company anticipates will be
completed by mid-year 2007. The Company continues to finalize
engineering for production capacity in excess of
1.0 million barrels of Samuel Adams brand products and
Twisted Tea. The Companys current best estimate is that
total project costs could be between $170 million and
$210 million, including land acquisition and development,
facility construction, equipment and other startup costs and the
Company believes financing for this to be available. The cost of
the project will ultimately depend on the final specifications.
The Company also continues to evaluate other supply strategies
to ensure that any decision to build is the best decision for
the Company, given the growth of the Craft beer category and
known and unknown risks in supply chain alternatives.
In 2006, the Company invested over $2.3 million in
property, plant and equipment at the brewery that it owns in
Cincinnati, Ohio (the Cincinnati Brewery) in order
to expand the facilities and improve efficiencies. The Company
expects to brew between 40 and 50% of its volume at the
Cincinnati Brewery in 2007. While the Cincinnati Brewery
produces all of the Companys beer styles, it is the
primary brewery for the production of most of the Companys
specialty and lower volume beers and hard cider production, as
well as most of the flavored malt beverage production. The
Company is evaluating further capital investments in the
Cincinnati Brewery to improve the brewerys capacity,
economics, capability and flexibility, as both an alternative
and a complement to the Companys other brewery
alternatives.
The Company uses its brewery located in Boston, Massachusetts
(the Boston Brewery) to develop new types of
innovative and traditional products and to supply, in limited
quantities, beers for the local market. Product development
entails researching market needs and competitive products,
sample brewing, and market taste testing. All of the
Companys products are produced at the Boston Brewery in
the course of a year.
The Company believes that it has secured sufficient alternatives
in the event that production at any of its brewing locations is
interrupted or discontinued; however, the Company may not be
able to maintain its
6
current economics if such disruption were to occur. Management
is currently aware of some impending issues at its non-owned
breweries that could preclude normal production. These include
the Companys continuing concerns about the financial
stability of the brewery in Rochester. The Company continues to
work with all of its breweries to attempt to minimize any
potential disruptions.
Competition
The Better Beer category within the United States beer market is
highly competitive due to the large number of craft brewers with
similar pricing and target customers and gains in market share
achieved by imported beers. The Company anticipates competition
among domestic craft brewers to remain strong as craft brewers
experienced their third successive year of growth in 2006.
Imported beers, such as
Corona®,
and
Heineken®,
continue to compete aggressively in the United States. These
import competitors may have substantially greater financial
resources, marketing strength, and distribution networks than
the Company. Large domestic brewers have developed or are
developing niche brands within the Better Beer category and have
acquired interests in or are exploring ownership or partnerships
with small brewers to compete with craft brewers or acquired
interests in import brands to compete with imported beers.
The Company also competes with other alcoholic beverages for
drinker attention and consumption. In recent years, wines and
spirits have been competing more directly with beers. The
Company monitors such activity and attempts to develop
strategies which benefit from the drinkers interest in
trading up and position our beers competitively with wine and
spirits.
The Company competes with other beer and alcoholic beverage
companies within a three-tier distribution system. The Company
competes for a share of the distributors attention, time
and selling efforts. In retail establishments, the Company
competes for shelf and tap space. From a drinker perspective,
competition exists for brand acceptance and loyalty. The
principal factors of competition in the Better Beer segment of
the beer industry include product quality and taste, brand
advertising, trade and drinker promotions, pricing, packaging,
the development of new products, and perceived nutritional
content.
The Company distributes its products through independent
distributors who may also distribute competitors products.
Certain brewers have contracts with their distributors that
impose requirements on distributors that are intended to
maximize the wholesalers attention, time and selling
efforts on that brewers products. These contracts
generally result in increased competition among brewers as the
contracts may affect the manner in which a distributor allocates
selling effort and investment to the brands included in its
portfolio. The Company closely monitors these and other trends
in its distributor network and develop programs and tactics
intended to best position its products in the market.
The Company has certain competitive advantages over the regional
craft brewers, including a long history of awards for product
quality, greater available resources and the ability to
distribute and promote its products on a more cost-effective
basis. Additionally, the Company believes it has competitive
advantages over imported beers, including lower transportation
costs, higher product quality, a lack of import charges and
superior product freshness.
The Companys Twisted
Tea®
products compete within the Malternative category of the Beer
Industry. This category is highly competitive due to, among
other factors, the presence of large spirits companies, the
advertising of malt-based spirits brands in channels not
available to the parent brands, and a fast pace of product
innovation.
Alcoholic
Beverage Regulation and Taxation
The manufacture and sale of alcoholic beverages is a highly
regulated and taxed business. The Companys 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, including 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
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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, and
suspension or revocation of permits, licenses or approvals.
There can be no assurance that other or more restrictive laws,
regulations or higher taxes will not be enacted in the future.
Under a federal regulation that became effective on
January 3, 2006, a reformulation of most flavored malt
beverage products was required so that a greater proportion of
the final alcohol content is a product of brewing. The Company
reformulated its Twisted
Tea®
products to meet these requirements. In 2006 this reformulation
caused production delays and increased costs and may have
negatively impacted the growth rate of Twisted
Tea®
products.
Licenses
and Permits
The Company, through its wholly-owned subsidiaries, Boston Beer
Corporation and Samuel Adams Brewery Company, Ltd., produces its
alcoholic beverages pursuant to a federal wholesalers
basic permit, a federal brewers notice and a federal
winery registration. Its products are then sold by Boston Beer
Corporation to distributors. Brewery and wholesale operations
require various federal, state, and local licenses, permits, and
approvals. In addition, some states prohibit any supplier, such
as the Company,
and/or
wholesaler from holding an interest in any retailer. 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, could have a
material adverse effect on the ability of the Company to conduct
its business.
At the federal level, the Alcohol and Tobacco Tax and Trade
Bureau of the U.S. Treasury Department (TTB),
administers and enforces the federal laws and tax code
provisions related to the production and taxation of alcohol
products. Brewers are required to file an amended notice with
the TTB in the event of a material change in the production
processes, production equipment, brewery location, brewery
management or brewery ownership. The TTB permits and
registrations can be suspended, revoked or otherwise adversely
affected for failure to pay tax, keep proper accounts, pay fees,
bond premises, abide by federal alcoholic beverage production
and distribution regulations, or to notify the TTB of any
material change. Permits, licenses and approvals from state
regulatory agencies can be revoked for many of the same reasons.
The Companys operations are subject to audit and
inspection by the TTB at any time.
At the state and local level, some jurisdictions merely require
notice of any material change in the operations, management or
ownership of the permit or license holder and others require
advance approvals, requiring that new licenses, permits, or
approvals be applied for and obtained in the event of a change
in the management or ownership of the permit or license holder.
State and local laws and regulations governing the sale of malt
beverages and hard cider within a particular state by an
out-of-state
brewer or wholesaler vary from locale to locale.
Because of the many and various state and federal licensing and
permitting requirements, there is a risk that one or more
regulatory agencies could determine that the Company has not
complied with applicable licensing or permitting regulations or
has not maintained the approvals necessary for it to conduct
business within its jurisdiction. There can be no assurance that
any such regulatory action would not have a material adverse
effect upon the Company or its operating results. The Company is
not aware of any infraction of any of its licenses or permits
which would materially impact its operations.
Taxation
The federal government and all of the states levy excise taxes
on beer and hard cider. For brewers producing no more than
2.0 million barrels of malt beverages per calendar year,
the federal excise tax is $7.00 per barrel on the first
60,000 barrels of malt beverages 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
2.0 million barrels of malt beverages for domestic
consumption in a calendar year, the federal excise tax is
$18.00 per barrel. The Company has been able to take
advantage of this reduced tax on the first 60,000 barrels
of its malt beverages produced. Individual states also impose
excise taxes on alcoholic beverages in varying amounts, which
have
8
also been subject to change. The determination of who is
responsible, the Company or the distributor, to bear the
liability of these taxes varies by state. Twisted
Tea®
is classified as a malt beverage for federal excise tax
purposes. In addition, the federal government and each of the
states levy taxes on hard cider. The federal excise tax rate on
qualifying hard cider is $7.00 per barrel.
Federal and state legislators routinely consider various
proposals to impose additional excise taxes on the production
and distribution of alcoholic beverages, including beer and hard
cider. Various states are also considering or have decided that
Malternative products should be taxed differently than beer.
Further increases in excise taxes on beer, Malternatives
and/or hard
cider, if enacted, could result in a general reduction in sales
for the affected products or in the profit realized from the
sales of the affected products.
Trademarks
The Company has obtained United States Trademark Registrations
for several trademarks, including Samuel
Adams®,
Sam
Adams®,
the design logo of Samuel
Adams®,
Samuel Adams Boston
Lager®,
Samuel Adams Cherry
Wheat®,
Triple
Bock®,
Sam Adams
Light®,
Twisted
Tea®
and
HardCore®.
The Samuel
Adams®
trademark and the Samuel Adams Boston
Lager®
trademark (including the design logo of Samuel Adams) and other
Company trademarks are also registered or registration is
pending in various foreign countries. The Company regards its
Samuel Adams family of trademarks 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 trademark infringements 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 Companys policy is to pursue registration of
its marks whenever appropriate and to vigorously oppose any
infringements of its marks.
Environmental
Regulations and Operating Considerations
The Companys 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 remediation, 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
any costs arising from existing environmental laws will not have
a material adverse effect on the Companys financial
condition or results of operations. However, there can be no
assurance 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 Companys operations are subject to certain hazards and
liability risks faced by all producers of alcoholic beverages,
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. The
occurrence of such a problem could result in a costly product
recall and serious damage to the Companys reputation for
product quality, as well as give rise to product liability
claims. The Company and the breweries where it brews under
contract maintain insurance which the Company believes is
sufficient to cover any product liability claims which might
result from a contamination or other product liability with
respect to its products.
As part of its efforts to be environmentally friendly, the
Company has reused its glass bottles returned from certain
states that have bottle deposit bills. The Company believes that
it benefits economically from washing and reusing these bottles
which result in a lower cost than purchasing new glass, and that
it benefits the environment by the reduction in landfill usage,
the reduction of usage of raw materials, and the lower utility
costs for reusing bottles versus producing new bottles. The
economics of using recycled glass varies based on the cost of
collection, sorting and handling, and may be affected by local
regulation, and retailer, distributor and glass dealer behavior.
There is no guarantee that the current economics of using
returned glass will continue, nor that the Company will continue
to do so.
9
Employees
During 2006, the Company employed an average of approximately
433 people, of which approximately 71 at the Cincinnati
Brewery were covered by collective bargaining agreements. The
representation involves three labor unions, one of whose
contract was renegotiated in 2006 and extended for 5 years.
The Company is currently in negotiations with the remaining two
unions on similar extensions. The Company believes it maintains
a good working relationship with all three labor unions and has
no reason to believe that the good working relationship will not
continue. The Company has experienced no work stoppages, or
threatened work stoppages, and believes that its employee
relations are good.
Other
The Company submitted the Section 12(a) CEO Certification
to the New York Stock Exchange in accordance with the
requirements of Section 303A of the NYSE Listed Company
Manual. This Annual Report on
Form 10-K
contains at Exhibits 31.1 and 31.2 the certifications of
the Chief Executive Officer and Chief Financial Officer,
respectively, in accordance with the requirements of
Section 302 of the Sarbanes-Oxley Act of 2002. The Company
makes available free of charge copies of its Annual Report on
Form 10-K,
as well as other reports required to be filed by
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, via the Internet at www.bostonbeer.com, or upon
written request to Investor Relations, The Boston Beer Company,
Inc., One Design Center Place, Suite 850, Boston,
Massachusetts 02210.
In addition to the other information in this Annual Report on
Form 10-K,
you should carefully consider the risks described below before
deciding to invest in shares of our Class A Common Stock.
These are risks and uncertainties that management believes are
most likely to be material and therefore are most important for
you to consider. Our business operations and results may also be
adversely affected by additional risks and uncertainties not
presently known to us, or which we currently deem immaterial, or
which are similar to those faced by other companies in our
industry or business in general. If any of the following risks
or uncertainties actually occurs, our business, financial
condition, results of operations or cash flows would likely
suffer. In that event, the market price of our Class A
Common Stock could decline.
The
Company Faces Substantial Competition.
The Better Beer category within the United States beer market is
highly competitive due to the large number of craft brewers with
similar pricing and target customers and gains in market share
achieved by imported beers. The Company anticipates competition
among domestic craft brewers to remain strong as craft brewers
experienced their third successive year of growth in 2006. Large
domestic brewers have developed or are developing niche brands
within the Better Beer category and have acquired or are
exploring acquiring interests in small brewers to compete in the
craft-brewed segment or in import brands to compete with
imported beers. Imported beers, such as
Corona®
and
Heineken®,
continue to compete aggressively in the United States beer
market. Samuel
Adams®
is the third largest brand in the Better Beer category of the
United States brewing industry, trailing only
Corona®
and
Heineken®.
The continued growth in the sales of craft-brewed domestic beers
and in imported beers is expected to increase the competition in
the Better Beer category within the United States beer market
and, as a result, prices and market share of the Companys
products may fluctuate and possibly decline. No assurance can be
given that any decline in price would be offset by an increase
in market share. The Companys products, including its
Twisted
Tea®
products, also compete generally with other alcoholic beverages.
The Company competes with other beer and beverage companies not
only for drinker acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by
the Companys distributors and their customers, all of
which also distribute and sell other beers and alcoholic
beverage products. Many of the Companys competitors,
including
Corona®
and
Heineken®
and the large domestic brewers have substantially greater
financial resources, marketing strength and distribution
networks than the Company. Moreover, the introduction of new
products by competitors that compete directly with the
Companys products, or that diminish the importance of the
Companys products to the retailers or distributors may
have a material adverse effect on the Companys results of
operations, cash flows and financial position.
10
There
Is No Assurance of Continued Growth.
The Companys future growth may be limited by both its
ability to continue to increase its market share in domestic and
international markets, including those markets that may be
dominated by one or more regional or local craft breweries, and
by the growth in the craft-brewed beer market and the Better
Beer market. The development of new products by the Company may
lead to reduced sales in the Companys other products,
including its flagship Samuel Adams Boston
Lager®.
The Companys future growth may also be limited by its
ability to enter into new brewing contracts on commercially
acceptable terms or the availability of suitable production
capacity, and its ability to obtain sufficient quantities of
certain ingredients and packaging materials from suppliers, such
as hops and bottles.
The
Unpredictability and Fluctuation of the Companys Quarterly
Results May Adversely Affect The Trading Price of Its Common
Stock. The Companys Advertising and Promotional
Investments May Not be Effective
The Companys revenues and results of operations have in
the past and may in the future vary from quarter to quarter due
to a number of factors, many of which are outside of the
Companys control and any of which may cause its stock
price to fluctuate. As a growth-oriented Company, the Company
has made, and expects to continue to make, significant
advertising and promotional expenditures to enhance its brands.
These expenditures may not result in higher sales volume.
Variations in the levels of advertising and promotional
expenditures have in the past caused, and are expected in the
future to continue to cause, variability in the Companys
quarterly results of operations. The Company has in the past
made, and expects from time to time in the future to make,
significant advertising and promotional expenditures to enhance
its brands even though those expenditures may adversely affect
the Companys results of operations in a particular quarter
or even for the full year, and may not result in increased
sales. While the Company attempts to invest only in effective
advertising and promotional expenditures, it is difficult to
correlate such investments with sales results, and there is no
guarantee that the Companys expenditure will be effective
in building brand equity or growing long term sales. In
addition, the Company fills orders from its wholesalers who may
choose independently to build their inventories or run their
inventories down. This change in wholesaler inventories is
somewhat unpredictable, and can lead to fluctuations in the
Companys quarterly or annual results.
The
Companys Dependence on Brewing at Non-Owned
Breweries Could Harm Its Business. However, the Alternative
of Owning Its Production Facilities has High Capital Costs,
creates a Larger Fixed Cost Burden on the Companys
Business, and has Greater Uncertainty as to Operating Costs, all
of which Could Have A Material Adverse Effect on the
Companys Operations or Financial Results.
The Company continues to pursue its strategy of combining
brewery ownership with brewing at breweries owned by others. The
Company-owned breweries are located in Cincinnati, Ohio and
Boston, Massachusetts and the Company currently brews under
agreements with breweries in Eden, North Carolina, Rochester,
New York, and La Crosse, Wisconsin. The Company carefully
selects breweries with (i) the capability of utilizing
traditional brewing methods and (ii) first rate quality
control capabilities throughout brewing, fermentation, finishing
and packaging. The brewing arrangements with other breweries
have historically allowed the Company to utilize their excess
capacity, providing the Company flexibility as well as quality
and cost advantages over its competitors. However, higher than
planned costs of operating under contract arrangement at
breweries owned by others or an unexpected decline in the
brewing capacity available to the Company may have a material
adverse effect on the Companys results of operations, cash
flows and financial position.
As the number of available breweries at which the Company can
brew under contract declines, the risk of disruption increases,
and the dynamics of the brewery strategy of ownership versus
brewing at breweries owned by others changes. The Company
continues to assess the viability of constructing a brewery in
the Northeast and has secured an option on a site in Freetown,
Massachusetts. The Company is working through a thorough
evaluation of this site including obtaining the required
permits, which the Company anticipates will be completed by
mid-year 2007. The Company continues to finalize engineering for
production capacity in excess of 1.0 million barrels of
Samuel Adams brand products and Twisted Tea. The Companys
current best estimate is that total project costs could be
between $170 million and $210 million, including land
acquisition
11
and development, facility construction, equipment and other
startup costs. This estimate, however, could change based on the
actual production capacity and capability of the additional
facilities. The Company believes that an ownership strategy
could produce improvement in operating and freight costs. The
Company continually evaluates these factors and others,
including the fact that the Company has no experience in
designing, building and bringing on line a new brewery of this
magnitude, in its evaluation of the risks and benefits of
ownership versus contracting.
The Company continues to brew its Samuel Adams Boston
Lager®
at each of its brewing facilities, but at any particular time
may rely on only one supplier for its products other than Samuel
Adams Boston
Lager®.
The Company believes that it has sufficient capacity options
that would allow for a shift in production locations if
necessary, although it is unable to quantify any additional
costs, capital or operating, if any, that it might incur in
securing access to such capacity.
Management believes that in the event of a labor dispute,
governmental action, a sudden closure of one of the breweries
not owned by the Company or other events that would prevent
either the Cincinnati Brewery or any of the breweries under
contract from producing the Companys beer, the Company
would be able to shift production between breweries so as to
meet demand for its beer. In such event, however, the Company
could experience temporary shortfalls in production
and/or
increased production or distribution costs, the combination of
which could have a material adverse effect on the Companys
results of operations, cash flows and financial position. A
simultaneous interruption at several of the Companys
production locations would likely cause significant disruption,
increased costs and, potentially, lost sales.
The
Company Is Dependent on Its Distributors.
In the United States, where approximately 99% of its beer is
sold, the Company sells its beer to independent beer
distributors for distribution to retailers and ultimately
drinkers. Although the Company currently has arrangements with
approximately 400 wholesale distributors, sustained growth will
require it to maintain such relationships and possibly enter
into agreements with additional distributors. Changes in control
or ownership of the current distribution network could lead to
less support of the Companys products. No assurance can be
given that the Company will be able to maintain or secure
additional distributors on terms favorable to the Company.
The Companys distribution agreements are generally
terminable by the distributor on short notice. While these
distribution agreements contain provisions regarding the
Companys enforcement and termination rights, some state
laws prohibit the Company from exercising these contractual
rights. The Companys ability to maintain its existing
distribution agreements may be adversely affected by the fact
that many of its distributors are reliant on one of the major
beer producers for a large percentage of their revenue and,
therefore, they may be influenced by such producers. If the
Companys existing distribution agreements are terminated
it may not be able to enter into new distribution agreements on
substantially similar terms, which may result in an increase in
the costs of distribution.
The
Company is Dependent on Key Suppliers, Including Foreign
Sources; Its Dependence on Foreign Sources Creates Foreign
Currency Exposure for the Company; The Companys Use of
Natural Ingredients Creates Weather and Crop Reliability
Exposure for the Company.
The Company purchases a substantial portion of the raw materials
used in the brewing of its products, including its malt and
hops, from a limited number of foreign and domestic suppliers.
The Company purchased most of the malt used in the production of
its beer from one major supplier during 2006. The Company is
exposed to the quality of the barley crop each year, and
significant failure of a crop would adversely affect the
Companys costs. The Company believes that there are other
malt vendors available that are capable of supplying its needs.
The Company uses Noble hops for its Samuel
Adams®
lagers. Noble hops are varieties from several specific growing
areas recognized for superior taste and aroma properties and
include Hallertau-Hallertauer, Tettnang-Tettnanger and
Spalt-Spalter from Germany. Noble hops are rare and more
expensive than most other varieties of hops. Traditional English
hops, namely, East Kent Goldings and English Fuggles, are used
in the Companys ales. The Company enters into purchase
commitments with two hops dealers, based
12
on the Companys projected future volumes and brewing
needs. The dealers then contract with farmers to ensure that the
Companys needs are met. However, the performance and
availability of the hops may be materially adversely affected by
factors such as adverse weather, the imposition of export
restrictions (such as increased tariffs and duties) and changes
in currency exchange rates resulting in increased prices. The
Company attempts to maintain over one years supply of
essential hop varieties on-hand in order to limit the risk of an
unexpected reduction in supply. The 2006 crop shortfall has
reduced the Companys hop inventories such that a similar
poor 2007 hop crop might lead the Company to explore alternative
sources of hops. The Company stores its hops in multiple cold
storage warehouses to minimize the impact of a catastrophe at a
single site. Hops and malt are agricultural products and
therefore many outside factors, including weather conditions,
crop production, government regulations and legislation
affecting agriculture, could affect both price and supply.
Historically, the Company has not experienced material
difficulties in obtaining timely delivery from its suppliers.
Although the Company believes that there are alternate sources
available for the ingredients and packaging materials, there can
be no assurance that the Company would be able to acquire such
ingredients or packaging materials from substitute sources on a
timely or cost effective basis in the event that current
suppliers could not adequately fulfill orders. The loss of a
supplier could, in the short-term, adversely affect the
Companys results of operations, cash flows and financial
position until alternative supply arrangements were secured.
The Companys contracts for hops are payable in Euros for
German hops and in Pounds Sterling for English hops, and
therefore, the Company is subject to the risk that the Euro or
Pound may rise against the U.S. dollar. The cost of hops is
approximately 10% of the Companys product cost. The
Company has, as a practice, not hedged this exposure although
this practice is subject to review. Significant adverse
fluctuations in foreign currency exchange rates may have a
material adverse effect on our results of operations, cash flows
and financial position. Management is currently reviewing the
Companys hops commitments in relation to existing exchange
rates and related implications on future profit margins and
considering the need to adopt strategies designed to minimize or
eliminate currency exchange rate exposure.
An
Increase in Packaging Costs Could Harm the Companys
Business.
The Company maintains multiple sources for the supply of most of
its packaging materials, such as shipping cases, six-pack
carriers and crowns. Currently, glass and labels are each
supplied by a single source and, although the Company believes
that alternative suppliers are available, the loss of either the
Companys glass or labels supplier could, in the
short-term, adversely affect the Companys results of
operations, cash flows and financial position until alternative
supply arrangements were secured. If packaging costs increase,
there is no guarantee that such costs can be fully passed along
to drinkers through increased prices. The Company has entered
into long-term supply agreements for certain packaging materials
that have shielded it from some cost increases. These contracts
have varying length and terms and there is no guarantee that the
economics of these contracts can be duplicated at time of
renewal. This could expose the Company to significant cost
increases in future years.
The Company initiates bottles deposits and reuses some of the
glass bottles that are returned pursuant to certain state bottle
recycling laws and derives some economic benefit from this
practice. The cost associated with reusing the glass varies,
based on the costs of collection, sorting and handling,
including arrangements with retailers, wholesalers and dealers
in recycled products. The Company believes that it benefits
economically from cleaning and reusing these bottles, which
result in a lower cost than purchasing new glass, and that it
benefits the environment by the reduction in landfill usage, the
reduction of usage of raw materials, and the lower utility costs
for reusing bottles versus producing new bottles. The economics
of using recycled glass varies based on the cost of collection,
sorting and handling, and may be affected by local regulation,
and retailer, distributor and glass dealer behavior. There is no
guarantee that the current economics of using returned glass
will continue, or that the Company will continue to do so.
13
An
Increase in Energy Costs Could Harm the Companys
Business.
In the last three years, the Company has experienced significant
increases in direct and indirect energy costs, and energy costs
could continue to rise, which would result in higher
transportation, freight and other operating costs, including
increases in the cost of supplies. The Companys future
operating expenses and margins will be dependent on its ability
to manage the impact of cost increases. If energy costs continue
to increase, there is no guarantee that such costs can be fully
passed along to drinkers through increased prices.
The
Companys Operations are Subject to Certain Operating
Hazards.
The Companys 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 not
experienced any serious contamination problem in its products,
the occurrence of such a problem could result in a costly
product recall and serious damage to the Companys
reputation for product quality, as well as claims for product
liability.
The
Company is Subject to Existing and Potential Additional
Regulation and Taxation, which Can Impose Burdens on Its
Operations and Narrow the Markets for Its
Products.
The manufacture and sale of alcoholic beverages is a business
that is highly regulated and taxed at the federal, state and
local levels. The Companys operations may be subject to
more restrictive regulations and increased taxation by federal,
state and local governmental agencies than are those of
non-alcohol related businesses. For instance, brewery and
wholesale operations require various federal, state and local
licenses, permits and approvals. In addition, some states
prohibit wholesalers and 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, failure to obtain any additional or new
licenses, permits or approvals or the failure to obtain approval
for the transfer of any existing permits or licenses, including
any transfers required in connection with the recapitalization,
could have a material adverse effect on the ability of the
Company to conduct its business. 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.
Under a federal regulation that became effective on
January 3, 2006, a reformulation of most flavored malt
beverage products was required so that a greater proportion of
the final alcohol content is a product of brewing. The Company
reformulated its Twisted
Tea®
products to meet these requirements. In 2006 this reformulation
caused production delays and increased costs and may have
negatively impacted the growth rate of Twisted
Tea®
products. Further regulations at federal or state level could be
forthcoming that would have a material adverse effect on our
ability to produce product acceptable to the Companys
drinkers at current economics, and would therefore significantly
affect the Companys results.
In addition, if federal or state excise taxes are increased, the
Company may have to raise prices to maintain present profit
margins. The Company does not believe that a price increase due
to increased taxes will reduce unit sales, but the actual effect
will depend on the amount of any increase, general economic
conditions and other factors. Higher taxes may reduce overall
demand for beer, thus negatively impacting sales of the
Companys products.
Further federal or state regulation may be forthcoming that
could limit distribution and sales of alcohol products. Such
regulation might reduce the Companys ability to sell its
products at retail and at wholesaler and could severely impact
the Companys business.
14
Changes
in Public Attitudes and Drinker Tastes Could Harm the
Companys Business.
The alcoholic beverage industry has become the subject of
considerable societal and political attention in recent years
due to increasing public concern over alcohol-related social
problems, including drunk driving, underage drinking and health
consequences from the misuse of alcohol, including alcoholism.
As an outgrowth of these concerns, the possibility exists that
advertising by beer producers could be restricted, that
additional cautionary labeling or packaging requirements might
be imposed, that further restrictions on the sale of alcohol
might be imposed, or that there may be renewed efforts to impose
increased excise or other taxes on beer sold in the United
States. The entire domestic beer industry, excluding Better
Beers, has experienced a slight decline in shipments over the
last ten years. The Company believes that this slower growth is
due to both declining alcohol consumption per person in the
population and increased competition from wine and spirits
companies. If beer consumption in general were to come into
disfavor among domestic drinkers, or if the domestic beer
industry were subjected to significant additional governmental
regulations, the Companys business could be materially
adversely affected.
The
Company Is Involved in Various Litigation Matters Which, If Not
Resolved in Its Favor, Could Harm the Companys Business.
There Is No Guarantee that Other Litigation Could Develop that
Could Harm the Companys Business.
The Company, along with numerous other beverage alcohol
producers, has been named as a defendant in a number of class
action law suits in several states relating to advertising
practices and under-age consumption. Each complaint contains
substantially the same allegations that each defendant marketed
its products to under-age drinkers and seeks an injunction and
unspecified money damages on behalf of a class of parents and
guardians. The Company has been defending this litigation
vigorously. Two of the complaints have been withdrawn by the
plaintiffs and all of the other active complaints have been
dismissed with prejudice. However, the plaintiffs have appealed
each of those dismissals. The appeals are in their earliest
stages and it is not possible at this time to determine their
likely outcome or the impact on the Company.
In November 2004, Royal Insurance Company of America and an
affiliate (RICA), the Companys liability
insurer during most of the period covered by the
above-referenced complaints, filed a complaint in Ohio seeking
declaratory judgment that RICA owes no duty to defend or
indemnify the Company in the underlying actions filed in Ohio
and has subsequently filed a motion for summary judgment. In
July 2005, Royal Indemnity Company, successor in interest to
RICA and an affiliate (Royal), filed a complaint in
New York seeking declaratory judgment that Royal owes no duty to
defend or indemnify the Company in five underlying actions filed
in states other than Ohio, which was dismissed in November 2005.
In August 2005, the Massachusetts Bay Insurance Company
(MBIC), the Companys liability insurer for
parts of 2004 and 2005, filed a complaint in Massachusetts
seeking declaratory judgment that MBIC owes no duty to defend or
indemnify the Company in the underlying actions filed during the
policy period and that MBIC owes no duty to contribute to any
obligation of Royal to defend or indemnify the Company as to
those underlying actions. Royal joined in the MBIC action with
its own declaratory judgment claim that it owes no duty to
defend the Company in the five underlying actions filed in
states other than Ohio. In December 2006, the motion for summary
judgment was denied, resulting in declaration that the insurers
do have a duty to defend the Company with respect to the
underlying actions. Both RICA and MBIC have indicated that they
intend to appeal the judgment. The Company continues to believe
that it has meritorious defenses, that it is entitled to
insurance coverage of its defense costs with respect to the
underlying class actions, and that it is premature to litigate
indemnification issues for the class actions. However, the
Company is not able to predict at this time the ultimate outcome
of these insurance coverage disputes.
While the Company believes it conducts its business
appropriately in accordance with laws, regulations and industry
guidelines, further litigation in addition to the above could
develop and might severely impact the Companys results.
15
Class B
Shareholder Has Significant Influence over the
Company.
The Companys Class A Common Stock is not entitled to
any voting rights, except for the right as a class to approve
certain mergers and charter and by-law amendments and to elect a
minority of the directors of the Company. Consequently, the
election of a majority of the Companys directors and all
other matters requiring stockholder approval is decided by C.
James Koch, Chairman of the Board of Directors of the Company,
as the current holder of 100% of the Class B Common Stock.
As a result, Mr. Koch is able to exercise substantial
influence over all matters requiring stockholder approval,
including the composition of the board of directors and approval
of equity-based and other executive compensation and other
significant corporate matters. This could have the effect of
delaying or preventing a change in control of the Company and
will make some transactions difficult or impossible to
accomplish without the support of Mr. Koch.
Continued
Health of our Brands, and Role of our Founder in the Samuel
Adams Brand Communication
There is no guarantee that the brand equities that the Company
has built in its brands will continue to appeal to drinkers.
Changes in drinker attitudes or demands could severely affect
the strength of the brands and the revenue that is generated
from that strength. It is possible that the Company could react
to such changes and reposition the brands, but there is no
certainty that the Company would be able to maintain volumes,
pricing power, and profitability. It is also possible that
marketing messages or other actions taken by the Company could
damage the brand equities as opposed to building them. If such
damage should occur it could have a negative effect on the
financial condition of the Company.
In addition to these inherent brand risks, the founder and
Chairman of the Company, C. James Koch, is an integral part of
the Companys current Samuel
Adams®
brand message. The role of Mr. Koch as founder, brewer and
leader of the Company is emphasized as part of the
Companys brand communication and has appeal to some
drinkers. If Mr. Koch were not available to the Company to
continue his active role, his absence could detrimentally affect
the strength of the Companys messaging and, accordingly,
the Companys growth prospects. If this were to occur, the
Company might need to adapt its strategy for communicating its
key messages regarding its traditional brewing processes,
brewing heritage and quality. This might have a detrimental
impact on the future growth of the Company.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
The Company has not received any written comments from the staff
of the Securities and Exchange Commission regarding the
Companys periodic or current reports that (1) the
Company believes are material, (2) were issued not less
than 180 days before the end of the Companys 2006
fiscal year, and (3) remain unresolved.
The Company maintains its principal corporate offices and a
brewery in Boston, Massachusetts, a brewery in Cincinnati, Ohio,
and two sales offices in California. 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
|
The Company, along with numerous other beverage alcohol
producers, has been named as a defendant in a number of class
action law suits in several states relating to advertising
practices and under-age consumption. Each complaint contains
substantially the same allegations that each defendant marketed
its products to under-age drinkers and seeks an injunction and
unspecified money damages on behalf of a class of parents and
guardians. The Company has been defending this litigation
vigorously. Two of the complaints have been withdrawn by the
plaintiffs and all of the other active complaints have been
dismissed with prejudice. However, the plaintiffs have appealed
each of those dismissals. The appeals are in their earliest
stages and it is not possible at this time to determine their
likely outcome or the impact on the Company.
16
In November 2004, Royal Insurance Company of America and its
affiliate (RICA), the Companys liability
insurer during most of the period covered by the
above-referenced complaints, filed a complaint in Ohio seeking
declaratory judgment that RICA owes no duty to defend or
indemnify the Company in the underlying actions filed in Ohio
and has subsequently filed a motion for summary judgment. In
July 2005, Royal Indemnity Company, successor in interest to
RICA and its affiliate (Royal), filed a complaint in
New York seeking declaratory judgment that Royal owes no duty to
defend or indemnify the Company in five underlying actions filed
in states other than Ohio, which was dismissed in November 2005.
In August 2005, the Massachusetts Bay Insurance Company
(MBIC), the Companys liability insurer for
parts of 2004 and 2005, filed a complaint in Massachusetts
seeking declaratory judgment that MBIC owes no duty to defend or
indemnify the Company in the underlying actions filed during the
policy period and that MBIC owes no duty to contribute to any
obligation of Royal to defend or indemnify the Company as to
those underlying actions. Royal joined in the MBIC action with
its own declaratory judgment claim that it owes no duty to
defend the Company in the five underlying actions filed in
states other than Ohio. In December 2006, the motion for summary
judgment was denied, resulting in declaration that the insurers
do have a duty to defend the Company with respect to the
underlying actions. Both RICA and MBIC have indicated that they
intend to appeal the judgment. The Company continues to believe
that it has meritorious defenses, that it is entitled to
insurance coverage of its defense costs with respect to the
underlying class actions, and that it is premature to litigate
indemnification issues for the class actions. However, the
Company is not able to predict at this time the ultimate outcome
of these insurance coverage disputes.
The Company is not a party to any other pending or threatened
litigation, the outcome of which would be expected to have a
material adverse effect upon its financial condition or the
results of its operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
In December 2006, the sole holder of the Companys
Class B Common Stock (i) approved the action of the
Companys Compensation Committee in setting the 2007 bonus
opportunities for the Companys CEO and (ii) approved
an amendment to the Companys Employee Equity Incentive
Plan (the EEIP)to increase the number of shares of
Class A Common Stock subject to the EEIP by
500,000 shares, change the methodology for determining fair
market value of the Companys Class A Common Stock and
grant to the Board of Directors the specific authority to waive
the participation eligibility requirements. There were no other
matters submitted to a vote of the holders of Class A or
Class B Common Stock of the Company during the fourth
quarter ended December 30, 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys Class A Common Stock is listed for
trading on the New York Stock Exchange. The Companys NYSE
symbol is SAM. For the fiscal periods indicated, the high and
low per share sales prices for the Class A Common Stock of
The Boston Beer Company, Inc. as reported on the New York Stock
Exchange-Composite Transaction Reporting System were as follows:
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
27.50
|
|
|
$
|
24.75
|
|
Second Quarter
|
|
$
|
29.45
|
|
|
$
|
25.55
|
|
Third Quarter
|
|
$
|
33.99
|
|
|
$
|
28.00
|
|
Fourth Quarter
|
|
$
|
37.50
|
|
|
$
|
30.80
|
|
17
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
24.55
|
|
|
$
|
20.71
|
|
Second Quarter
|
|
$
|
23.25
|
|
|
$
|
19.85
|
|
Third Quarter
|
|
$
|
24.08
|
|
|
$
|
21.00
|
|
Fourth Quarter
|
|
$
|
27.27
|
|
|
$
|
23.32
|
|
There were 15,485 holders of record of the Companys
Class A Common Stock as of March 9, 2007. Excluded in
the number of stockholders of record are stockholders who hold
shares in nominee or street name. The
closing price per share of the Companys Class A
Common Stock as of March 9, 2007 as reported under the New
York Stock Exchange-Composite Transaction Reporting System, was
$33.12.
Class A
Common Stock
At December 30, 2006, the Company had 22,700,000 authorized
shares of Class A Common Stock with a par value of $.01, of
which 9,992,347 were issued and outstanding. The Class A
Common Stock has no voting rights, except (1) as required
by law, (2) for the election of Class A Directors, and
(3) that the approval of the holders of the Class A
Common Stock is required for (a) future authorizations or
issuances of additional securities which have rights senior to
Class A Common Stock, (b) alterations of rights or
terms of the Class A or Class B Common Stock as set
forth in the Articles of Organization of the Company,
(c) certain other amendments of the Articles of
Organization of the Company, (d) certain mergers or
consolidations with, or acquisitions of, other entities, and
(e) sales or dispositions of any significant portion of the
Companys assets.
Class B
Common Stock
At December 30, 2006, the Company had 4,200,000 authorized
shares of Class B Common Stock with a par value of $.01, of
which 4,107,355 shares were issued and outstanding. The
Class B Common Stock has full voting rights, including the
right to (1) elect a majority of the members of the
Companys Board of Directors and (2) approve all
(a) amendments to the Companys Articles of
Organization, (b) mergers or consolidations with, or
acquisitions of, other entities, (c) sales or dispositions
of any significant portion of the Companys assets and
(d) equity-based and other executive compensation and other
significant corporate matters. The Companys Class B
Common Stock is not listed for trading. Each share of
Class B Common Stock is freely convertible into one share
of Class A Common Stock, upon request of any Class B
holder.
As of March 9, 2007, C. James Koch was the sole holder of
record of all the Companys issued and outstanding
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 if and when declared by the Board of Directors of
the Company out of funds legally available for payment thereof.
Since its inception, the Company has not paid dividends and does
not currently anticipate paying dividends on its Class A or
Class B Common Stock in the foreseeable future. It should
be further noted that under the terms of the Companys
July 1, 2002 credit agreement and further amended credit
agreement, dated August 4, 2004 and February 27, 2007,
with Bank of America, N.A.,
successor-in-merger
to Fleet National Bank, the Company is subject to certain
affirmative covenants, financial covenants and negative
covenants, including restricting the Companys ability to
pay dividends. The Company was in compliance with all covenants
as of December 30, 2006.
18
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Dec. 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 30
|
|
|
2005
|
|
|
Dec. 25
|
|
|
Dec. 27
|
|
|
Dec. 28,
|
|
|
|
2006
|
|
|
(53 Weeks)
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
315,250
|
|
|
$
|
263,255
|
|
|
$
|
239,680
|
|
|
$
|
230,103
|
|
|
$
|
238,335
|
|
Less excise taxes
|
|
|
29,819
|
|
|
|
24,951
|
|
|
|
22,472
|
|
|
|
22,158
|
|
|
|
22,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
285,431
|
|
|
|
238,304
|
|
|
|
217,208
|
|
|
|
207,945
|
|
|
|
215,355
|
|
Cost of goods sold
|
|
|
121,155
|
|
|
|
96,830
|
|
|
|
87,973
|
|
|
|
85,606
|
|
|
|
88,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
164,276
|
|
|
|
141,474
|
|
|
|
129,235
|
|
|
|
122,339
|
|
|
|
126,988
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, promotional and
selling expenses
|
|
|
113,669
|
|
|
|
100,870
|
|
|
|
94,913
|
|
|
|
91,841
|
|
|
|
100,734
|
|
General and administrative expenses
|
|
|
22,657
|
|
|
|
17,288
|
|
|
|
14,837
|
|
|
|
14,628
|
|
|
|
14,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
136,326
|
|
|
|
118,158
|
|
|
|
109,750
|
|
|
|
106,469
|
|
|
|
115,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,950
|
|
|
|
23,316
|
|
|
|
19,485
|
|
|
|
15,870
|
|
|
|
11,668
|
|
Other income, net
|
|
|
3,816
|
|
|
|
2,203
|
|
|
|
593
|
|
|
|
1,104
|
|
|
|
2,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
31,766
|
|
|
|
25,519
|
|
|
|
20,078
|
|
|
|
16,974
|
|
|
|
14,091
|
|
Provision for income taxes
|
|
|
13,574
|
|
|
|
9,960
|
|
|
|
7,576
|
|
|
|
6,416
|
|
|
|
5,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,192
|
|
|
$
|
15,559
|
|
|
$
|
12,502
|
|
|
$
|
10,558
|
|
|
$
|
8,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
1.31
|
|
|
$
|
1.10
|
|
|
$
|
0.89
|
|
|
$
|
0.72
|
|
|
$
|
0.53
|
|
Net income per share
diluted
|
|
$
|
1.27
|
|
|
$
|
1.07
|
|
|
$
|
0.86
|
|
|
$
|
0.70
|
|
|
$
|
0.52
|
|
Weighted average shares
outstanding basic
|
|
|
13,900
|
|
|
|
14,126
|
|
|
|
14,126
|
|
|
|
14,723
|
|
|
|
16,083
|
|
Weighted average shares
outstanding diluted
|
|
|
14,375
|
|
|
|
14,516
|
|
|
|
14,518
|
|
|
|
15,000
|
|
|
|
16,407
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
79,692
|
|
|
$
|
60,450
|
|
|
$
|
61,530
|
|
|
$
|
45,920
|
|
|
$
|
58,666
|
|
Total assets
|
|
$
|
154,475
|
|
|
$
|
119,054
|
|
|
$
|
107,462
|
|
|
$
|
87,354
|
|
|
$
|
106,806
|
|
Total long-term obligations
|
|
$
|
5,016
|
|
|
$
|
4,336
|
|
|
$
|
2,854
|
|
|
$
|
2,931
|
|
|
$
|
3,103
|
|
Total stockholders equity
|
|
$
|
108,589
|
|
|
$
|
85,979
|
|
|
$
|
78,370
|
|
|
$
|
62,524
|
|
|
$
|
78,832
|
|
Statistical Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barrels sold
|
|
|
1,612
|
|
|
|
1,364
|
|
|
|
1,267
|
|
|
|
1,236
|
|
|
|
1,286
|
|
Net revenue per barrel
|
|
$
|
177
|
|
|
$
|
175
|
|
|
$
|
171
|
|
|
$
|
168
|
|
|
$
|
167
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
In this
Form 10-K
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 Companys future plans of operations, business
strategy, results of operations, and financial position. These
statements are based on the Companys 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 future events
or circumstances. Forward-looking statements should not be
relied upon as a
19
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 above and the other information set forth in this
Form 10-K.
Introduction
and Outlook
The Boston Beer Company is engaged in the business of producing
and selling low alcohol beverages primarily in the domestic
market and, to a lesser extent, in selected international
markets. The Companys revenues are derived by selling its
products to distributors, who in turn sell the product through
to retailers and drinkers.
The Companys products compete in the Better
Beer category, which includes imported beers and craft
beers. This category has seen high single-digit compounded
annual growth over the past ten years. Defining factors for
Better Beer include superior quality, image and taste, supported
by appropriate pricing. The Company believes that the Better
Beer category is positioned to increase market share as drinkers
continue to trade up in taste and quality. In 2006, growth of
the Craft beer category was approximately 12%, and the Better
Beer category grew 11 to 12% while the total beer category grew
approximately 2%. The Better Beer category now comprises
approximately 18% of domestic beer consumption. The Company
believes that significant opportunity to gain market share
continues to exist for the Better Beer category.
In 2007, shipments and orders in-hand suggest that core
shipments for the first fiscal quarter of 2007 could be up
approximately 23% as compared to the same period in 2006. Actual
shipments may differ, however, and no inferences should be drawn
with respect to shipments in future periods. January and
preliminary February 2007 depletions are estimated to be up 23%
over 2006 benefiting from an extra selling day. While there is
no guarantee that these trends will continue, the Company is
encouraged by the strong start to 2007. The Companys 2007
plan calls for depletion growth in the low double digits, which
is slightly lower than the 2006 trends. The Companys
pricing plans include an overall 3% increase which the Company
believes is attainable given the current market conditions.
Based on current known information, the Company is facing
overall production costs increases of approximately 7 to 10%
over full year 2006, primarily reflecting increases in the cost
of malt caused by poor worldwide barley crops and potential
increases in the cost of glass driven by energy costs. These
cost increases will be somewhat offset by price increases, but
the Company anticipates that 2007 gross margin could be down
2 percentage points below full year 2006. The Company
believes that its 2007 effective tax rate will be approximately
40.5%. Based on these assumptions, 2007 earnings per diluted
share are expected to be between $1.42 and $1.55, absent any
significant change in currently planned levels of brand support.
Current plans are to increase brand support by $10.0 to
$15.0 million including freight expense to wholesalers. The
earnings per share range estimate does not include any
significant expenses associated with new brewery construction or
ownership. Through December 30, 2006, the Company had
capitalized $1.7 million of new brewery project costs that
would need to be expensed if a decision were made not to proceed
with the construction of a new brewery. The Companys
ability to achieve this type of earnings growth in 2007 is
dependent on its ability to achieve challenging targets for
volume, pricing and costs. The Company continues to pursue cost
savings initiatives and pricing opportunities and hopes to
preserve its economics to allow for continued support of its
brands with appropriate investment in order to grow volume and
earnings.
The Company continues to assess the viability of constructing a
brewery in the Northeast and has secured an option on a site in
Freetown, Massachusetts. The Company is working through a
thorough evaluation of this site including obtaining the
required permits, which the Company anticipates will be
completed by mid-year 2007. The Company continues to finalize
engineering for production capacity in excess of
1.0 million barrels of Samuel Adams brand products and
Twisted Tea. The Companys current best estimate is that
total project costs could be between $170 million and
$210 million, including land acquisition and development,
facility construction, equipment and other startup costs and the
Company believes financing for this to be available. The cost of
the project will ultimately depend on the final specifications.
The Company also continues to
20
evaluate other supply strategies to ensure that any decision to
build is the best decision for the Company, given the growth of
the Craft beer category and known and unknown risks in supply
chain alternatives.
The Company currently estimates total capital expenditures in
2007 to be between $8.0 and $12.0 million, approximately
half of which is for the purchases of kegs to support the
Companys on-premise depletions growth. This amount does
not include any further investment in the new brewery project or
any other major investments that result from the Companys
evaluation of its long-term production strategy. The
Companys capital investment would be significantly higher
if major brewery investment projects are initiated.
The Company continually evaluates the best way to utilize its
cash balances, and absent significant capital needs for its
production strategy, expects to continue the stock repurchase
program within the parameters authorized by the Board of
Directors. The Company continually evaluates the tradeoffs
between the stock repurchase program and alternative uses of its
cash, such as capital investment in a brewery facility,
dividends and acquisitions.
Results
of Operations
Boston Beers flagship product is Samuel Adams Boston
Lager®.
For purposes of this discussion, Boston Beers core
brands include all products sold under the Samuel
Adams®,
Sam
Adams®,
Twisted
Tea®
and
HardCore®
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.
The following table sets forth certain items included in the
Companys consolidated statements of income as a percentage
of net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Dec. 31 2005
|
|
|
|
|
|
|
Dec. 30 2006
|
|
|
(53 Weeks)
|
|
|
Dec. 25 2004
|
|
|
Barrels Sold (in thousands)
|
|
|
1,612
|
|
|
|
1,364
|
|
|
|
1,267
|
|
|
|
|
|
|
Percentage of Net
Revenue
|
Net revenue
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost of goods sold
|
|
|
42.4
|
|
|
|
40.6
|
|
|
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57.6
|
|
|
|
59.4
|
|
|
|
59.5
|
|
Advertising, promotional and
selling expenses
|
|
|
39.8
|
|
|
|
42.3
|
|
|
|
43.7
|
|
General and administrative expenses
|
|
|
7.9
|
|
|
|
7.3
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47.8
|
|
|
|
49.6
|
|
|
|
50.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.8
|
|
|
|
9.8
|
|
|
|
9.0
|
|
Interest income, net
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
0.4
|
|
Other (expense) income, net
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
11.1
|
|
|
|
10.7
|
|
|
|
9.3
|
|
Provision for income taxes
|
|
|
4.8
|
|
|
|
4.2
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.37
|
%
|
|
|
6.53
|
%
|
|
|
5.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 30, 2006 (52 weeks) Compared to Year
Ended December 31, 2005 (53 weeks)
Fiscal periods. The 2006 fiscal year
consisted of 52 weeks as compared to 53 weeks in
fiscal 2005 and 52 weeks in fiscal 2004.
Net revenue. Net revenue increased by
$47.1 million or 19.8% to $285.4 million for the year
ended December 30, 2006 as compared to $238.3 million
for the year ended December 31, 2005, due to an 18.2%
increase in shipment volume and a 1.3% increase in net revenue
per barrel.
21
Volume. Volume increased by .2 million
barrels or 18.2% to 1.6 million barrels for the year ended
December 30, 2006 as compared to 1.4 million barrels
for the year ended December 31, 2005. The increase in
volume was attributable to increases in the Samuel
Adams®
brand family and the Twisted
Tea®
brand family. The growth in the Samuel
Adams®
brand family was driven by double-digit growth rates in Samuel
Adams®
Seasonals and Brewmasters Collection and the Twisted
Tea®
brand family and single-digit growth rates in Sam Adams
Light®
and Samuel Adams Boston
Lager®.
Wholesaler inventory levels at the end of the fourth quarter of
2006 are estimated to be approximately 30,000 barrels
higher than the fourth quarter 2005, as a result of orders
initiated by wholesalers. The Company believes that the increase
in wholesaler inventory is necessary and appropriate to support
the growth of the business.
Shipments to date and orders in-hand suggest that core shipments
for the first fiscal quarter of 2007 could be up approximately
23% as compared to the same period in 2006. Actual shipments may
differ, however, and no inferences should be drawn with respect
to shipments in future periods.
Net selling price. The selling price per
barrel increased by approximately 1.3% to $177.07 per
barrel for the year ended December 30, 2006, as compared to
$174.71 for the year ended December 31, 2005. This increase
was primarily driven by price increases and a slight shift in
the package mix.
Significant changes in the package mix could have a material
effect on net revenue. The Company packages its core brands in
kegs and bottles. Assuming the same level of production, a shift
in the mix from kegs to bottles would effectively increase
revenue per barrel, as the price per equivalent barrel is higher
for bottles than for kegs. The percentage of bottles to total
shipments increased by 0.5% in core brands to 73.1% of total
shipments for the year ended December 30, 2006 as compared
to 2005.
In 2007, the Company is planning a 3% increase in net selling
price which it believes is attainable given the current market
conditions.
Gross profit. Gross profit was
$101.91 per barrel or 57.6% as a percentage of net revenue
for the year ended December 30, 2006, as compared to
$103.72 or 59.4% for the year ended December 31, 2005. The
decrease in gross profit per barrel is primarily due to increase
in cost of goods sold per barrel as compared to the prior year
partially offset by price increases.
Cost of goods sold increased to $75.16 per barrel or 42.4%
as a percentage of net revenue as compared to $70.99 per
barrel or 40.6% as a percentage of net revenue in the prior
year. The increase is primarily due to higher packaging material
and supply chain costs as compared to 2005, as well as shifts in
the product and package mix.
In 2007, the Company expects overall production costs increases
of approximately 7 to 10% over full year 2006, primarily
reflecting malt increases, caused by poor worldwide barley
crops, and potential glass cost increases driven by energy costs.
Based on current cost increase knowledge and preliminary pricing
expectations, 2007 gross margin as a percent of net revenue
could be down two percentage points below full year 2006 levels.
The Company includes freight charges related to the movement of
finished goods from manufacturing locations to distributor
locations in its advertising, promotional and selling expense
line item. As such, the Companys gross margins may not be
comparable to other entities that classify costs related to
distribution differently.
Advertising, promotional and
selling. Advertising, promotional and selling
expenses increased by $12.8 million or 12.7% to
$113.7 million for the year ended December 30, 2006,
as compared to the prior year. The increase is primarily due to
increases in freight costs, selling costs and promotional
expenditures. The Company will invest in advertising and
promotional campaigns that it believes are effective, but there
is no guarantee that such investment will generate sales growth.
The Company conducts certain advertising and promotional
activities in its wholesalers markets, and the wholesalers
make contributions to the Company for such efforts. These
amounts are included in the
22
Companys statement of operations as reductions to
advertising, promotional and selling expenses. Historically,
contributions from wholesalers for advertising and promotional
activities have amounted to between 2% and 4% of net sales. The
Company may adjust its promotional efforts in the
wholesalers markets if changes occur in these promotional
contribution arrangements, depending on the industry and market
conditions.
General and administrative. General and
administrative expenses increased by $5.4 million or 31.2%
to $22.7 million in 2006 as compared to 2005, primarily due
to increases in salaries and benefits (including stock based
compensation of $1.9 million due to performance-based stock
options and the adoption of Statement of Financial Accounting
Standard (SFAS) No. 123R, Share-Based
Payment, consulting, insurance and depreciation expense.
Stock-Based Compensation Expense. For
the year ended December 30, 2006, an aggregate of
$2.8 million in stock-based compensation expense is
included in advertising, promotional and selling expense and
general and administrative expenses. Effective January 1,
2006, the Company adopted SFAS No. 123R, which
generally requires recognition in financial statements of
share-based compensation costs based on fair value of the
awards. Prior to the adoption of SFAS No. 123R, the
Company accounted for share-based arrangements using the
intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations and
provided pro forma disclosures applying the fair value
recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based awards. For the
year ended December 30, 2006, the effect of the adoption of
SFAS No. 123R, as compared to the method under APB
Opinion No. 25, was a decrease in income before provision
for income taxes by $0.7 million and a decrease in net
income by $0.4 million, or $0.03 per basic and diluted
common share. Because the Company elected to use the
modified-prospective application as its transition method under
SFAS No. 123R, prior period financial statements were
not restated. Had the Company recognized compensation expense
under the fair value method during the year ended
December 31, 2005, such expense would have decreased income
before provision for income taxes by $1.6 million and net
income by $1.0 million, or $0.07 and $0.06 per basic
and diluted common share, respectively.
For stock options granted prior to January 1, 2006, fair
values were estimated on the date of grants using a
Black-Scholes option-pricing model. As permitted by
SFAS No. 123R, the Company elected to use a binomial
option-pricing model to estimate the fair values of stock
options granted on or after January 1, 2006. The Company
believes that the Black-Scholes option-pricing model is less
effective than the binomial option-pricing model in valuing
long-term options, as it assumes that volatility and interest
rates are constant over the life of the option. In addition, the
Company believes that the binomial option-pricing model more
accurately reflects the fair value of its stock awards, as it
takes into account historical employee exercise patterns based
on changes in the Companys stock price and other relevant
variables. The weighted-average fair value of stock options
granted during the year ended December 31, 2005 was
$9.35 per share, as calculated using the Black-Scholes
option-pricing model. The weighted-average fair value of stock
options granted during the year ended December 30, 2006 was
$8.43 per share, as calculated using a binomial
option-pricing model. Had the Company used the Black-Scholes
option-pricing model to value stock options granted during 2006,
the weighted-average fair value would have been $10.65 per
share and stock-based compensation expense for the year ended
December 30, 2006 would have been higher by
$0.2 million.
The Company uses the straight-line attribution method in
recognizing stock-based compensation expense for awards that
vest based on service conditions. For awards that vest subject
to performance conditions, compensation expense is recognized
ratably for each tranche of the award over the performance
period if it is probable that performance conditions will be
met. These methods are consistent with the methods the Company
used in recognizing stock-based compensation expense for
disclosure purposes under SFAS No. 123 prior to the
adoption of SFAS No. 123R. In June 2005, an option to
purchase 300,000 shares of the Companys common stock
was granted to the Companys chief executive officer. This
option vests based upon the achievement of performance targets.
During the fourth quarter of 2006, the Company was able to
estimate for the first time that the achievement of the
performance targets in relation to 180,000 shares of this
option is probable. Consequently, the Company recorded
$0.8 million in stock-based compensation expense related to
this stock option in the fourth quarter of 2006.
23
Interest income. Interest income
increased by $1.4 million to $3.1 million for the year
ended December 30, 2006 primarily due to higher interest
rates earned on increased average cash and investment balances
during 2006 as compared to 2005.
Other income (expense), net. Other
income increased by $0.3 million to income of
$0.7 million for the year ended December 30, 2006 as
compared to income of $0.4 million the prior year. The
increase is due primarily to disposals of equipment in 2005 and
certain equipment rental income in 2006.
Provision for income taxes. The
Companys effective income tax rate for the year ended
December 30, 2006 increased to 42.7% from the 2005 rate of
39.0% primarily due to an incremental accrual for state income
taxes of $1.0 million for fiscal years 2003 to 2006. The
Companys 2007 effective income tax rate is expected to be
approximately 40.5%.
Year
Ended December 31, 2005 (53 weeks) compared to Year
Ended December 25, 2004 (52 weeks)
Net revenue. Net revenue increased by
$21.1 million or 9.7% to $238.3 million for the year
ended December 31, 2005 as compared to $217.2 million
for the year ended December 25, 2004, due to a 7.7%
increase in shipment volume, as well as a 1.9% increase in net
revenue per barrel.
Volume. Volume increased by 0.1 million
barrels or 7.7% to 1.4 million barrels for the year ended
December 31, 2005 as compared to 1.3 million barrels
for the year ended December 25, 2004. The increase in
volume was attributable to increases in the Samuel Adams brand
family and the Twisted Tea brand family. The growth in the
Samuel Adams brand family was driven by growth in Samuel Adams
Seasonals and Brewmasters Collection and was offset
somewhat by declines in Sam Adams Light and Samuel Adams Boston
Lager.
Net selling price. The selling price per
barrel increased by approximately 1.9% to $174.71 per
barrel for the year ended December 30, 2005, as compared to
$171.43 for the year ended December 25, 2004. This increase
was primarily driven by price increases and a shift in the
package mix.
Significant changes in the package mix could have a material
effect on net revenue. The Company packages its core brands in
kegs and bottles. Assuming the same level of production, a shift
in the mix from kegs to bottles would effectively increase
revenue per barrel, as the price per equivalent barrel is higher
for bottles than for kegs. The percentage of bottles to total
shipments increased by 0.5% in core brands to 72.6% of total
shipments for the year ended December 30, 2005 as compared
to 2004.
Gross profit. Gross profit was
$103.72 per barrel or 59.4% as a percentage of net revenue
for the year ended December 30, 2005, as compared to
$102.00 or 59.5% for the year ended December 25, 2004. The
increase in gross profit per barrel is primarily due to price
increases offset by an increase in cost of goods sold per barrel
as compared to the prior year.
Cost of goods sold increased to $70.99 per barrel or 40.6%
as a percentage of net revenue as compared to $69.43 per
barrel or 40.5% as a percentage of net revenue in the prior
year. The increase is primarily due to higher packaging material
and production costs as compared to 2004, as well as shifts in
the product and package mix.
The Company includes freight charges related to the movement of
finished goods from manufacturing locations to distributor
locations in its advertising, promotional and selling expense
line item. As such, the Companys gross margins may not be
comparable to other entities that classify costs related to
distribution differently.
Advertising, promotional and
selling. Advertising, promotional and selling
expenses increased by $6.0 million or 6.3% to
$100.9 million for the year ended December 30, 2005,
as compared to the prior year. The increase is primarily due to
increases in freight costs, selling costs and promotional
expenditures.
General and administrative. General and
administrative expenses increased by $2.5 million or 16.5%
to $17.3 million in 2005 as compared to last year,
primarily due to higher wages, legal and consulting fees.
24
Interest income. Interest income
increased by $0.9 million to $1.8 million for the year
ended December 30, 2005 primarily due to higher interest
rates earned on increased average cash and investment balances
during 2005 as compared to 2004.
Other income (expense), net. Other
income increased by $0.7 million to income of
$0.4 million for the year ended December 30, 2005 as
compared to an expense of $0.2 million the prior year. The
increase is due primarily to a gain on the sale of equipment and
certain equipment rental income in 2005. The amount of other
expense in 2004 included a $0.2 million loss incurred on
the sale of
available-for-sale
securities.
Provision for income taxes. The
Companys effective tax rate increased to 39.0% in 2005
from 37.8% in 2004. The increase in the effective tax rate, as
compared to the prior year, is due to changes in the
apportionment of income among states.
Liquidity
and Capital Resources
Cash and short term investments increased to $82.4 million
as of December 30, 2006 from $63.9 million as of
December 31, 2005, primarily due to cash flows provided by
operating activities, partially offset by cash used in investing
activities to purchase property, plant and equipment.
Cash flows provided by operating activities were approximately
$29 million during the year ended December 30, 2006
and the prior year. The significant changes in the components of
cash provided by operating activities were a $2.6 million
increase in net income, a $1.6 million increase in net
proceeds of trading securities, a $11.9 million change in
accounts payable and accrued expenses offset by a
$12.2 million increase in accounts receivable, a
$2.3 million increase in inventory balances and a
$3.4 million due to changes in the excess tax benefit from
stock based arrangements. The purchase of trading securities in
2005 and 2006 includes high grade, interest bearing municipal
auction rate securities. The change in accounts payable and
accrued expenses was due to timing of payments, an increase in
current liabilities related to inventory purchases and marketing
to support the growth of the business as well as increases in
the bonus and tax accruals. The change in accounts receivable
was due to higher December 2006 shipment volume and the timing
of those shipments during the month compared to December 2005.
Average days sales outstanding at December 30, 2006
remained essentially unchanged compared to December 31,
2005. The increase in inventory was primarily due to taking
ownership of the liquid at our non-owned breweries to comply
with changes in the Alcohol and Tobacco Tax and Trade Bureau
regulations related to the production of alcohol.
The Company used $9.1 million for the purchase of capital
equipment during 2006 as compared to $14.0 million in 2005.
Capital expenditures during 2006 primarily consisted of
$2.9 million for the build out cost of the Companys
new corporate offices in Boston, $2.3 million for
machinery, equipment and land purchases related to the brewery
expansion project in Cincinnati, $1.7 million related to
the new brewery project in Freetown Massachusetts, and
$2.0 million of purchases of kegs and other equipment.
The Company continues to pursue its strategy of combining
brewery ownership with brewing at breweries owned by others. The
brewing arrangements with breweries owned by others have
historically allowed the Company to utilize the excess capacity,
providing the Company flexibility and quality and cost
advantages over its competitors while maintaining full control
over the brewing process. As the number of available breweries
declines, the risk of disruption increases, and the structure of
the brewery strategy of ownership versus brewing at facilities
owned by others changes. The Company continues to assess the
viability of constructing a brewery in the Northeast for
production capacity in excess of 1.0 million barrels of
Samuel
Adams®
brand products and Twisted
Tea®.
The Companys current best estimate is that total project
costs could be between $170 million and $210 million
and the Company believes financing for this to be available. The
cost of the project will ultimately depend on the final
specifications. The Company also continues to evaluate other
supply strategies to ensure that any decision to build is the
best decision for the Company, given the growth of the Craft
beer category and known and unknown risks in supply chain
alternatives.
Cash provided by financing activities was $1.7 million
during 2006, a change of $10.9 million from the
$9.3 million of cash used in financing activities in 2005.
The increase of cash provided by financing activities is
primarily due to a lower level of repurchases of the
Companys Class A Common Stock under its Stock
25
Repurchase Program, a $2.2 million increase in excess tax
benefits from stock-based compensation arrangements and a
$1.5 million increase in proceeds from exercise of stock
options. As of March 9, 2007, the Company has repurchased a
cumulative total of approximately 7.8 million shares of its
Class A Common Stock for an aggregate purchase price of
$92.6 million and had $7.4 million remaining on the
$100.0 million share buyback expenditure limit established
by the Companys Board of Directors. The Company
continually evaluates the best way to utilize its cash balances,
and absent significant capital needs for its production
strategy, expects to continue the stock repurchase program
within the parameters authorized by the Board of Directors.
During 2006, the Companys available cash was invested
primarily in high-grade tax-exempt and taxable money-market
funds, and high grade Municipal Auction Rate Securities with
geographic diversification and short-term maturities. The
Companys investment objectives are to preserve principal,
maintain liquidity, optimize return on investment and minimize
fees, transaction costs and expenses associated with the
selection and management of the investment securities.
With working capital of $79.7 million and $20 million
in unused credit facilities as of December 30, 2006, the
Company believes that its cash flows from operations and
existing resources should be sufficient to meet the
Companys short-term and long-term operating and capital
requirements, based on current projections for its total capital
expenditures in 2007. The current projections of between
$8.0 million and $12.0 million do not include the
major capital investments that could be required to transition
the Company to the 100% production capacity ownership under the
strategy currently being evaluated by the Company. If the
Company pursues this strategy, the Company possibly would seek
alternative forms of funding, including, but not limited to
long-term or asset-backed borrowing arrangements with lending
institutions. The Companys existing $20.0 million
credit facility expires on March 31, 2008. The Company was
not in violation of any of its covenants to the lender under the
credit facility and there were no amounts outstanding under the
credit facility as of the date of this filing.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make
significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. These
items are monitored and analyzed by management for changes in
facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in
the period in which they become known. We base our estimates on
historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ from our estimates if past experience or other
assumptions do not turn out to be substantially accurate.
Inventories
Inventories are stated at the lower of cost, determined on a
first-in,
first-out basis, or market. Our provisions for excess or expired
inventory are based on managements estimates of forecasted
usage of inventories. A significant change in the timing or
level of demand for certain products as compared to forecasted
amounts may result in recording additional provisions for excess
or expired inventory in the future. Provisions for excess
inventory are recorded as cost of goods sold.
The Company uses certain Noble hops grown in Germany and certain
English hops, for which it enters into purchase commitments to
ensure adequate numbers of farmers in its preferred growing
regions are planting and maintaining the proper quality hop
vines. The Company manages hop inventory and contract levels as
necessary to attempt to ensure that it has access to the best
hops each year. The current inventory and contract levels are
deemed adequate, based upon foreseeable future brewing
requirements. Actual hops usage and needs may differ materially
from managements estimates.
26
Promotional
Activities Accrual
Throughout the year, the Companys sales force engages in
numerous promotional activities. In connection with its
preparation of financial statements and other financial
reporting, management is required to make certain estimates and
assumptions regarding the amount and timing of expenditures
resulting from these activities. Actual expenditures incurred
could differ from managements estimates and assumptions.
Distributor
Promotional Discount Allowance
The Company enters into promotional discount agreements with its
various wholesalers for certain periods of time. The
agreed-upon
discount rates are applied to the wholesalers sales to
retailers in order to determine the total discounted amount. The
computation of the discount accrual requires that management
make certain estimates and assumptions that affect the reported
amounts of related assets at the date of the financial
statements and the reported amounts of revenue during the
reporting period. Actual promotional discounts owed and paid
could differ from the estimated accrual.
Stale
Beer Accrual
In certain circumstances and with the Companys approval,
the Company accepts and destroys stale beer that is returned by
distributors. For several years, the Company has credited
approximately fifty percent of the distributors cost of
the beer that has passed its expiration date for freshness when
it is returned to the Company or destroyed. The Company
establishes an accrual based upon both historical returns
expense, which is applied to an estimated lag time for receipt
of product, and the Companys knowledge of specific return
transactions. The actual stale beer expense incurred by the
Company could differ from the estimated accrual.
Allowance
for Deposits/First Fill Kegs
The Company purchases kegs from vendors and records these assets
in property, plant and equipment. When the kegs are shipped to
the distributors, a keg deposit is collected. This deposit is
refunded to the distributors upon return of the kegs to the
Company. The first fill allowance for deposits, a current
liability, is estimated based on historical information and this
computation requires that management make certain estimates and
assumptions that affect the reported amounts of keg deposit
liabilities at the date of the financial statements and the
reported amounts of revenue during the reporting period. Actual
keg deposit liability could differ from the estimates.
Stock-Based
Compensation
The Company accounts for stock-based compensation in accordance
with the fair value recognition provisions of
SFAS No. 123R. To calculate the fair value of options,
the Company uses the Black Scholes option-pricing
model for grants issued prior to January 1, 2006 and the
binomial option-pricing model for grants issued on or after
January 1, 2006. Both methods require the input of
subjective assumptions. These assumptions include estimating the
length of time employees will retain their vested stock options
before exercising them (expected term), the
estimated volatility of the Companys common stock price
over the expected term, the expected dividend rate and expected
exercise behavior. In addition, an estimated forfeiture rate is
applied in the recognition of the compensation charge.
Periodically, the Company grants performance-based stock
options, related to which it only recognizes compensation
expense if it is probable that performance targets will be met.
Consequently, at the end of each reporting period, the Company
estimates whether it is probable that performance targets will
be met. Changes in the subjective assumptions and estimates can
materially affect the amount of stock-based compensation expense
recognized on the consolidated statements of income.
Income
Taxes
The Company provides for deferred taxes using an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been recognized in the Companys
consolidated financial statements or tax returns, which result
in differences between the
27
book and tax basis of the Companys assets and liabilities
and carryforwards, such as tax credits and loss carryforwards.
The calculation of the Companys tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations in several different state tax jurisdictions. The
Company is periodically reviewed by tax authorities regarding
the amount of taxes due. These reviews include questions
regarding the timing and amount of deductions and the allocation
of income among various tax jurisdictions. In evaluating the
exposure associated with various filing positions, the Company
records estimated reserves for probable exposures. Based on the
Companys evaluation of current tax positions, the Company
believes it has appropriately accrued for probable exposures.
The Company includes its estimated reserves for probable
exposures in accrued expenses.
Business
Environment
The alcoholic beverage industry is highly regulated at the
federal, state and local levels. The Federal Treasury
Departments Alcohol and Tax and Trade Bureau
(TTB) and the Justice Departments Bureau of
Alcohol, Tobacco, Firearms and Explosives enforce laws under the
Federal Alcohol Administration Act. The TTB is responsible for
administering and enforcing excise tax laws that directly affect
the Companys results of operations. State and regulatory
authorities have the ability to suspend or revoke the
Companys licenses and permits or impose substantial fines
for violations. The Company has established strict policies,
procedures and guidelines in efforts to ensure compliance with
all applicable state and federal laws. However, the loss or
revocation of any existing license or permit could have a
material adverse effect on the Companys business, results
of operations, cash flows and financial position.
The Better Beer category is highly competitive due to the large
number of regional craft and specialty brewers and the brewers
of imported beers who distribute similar products that have
similar pricing and target drinkers. The Company believes that
its pricing is appropriate given the quality and reputation of
its core brands, while realizing that economic pricing pressures
may affect future pricing levels. Certain major domestic brewers
have also developed niche brands to compete within the Better
Beer category and have acquired interests in craft beers or
importation rights to foreign brands. Import brewers and major
domestic brewers are able to compete more aggressively than the
Company, as they have substantially greater resources, marketing
strength and distribution networks than the Company. The Company
anticipates craft beer competition increasing as craft brewers
have benefited from a couple of years of healthy growth and are
looking to maintain these trends. The Company also increasingly
competes with wine and spirits companies, some of which have
significantly greater resources than the Company. This
competitive environment may affect the Companys overall
performance within the Better Beer category. As the market
matures and the Better Beer category continues to consolidate,
the Company believes that companies that are well-positioned in
terms of brand equity, marketing and distribution will have
greater success than those who do not. With approximately 400
distributors nationwide and the Companys salesforce of
approximately 200 people, a commitment to maintaining brand
equity, and the quality of its beer, the Company believes it is
well positioned to compete in a maturing market.
The demand for the Companys products is also subject to
changes in drinkers tastes.
The
Potential Impact of Known Facts, Commitments, Events and
Uncertainties
Brewing
Capacity
The Company continues to pursue its strategy of combining
brewery ownership with brewing in breweries owned by others. The
brewing arrangements with breweries owned by others have
historically allowed the Company to utilize their excess
capacity, providing the Company flexibility and quality and cost
advantages over its competitors while maintaining full control
over the brewing process. As the number of available breweries
declines, the risk of disruption increases, and the dynamics of
the brewery strategy of ownership versus brewing at facilities
owned by others changes. The Company continues to assess the
viability of constructing a brewery in the Northeast for
production capacity in excess of 1.0 million barrels of
Samuel Adams brand products and Twisted Tea. The Companys
current best estimate is that total project costs could be
between $170 million and $210 million and the Company
believes financing for this to be available. The
28
cost of the project will ultimately depend on the final
specifications. This estimate could change based on the actual
production capacity and capability of the additional facilities.
The Company believes that an ownership strategy could produce
improvement in operating and freight costs. The Company
continually evaluates these factors and others in its evaluation
of the risks and benefits of ownership versus contracting.
The Company believes that it has secured sufficient alternatives
in the event that production at any of its brewing locations is
interrupted or discontinued; however, the Company may not be
able to maintain its current economics if such disruption were
to occur. Management is currently aware of some impending issues
at its breweries at which its beer is produced that could
preclude normal production. These include the Companys
continuing concerns about financial stability of the Rochester
Brewery. The Company is working with these breweries to attempt
to minimize any potential disruptions.
The Company continues to brew its Samuel Adams Boston
Lager®
at each of its brewing facilities, but at any particular time
may rely on only one supplier for its products other than Samuel
Adams Boston
Lager®.
The Company believes that it has sufficient capacity options
that would allow for a shift in production locations if
necessary, although it is unable to quantify any additional
costs, capital or operating, if any, that it might incur in
securing access to such capacity.
In the event of a labor dispute, governmental action, a sudden
closure of one of the breweries or other events that would
prevent either the Cincinnati Brewery or any of the breweries at
which its beer is being produced under contract from producing
the Companys beer, management believes that it would be
able to shift production between breweries so as to meet demand
for its beer. In such event, however, the Company could
experience temporary shortfalls in production
and/or
increased production or distribution costs, the combination of
which could have a material adverse effect on the Companys
results of operations, cash flows and financial position. A
simultaneous interruption at several of the Companys
production locations would likely cause significant disruption,
increased costs and potentially lost sales.
Hops
Purchase Commitments
The Company utilizes several varieties of hops in the production
of its products. To ensure adequate supplies of these varieties,
the Company enters into advance multi-year purchase commitments
based on forecasted future hops requirements, among other
factors.
During 2006, the Company entered into several hops future
contracts in the normal course of business. The total value of
the contracts entered into as of December 30, 2006, which
are denominated in Euros and British Pounds Sterling, was
$24.4 million. The Company has no forward exchange
contracts in place as of December 30, 2006 and currently
intends to purchase future hops using the exchange rate at the
time of purchase. The contract agreements were deemed necessary
in order to bring hops inventory levels and purchase commitments
into balance with the Companys current brewing volume and
hops usage forecasts. In addition, these new contracts enabled
the Company to secure its position for future supply with hops
vendors in the face of some competitive buying activity.
The Companys accounting policy for hops inventory and
purchase commitments is to recognize a loss by establishing a
reserve to the extent inventory levels and commitments exceed
forecasted needs as well as aged hops as determined by the
Companys brewing department. The computation of the excess
inventory required management to make certain assumptions
regarding future sales growth, product mix, cancellation costs
and supply, among others. Actual results may differ materially
from managements estimates. The Company continues to
manage inventory levels and purchase commitments in an effort to
maximize utilization of hops on hand and hops under commitment.
The current inventory levels are deemed adequate, based upon
foreseeable future brewing requirements and expectations for
average hop crops. However, changes in managements
assumptions regarding future sales growth, product mix, and hops
market conditions could result in future material losses.
29
Contractual
Obligations
The following table presents contractual obligations as of
December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Advertising Commitments
|
|
$
|
15,284
|
|
|
$
|
15,026
|
|
|
$
|
258
|
|
|
$
|
|
|
|
$
|
|
|
Hops Purchase Commitments
|
|
|
24,423
|
|
|
|
10,022
|
|
|
|
12,079
|
|
|
|
2,322
|
|
|
|
|
|
Operating Leases
|
|
|
7,134
|
|
|
|
691
|
|
|
|
1,442
|
|
|
|
1,235
|
|
|
|
3,766
|
|
Other
|
|
|
1,746
|
|
|
|
1,231
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
48,587
|
|
|
$
|
26,970
|
|
|
$
|
14,294
|
|
|
$
|
3,557
|
|
|
$
|
3,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys outstanding purchase commitments related to
advertising contracts of approximately $15.3 million at
December 30, 2006 reflect amounts that are non-cancelable.
The Company has entered into contracts for the supply of a
portion of its hops requirements. These purchase contracts,
which extend through crop year 2010, specify both the quantities
and prices, denominated in Euros and British Pounds Sterling, to
which the Company is committed. Amounts included in the above
table are in United States dollars using the exchange rates as
of December 30, 2006. The Company does not have any forward
currency contracts in place and currently intends to purchase
the committed hops in Euros using the exchange rate at the time
of purchase. Purchases under hops contracts for the year ended
December 30, 2006 were approximately $3.2 million.
In the normal course of business, the Company enters into
various agreements with brewing companies related to the
production of its beers. Under these agreements, the Company is
required to repurchase from the supplier all unused raw
materials purchased by the supplier specifically for its product
at the suppliers cost upon termination of these production
arrangements. Also, in some cases the Company is obligated to
meet annual volume requirements under its agreements with other
breweries. During 2006, the Company met all existing minimum
volume requirements in accordance with its agreements, with the
exception of one brewery, where the fees associated with this
minimum volume requirement were not significant and have been
fully expensed in the Companys financial statements at
December 30, 2006.
The Companys agreements with breweries where its beer is
brewed periodically require the Company to purchase certain
fixed assets in support of brewery operations. At
December 30, 2006, the Company has no commitments for fixed
asset purchases under existing contracts during the next twelve
months, but this amount could vary significantly should there be
a change in the Companys brewing strategy or changes to
existing production agreements or should the Company enter new
production relationships or introduce new products.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes, which
is an interpretation of SFAS No. 109, Accounting for
Income Taxes. This interpretation clarifies the accounting and
financial statement reporting for uncertainty in income taxes
recognized by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. The Company is required to adopt
FIN No. 48 in the first quarter of 2007. The adoption
of FIN No. 48 is expected to result in a decrease to
the Companys current liabilities and an increase to the
Companys long-term liabilities. The Company does not
expect that the adoption of FIN No. 48 will have a
material impact on its consolidated financial position,
operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The Company is
required to adopt the provisions of SFAS No. 157 in
the fiscal first quarter of 2008.
30
The Company believes that the adoption of SFAS No. 157
will not have a material effect on its consolidated financial
position, operations and cash flows.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106 and 132(R), which applies to all plan
sponsors who offer defined benefit postretirement plans.
SFAS No. 158 requires recognition of the funded status
of a defined benefit postretirement plan in the statement of
financial position and expanded disclosures in the notes to
financial statements. The Company adopted this provision for the
year ended December 30, 2006 and the adoption did not have
a material impact on its consolidated financial position. In
addition, SFAS No. 158 requires measurement of plan
assets and benefit obligations as of the date of the plan
sponsors fiscal year end. The Company is required to adopt
the measurement provision of SFAS No. 158 for its
fiscal year ending December 27, 2008. The Company is in the
process of evaluating the impact of the measurement provision of
SFAS No. 158 on its 2008 consolidated financial
position, operations and cash flows.
Other
Risks and Uncertainties
Changes in general economic conditions could result in numerous
events that may have a material adverse effect on the
Companys results of operations, cash flows and financial
position. Numerous factors that could adversely affect the
Companys operating income, cash flows and financial
position, include, but are not limited to, (1) a slowing of
the growth rate of the Better Beer category;
(2) share-of-market
erosion of Samuel
Adams®
brands, Sam Adams
Light®
and Twisted
Tea®
brands due to increased competition; (3) an unexpected
decline in the brewing capacity available to the Company;
(4) increased advertising and promotional expenditures that
are not followed by higher sales volume; (5) higher than
planned operating costs that result from a change in the
Companys brewing strategy towards full ownership of its
brewing capacity which would involve significant capital
investment; (6) higher than planned costs of operating the
Cincinnati Brewery; (7) higher than planned costs of
operating under contract arrangement at non-Company owned
breweries; (8) increased freight costs resulting from
changes in legislation, changes in fuel costs, or changes in the
locations of available breweries; (9) changes in economics
and feasibility of using recycled glass; (10) increases in
raw material or packaging costs which cannot be passed along
through increased prices; (11) market conditions affecting
the Companys ability to buy or sell hops or cancel excess
hops commitments; (12) poor weather conditions, resulting
in an inadequate supply of agricultural raw materials;
(13) adverse fluctuations in foreign currency exchange
rates; (14) ability to obtain timely and cost effective
delivery of ingredients or packaging materials from its
suppliers; (15) changes in control or ownership of the
current distribution network or competition from other brands
carried by the Companys distributors which could lead to
less support of the Companys products; (16) increases
in the costs of distribution; and (17) increases in the
costs associated with packaging materials; (18) increases
in federal
and/or state
excise tax; (19) introduction of new products by
competitors that compete directly with the Companys
products, or that diminish the importance of the Companys
products to the retailers or distributors; (20) further
limitations on advertising; (21) changes in drinker tastes,
including increased competition from wine and spirits companies.
Certain of these factors, as well as general risk factors
affecting the Company, are discussed in greater detail in this
Annual Report on
Form 10-K,
including Item 1A Risk Factors.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
In the ordinary course of business, the Company is exposed to
the impact of fluctuations in foreign exchange rates. The
Company does not enter into derivatives or other market risk
sensitive instruments for the purpose of speculation or for
trading purposes. Market risk sensitive instruments include
derivative financial instruments, other financial instruments,
and derivative commodity instruments. Such instruments that are
exposed to rate or price changes should be included in the
sensitivity analysis disclosure. The Company does not enter into
derivative commodity instruments (futures, forwards, swaps,
options, etc.).
31
The Company enters into hops purchase contracts in foreign
denominated currencies, as described above under Hops
Purchase Commitments. The purchase price changes as
foreign exchange rates fluctuate. Currently, it is not the
Companys policy to hedge against foreign currency
fluctuations.
Sensitivity
Analysis
The Company applies a sensitivity analysis to reflect the impact
of a 10% hypothetical adverse change in the foreign currency
rates. A potential adverse fluctuation in foreign currency
exchange rates could negatively impact future cash flows by
approximately $2.2 million as of December 30, 2006.
There are many economic factors that can affect volatility in
foreign exchange rates. As such factors cannot be predicted, the
actual impact on earnings due to an adverse change in the
respective rates could vary substantially from the amounts
calculated above.
As of December 30, 2006, the Company had no amounts
outstanding under its current $20.0 million line of credit.
32
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
The Boston Beer Company, Inc.
We have audited the accompanying consolidated balance sheets of
The Boston Beer Company, Inc. and subsidiaries as of
December 30, 2006 and December 31, 2005, and the
related consolidated statements of income, stockholders
equity, and cash flows for each of the two years in the period
ended December 30, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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. and
subsidiaries at December 30, 2006 and December 31,
2005, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended
December 30, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note B to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, and effective December 30,
2006, the Company adopted Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106 and 132(R).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of The Boston Beer Company Inc.s internal
control over financial reporting as of December 30, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 9, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 9, 2007
33
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of The Boston Beer Company, Inc.:
We have audited the accompanying consolidated statements of
income, stockholders equity and cash flows of The Boston
Beer Company, Inc. and subsidiaries (the Company)
for the year ended December 25, 2004. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present
fairly, in all material respects, the results of the operations
and cash flows of the Company for the year ended
December 25, 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 11, 2005
34
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,147
|
|
|
$
|
41,516
|
|
Short-term investments
|
|
|
19,223
|
|
|
|
22,425
|
|
Accounts receivable, net of
allowance for doubtful accounts of $451 and $116 as of
December 30, 2006 and December 31, 2005, respectively
|
|
|
17,770
|
|
|
|
9,534
|
|
Inventories
|
|
|
17,034
|
|
|
|
13,649
|
|
Prepaid expenses and other assets
|
|
|
2,721
|
|
|
|
1,236
|
|
Deferred income taxes
|
|
|
667
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
120,562
|
|
|
|
89,189
|
|
Property, plant and equipment, net
|
|
|
30,699
|
|
|
|
26,525
|
|
Other assets
|
|
|
1,837
|
|
|
|
1,963
|
|
Goodwill
|
|
|
1,377
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
154,475
|
|
|
$
|
119,054
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
17,942
|
|
|
$
|
11,378
|
|
Accrued expenses
|
|
|
22,928
|
|
|
|
17,361
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,870
|
|
|
|
28,739
|
|
Deferred income taxes
|
|
|
1,494
|
|
|
|
2,390
|
|
Other liabilities
|
|
|
3,522
|
|
|
|
1,946
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
45,886
|
|
|
|
33,075
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock,
$.01 par value; 22,700,000 shares authorized;
9,992,347 and 9,814,457 shares issued and outstanding as of
December 30, 2006 and December 31, 2005, respectively
|
|
|
100
|
|
|
|
98
|
|
Class B Common Stock,
$.01 par value; 4,200,000 shares authorized;
4,107,355 shares issued and outstanding
|
|
|
41
|
|
|
|
41
|
|
Additional paid-in capital
|
|
|
80,158
|
|
|
|
70,808
|
|
Unearned compensation
|
|
|
|
|
|
|
(353
|
)
|
Accumulated other comprehensive
loss, net of tax
|
|
|
(197
|
)
|
|
|
(196
|
)
|
Retained earnings
|
|
|
28,487
|
|
|
|
15,581
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
108,589
|
|
|
|
85,979
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
154,475
|
|
|
$
|
119,054
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
35
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
December 30,
|
|
|
2005
|
|
|
December 25,
|
|
|
|
2006
|
|
|
(53 weeks)
|
|
|
2004
|
|
|
Revenue
|
|
$
|
315,250
|
|
|
$
|
263,255
|
|
|
$
|
239,680
|
|
Less excise taxes
|
|
|
29,819
|
|
|
|
24,951
|
|
|
|
22,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
285,431
|
|
|
|
238,304
|
|
|
|
217,208
|
|
Cost of goods sold
|
|
|
121,155
|
|
|
|
96,830
|
|
|
|
87,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
164,276
|
|
|
|
141,474
|
|
|
|
129,235
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, promotional and
selling expenses
|
|
|
113,669
|
|
|
|
100,870
|
|
|
|
94,913
|
|
General and administrative expenses
|
|
|
22,657
|
|
|
|
17,288
|
|
|
|
14,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
136,326
|
|
|
|
118,158
|
|
|
|
109,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
27,950
|
|
|
|
23,316
|
|
|
|
19,485
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,143
|
|
|
|
1,761
|
|
|
|
840
|
|
Other income (expense), net
|
|
|
673
|
|
|
|
442
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
3,816
|
|
|
|
2,203
|
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
31,766
|
|
|
|
25,519
|
|
|
|
20,078
|
|
Provision for income taxes
|
|
|
13,574
|
|
|
|
9,960
|
|
|
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,192
|
|
|
$
|
15,559
|
|
|
$
|
12,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
1.31
|
|
|
$
|
1.10
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share diluted
|
|
$
|
1.27
|
|
|
$
|
1.07
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares basic
|
|
|
13,900
|
|
|
|
14,126
|
|
|
|
14,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares diluted
|
|
|
14,375
|
|
|
|
14,516
|
|
|
|
14,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class A
|
|
|
Class B
|
|
|
Class B
|
|
|
|
|
|
Additional
|
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Capital
|
|
|
Balance at December 27, 2003
|
|
|
16,945
|
|
|
$
|
169
|
|
|
|
4,107
|
|
|
$
|
41
|
|
|
|
(7,102
|
)
|
|
$
|
62,517
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, including
tax benefit of $915
|
|
|
223
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,210
|
|
Net issuance of investment shares
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock retirement
|
|
|
(7,102
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
7,102
|
|
|
|
|
|
Minimum pension liability, net of
tax of $23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss from
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2004 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2004
|
|
|
10,089
|
|
|
|
101
|
|
|
|
4,107
|
|
|
|
41
|
|
|
|
|
|
|
|
66,157
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, including
tax benefit of $1,172
|
|
|
249
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,122
|
|
Net issuance of investment shares
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class A common
stock
|
|
|
(548
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability, net of
tax of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2005 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
9,814
|
|
|
|
98
|
|
|
|
4,107
|
|
|
|
41
|
|
|
|
|
|
|
|
70,808
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, including
tax benefit of $2,240
|
|
|
334
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,737
|
|
Net issuance of investment shares
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
Net issuance of restricted stock
awards
|
|
|
30
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Elimination of unearned
compensation upon adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,751
|
|
Repurchase of Class A common
stock
|
|
|
(199
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans liability
adjustment, net of tax of $3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2006 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
9,992
|
|
|
$
|
100
|
|
|
|
4,107
|
|
|
$
|
41
|
|
|
|
|
|
|
$
|
80,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
37
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Unearned
|
|
|
Income (Loss),
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Compensation
|
|
|
Net of Tax
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Income
|
|
|
Balance at December 27, 2003
|
|
$
|
(229
|
)
|
|
$
|
45
|
|
|
$
|
74,758
|
|
|
$
|
(74,777
|
)
|
|
$
|
62,524
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
12,502
|
|
|
|
|
|
|
|
12,502
|
|
|
$
|
12,502
|
|
Stock options exercised, including
tax benefit of $915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,213
|
|
|
|
|
|
Net issuance of investment shares
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
Treasury stock retirement
|
|
|
|
|
|
|
|
|
|
|
(74,706
|
)
|
|
|
74,777
|
|
|
|
|
|
|
|
|
|
Minimum pension liability, net of
tax of $23
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
(107
|
)
|
Unrealized loss from
available-for-sale
securities
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2004 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2004
|
|
|
(280
|
)
|
|
|
(203
|
)
|
|
|
12,554
|
|
|
|
|
|
|
|
78,370
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
15,559
|
|
|
|
|
|
|
|
15,559
|
|
|
$
|
15,559
|
|
Stock options exercised, including
tax benefit of $1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,124
|
|
|
|
|
|
Net issuance of investment shares
|
|
|
(219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
Repurchase of Class A common
stock
|
|
|
|
|
|
|
|
|
|
|
(12,532
|
)
|
|
|
|
|
|
|
(12,537
|
)
|
|
|
|
|
Minimum pension liability, net of
tax of $2
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2005 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
(353
|
)
|
|
|
(196
|
)
|
|
|
15,581
|
|
|
|
|
|
|
|
85,979
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
18,192
|
|
|
|
|
|
|
|
18,192
|
|
|
$
|
18,192
|
|
Stock options exercised, including
tax benefit of $2,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,740
|
|
|
|
|
|
Net issuance of investment shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
Net issuance of restricted stock
awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of unearned
compensation upon adoption of SFAS No. 123R
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,751
|
|
|
|
|
|
Repurchase of Class A common
stock
|
|
|
|
|
|
|
|
|
|
|
(5,286
|
)
|
|
|
|
|
|
|
(5,288
|
)
|
|
|
|
|
Defined benefit plans liability
adjustment, net of tax of $3
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fiscal 2006 comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
$
|
|
|
|
$
|
(197
|
)
|
|
$
|
28,487
|
|
|
$
|
|
|
|
$
|
108,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
38
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
December 30,
|
|
|
2005
|
|
|
December 25,
|
|
|
|
2006
|
|
|
(53 Weeks)
|
|
|
2004
|
|
|
Cash flows provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,192
|
|
|
$
|
15,559
|
|
|
$
|
12,502
|
|
Adjustments to reconcile net
income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,991
|
|
|
|
4,521
|
|
|
|
5,025
|
|
Realized loss on sale of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
229
|
|
(Gain) loss on disposal of
property, plant and equipment
|
|
|
(8
|
)
|
|
|
162
|
|
|
|
(4
|
)
|
Bad debt expense (recovery)
|
|
|
365
|
|
|
|
(255
|
)
|
|
|
147
|
|
Stock-based compensation expense
|
|
|
2,751
|
|
|
|
146
|
|
|
|
121
|
|
Excess tax benefit from
stock-based compensation arrangements
|
|
|
(2,240
|
)
|
|
|
|
|
|
|
|
|
Tax benefit from stock options
exercised
|
|
|
|
|
|
|
1,172
|
|
|
|
915
|
|
Deferred income taxes
|
|
|
(731
|
)
|
|
|
952
|
|
|
|
(449
|
)
|
Purchases of trading securities
|
|
|
(36,577
|
)
|
|
|
(9,075
|
)
|
|
|
(32,400
|
)
|
Proceeds from sale of trading
securities
|
|
|
39,779
|
|
|
|
10,650
|
|
|
|
8,400
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,601
|
)
|
|
|
3,547
|
|
|
|
(2,541
|
)
|
Inventories
|
|
|
(3,385
|
)
|
|
|
(1,088
|
)
|
|
|
(2,671
|
)
|
Prepaid expenses and other assets
|
|
|
(1,506
|
)
|
|
|
(1,133
|
)
|
|
|
1,692
|
|
Accounts payable
|
|
|
6,564
|
|
|
|
1,634
|
|
|
|
3,349
|
|
Accrued expenses
|
|
|
7,807
|
|
|
|
867
|
|
|
|
990
|
|
Other liabilities
|
|
|
1,576
|
|
|
|
1,182
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
28,977
|
|
|
|
28,841
|
|
|
|
(4,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used
in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(9,056
|
)
|
|
|
(13,973
|
)
|
|
|
(4,559
|
)
|
Proceeds from disposal of
property, plant and equipment
|
|
|
42
|
|
|
|
129
|
|
|
|
4
|
|
Purchases of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
(6,255
|
)
|
Proceeds from sale of
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
20,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(9,014
|
)
|
|
|
(13,844
|
)
|
|
|
10,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used
in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Class A Common
Stock
|
|
|
(5,288
|
)
|
|
|
(12,537
|
)
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
4,500
|
|
|
|
2,952
|
|
|
|
2,298
|
|
Excess tax benefit from
stock-based compensation arrangements
|
|
|
2,240
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of
investment shares
|
|
|
216
|
|
|
|
310
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
1,668
|
|
|
|
(9,275
|
)
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
21,631
|
|
|
|
5,722
|
|
|
|
8,002
|
|
Cash and cash equivalents at
beginning of year
|
|
|
41,516
|
|
|
|
35,794
|
|
|
|
27,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
63,147
|
|
|
$
|
41,516
|
|
|
$
|
35,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
10,632
|
|
|
$
|
7,901
|
|
|
$
|
5,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
39
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
December 30,
2006
|
|
A.
|
Organization
and Basis of Presentation
|
The Boston Beer Company, Inc. and subsidiaries (the
Company) are engaged in the business of selling low
alcohol beverages throughout the United States and in selected
international markets, under the trade names The Boston
Beer Company, Twisted Tea Brewing Company and
HardCore Cider Company. The Companys Samuel
Adams®
beers and Sam Adams
Light®are
produced and sold under the trade name, The Boston Beer Company.
|
|
B.
|
Summary
of Significant Accounting Policies
|
Fiscal
Year
The Companys fiscal year is a fifty-two or fifty-three
week period ending on the last Saturday in December. The fiscal
periods of 2006 and 2004 consist of fifty-two weeks and the
fiscal period of 2005 consists of fifty-three weeks.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are
wholly-owned. All intercompany transactions and balances have
been eliminated in consolidation.
Use of
Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.
Reclassifications
In 2005, certain amounts in the accompanying 2004 financial
statements were reclassified to permit comparison with the 2005
presentations. Specifically, the Company has reclassified the
cash flows of activities related to its trading securities from
cash flows from investing activities to cash flows from
operating activities. The net impact was to increase cash flows
from investing activities and decrease cash flows from operating
activities by $24.0 million in 2004.
Cash
and Cash Equivalents
Cash and cash equivalents at December 30, 2006 and
December 31, 2005 included cash on-hand, as well as
tax-exempt and taxable money market instruments that are highly
liquid investments.
Short-Term
Investments
The Company classifies its investments depending on the
Companys intent and the nature of the investment. The
Companys short-term investments at December 30, 2006
and December 31, 2005 consist of trading securities, which
are recorded at fair market value, and whose change in fair
market value is included in earnings. Short-term investments at
December 30, 2006 and December 31, 2005 consisted of
municipal auction rate securities. During a portion of 2004, the
Company held
available-for-sale
securities which were recorded at fair market value, with the
change in fair market value during the period excluded from
earnings and recorded, net of tax, as a component of accumulated
other comprehensive loss.
40
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Allowance
for Doubtful Accounts
The Company records an allowance for doubtful accounts that is
based on historical trends, customer knowledge, any known
disputes, and the aging of the accounts receivable balances
combined with managements estimate of future potential
recoverability, based upon managements knowledge of
customers financial condition.
Inventories
Inventories consist of raw materials, work in process and
finished goods. Raw materials, which principally consist of
hops, other brewing materials and packaging, are stated at the
lower of cost, determined on the
first-in,
first-out basis, or market. The cost elements of work in process
and finished goods inventory consist of raw materials, direct
labor and manufacturing overhead. Packaging design costs are
expensed as incurred.
The provisions for excess or expired inventory are based on
managements estimates of forecasted usage of inventories.
A significant change in the timing or level of demand for
certain products as compared to forecasted amounts may result in
recording additional provisions for excess or expired inventory
in the future. Provisions for excess inventory are recorded as
cost of goods sold.
The computation of the excess hops inventory requires management
to make certain assumptions regarding future sales growth,
product mix, cancellation costs, and supply, among others. The
Company manages inventory levels and purchase commitments in an
effort to maximize utilization of hops on hand and hops under
commitment. The Companys accounting policy for hops
inventory and purchase commitments is to recognize a loss by
establishing a reserve to the extent inventory levels and
commitments exceed forecasted needs as determined by the
Companys brewmasters. The Company has not recorded any
loss on purchase commitments in the fiscal years 2006, 2005 and
2004.
Property,
Plant and Equipment
Property, plant, and equipment are stated at cost. Expenditures
for repairs and maintenance are expensed as incurred. Major
renewals and betterments that extend the life of the property
are capitalized. Some of the Companys equipment is used by
other brewing companies to produce the Companys products
under brewing service arrangements (Note I). Depreciation
is computed using the straight-line method based upon the
estimated useful lives of the underlying assets as follows:
|
|
|
Kegs
|
|
5 years
|
Machinery and plant equipment
|
|
3 to 20 years, or the term of
the production agreement, whichever is shorter
|
Office equipment and furniture
|
|
3 to 5 years
|
Leasehold improvements
|
|
Lesser of the remaining term of
the lease or estimated useful life of the asset
|
Building
|
|
15 to 20 years
|
Goodwill
Goodwill represents the excess of the purchase price of the
Company-owned Cincinnati Brewery over the fair value of the net
assets acquired upon the completion of the acquisition in
November 2000 and relates to the Companys single operating
unit. The Company does not amortize goodwill, but performs an
annual impairment analysis of goodwill by comparing the carrying
value and the fair value of its one reporting unit at the end of
the third quarter of every fiscal year. The Company has
concluded that its goodwill was not impaired as of
December 30, 2006 and December 31, 2005.
41
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Lived
Assets
Long-lived assets are recorded at cost. The Company evaluates
potential impairment of long-lived assets on a periodic basis.
If indicators of impairment are present with respect to
long-lived assets used in operations and undiscounted future
cash flows are not expected to be sufficient to recover the
assets carrying amount, an impairment loss representing
the excess of the fair value of the asset over its carrying
value would be charged to expense in the period the impairment
is identified.
Income
Taxes
The Company provides for deferred taxes using an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been recognized in the Companys
consolidated financial statements or tax returns. This results
in differences between the book and tax basis of the
Companys assets and liabilities and carryforwards, such as
tax credits and loss carryforwards. In estimating future tax
consequences, all expected future events, other than enactment
of changes in the tax laws or rates, are generally considered.
Valuation allowances are provided to the extent deemed necessary
when realization of deferred tax assets appears unlikely.
The Company records estimated income tax reserves as it deems
necessary in accordance with Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies. The
Company includes its reserves for probable and estimated income
tax exposures in accrued expenses (Note H).
Revenue
Recognition
The Company recognizes revenue on product sales at the time when
the product is shipped and the following conditions exist:
persuasive evidence of an arrangement exists, title has passed
to the customer according to the shipping terms, the price is
fixed and determinable, and collection of the sales proceeds is
reasonably assured. Further, the Company generally accepts and
destroys beer that has passed its expiration date for freshness
and is returned by distributors. Credits given to distributors
for these returns represent approximately fifty percent of the
distributors cost of the beer. Consequently, the Company
records an allowance for estimated returns, based on historical
experience and current trends.
Cost
of Goods Sold
The following expenses are included in cost of goods sold: raw
material costs, packaging costs, costs related to deposit
activity, purchasing and receiving costs, manufacturing labor
and overhead, brewing and processing costs, inspection costs
relating to quality control, inbound freight charges,
depreciation expense related to manufacturing equipment and
warehousing costs, which include rent, labor and overhead costs.
Shipping
Costs
Costs incurred for the shipping of products to customers are
included in advertising, promotional and selling expenses in the
accompanying consolidated statements of income. The Company
incurred shipping costs of $22.2 million,
$17.2 million and $13.7 million in fiscal years 2006,
2005 and 2004, respectively.
Advertising
and Sales Promotions
The following expenses are included in advertising, promotional
and selling expenses in the accompanying consolidated statements
of income: media advertising costs, sales and marketing
expenses, salary and benefit expenses for the sales and sales
support workforce, promotional activity expenses, freight
charges related to shipments of finished goods from
manufacturing locations to distributor locations, and point of
sale items.
42
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company reimburses its wholesalers and retailers for
promotional discounts, samples and certain advertising and
marketing activities used in the promotion of the Companys
products. The reimbursements for discounts to wholesalers are
recorded as reductions to net revenue. The Company has sales
incentive arrangements with its wholesalers based upon
performance of certain marketing and advertising activities by
the wholesalers. Depending on applicable state laws and
regulations, these activities promoting the Companys
products may include, but are not limited to, the following:
point-of-sale
merchandise placement, product displays and promotional programs
at retail locations. The costs incurred for these sales
incentive arrangements and advertising and promotional programs
are included in advertising, promotional and selling expenses
during the period in which they are incurred. Total advertising
and sales promotional expenditures of $58.5 million,
$55.7 million and $56.5 million were included in
advertising, promotional and selling expenses in the
accompanying consolidated statements of income for fiscal years
2006, 2005 and 2004, respectively. Of these amounts,
$5.6 million, $4.2 million and $4.4 million
related to sales incentives, samples and other promotional
discounts and $28.8 million, $26.3 million and
$27.7 million related to advertising costs for fiscal years
2006, 2005 and 2004, respectively.
The Company conducts certain advertising and promotional
activities in its wholesalers markets and the wholesalers
make contributions to the Company for such efforts.
Reimbursements from wholesalers for advertising and promotional
activities are recorded as reductions to advertising,
promotional and selling expenses.
General
and Administrative Expenses
The following expenses are included in general and
administrative expenses in the accompanying consolidated
statements of income: general and administrative salary and
benefit expenses, insurance costs, professional service fees,
rent and utility expenses, meals, travel and entertainment
expenses for general and administrative employees, and other
general and administrative overhead costs.
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents, short-term investments, and trade receivables. The
Company places its short-term investments with high credit
quality financial institutions. The Company sells primarily to
independent beer distributors across the United States. Sales to
foreign customers are insignificant. Receivables arising from
these sales are not collateralized; however, credit risk is
minimized as a result of the large and diverse nature of the
Companys 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. There were no individual customer accounts
receivable balances outstanding at December 30, 2006 and
December 31, 2005 that were in excess of 10% of the gross
accounts receivable balance on those dates. No individual
customers represented more than 10% of the Companys
revenues during fiscal years 2006, 2005 and 2004.
Financial
Instruments and Fair Value of Financial
Instruments
The Companys primary financial instruments at
December 30, 2006 and December 31, 2005 consisted of
cash equivalents, short-term investments, accounts receivable
and accounts payable. The carrying amounts of these financial
instruments approximate their fair values due to the short-term
nature of these instruments.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised)
(SFAS No. 123R), Share-Based
Payment, which generally requires recognition of share-based
compensation costs in financial statements based on fair value.
Compensation cost is recognized over the period during which an
employee is required to provide services in exchange for the
award (the requisite
43
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
service period). The amount of compensation cost recognized in
the consolidated statements of income is based on the awards
ultimately expected to vest, and therefore, reduced for
estimated forfeitures. Prior to the adoption of
SFAS No. 123R, the Company accounted for share-based
compensation using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, and provided pro forma disclosures applying the
fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based
awards. See Note J for the effect of the adoption of
SFAS No. 123R.
As permitted by SFAS No. 123R, the Company elected to
use the modified-prospective application as its transition
method, under which SFAS No. 123R applies to new
awards and to awards modified, repurchased, or cancelled after
the statements effective date. Additionally, compensation
cost for the portion of awards for which the requisite service
has not been rendered that are outstanding on January 1,
2006 is recognized based on the fair value estimated on grant
date and as the requisite service is rendered on or after
January 1, 2006. Prior period financial statements are not
restated to reflect the effect of SFAS No. 123R under
the modified-prospective transition method.
For stock options granted prior to January 1, 2006, fair
values were estimated on the date of grants using a
Black-Scholes option-pricing model. As permitted by
SFAS No. 123R, the Company elected to use a binomial
option-pricing model to estimate the fair values of stock
options granted on or after January 1, 2006. See
Note J for further discussion of the application of the
option-pricing models.
Further, SFAS No. 123R requires that cash retained as
a result of tax benefits in excess of recognized compensation
costs relating to share-based awards be presented in the
statement of cash flows as a financing cash inflow with a
corresponding operating cash outflow. Consequently, the adoption
of SFAS No. 123R decreased cash flow from operating
activities and increased cash flow from financing activities by
$2.2 million for the year ended December 30, 2006.
Total cash flow in 2006 was not affected by this presentation
and statements of cash flows for prior periods were not restated
under the modified-prospective transition method.
Net
Income Per Share
Basic net income per share is calculated by dividing net income
by the weighted-average common shares outstanding. Diluted net
income per share is calculated by dividing net income by the
weighted-average common shares and potentially dilutive
securities outstanding during the period using the treasury
stock method.
Segment
Reporting
The Company consists of a single operating segment that produces
and sells low alcoholic beverages. The Companys brands,
which include Samuel
Adams®,
Sam Adams
Light®,
Twisted
Tea®
and
HardCore®,
are predominantly malt beverages, which are sold to the same
types of customers in similar size quantities, at similar price
points and through substantially the same channels of
distribution. The Companys products are manufactured using
similar production processes and have comparable alcohol content
and constitute a single group of similar products.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes,
which is an interpretation of SFAS No. 109,
Accounting for Income Taxes. This interpretation
clarifies the accounting and financial statement reporting for
uncertainty in income taxes recognized by prescribing a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
Company is required to adopt FIN No. 48 in the first
quarter of 2007. The adoption of FIN No. 48 is
expected
44
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to result in a decrease to the Companys current
liabilities and an increase to the Companys long-term
liabilities. The Company does not expect that the adoption of
FIN No. 48 will have a material impact on its
consolidated financial position, operations and cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The Company
is required to adopt the provisions of SFAS No. 157 in
the fiscal first quarter of 2008. The Company believes that the
adoption of SFAS No. 157 will not have a material
effect on its consolidated financial position, operations and
cash flows.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106 and 132(R), which applies to all plan
sponsors who offer defined benefit postretirement plans.
SFAS No. 158 requires recognition of the funded status
of a defined benefit postretirement plan in the statement of
financial position and expanded disclosures in the notes to
financial statements. The Company adopted this provision for the
year ended December 30, 2006 and the adoption did not have
a material impact on its consolidated financial position. In
addition, SFAS No. 158 requires measurement of plan
assets and benefit obligations as of the date of the plan
sponsors fiscal year end. The Company is required to adopt
the measurement provision of SFAS No. 158 for its
fiscal year ending December 27, 2008. The Company is in the
process of evaluating the impact of the measurement provision of
SFAS No. 158 on its 2008 consolidated financial
position, operations and cash flows.
C. Short-Term
Investments
There were no realized gains or losses on short-term investments
recorded during fiscal years 2006 and 2005. The Company recorded
a realized loss on
available-for-sale
securities of approximately $0.2 million in fiscal year
2004.
D. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
11,767
|
|
|
$
|
11,354
|
|
Work in process
|
|
|
3,483
|
|
|
|
1,192
|
|
Finished goods
|
|
|
1,784
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,034
|
|
|
$
|
13,649
|
|
|
|
|
|
|
|
|
|
|
45
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
E. Property,
Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
|
(In thousands)
|
|
|
Kegs
|
|
$
|
27,421
|
|
|
$
|
26,301
|
|
Machinery and plant equipment
|
|
|
32,774
|
|
|
|
30,777
|
|
Office equipment and furniture
|
|
|
8,443
|
|
|
|
6,717
|
|
Leasehold improvements
|
|
|
3,544
|
|
|
|
1,700
|
|
Land
|
|
|
1,315
|
|
|
|
350
|
|
Building
|
|
|
5,479
|
|
|
|
4,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,976
|
|
|
|
70,237
|
|
Less accumulated depreciation
|
|
|
48,277
|
|
|
|
43,712
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,699
|
|
|
$
|
26,525
|
|
|
|
|
|
|
|
|
|
|
During 2006, the Company recorded $0.9 million,
$0.3 million and $0.5 million in capitalized costs for
machinery and plant equipment, land, and building, respectively,
in connection with its proposed purchase of land for purpose of
building a brewery (see Note I).
The Company recorded depreciation expense related to these
assets of $4.8 million, $4.4 million and
$4.4 million in fiscal years 2006, 2005 and 2004,
respectively.
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
|
(In thousands)
|
|
|
Advertising, promotional and
selling expenses
|
|
$
|
3,052
|
|
|
$
|
2,608
|
|
Accrued deposits
|
|
|
4,840
|
|
|
|
4,568
|
|
Employee wages, related benefits
and reimbursements
|
|
|
5,217
|
|
|
|
3,821
|
|
Income taxes (see Note H)
|
|
|
3,295
|
|
|
|
1,737
|
|
Other accrued liabilities
|
|
|
6,524
|
|
|
|
4,627
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,928
|
|
|
$
|
17,361
|
|
|
|
|
|
|
|
|
|
|
G. Long-term
Debt and Line of Credit
The Company has a credit facility in place that provides for a
$20.0 million revolving line of credit which was set to
expire on March 31, 2007. In February 2007, the expiration
date was extended to March 31, 2008. The Company may elect
an interest rate for borrowings under the credit facility based
on either (i) the Alternative Prime Rate (8.25% at
December 30, 2006) or (ii) the applicable LIBOR
rate (5.4% at December 30, 2006) plus 0.45%. 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 covenants as of December 30, 2006.
There were no borrowings outstanding under the credit facility
as of December 30, 2006 and December 31, 2005.
There are also certain restrictive covenants set forth by the
debt agreement. Pursuant to the negative covenants, the Company
has agreed that it will not: enter into any indebtedness or
guarantees other than those specified by the lender, enter into
any sale and leaseback transactions, merge, consolidate, or
dispose of significant
46
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets without the lenders prior written consent, will not
make or maintain any investments other than those permitted in
the debt agreement, will not enter into any transactions with
affiliates outside of the ordinary course of business, and will
not make any distributions on account of, or in repurchase,
retirement or purchase of its capital stock, partnership or
other equity interest, except as noted in the agreement. In
addition, the credit agreement requires the Company to obtain
prior written consent from the lender on distributions on
account of, or in repurchase, retirement or purchase of its
capital stock or other equity interests with the exception of
the following: (a) distributions of capital stock from
subsidiaries to The Boston Beer Company, Inc. and Boston Beer
Corporation (a subsidiary of The Boston Beer Company, Inc.),
(b) repurchase from former employees of non-vested
investment shares of Class A Common Stock, issued under the
Employee Equity Incentive Plan, and (c) repurchase of
certain shares of Class A Common Stock as approved by the
Board of Directors. In the event of a default that has not been
cured, the credit facility would terminate and any unpaid
principal and accrued interest would become due and payable.
Significant components of the Companys deferred tax assets
and liabilities are as follows at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
|
|
|
$
|
120
|
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
136
|
|
|
$
|
136
|
|
Accrued expenses
|
|
|
1,132
|
|
|
|
|
|
|
|
1,132
|
|
|
|
1,147
|
|
|
|
|
|
|
|
1,147
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
1,052
|
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
475
|
|
|
|
475
|
|
|
|
|
|
|
|
603
|
|
|
|
603
|
|
Other
|
|
|
51
|
|
|
|
74
|
|
|
|
125
|
|
|
|
49
|
|
|
|
42
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,183
|
|
|
|
1,721
|
|
|
|
2,904
|
|
|
|
1,196
|
|
|
|
781
|
|
|
|
1,977
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
(3,025
|
)
|
|
|
(3,025
|
)
|
|
|
|
|
|
|
(3,020
|
)
|
|
|
(3,020
|
)
|
Prepaid expenses
|
|
|
(515
|
)
|
|
|
|
|
|
|
(515
|
)
|
|
|
(362
|
)
|
|
|
|
|
|
|
(362
|
)
|
Goodwill
|
|
|
|
|
|
|
(190
|
)
|
|
|
(190
|
)
|
|
|
|
|
|
|
(151
|
)
|
|
|
(151
|
)
|
Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(516
|
)
|
|
|
(3,215
|
)
|
|
|
(3,731
|
)
|
|
|
(367
|
)
|
|
|
(3,171
|
)
|
|
|
(3,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
(liabilities)
|
|
$
|
667
|
|
|
$
|
(1,494
|
)
|
|
$
|
(827
|
)
|
|
$
|
829
|
|
|
$
|
(2,390
|
)
|
|
$
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the income tax provision are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
2006
|
|
|
(53 weeks)
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,845
|
|
|
$
|
7,682
|
|
|
$
|
7,134
|
|
State
|
|
|
3,457
|
|
|
|
1,326
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
14,302
|
|
|
|
9,008
|
|
|
|
7,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(714
|
)
|
|
|
913
|
|
|
|
(344
|
)
|
State
|
|
|
(14
|
)
|
|
|
39
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(728
|
)
|
|
|
952
|
|
|
|
(379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
13,574
|
|
|
$
|
9,960
|
|
|
$
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys reconciliations to statutory rates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal
benefit
|
|
|
8.5
|
|
|
|
4.2
|
|
|
|
2.5
|
|
Non-deductible meals and
entertainment
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.4
|
|
Tax-exempt income
|
|
|
(1.1
|
)
|
|
|
(1.5
|
)
|
|
|
(0.8
|
)
|
Deduction relating to
U.S. production activities
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
Other
|
|
|
0.1
|
|
|
|
1.0
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.7
|
%
|
|
|
39.0
|
%
|
|
|
37.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of the Companys tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations in several different state tax jurisdictions. The
Company is periodically reviewed by tax authorities regarding
the amount of taxes due. These reviews include questions
regarding the timing and amount of deductions, and the
allocation of income among various tax jurisdictions. In
evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable
exposures. Based on the Companys evaluation of current tax
positions, the Company believes it has appropriately accrued for
probable exposures. During the fourth quarter of 2006, the
Company increased its accrual for income taxes in certain states
for 2003 to 2006 by approximately $1.0 million, of which
approximately $0.5 million related to 2006. The Company
includes its estimated reserves for probable exposures in
accrued expenses. The total amount of income tax reserves
recorded in accrued expenses at December 30, 2006 was
$3.5 million.
|
|
I.
|
Commitments
and Contingencies
|
Purchase
Commitments
The Company had outstanding non-cancelable purchase commitments
related to advertising contracts of approximately
$15.3 million at December 30, 2006, most of which are
expected to be incurred in fiscal 2007.
The Company has entered into contracts for the supply of a
portion of its hops requirements. These purchase contracts
extend through crop year 2010 and specify both the quantities
and prices, mostly denominated in euros, to which the Company is
committed. The Company does not use forward currency exchange
contracts and intends to purchase future hops using the exchange
rate at the time of purchase. Purchases under these hops
contracts were approximately $3.2 million,
$3.9 million and $4.0 million for fiscal years 2006,
2005 and
48
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004, respectively. As of December 30, 2006, obligations
under hops purchase commitments for each of the remaining years
under the contracts are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
10,022
|
|
2008
|
|
|
6,445
|
|
2009
|
|
|
5,634
|
|
2010
|
|
|
2,322
|
|
|
|
|
|
|
|
|
$
|
24,423
|
|
|
|
|
|
|
The Company uses specific hops for its beer. These hops include
Hallertau-Hallertauer, Tettnang-Tettnanger and Spalt-Spalter and
are harvested in several specific regions in Germany. To a
lesser extent, the Company uses traditional English hops from
England. The Company attempts to maintains over one years
supply of essential hop varieties on-hand in order to limit the
risk of an unexpected reduction in supply and stores its hops in
multiple cold storage warehouses to minimize the impact of a
catastrophe at a single site.
In the normal course of business, the Company enters into
various production arrangements with other brewing companies.
Between 40% and 50% of the Companys products is brewed at
its wholly owned subsidiary, Samuel Adams Brewing Company, Ltd.,
in Cincinnati. The remaining of the Companys products is
brewed by other brewing companies. In April 2006, one of such
brewing companies submitted a notice to the Company terminating
its existing brewing relationship effective October 31,
2008. The termination is in accordance with the terms of the
arrangement and a 2003 arbitration award. During 2006, 2005 and
2004, approximately 27%, 32% and 32% of the Companys sales
were from products brewed by this brewing company. As a result
of the termination notice, the Company is evaluating various
production options, including, but not limited to, building a
brewery that it would own, re-negotiating the current
arrangement with such brewery, increasing the volume at the
other breweries, and entering into new brewing arrangements with
current contract brewers and other third parties.
Prior to 2006, title to beer products brewed under production
arrangements with other brewing companies remained with the
brewing company until the brewery shipped the beer. At various
dates during 2006, primarily as a result of changes in the
Alcohol and Tobacco Tax and Trade Bureau regulations related to
the production of alcohol products, the Company changed its
brewing service arrangements with other brewing companies,
whereby the Company purchases the liquid produced by those
brewing companies, including the raw materials that are used in
the liquid, at the time such liquid goes into fermentation.
Consequently, the Company took title to the liquid on hand at
those brewing companies and included the respective values in
its inventories. The Company is required to repurchase from the
supplier all unused raw materials purchased by the supplier
specifically for its products at suppliers cost upon
termination of these production arrangements. The Company is
also obligated to meet annual volume requirements in conjunction
with certain production arrangements. During 2006, the Company
met all existing minimum volume requirements in accordance with
the production agreements, with the exception of one brewery
location. For that brewery, the fees associated with not meeting
minimum volume requirement were not significant and have been
recognized in the Companys consolidated financial
statements at December 30, 2006.
The Companys arrangements with other brewing companies
require it to periodically purchase fixed assets in support of
brewery operations. As of December 30, 2006, there were no
specific fixed asset purchase requirements outstanding under
existing contracts. Changes to the Companys brewing
strategy or existing production arrangements, new production
relationships or introduction of new products in the future may
require the Company to purchase fixed assets to support the
contract breweries operations.
49
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchase
of Land
On August 10, 2006, the Company entered into a cancelable
Purchase and Sale Agreement (the Agreement) to buy
land in the Town of Freetown, Massachusetts. The Agreement
originally provided for a period in excess of 180 days in
which to conduct due diligence investigations and to obtain the
necessary environmental reviews and permits in order to
construct a brewery on the site, as well as the opportunity to
extend the term of the Agreement for up to an additional
180 days. The term of the Agreement has since been extended
through mid-April 2007 and the Company has the ability to
further extend the term in monthly increments through mid-July
2007. The Company may also, at any time, in its sole discretion,
elect to terminate the Agreement, but will, as a consequence,
forfeit its deposits or be required to make additional
non-refundable deposits. As of December 30, 2006, the
Company had made $0.3 million in deposits under this
Agreement.
Lease
Commitments
On March 24, 2006, the Company entered into an agreement to
lease office space for purpose of relocating its corporate
offices within the City of Boston. The lease has a term of
124 months and expires in 2017, with an option to renew for
a five year period. The lease also includes scheduled rent
increases over the term of the lease and leasehold improvement
incentives.
The Company has various other operating lease agreements in
place for facilities and equipment as of December 30, 2006.
Terms of these leases include, in some instances, purchase
options, renewals, and maintenance costs, and vary by lease.
These lease obligations expire at various dates through 2009.
Aggregate rent expense was $1.4 million, $1.3 million
and $1.3 million in fiscal years 2006, 2005 and 2004,
respectively.
Aggregate minimum annual rental payments under these agreements
are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
691
|
|
2008
|
|
|
716
|
|
2009
|
|
|
726
|
|
2010
|
|
|
603
|
|
2011
|
|
|
632
|
|
Thereafter
|
|
|
3,766
|
|
|
|
|
|
|
|
|
$
|
7,134
|
|
|
|
|
|
|
Litigation
The Company, along with numerous other beverage alcohol
producers, has been named as a defendant in a number of class
action law suits in several states relating to advertising
practices and under-age consumption. Each complaint contains
substantially the same allegations that each defendant marketed
its products to under-age drinkers and seeks an injunction and
unspecified money damages on behalf of a class of parents and
guardians. The Company has been defending this litigation
vigorously. Two of the complaints have been withdrawn by the
plaintiffs and all of the other active complaints have been
dismissed with prejudice. However, the plaintiffs have appealed
each of those dismissals. The appeals are in their earliest
stages and it is not possible at this time to determine their
likely outcome or the impact on the Company.
In November 2004, Royal Insurance Company of America and its
affiliate (RICA), the Companys liability
insurer during most of the period covered by the
above-referenced complaints, filed a complaint in Ohio seeking
declaratory judgment that RICA owes no duty to defend or
indemnify the Company in the underlying actions filed in Ohio
and has subsequently filed a motion for summary judgment. In
July 2005, Royal Indemnity Company, successor in interest to
RICA and its affiliate (Royal), filed a complaint in
New York
50
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
seeking declaratory judgment that Royal owes no duty to defend
or indemnify the Company in five underlying actions filed in
states other than Ohio, which was dismissed in November 2005. In
August 2005, the Massachusetts Bay Insurance Company
(MBIC), the Companys liability insurer for
parts of 2004 and 2005, filed a complaint in Massachusetts
seeking declaratory judgment that MBIC owes no duty to defend or
indemnify the Company in the underlying actions filed during the
policy period and that MBIC owes no duty to contribute to any
obligation of Royal to defend or indemnify the Company as to
those underlying actions. Royal joined in the MBIC action with
its own declaratory judgment claim that it owes no duty to
defend the Company in the five underlying actions filed in
states other than Ohio. In December 2006, the motion for summary
judgment was denied, resulting in declaration that the insurers
do have a duty to defend the Company with respect to the
underlying actions. On March 2, 2007, RICA filed a notice
of appeal of this judgment; MBIC has indicated that it also
intends to appeal the judgment. The Company continues to believe
that it has meritorious defenses, that it is entitled to
insurance coverage of its defense costs with respect to the
underlying class actions, and that it is premature to litigate
indemnification issues for the class actions. However, the
Company is not able to predict at this time the ultimate outcome
of these insurance coverage disputes.
The Company is not a party to any other pending or threatened
litigation, the outcome of which would be expected to have a
material adverse effect upon its financial condition or the
results of its operations.
Class A
Common Stock
The Class A Common Stock has no voting rights, except
(1) as required by law, (2) for the election of
Class A Directors, and (3) that the approval of the
holders of the Class A Common Stock is required for
(a) certain future authorizations or issuances of
additional securities which have rights senior to Class A
Common Stock, (b) certain alterations of rights or terms of
the Class A or Class B Common Stock as set forth in
the Articles of Organization of the Company, (c) other
amendments of the Articles of Organization of the Company,
(d) certain mergers or consolidations with, or acquisitions
of, other entities, and (e) sales or dispositions of any
significant portion of the Companys assets.
Class B
Common Stock
The Class B Common Stock has full voting rights, including
the right to (1) elect a majority of the members of the
Companys Board of Directors and (2) approve all
(a) amendments to the Companys articles of
Organization, (b) mergers or consolidations with, or
acquisitions of, other entities, (c) sales or dispositions
of any significant portion of the Companys assets, and
(d) equity-based and other executive compensation and other
significant corporate matters. The Companys Class B
Common Stock is not listed for trading. Each share of
Class B Common Stock is freely convertible into one share
of Class A Common Stock, upon request of any Class B
holder.
All distributions of equity interest, including dividends, are
restricted by the Companys debt agreements, with the
exception of distributions of capital stock from subsidiaries to
The Boston Beer Company, Inc. and Boston Beer Corporation,
repurchase from former employees of non-vested investment shares
of Class A Common Stock issued under the Companys
equity incentive plan and redemption of certain shares of
Class A Common Stock as approved by the Board of Directors.
Employee
Stock Compensation Plan
The Companys Employee Equity Incentive Plan (the
Equity Plan) currently provides for the grant of
discretionary options and restricted stock awards to employees;
it also provides for shares issued to employees of the Company
under its investment share program. The Plan is administered by
the Board of Directors of the
51
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company, based on recommendations received from the Compensation
Committee of the Board of Directors. The Compensation Committee
consists of three independent directors. In determining the
quantities and types of awards for grant, the Compensation
Committee periodically reviews the objectives of the
Companys compensation system and takes into account the
position and responsibilities of the employee being considered,
the nature and value to the Company of his or her service and
accomplishments, his or her present and potential contributions
to the success of the Company, the value of the type of awards
to the employee and such other factors as the Compensation
Committee deems relevant.
Stock options and related vesting requirements and terms are
granted at the Board of Directors discretion, but
generally vest ratably over five-year periods and, with respect
to certain options granted to members of senior management,
based on the Companys performance. The maximum contractual
term of stock options is ten years. During fiscal 2006, the
Company granted options to purchase 94,000 shares of its
Class A Common Stock to employees at market price on the
grant dates. The number of these options that will vest over
five years depends on the level of performance targets attained
in 2006.
Restricted stock awards are also granted at the Board of
Directors discretion. During fiscal 2006, the Company
granted 32,079 shares of restricted stock awards to certain
senior managers and key employees, which vest ratably over
service periods of five years. No restricted stock awards were
granted prior to January 1, 2006. The issuance of
restricted stock awards in 2006 resulted in part from the
Companys evaluation of employee preference in the types of
stock awards to be issued to them as part of their total
compensation package.
The Equity Plan also has an investment share program which
permits employees who have been with the Company for at least
one year to purchase shares of Class A Common Stock at a
discount from current market value of 0% to 40%, based on the
employees tenure with the Company. Investment shares vest
ratably over service periods of five years. Participants may pay
for these shares either up front or through payroll deductions
over an eleven-month period during the year of purchase. During
fiscal 2006, employees elected to purchase an aggregate of
19,577 investment shares.
On December 19, 2006, the Equity Plan was amended whereby
the number of shares of Class A Common Stock reserved for
issuance under the plan was increased from 3.7 million to
4.2 million. As of December 30, 2006, 0.6 million
shares remained available for grant. Shares reserved for
issuance under canceled employee stock options and forfeited
restricted stock are returned to the reserve under the Equity
Plan for future grants or purchases. The Company also purchases
unvested investment shares from employees who have left the
Company; these shares are also returned to the reserve under the
Equity Plan for future grants or purchases.
Non-Employee
Director Options
The Company has a stock option plan for non-employee directors
of the Company (the Non-Employee Director Plan),
pursuant to which each non-employee director of the Company is
granted an option to purchase shares of the Companys
Class A Common Stock upon election or re-election to the
Board of Directors. Stock options issued to non-employee
directors vest upon grant and have a maximum contractual term of
ten years. During fiscal 2006, the Company granted options to
purchase an aggregate of 31,000 shares of the
Companys Class A Common Stock to non-employee
directors.
The Company has reserved 0.4 million shares of Class A
Common Stock for issuance pursuant to the Non-Employee Director
Plan, of which 0.1 million shares were available for grant
as of December 30, 2006. Cancelled non-employee
directors stock options are returned to the reserve under
the Non-Employee Director Plan for future grants.
52
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Option
Activity
Information related to stock options under the Equity Plan and
the Non-Employee Director Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Option Price
|
|
Exercise Price
|
|
|
Outstanding at December 27,
2003
|
|
|
1,738,267
|
|
|
$ 0.01
$ 35.09
|
|
$
|
12.84
|
|
Granted
|
|
|
169,100
|
|
|
18.47 19.41
|
|
|
18.61
|
|
Canceled
|
|
|
(13,325
|
)
|
|
0.01 17.55
|
|
|
12.54
|
|
Exercised
|
|
|
(222,847
|
)
|
|
0.01 17.55
|
|
|
10.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 25,
2004
|
|
|
1,671,195
|
|
|
0.01 35.09
|
|
|
13.80
|
|
Granted
|
|
|
473,050
|
|
|
21.14 24.19
|
|
|
22.00
|
|
Canceled
|
|
|
(40,530
|
)
|
|
7.16 21.14
|
|
|
12.56
|
|
Exercised
|
|
|
(249,015
|
)
|
|
0.01 23.33
|
|
|
11.86
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
1,854,700
|
|
|
0.01 35.09
|
|
|
16.18
|
|
Granted
|
|
|
125,000
|
|
|
24.95 26.43
|
|
|
25.45
|
|
Canceled
|
|
|
(29,230
|
)
|
|
14.47 24.95
|
|
|
20.22
|
|
Exercised
|
|
|
(334,476
|
)
|
|
0.01 21.21
|
|
|
13.45
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30,
2006
|
|
|
1,615,994
|
|
|
$ 0.01
$ 35.09
|
|
$
|
17.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total options outstanding at December 30, 2006,
443,600 shares were performance-based options.
Options exercisable at December 31, 2005 and
December 25, 2004 were 973,870 and 955,645 shares,
respectively. The weighted-average exercise price of the
exercisable options at December 31, 2005 and
December 25, 2004 was $12.96 and $12.07, respectively. The
following table summarizes information about stock options
outstanding at December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
Exercise Price
|
|
of Shares
|
|
|
Price
|
|
|
Life
|
|
|
of Shares
|
|
|
Price
|
|
|
Life
|
|
|
$ 0.01
|
|
|
551
|
|
|
$
|
0.01
|
|
|
|
0.30 years
|
|
|
|
551
|
|
|
$
|
0.01
|
|
|
|
0.30 years
|
|
$ 7.16 $9.53
|
|
|
298,660
|
|
|
$
|
8.85
|
|
|
|
2.55 years
|
|
|
|
298,660
|
|
|
$
|
8.85
|
|
|
|
2.55 years
|
|
$11.09 $16.64
|
|
|
449,363
|
|
|
$
|
14.63
|
|
|
|
4.54 years
|
|
|
|
344,763
|
|
|
$
|
14.50
|
|
|
|
4.06 years
|
|
$17.55 $26.33
|
|
|
814,920
|
|
|
$
|
21.25
|
|
|
|
7.44 years
|
|
|
|
171,220
|
|
|
$
|
19.42
|
|
|
|
5.87 years
|
|
$26.43 $35.09
|
|
|
52,500
|
|
|
$
|
29.59
|
|
|
|
4.61 years
|
|
|
|
42,500
|
|
|
$
|
28.29
|
|
|
|
5.63 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615,994
|
|
|
$
|
17.39
|
|
|
|
5.64 years
|
|
|
|
857,694
|
|
|
$
|
14.19
|
|
|
|
3.97 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
In fiscal 2006, the Company recorded an aggregate of
$2.8 million in stock-based compensation expense
($1.6 million net of tax effects) in accordance with
SFAS No. 123R, of which $1.2 million represented
pre-tax compensation expense related to performance-based stock
options. Of the aggregate stock-based compensation expense,
$0.9 million was included in advertising, promotional and
selling expenses and $1.9 million was included in general
and administrative expenses in the accompanying consolidated
statements of income for the fiscal year 2006. The Company
adopted SFAS No. 123R using the modified-prospective
transition method. Consequently, prior period financial
statements have not been restated to reflect the effect of
SFAS No. 123R. In each of the fiscal years 2005 and
2004, the Company recognized $0.1 million in stock-based
compensation expense related to investment shares under the
intrinsic value method (Note B).
53
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of the adoption of SFAS No. 123R was a
decrease in income before provision for income taxes by
$0.7 million and a decrease in net income by
$0.4 million, or $0.03 per basic and diluted common
share. The following table illustrates the effect on net income
and net income per common share if the Company had recognized
stock-based compensation expense under the fair value method in
fiscal 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
(53 weeks)
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income, as reported
|
|
$
|
15,559
|
|
|
$
|
12,502
|
|
Add: Stock-based employee
compensation expense reported in net income, net of tax effects
|
|
|
87
|
|
|
|
70
|
|
Deduct: Total stock-based
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
(1,038
|
)
|
|
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
14,608
|
|
|
$
|
11,566
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.10
|
|
|
$
|
0.89
|
|
Basic pro forma
|
|
$
|
1.03
|
|
|
$
|
0.82
|
|
Diluted as reported
|
|
$
|
1.07
|
|
|
$
|
0.86
|
|
Diluted pro forma
|
|
$
|
1.01
|
|
|
$
|
0.80
|
|
For stock options granted prior to January 1, 2006, fair
values were estimated on the date of grants using a
Black-Scholes option-pricing model. As permitted by
SFAS No. 123R, the Company elected to use a binomial
option-pricing model to estimate the fair values of stock
options granted on or after January 1, 2006. The Company
believes that the Black-Scholes option-pricing model is less
effective than the binomial option-pricing model in valuing
long-term options, as it assumes that volatility and interest
rates are constant over the life of the option. In addition, the
Company believes that the binomial option-pricing model more
accurately reflects the fair value of its stock awards, as it
takes into account historical employee exercise patterns based
on changes in the Companys stock price and other relevant
variables. The weighted-average fair value of stock options
granted during 2005 and 2004 was $9.35 and $7.82 per share,
respectively, as calculated using the Black-Scholes
option-pricing model. The weighted-average fair value of stock
options granted during 2006 was $8.43 per share, as
calculated using a binomial option-pricing model.
Weighted average assumptions used to estimate fair values of
stock options on the date of grants are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Binomial Model)
|
|
|
(Black-Scholes Model)
|
|
|
Expected volatility
|
|
|
31.6
|
%
|
|
|
33.6
|
%
|
|
|
34.2
|
%
|
Expected life of option
|
|
|
Ù
|
|
|
|
6.8 years
|
|
|
|
7.1 years
|
|
Risk-free interest rate
|
|
|
3.82
|
%
|
|
|
3.78
|
%
|
|
|
3.50
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Exercise factor
|
|
|
1.5 times
|
|
|
|
*
|
|
|
|
*
|
|
Discount for post-vesting
restrictions
|
|
|
6.5
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
|
Ù
|
|
The expected life of the option is an output of the binomial
model, which resulted in a weighted average of 7.3 years
for options granted during 2006. |
|
* |
|
Assumption not considered in the Black-Scholes option-pricing
model. |
Expected volatility is based on the Companys historical
realized volatility. Expected life of an option is based on the
Companys historical experience of stock options. The
risk-free interest rate represents the implied
54
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
yields available from the U.S. Treasury zero-coupon yield
curve over the contractual term of the option when using the
binomial model and the implied yield available on
U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term of the option when using the
Black-Scholes model. Expected dividend yield is 0% because the
Company has not paid dividends in the past and currently has no
known intention to do so in the future. Exercise factor and
discount for post-vesting restrictions are based on the
Companys historical experience.
Fair value of investment shares was calculated using the same
methods as those used to calculate the fair value of stock
options in the respective financial statement periods. Fair
value of restricted stock awards was based on the Companys
traded stock price on the date of the grants.
The Company uses the straight-line attribution method in
recognizing stock-based compensation expense for awards that
vest based on service conditions. For awards that vest subject
to performance conditions, compensation expense is recognized
ratably for each tranche of the award over the performance
period if it is probable that performance conditions will be
met. These methods are consistent with the methods the Company
used in recognizing stock-based compensation expense for
disclosure purposes under SFAS No. 123 prior to the
adoption of SFAS No. 123R. In June 2005, an option to
purchase 300,000 shares of the Companys common stock
was granted to the Companys chief executive officer. This
option vests based upon the achievement of performance targets.
During the fourth quarter of 2006, the Company was able to
estimate for the first time that the achievement of the
performance targets as to 180,000 shares of this option is
probable. Consequently, the Company recorded $0.8 million
in stock-based compensation expense related to this stock option
in the fourth quarter of 2006.
Under SFAS No. 123R, compensation expense is
recognized less estimated forfeitures. Because most of the
Companys equity awards vests on
January 1st each
year, the Company recognized stock-based compensation expense
related to those awards, net of actual forfeitures, in 2006. For
equity awards that do not vest on January 1st each
year, the estimated forfeiture rate used was 10%. The forfeiture
rate was based upon historical experience and the Company
periodically reviews this rate to ensure proper projection of
future forfeitures. No forfeiture is taken with respect to stock
options granted to non-employee directors, as those stock
options vest upon grant. For pro forma compensation expense
disclosure purposes for 2005 and 2004, forfeitures are
recognized as occurred according to SFAS No. 123.
The total fair value of options vested during 2006 was
$1.4 million. The aggregate intrinsic value of stock
options exercised during 2006, 2005 and 2004 was
$5.7 million, $3.0 million and $2.1 million,
respectively. The aggregate intrinsic value of outstanding and
exercisable stock options as of December 30, 2006 was
$30.0 million and $18.7 million, respectively.
Based on equity awards outstanding as of December 30, 2006,
there were $3.6 million of unrecognized compensation costs,
net of estimated forfeitures, related to unvested share-based
compensation arrangements that are expected to vest. Such costs
are expected to be recognized over a weighted-average period of
1.8 years. The following table summarizes the estimated
future annual stock-based compensation expense related to
share-based arrangements existing as of December 30, 2006
that are expected to vest:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
1,792
|
|
2008
|
|
|
1,084
|
|
2009
|
|
|
506
|
|
2010
|
|
|
226
|
|
|
|
|
|
|
Total
|
|
$
|
3,608
|
|
|
|
|
|
|
In addition, as of December 30, 2006, there were
$1.1 million of unrecognized compensation costs associated
with the second tranche of the option to purchase
300,000 shares of the Companys common stock granted
to
55
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys chief executive officer with vesting
requirements based on the achievement of various performance
targets in 2009. Through December 30, 2006, no compensation
expense was recognized for this remaining portion of the
performance-based stock option, nor will any be recognized until
such time when the Company can estimate that it is probable that
performance targets will be met.
Non-Vested
Shares Activity
The following table summarizes vesting activities of shares
issued under the investment share program and restricted stock
awards during fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
|
Non-vested at December 31,
2005
|
|
|
70,583
|
|
|
$
|
8.50
|
|
Granted
|
|
|
51,656
|
|
|
|
20.38
|
|
Vested
|
|
|
(22,425
|
)
|
|
|
7.58
|
|
Forfeited
|
|
|
(8,760
|
)
|
|
|
13.74
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 30,
2006
|
|
|
91,054
|
|
|
$
|
14.96
|
|
|
|
|
|
|
|
|
|
|
Stock
Repurchase Program
The Board of Directors has approved up to $100.0 million
for the repurchase of the Companys Class A Common
Stock. Through December 30, 2006, the Company has
repurchased a total of approximately 7.8 million shares of
its Class A Common Stock for an aggregate purchase price of
$92.6 million.
K. Employee
Retirement Plans
The Company has one retirement plan covering substantially all
non-union employees and five retirement plans covering
substantially all union employees.
Non-Union
Plan
The Boston Beer Company 401(k) Plan (the 401(k)
Plan), which was established by the Company in 1993, is a
Company-sponsored defined contribution plan that covers a
majority of the Companys non-union employees. All
full-time, non-union employees over the age of 21 are eligible
to participate in the plan on the first day of the first month
after commencing employment. Participants may make voluntary
contributions up to 60% of their annual compensation, subject to
IRS limitations. After the sixth month of employment, the
Company matches each employees contribution dollar for
dollar up to $1,000 and, thereafter, 50% of the employees
contribution up to 6% of the employees eligible annual
wages. The Company made contributions of $0.6 million to
the 401(k) Plan in fiscal year 2006 and $0.5 million in
each of the fiscal years 2005 and 2004.
Union
Plans
The Company has one Company-sponsored defined contribution plan
and four defined benefit plans, which combined cover
substantially all union employees. The defined benefit plans
include two union-sponsored collectively bargained
multi-employer pension plans, a Company-sponsored defined
benefit pension plan and a Company-sponsored post-retirement
medical plan.
The Companys defined contribution plan, the Samuel Adams
Brewery Company, Ltd. 401(k) Plan for Represented Employees, was
established by the Company in 1997 and is available to all union
employees upon completion of one hour of full-time employment.
Participants may make voluntary contributions up to
56
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
60% of their annual compensation to the Samuel Adams Brewery
Company, Ltd. 401(k) Plan, subject to IRS limitations. The
Company does not make contributions to this plan, but does incur
insignificant administration costs.
The union-sponsored benefit plans are two multi-employer
retirement plans administrated by organized labor unions.
Information from the plans administrators is not
sufficient to permit the Company to determine its share, if any,
of the unfunded vested benefits. Pension expense and employer
contributions for these multi-employer plans were not
significant in the aggregate.
The Company-sponsored defined benefit pension plan, The Local
Union #1199 Defined Benefit Pension Plan (the Local
1199 Plan), was established in 1991 and is eligible to all
union employees who are covered by the Companys collective
bargaining agreement and have completed twelve consecutive
months of employment with at least 750 hours worked. The
defined benefit is determined based on years of service since
July 1991. The Company made combined contributions of
$0.1 million to this plan in each of the fiscal years 2006,
2005 and 2004.
A comprehensive medical plan is offered to union employees who
have voluntarily retired at 65 or have become permanently
disabled. Employees must have worked for the Company or have
prior ownership for at least 10 years at the Companys
Cincinnati brewery, been enrolled in the Companys medical
insurance plan and be eligible for Medicare benefits under the
Social Security Act. The accumulated post-retirement benefit
obligation was determined using a discount rate of 5.75% and
5.5% at September 30, 2006 and 2005, respectively, and a
2.5% increase in the Cincinnati Consumer Price Index for the
years then ended. The effect of a 1% point increase and the
effect of a 1% point decrease in the assumed health care cost
trend rates on the aggregate of the service and interest cost
components of net periodic postretirement health care benefit
costs and the accumulated post-retirement benefit obligation for
health care benefits were not significant.
As required, the Company adopted the recognition and disclosure
provisions of SFAS No. 158 as of December 30,
2006. SFAS No. 158 required the Company to recognize
the funded status, the difference between the fair value of plan
assets and the projected benefit obligations, with a
corresponding adjustment to accumulated other comprehensive
loss, net of tax. The adjustment to accumulated other
comprehensive loss at adoption represents the net unrecognized
actuarial losses, unrecognized prior service costs and
unrecognized transition obligation remaining from the initial
adoption of SFAS No. 87, Employers Accounting
for Pensions, which were previously netted against the
plans funded status in the Companys consolidated
balance sheet. These amounts will be subsequently recognized as
net periodic pension cost pursuant to the Companys
historical accounting policy for amortizing such amounts. The
incremental effects of the adoption of the recognition
provisions of SFAS No. 158 were not significant to the
Companys consolidated balance sheet as of
December 30, 2006.
57
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company uses a September 30 measurement date for its
defined benefit pension plan and post-retirement medical plan.
Summarized information for those plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local 1199 Plan
|
|
|
Post-Retirement Medical Plan
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Change in Benefit
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning
of year
|
|
$
|
981
|
|
|
$
|
847
|
|
|
$
|
259
|
|
|
$
|
199
|
|
Service cost
|
|
|
77
|
|
|
|
74
|
|
|
|
9
|
|
|
|
9
|
|
Interest cost
|
|
|
53
|
|
|
|
48
|
|
|
|
14
|
|
|
|
11
|
|
Actuarial (gains) losses
|
|
|
(40
|
)
|
|
|
25
|
|
|
|
7
|
|
|
|
45
|
|
Benefits paid
|
|
|
(19
|
)
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year
|
|
$
|
1,052
|
|
|
$
|
981
|
|
|
$
|
281
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
713
|
|
|
$
|
603
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
50
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
69
|
|
|
|
70
|
|
|
|
8
|
|
|
|
5
|
|
Benefits paid
|
|
|
(19
|
)
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
813
|
|
|
$
|
713
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(239
|
)
|
|
$
|
(268
|
)
|
|
$
|
(281
|
)
|
|
$
|
(259
|
)
|
Unrecognized net actuarial loss
|
|
|
261
|
|
|
|
316
|
|
|
|
58
|
|
|
|
53
|
|
Prepaid contribution
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
22
|
|
|
$
|
62
|
|
|
$
|
(223
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
(4
|
)
|
Noncurrent liabilities
|
|
|
(239
|
)
|
|
|
(254
|
)
|
|
|
(273
|
)
|
|
|
(255
|
)
|
Accumulated other comprehensive
loss
|
|
|
261
|
|
|
|
316
|
|
|
|
58
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
22
|
|
|
$
|
62
|
|
|
$
|
(223
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit
Obligation
|
|
$
|
1,052
|
|
|
$
|
981
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in accumulated other comprehensive loss at
December 30, 2006 and December 31, 2005 that have not
yet been recognized as components of net periodic benefit cost
represent net gains and losses. There were no unrecognized prior
service costs and net transition asset or obligation. The amount
in accumulated other comprehensive loss expected to be
recognized as components of net periodic benefit cost in fiscal
year 2007 is $12,000 and $2,000 for the Local 1199 Plan and the
post-retirement medical plan, respectively.
58
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement
|
|
|
|
Local 1199 Plan
|
|
|
Medical Plan
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Components of Net Periodic
Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
77
|
|
|
$
|
74
|
|
|
$
|
61
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
7
|
|
Interest cost
|
|
|
53
|
|
|
|
48
|
|
|
|
44
|
|
|
|
14
|
|
|
|
11
|
|
|
|
11
|
|
Expected return on plan assets
|
|
|
(54
|
)
|
|
|
(52
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
17
|
|
|
|
18
|
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
93
|
|
|
$
|
88
|
|
|
$
|
74
|
|
|
$
|
25
|
|
|
$
|
20
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain
|
|
$
|
(54
|
)
|
|
$
|
6
|
|
|
$
|
61
|
|
|
$
|
5
|
|
|
$
|
44
|
|
|
$
|
13
|
|
Amortization of net actuarial loss
|
|
|
(17
|
)
|
|
|
(18
|
)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other
comprehensive loss
|
|
$
|
(71
|
)
|
|
$
|
(12
|
)
|
|
$
|
48
|
|
|
$
|
3
|
|
|
$
|
44
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions
used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.5
|
%
|
|
|
5.8
|
%
|
|
|
5.75
|
%
|
|
|
5.5
|
%
|
|
|
5.75
|
%
|
Weighted-average assumptions
used to determine net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.5
|
%
|
|
|
5.8
|
%
|
|
|
6.3
|
%
|
|
|
5.5
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
Expected return on assets
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The Local 1199 Plan does not have formal investment strategies
but invests in a family of funds that are designed to minimize
excessive short-term risk and focus on consistent, competitive
long-term performance, consistent with the funds
investment objectives. The fund specific objectives vary and
include maximizing long-term returns both before and after
taxes, maximizing total return from capital appreciation plus
income and funds that invest primarily in common stock of
companies that cover a broad range of industries and that have
market capitalization of at least $5 billion at the time of
purchase.
The basis of the long-term rate of return assumption reflects
the Local 1199 Plans current asset mix of approximately
60% debt securities and 40% equity securities with assumed
average annual returns of approximately 5% to 6% for debt
securities and 10% to 12% for equity securities. It is assumed
that the Local 1199 Plans investment portfolio will be
adjusted periodically to maintain the current ratios of debt
securities and equity securities. Additional consideration is
given to the Plans historical returns as well as future
long-range projections of investment returns for each asset
category.
The Local 1199 Plans weighted-average asset allocations at
the measurement dates by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Asset Category
|
|
2006
|
|
|
2005
|
|
|
Equity securities
|
|
|
46
|
%
|
|
|
45
|
%
|
Debt securities
|
|
|
54
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute $0.1 million to the Local
1199 Plan and $8,000 to the post-retirement medical plan during
the fiscal year 2007.
59
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following benefit amounts, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
Local 1199
|
|
|
Post-Retirement
|
|
|
|
Plan
|
|
|
Medical Plan
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
20
|
|
|
$
|
8
|
|
2008
|
|
|
23
|
|
|
|
8
|
|
2009
|
|
|
24
|
|
|
|
9
|
|
2010
|
|
|
27
|
|
|
|
9
|
|
2011
|
|
|
33
|
|
|
|
9
|
|
2012-2016
|
|
|
312
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
439
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the computation of basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
2006
|
|
|
(53 weeks)
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
18,192
|
|
|
$
|
15,559
|
|
|
$
|
12,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per
common share basic
|
|
|
13,900
|
|
|
|
14,126
|
|
|
|
14,126
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
460
|
|
|
|
390
|
|
|
|
392
|
|
Non-vested investment shares and
restricted stock
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
475
|
|
|
|
390
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per
common share diluted
|
|
|
14,375
|
|
|
|
14,516
|
|
|
|
14,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
1.31
|
|
|
$
|
1.10
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share diluted
|
|
$
|
1.27
|
|
|
$
|
1.07
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 106,000, 33,000 and 60,000 shares of
Class A Common Stock were outstanding during fiscal 2006,
2005 and 2004, respectively, but not included in computing
diluted income per share because their effects were
anti-dilutive. Additionally, performance-based stock options to
purchase 120,000 shares and 364,500 of Class A Common
Stock were outstanding during fiscal 2006 and 2005,
respectively, but not included in computing dilutive income per
share because the performance criteria of these stock options
were not expected to be met as of December 30, 2006 and
December 31, 2005.
60
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
M.
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Minimum
|
|
|
Accumulated
|
|
|
|
Gain (Loss) on
|
|
|
Pension
|
|
|
Other
|
|
|
|
Available-For-
|
|
|
Liability
|
|
|
Comprehensive
|
|
|
|
Sale Securities
|
|
|
Adjustment
|
|
|
Income (Loss)
|
|
|
|
(In thousands)
|
|
|
Balance, December 27, 2003
|
|
$
|
141
|
|
|
$
|
(96
|
)
|
|
$
|
45
|
|
Minimum pension liability
adjustment, net of tax
|
|
|
|
|
|
|
(107
|
)
|
|
|
(107
|
)
|
Reclassification
adjustment
available-for-sale
securities, net of tax
|
|
|
(141
|
)
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 25, 2004
|
|
|
|
|
|
|
(203
|
)
|
|
|
(203
|
)
|
Minimum pension liability
adjustment, net of tax
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
Defined benefit plans liability
adjustment, net of tax
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
$
|
|
|
|
$
|
(197
|
)
|
|
$
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.
|
Valuation
and Qualifying Accounts
|
The Company maintains reserves against accounts receivable for
doubtful accounts and inventory for obsolete and slow-moving
inventory. In addition, the Company maintains a reserve for
estimated returns of stale beer, which is included in accrued
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Net Provision
|
|
|
Amounts Charged
|
|
|
End of
|
|
Allowance for Doubtful Accounts
|
|
Period
|
|
|
(Recovery)
|
|
|
Against Reserves
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
116
|
|
|
$
|
365
|
|
|
$
|
(30
|
)
|
|
$
|
451
|
|
2005
|
|
|
597
|
|
|
|
(255
|
)
|
|
|
(226
|
)
|
|
|
116
|
|
2004
|
|
|
450
|
|
|
|
147
|
|
|
|
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Net Provision
|
|
|
Amounts Charged
|
|
|
End of
|
|
Inventory Obsolescence Reserve
|
|
Period
|
|
|
(Recovery)
|
|
|
Against Reserves
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
463
|
|
|
$
|
(89
|
)
|
|
$
|
(57
|
)
|
|
$
|
317
|
|
2005
|
|
|
713
|
|
|
|
(247
|
)
|
|
|
(3
|
)
|
|
|
463
|
|
2004
|
|
|
1,047
|
|
|
|
(334
|
)
|
|
|
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Net Provision
|
|
|
Amounts Charged
|
|
|
End of
|
|
Stale Beer Reserve
|
|
Period
|
|
|
(Recovery)
|
|
|
Against Reserves
|
|
|
Period
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2006
|
|
$
|
845
|
|
|
$
|
1,755
|
|
|
$
|
(1,746
|
)
|
|
$
|
854
|
|
2005
|
|
|
798
|
|
|
|
1,393
|
|
|
|
(1,346
|
)
|
|
|
845
|
|
2004
|
|
|
742
|
|
|
|
1,030
|
|
|
|
(974
|
)
|
|
|
798
|
|
61
THE
BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
O.
|
Quarterly
Results (Unaudited)
|
The Companys fiscal quarters are consistently determined
year to year and generally consist of 13 weeks, except in
those fiscal years in which there are fifty-three weeks where
the last fiscal quarters then consist of 14 weeks. In
managements opinion, the following unaudited information
includes all adjustments, consisting 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Quarters Ended
|
|
|
|
(In thousands, except per share data)
|
|
|
|
December 30,
|
|
|
September 30,
|
|
|
July 1,
|
|
|
April 1,
|
|
|
December 31,
|
|
|
September 24,
|
|
|
June 25,
|
|
|
March 26,
|
|
|
|
2006(1)
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(14 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
Barrels Sold
|
|
|
416
|
|
|
|
432
|
|
|
|
440
|
|
|
|
324
|
|
|
|
371
|
|
|
|
360
|
|
|
|
353
|
|
|
|
280
|
|
Revenue
|
|
$
|
81,013
|
|
|
$
|
83,864
|
|
|
$
|
87,635
|
|
|
$
|
62,738
|
|
|
$
|
71,392
|
|
|
$
|
69,743
|
|
|
$
|
68,495
|
|
|
$
|
53,625
|
|
Less excise taxes
|
|
|
7,670
|
|
|
|
7,997
|
|
|
|
8,302
|
|
|
|
5,850
|
|
|
|
6,640
|
|
|
|
6,533
|
|
|
|
6,862
|
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
73,343
|
|
|
|
75,867
|
|
|
|
79,333
|
|
|
|
56,888
|
|
|
|
64,752
|
|
|
|
63,210
|
|
|
|
61,633
|
|
|
|
48,709
|
|
Cost of goods sold
|
|
|
32,267
|
|
|
|
32,397
|
|
|
|
32,276
|
|
|
|
24,215
|
|
|
|
27,414
|
|
|
|
25,838
|
|
|
|
24,701
|
|
|
|
18,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,076
|
|
|
|
43,470
|
|
|
|
47,057
|
|
|
|
32,673
|
|
|
|
37,338
|
|
|
|
37,372
|
|
|
|
36,932
|
|
|
|
29,832
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, promotional and
selling expenses
|
|
|
29,010
|
|
|
|
29,913
|
|
|
|
29,368
|
|
|
|
25,378
|
|
|
|
29,173
|
|
|
|
26,816
|
|
|
|
25,073
|
|
|
|
19,808
|
|
General and administrative expenses
|
|
|
6,976
|
|
|
|
5,374
|
|
|
|
5,381
|
|
|
|
4,926
|
|
|
|
4,916
|
|
|
|
4,353
|
|
|
|
3,999
|
|
|
|
4,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35,986
|
|
|
|
35,287
|
|
|
|
34,749
|
|
|
|
30,304
|
|
|
|
34,089
|
|
|
|
31,169
|
|
|
|
29,072
|
|
|
|
23,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,090
|
|
|
|
8,183
|
|
|
|
12,308
|
|
|
|
2,369
|
|
|
|
3,249
|
|
|
|
6,203
|
|
|
|
7,860
|
|
|
|
6,004
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
970
|
|
|
|
874
|
|
|
|
711
|
|
|
|
588
|
|
|
|
556
|
|
|
|
425
|
|
|
|
479
|
|
|
|
301
|
|
Other income, net
|
|
|
171
|
|
|
|
271
|
|
|
|
170
|
|
|
|
61
|
|
|
|
49
|
|
|
|
175
|
|
|
|
60
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
6,231
|
|
|
|
9,328
|
|
|
|
13,189
|
|
|
|
3,018
|
|
|
|
3,854
|
|
|
|
6,803
|
|
|
|
8,399
|
|
|
|
6,463
|
|
Provision for income taxes
|
|
|
3,754
|
|
|
|
3,420
|
|
|
|
5,203
|
|
|
|
1,197
|
|
|
|
1,588
|
|
|
|
2,616
|
|
|
|
3,256
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,477
|
|
|
$
|
5,908
|
|
|
$
|
7,986
|
|
|
$
|
1,821
|
|
|
$
|
2,266
|
|
|
$
|
4,187
|
|
|
$
|
5,143
|
|
|
$
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic
|
|
$
|
0.18
|
|
|
$
|
0.43
|
|
|
$
|
0.57
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
diluted
|
|
$
|
0.17
|
|
|
$
|
0.41
|
|
|
$
|
0.56
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
basic
|
|
|
13,971
|
|
|
|
13,865
|
|
|
|
13,919
|
|
|
|
13,856
|
|
|
|
13,915
|
|
|
|
14,070
|
|
|
|
14,258
|
|
|
|
14,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
diluted
|
|
|
14,520
|
|
|
|
14,351
|
|
|
|
14,346
|
|
|
|
14,293
|
|
|
|
14,328
|
|
|
|
14,437
|
|
|
|
14,614
|
|
|
|
14,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the fourth quarter of 2006, the Company increased income
tax expense related to state income tax in certain states for
2003 to 2006 by approximately $1.0 million, of which
approximately $0.5 million related to 2006. |
62
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosures
|
Effective March 14, 2005, upon the recommendation of the
Audit Committee, the Board of Directors dismissed
Deloitte & Touche LLP as its independent auditor and
appointed Ernst & Young LLP as its independent auditor
for the Companys fiscal year ending December 30,
2006. At the recommendation of the Audit Committee of the Board
of Directors, the engagement of Ernst & Young LLP was
approved by the Board of Directors and by the sole holder of the
Companys Class B Common Stock.
The report of Deloitte & Touche LLP on the consolidated
financial statements for the years ended December 25, 2004
and December 27, 2003 did not contain an adverse opinion or
disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope or accounting
principles. During the Companys fiscal years ended
December 25, 2004 and December 27, 2003 and through
the date of termination of the engagement, there were no
disagreements on any matter of accounting principles or
practices, financial statement disclosure, auditing scope or
procedure, between the Company and Deloitte & Touche
LLP.
During the Companys fiscal years ended December 25,
2004 and December 27, 2003 through the date of the
engagement, the Company did not consult Ernst & Young
LLP with respect to the application of accounting principles to
a specified transaction, either completed or proposed, or the
type of audit opinion that Ernst & Young LLP might
render on the Companys consolidated financial statements.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of disclosure controls and procedures
|
The Companys management, including the Chief Executive
Officer and the Chief Financial Officer, carried out an
evaluation of the effectiveness of the Companys disclosure
controls and procedures as of the end of the period covered by
this report. Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective
to provide a reasonable level of assurance that the information
required to be disclosed in the reports filed or submitted by
the Company under the Securities Exchange Act of 1934 was
recorded, processed, summarized and reported within the
requisite time periods.
|
|
(b)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and Board of Directors regarding the preparation and fair
presentation of published financial statements.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 30, 2006. In making this assessment, the Company
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on our
assessment we believe that, as of December 30, 2006, the
Companys internal control over financial reporting is
effective based on those criteria.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Managements assessment of the effectiveness of its
internal control over financial reporting as of
December 30, 2006 has been attested to by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included herein:
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of The Boston Beer Company, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that The Boston Beer Company, Inc.
maintained effective internal control over financial reporting
as of December 30, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Boston Beer Company, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that The Boston
Beer Company, Inc. maintained effective internal control over
financial reporting as of December 30, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, The Boston Beer Company, Inc. maintained,
in all material respects, effective internal control over
financial reporting as of December 30, 2006, based on the
COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The Boston Beer Company, Inc. and
subsidiaries as of December 30, 2006 and December 31,
2005, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the two
years in the period ended December 30, 2006, and our report
dated March 9, 2007 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 9, 2007
64
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(c)
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Changes
in internal control over financial reporting
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No changes in the Companys internal control over financial
reporting occurred during the quarter ended December 30,
2006 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
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Item 9B.
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Other
Information
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None.
PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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In December, 2002, the Board of Directors of the Company adopted
a (i) Code of Business Conduct and Ethics that applies to
its Chief Executive Officer and its Chief Financial Officer, and
(ii) Corporate Governance Guidelines.
These, as well as the charters of each of the Board Committees,
are posted on the Companys website,
www.bostonbeer.com, and are available in print to any
shareholder who requests them. Such requests should be directed
to the Investor Relations Department, The Boston Beer Company,
Inc., One Design Center Place, Suite 850, Boston, MA 02210.
The Company intends to disclose any amendment to, or waiver
from, a provision of its code of ethics that applies to the
Companys Chief Executive Officer or Chief Financial
Officer and that relates to any element of the Code of Ethics
definition enumerated in Item 406 of
Regulation S-K
by posting such information on the Companys website.
The information required by Item 10 is hereby incorporated
by reference from the registrants definitive Proxy
Statement for the 2007 Annual Meeting to be held on May 31,
2007.
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Item 11.
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Executive
Compensation
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The Information required by Item 11 is hereby incorporated
by reference from the registrants definitive Proxy
Statement for the 2007 Annual Meeting to be held on May 31,
2007.
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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Security
Ownership
The information required by Item 12 with respect to
security ownership of certain beneficial owners and management
is hereby incorporated by reference from the Registrants
definitive Proxy Statement for the 2007 Annual Meeting to be
held on May 31, 2007.
Related
Stockholder Matters
Equity
Compensation Plan Information
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Number of Securities to be
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Weighted-Average
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Number of Securities
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Issued Upon Exercise of
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Exercise Price of
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Remaining Available for
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Outstanding Options,
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Outstanding Options,
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Future Issuance Under
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Plan Category
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Warrants and Rights
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Warrants and Rights
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Equity Compensation Plans
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Equity Compensation Plans Approved
by Security Holders
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1,615,994
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$
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17.39
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739,759
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Equity Compensation Plans Not
Approved by Security Holders
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N/A
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N/A
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N/A
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Total
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1,615,994
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$
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17.39
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739,759
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65
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Item 13.
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Certain
Relationships and Related Transactions
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The information required by Item 13 is hereby incorporated
by reference from the registrants definitive Proxy
Statement for the 2007 Annual Meeting to be held on May 31,
2007.
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Item 14.
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Principal
Accountant Fees and Services
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The information required by Item 13 is hereby incorporated
by reference from the registrants definitive Proxy
Statement for the 2007 Annual Meeting to be held on May 31,
2007.
PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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(a)1. Financial Statements.
The following financial statements are filed as a part of this
report:
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Page
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33
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34
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35
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36
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37
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39
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40
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(a)2. Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
have been omitted because they are inapplicable or the required
information is shown in the consolidated financial statements,
or notes thereto, included herein.
(b) Exhibits
The following is a list of exhibits filed as part of this
Form 10-K:
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Exhibit No.
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Title
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3
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.1
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Amended and Restated By-Laws of
the Company, dated June 2, 1998 (incorporated by reference
to Exhibit 3.5 to the Companys
Form 10-Q
filed on August 10, 1998).
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3
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.2
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Restated Articles of Organization
of the Company, dated November 17, 1995, as amended
August 4, 1998.
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4
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.1
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Form of Class A Common Stock
Certificate (incorporated by reference to Exhibit 4.1 to
the Companys Registration Statement
No. 33-96164).
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10
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.1
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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 Companys Registration Statement
No. 33-96162).
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10
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.2
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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 Companys Registration Statement
No. 33-96164).
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66
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Exhibit No.
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Title
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10
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.3
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Deferred Compensation Agreement
between the Partnership and Alfred W. Rossow, Jr.,
effective December 1, 1992 (incorporated by reference to
Exhibit 10.3 to the Companys Registration Statement
No. 33-96162).
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10
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.4
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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
Companys Registration Statement
No. 333-1798).
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10
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.5
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Form of Employment Agreement
between the Partnership and employees (incorporated by reference
to Exhibit 10.5 to the Companys Registration
Statement No.
33-96162).
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10
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.6
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Services Agreement between The
Boston Beer Company, Inc. and Chemical Mellon Shareholder
Services, dated as of October 27, 1995 (incorporated by
reference to the Companys
Form 10-K,
filed on April 1, 1996).
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10
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.7
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Form of Indemnification Agreement
between the Partnership and certain employees and Advisory
Committee members (incorporated by reference to
Exhibit 10.7 to the Companys Registration Statement
No. 33-96162).
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10
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.8
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Stockholder Rights Agreement,
dated as of December, 1995, among The Boston Beer Company, Inc.
and the initial Stockholders (incorporated by reference to the
Companys
Form 10-K,
filed on April 1, 1996).
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+10
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.9
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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 Companys Registration Statement
No. 33-96164).
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+10
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.10
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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 Companys Registration Statement
No. 33-96164).
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+10
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.11
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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 Companys
Registration Statement
No. 33-96164).
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10
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.12
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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 Companys Registration Statement
No. 33-96162).
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+10
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.13
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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
Companys Registration Statement No.
33-96164).
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+10
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.14
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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 Companys Registration
Statement
No. 33-96164).
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10
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.15
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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
Companys Registration Statement
No. 33-96162).
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+10
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.16
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Letter Agreement between Boston
Beer Company Limited Partnership and Joseph E.
Seagram & Sons, Inc. (incorporated by reference to
Exhibit 10.16 to the Companys Registration Statement
No. 33-96162).
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10
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.17
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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
Companys Registration Statement No.
33-96164).
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10
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.18
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Amendment to Revolving Credit
Agreement between Fleet Bank of Massachusetts, N.A. and the
Partnership (incorporated by reference to Exhibit 10.18 to
the Companys Registration Statement
No. 33-96164).
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10
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.19
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1996 Stock Option Plan for
Non-Employee Directors (incorporated by reference to the
Companys
Form 10-K,
filed on March 31, 1997).
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67
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Exhibit No.
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Title
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+10
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.20
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Production Agreement between The
Stroh Brewery Company and Boston Beer Company Limited
Partnership, dated January 14, 1997 (incorporated by
reference to the Companys
Form 10-K,
filed on March 31, 1997).
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+10
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.21
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Letter Agreement between The Stroh
Brewery Company and Boston Beer Company Limited Partnership,
dated January 14, 1997 (incorporated by reference to the
Companys
Form 10-K,
filed on March 31, 1997).
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+10
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.22
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Agreement between Boston Beer
Company Limited Partnership and The Schoenling Brewing Company,
dated May 22, 1996 (incorporated by reference to the
Companys
Form 10-K,
filed on March 31, 1997).
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10
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.23
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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 Companys
Form 10-Q,
filed on May 12, 1997).
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+10
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.24
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Amended and Restated Agreement
between Boston Brewing Company, Inc. and the Genesee Brewing
Company, Inc. dated April 30, 1997 (incorporated by
reference to the Companys
Form 10-Q,
filed on August 11, 1997).
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+10
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.26
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Fifth Amendment, dated
December 31, 1997, to Amended and Restated Agreement
between Pittsburgh Brewing Company and Boston Brewing Company,
In |