e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) |
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OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended April 1, 2006
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) |
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OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from .......... to ..........
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS
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04-3284048 |
(State or other jurisdiction of incorporation
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(I.R.S. Employer |
or organization)
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Identification No.) |
75 Arlington Street, Boston, Massachusetts
(Address of principal executive offices)
02116
(Zip Code)
(617) 368-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer
x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.)
Yes o No x
Number of shares outstanding of each of the issuers classes of common stock, as of May 5, 2006:
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Class A Common Stock, $.01 par value
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9,927,596 |
Class B Common Stock, $.01 par value
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4,107,355 |
(Title of each class)
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(Number of shares) |
THE BOSTON BEER COMPANY, INC.
FORM 10-Q
QUARTERLY REPORT
APRIL 1, 2006
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1.
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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April 1, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
59,173 |
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$ |
41,516 |
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Short-term investments |
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22,425 |
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Accounts receivable, net of allowance for
doubtful accounts of $199 and $116 as of April
1, 2006 and December 31, 2005, respectively |
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15,820 |
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9,534 |
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Inventories |
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13,367 |
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13,649 |
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Prepaid expenses and other assets |
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1,980 |
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1,236 |
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Deferred income taxes |
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829 |
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829 |
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Total current assets |
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91,169 |
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89,189 |
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Property, plant and equipment, net |
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26,310 |
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26,525 |
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Other assets |
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2,174 |
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1,963 |
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Goodwill |
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1,377 |
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1,377 |
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Total assets |
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$ |
121,030 |
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$ |
119,054 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
10,573 |
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$ |
11,378 |
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Accrued expenses |
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16,970 |
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17,361 |
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Total current liabilities |
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27,543 |
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28,739 |
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Deferred income taxes |
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2,390 |
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2,390 |
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Other long-term liabilities |
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1,897 |
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1,946 |
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Total liabilities |
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31,830 |
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33,075 |
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Commitments and Contingencies |
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Stockholders Equity: |
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Class A Common Stock, $.01 par value;
22,700,000 shares authorized; 9,921,018 and
9,814,457 issued and outstanding as of April 1,
2006 and December 31, 2005, respectively |
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99 |
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98 |
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Class B Common Stock, $.01 par value; 4,200,000
shares authorized; 4,107,355 issued and
outstanding |
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41 |
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41 |
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Additional paid-in-capital |
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73,709 |
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70,808 |
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Unearned compensation |
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(353 |
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Accumulated other comprehensive loss, net of tax |
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(196 |
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(196 |
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Retained earnings |
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15,547 |
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15,581 |
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Total stockholders equity |
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89,200 |
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85,979 |
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Total liabilities and stockholders equity |
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$ |
121,030 |
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$ |
119,054 |
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The accompanying notes are an integral part of these consolidated financial statements
3
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three months ended |
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April 1, |
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March 26, |
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2006 |
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2005 |
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Revenue |
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$ |
62,738 |
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$ |
53,625 |
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Less excise taxes |
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5,850 |
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4,916 |
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Net revenue |
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56,888 |
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48,709 |
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Cost of goods sold |
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24,215 |
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18,877 |
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Gross profit |
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32,673 |
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29,832 |
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Operating expenses: |
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Advertising, promotional and selling expenses |
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25,378 |
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19,808 |
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General and administrative expenses |
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4,926 |
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4,020 |
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Total operating expenses |
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30,304 |
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23,828 |
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Operating income |
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2,369 |
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6,004 |
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Other income, net: |
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Interest income, net |
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588 |
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301 |
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Other income, net |
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61 |
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158 |
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Total other income, net |
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649 |
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459 |
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Income before provision for income taxes |
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3,018 |
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6,463 |
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Provision for income taxes |
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1,197 |
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2,500 |
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Net income |
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$ |
1,821 |
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$ |
3,963 |
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Net income per common share basic |
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$ |
0.13 |
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$ |
0.28 |
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Net income per common share diluted |
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$ |
0.13 |
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$ |
0.27 |
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Weighted-average number of common shares basic |
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13,856 |
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14,275 |
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Weighted-average number of common shares diluted |
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14,293 |
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14,698 |
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The accompanying notes are an integral part of these consolidated financial statements
4
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months ended |
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April 1, |
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March 26, |
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2006 |
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2005 |
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Cash flows provided by operating activities: |
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Net income |
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$ |
1,821 |
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$ |
3,963 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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1,131 |
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980 |
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Loss on disposal of property, plant and equipment |
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26 |
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Bad debt expense |
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105 |
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Stock-based compensation expense |
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378 |
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36 |
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Deferred income taxes |
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(422 |
) |
Excess tax benefit from stock-based compensation arrangements |
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(587 |
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413 |
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Purchases of trading securities |
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(6,050 |
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(1,500 |
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Proceeds from sale of trading securities |
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28,475 |
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1,600 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(6,391 |
) |
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2,337 |
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Inventories |
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282 |
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(194 |
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Prepaid expenses and other assets |
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(458 |
) |
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(4,657 |
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Accounts payable |
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(805 |
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(3,780 |
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Accrued expenses |
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196 |
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5,645 |
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Other
long-term liabilities |
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(49 |
) |
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Net cash provided by operating activities |
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18,074 |
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4,421 |
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Cash flows used in investing activities: |
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Purchases of property, plant and equipment |
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(907 |
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(2,465 |
) |
Proceeds from disposal of property, plant and equipment |
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1 |
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Increase in other long-term assets |
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(45 |
) |
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Net cash used in investing activities |
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(951 |
) |
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(2,465 |
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Cash flows provided by financing activities: |
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Repurchase of Class A common stock |
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(1,855 |
) |
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Proceeds from exercise of stock options |
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1,764 |
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|
697 |
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Excess tax benefit from stock-based compensation arrangements |
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587 |
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Net proceeds from sale of investment shares |
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38 |
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76 |
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Net cash provided by financing activities |
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534 |
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773 |
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Change in cash and cash equivalents |
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17,657 |
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2,729 |
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Cash and cash equivalents at beginning of period |
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41,516 |
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35,794 |
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Cash and cash equivalents at end of period |
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$ |
59,173 |
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$ |
38,523 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
255 |
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$ |
856 |
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The accompanying notes are an integral part of these consolidated financial statements
5
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
The Boston Beer Company, Inc. and its subsidiaries (the Company) are engaged in the business of
selling low alcoholic 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. The accompanying consolidated statement of financial
position as of April 1, 2006 and the statements of consolidated operations and consolidated cash
flows for the interim periods ending April 1, 2006 and March 26, 2005 have been prepared by the
Company, without audit, in accordance with U.S. generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and footnotes
required for complete financial statements by generally accepted accounting principles and should
be read in conjunction with the audited financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2005.
Managements Opinion
In the opinion of the Companys management, the Companys unaudited consolidated financial position
as of April 1, 2006 and the results of its consolidated operations and consolidated cash flows for
the interim periods ended April 1, 2006 and March 26, 2005, reflect all adjustments (consisting
only of normal and recurring adjustments) necessary to present fairly the results of the interim
periods presented. The operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for the interim period
ended March 26, 2005 have been reclassified to permit comparison with the presentation for the
interim period ended April 1, 2006. Specifically, the Company has reclassified the cash flows
from activities of its trading securities from cash flows from investing activities to cash flows
from operating activities. The net impact was an increase in cash flows from operating activities
and a decrease in cash flows from investing activities by $0.1 million for the interim period
ended March 26, 2005.
B. Short-Term Investments
The Companys short-term investments consisted of municipal auction rate securities as of March
26, 2005, and were classified as trading securities, which are recorded at fair market value and
whose change in fair market value, if any, is recorded in earnings. As of April 1, 2006, the
Company had liquidated all of its short-term investments in municipal auction rate securities and
invested the proceeds in highly liquid money market funds.
The Company recorded no realized gains or losses on short-term investments for the interim periods
ended April 1, 2006 and March 26, 2005.
C. Inventories
Inventories consist of raw materials, work in process and finished goods. Raw materials, which
principally consist of hops, brewing materials and packaging, are stated at the lower of cost,
determined on the first-in, first-out basis, or market. The cost elements of work in process and
finished goods inventory consist of raw materials, direct labor and manufacturing overhead.
Inventories consist of the following:
6
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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April 1, |
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December 31, |
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2006 |
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2005 |
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(in thousands) |
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Raw materials, principally hops |
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$ |
11,116 |
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$ |
11,354 |
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Work in process |
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1,038 |
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1,192 |
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Finished goods |
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1,213 |
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|
1,103 |
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$ |
13,367 |
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$ |
13,649 |
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D. Net Income per Share
The following table sets forth the computation of basic and diluted earnings per share:
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For the three months ended |
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April 1, 2006 |
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March 26, 2005 |
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(in thousands, except per share data) |
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Net income |
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$ |
1,821 |
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|
$ |
3,963 |
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Shares used in net income per common share basic |
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13,856 |
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|
14,275 |
|
Effect of dilutive securities: |
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Stock options |
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|
429 |
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|
423 |
|
Non-vested investment shares and restricted stock |
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8 |
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|
|
|
|
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Dilutive potential common shares |
|
|
437 |
|
|
|
423 |
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Shares used in net income per common share diluted |
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|
14,293 |
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|
14,698 |
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|
Net income per common share basic |
|
$ |
0.13 |
|
|
$ |
0.28 |
|
|
|
|
|
|
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|
Net income per common share diluted |
|
$ |
0.13 |
|
|
$ |
0.27 |
|
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|
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E. Comprehensive Income
Comprehensive income represents net income, plus minimum pension liability adjustment. The minimum
pension liability adjustments for the interim periods ended April 1, 2006 and March 26, 2005 were
immaterial.
F. Commitments and Contingencies
Purchase Commitments
The Company had outstanding non-cancelable purchase commitments related to advertising contracts
of approximately $8.8 million at April 1, 2006.
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, denominated mostly in Euros, to which the Company is committed. Hops purchase
commitments outstanding at April 1, 2006 totaled $8.0 million, based on the exchange rates at
April 1, 2006.
Other
outstanding purchase commitments totaled $1.3 million at April 1, 2006.
Lease Commitments
The Company has lease commitments for office space and equipment.
On March 24, 2006, the Company entered into a new 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.
7
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate
minimum annual rental payments under lease agreements are as follows:
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(in thousands) |
Under 1 year |
|
$ |
755 |
|
1-3 years |
|
|
1,444 |
|
3-5 years |
|
|
1,305 |
|
Thereafter |
|
|
4,241 |
|
|
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Total |
|
$ |
7,745 |
|
|
|
|
|
G. Stock-Based Compensation
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 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
members of senior management, based on the Companys performance, with a maximum contractual term
of ten years. During the interim period ended April 1, 2006, the
Company granted 94,000 options to purchase shares
of its Class A common stock to employees at market price. 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 the
interim period ended April 1, 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 from the
Companys continued 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 the interim
period ended April 1, 2006, employees elected to purchase an aggregate of 19,577 investment shares.
The Company has reserved 3.7 million shares of Class A Common Stock for issuance pursuant to the
Equity Plan, of which 0.1 million shares were available for grant as of April 1, 2006. Cancelled
employee stock options are returned to the reserve under the Equity Plan for future grants.
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 the interim period ended April 1, 2006, the Company
granted options to purchase an aggregate of 6,000 shares of the Companys Class A Common Stock to
a non-employee director.
8
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 April 1,
2006. Cancelled non-employee directors stock options are returned to the reserve under the
Equity Plan for future grants.
Adoption of Statement of Financial Accounting Standards No. 123 (revised)
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised), Share-Based Payment (SFAS No. 123R), which generally requires recognition of
share-based compensation costs based on fair value in financial statements. Prior to the
adoption of SFAS No. 123R, the Company accounted for share-based compensation using the intrinsic
value method under Accounting Principals 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 interim period ended April 1, 2006, the effect of the adoption of
SFAS No. 123R was a decrease to income before provision for income taxes by $0.3 million and a
decrease to net income by $0.2 million, or $0.01 per basic and diluted common share. The
following table illustrates the effect on net income and net income per share if the Company had
recognized stock-based compensation expense under the fair value method for the interim period
ended March 26, 2005:
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 26, 2005 |
|
|
|
(in thousands, |
|
|
|
except per |
|
|
|
share data) |
|
Net income, as reported |
|
$ |
3,963 |
|
Add: Stock-based employee compensation
expense reported in net income, net of
tax effects |
|
|
22 |
|
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects |
|
|
(283 |
) |
|
|
|
|
Pro forma net income |
|
$ |
3,702 |
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
Basic as reported |
|
$ |
0.28 |
|
Basic pro forma |
|
$ |
0.26 |
|
Diluted as reported |
|
$ |
0.27 |
|
Diluted pro forma |
|
$ |
0.25 |
|
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 is presented in the statement of
cash flows as a financing cash inflow, while this amount was presented in operating cash flow
activities prior to the adoption of SFAS No. 123R. Consequently, the adoption of SFAS No. 123R
decreased cash flow from operating activities and increased cash flow from financing activities
by $0.6 million for the interim period ended April 1, 2006. Total cash flow remains unchanged
from what would have been reported under the prior accounting rules.
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, January 1, 2006. 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 123R under the modified-prospective transition method. Consequently,
included in the Companys statements of operations for the interim periods ended April 1, 2006 and
March 26, 2005 was $0.4 million of stock-based compensation expense under SFAS No. 123R (or $0.2
million net of tax
9
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
effects) and $36,000 of stock-based compensation expense under APB Opinion No. 25 (or $22,000 net
of tax effects), respectively. Further, for the interim period ended April 1, 2006, $0.2 million
of stock-based compensation expense was included in advertising, promotional and selling
expenses and $0.2 million in stock-based
compensation expense was included in general and administrative expenses.
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 interim period ended March 26,
2005 was $9.21 per share, as calculated using
the Black-Scholes option-pricing model. The weighted-average fair value of stock options granted
during the interim period ended April 1, 2006 was $8.78 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 the interim period ended April 1, 2006, the weighted-average fair value
would have been $10.81 per share and stock-based compensation expense for the period would have been higher
by $41,000.
Weighted average assumptions used to estimate fair values of stock options on the date of grants
are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
April 1, |
|
|
March 26, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Binomial |
|
|
(Black-Scholes |
|
|
|
Model) |
|
|
Model) |
|
Expected volatility |
|
|
31.71% |
|
|
|
34.22% |
|
Expected life of option |
|
|
^ |
|
7.1 years |
|
Risk-free interest rate |
|
|
3.73% |
|
|
|
3.48% |
|
Expected dividends |
|
|
0% |
|
|
|
0% |
|
Exercise factor |
|
1.5 times |
|
|
* |
|
Discount for post-vesting restrictions |
|
|
6.6% |
|
|
|
* |
|
|
|
|
^ |
|
The expected life of the option is an output of the binomial
model, which is a weighted average of 8.0 years for options
granted during the interim period ended April 1, 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 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 restricted stock awards granted during the interim period ended April 1, 2006 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 vesting tranche. These methods are
consistent with the methods the Company used in recognizing stock-based
10
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
compensation expense for disclosure purposes under SFAS No. 123 prior to the adoption of SFAS No.
123R.
Under SFAS No. 123R, compensation expense is recognized less estimated forfeitures. For the
interim period ended April 1, 2006, the estimated
forfeiture rate used in awards that vest based on service conditions
was 15%, or $52,000. The forfeiture
rate was based upon historical experience and the Company periodically reviews this rate to
ensure proper projection of future forfeitures. Additionally, based on historical experience,
there are no significant differences in actual forfeiture rates between groups of employees. No
compensation expense was recognized for certain performance-based employee stock options during
the interim period ended April 1, 2006, nor will any until such
time when the Company can estimate that
it is probable performance targets will be met. For pro forma compensation expense disclosure
purposes for the interim period ended March 26, 2005, forfeitures are recognized as occurred
according to SFAS No. 123.
As of April 1, 2006, there were $3.2 million of unrecognized compensation costs, net of estimated
forfeitures, related to unvested share-based compensation arrangements that are expected to vest.
That cost is recognized based on service condition and is expected to be recognized over a
weighted-average period of 2.3 years. In addition, as of April 1, 2006, there were $4.0 million
of unrecognized compensation costs related to an aggregate of 445,600 shares of unvested employee
stock options with vesting requirements based on the achievement of various performance targets
through 2010. Assuming performance targets will be met, unrecognized compensation costs
associated with these performance-based employee stock options are expected to be recognized over
a weighted-average period of 2.3 years.
Option Activity
Stock option activity during the three months ended April 1, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
|
|
|
|
Exercise |
|
|
|
of Shares |
|
|
Option Price |
|
|
Price |
|
Outstanding at December 31, 2005 |
|
|
1,854,700 |
|
|
$ |
0.01-$35.09 |
|
|
$ |
16.18 |
|
Granted |
|
|
100,000 |
|
|
$ |
24.95-$26.33 |
|
|
|
25.20 |
|
Canceled |
|
|
(24,440 |
) |
|
$ |
14.47-$24.95 |
|
|
|
20.49 |
|
Exercised |
|
|
(133,700 |
) |
|
$ |
7.16-$21.14 |
|
|
|
15.31 |
|
|
|
|
|
|
|
Outstanding at April 1, 2006 |
|
|
1,796,560 |
|
|
$ |
0.01-$35.09 |
|
|
$ |
16.68 |
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at April 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
Exercise Price |
|
of Shares |
|
|
Life |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
|
Life |
|
$0.01 |
|
|
1,917 |
|
|
0.91 years |
|
$ |
0.01 |
|
|
|
1,917 |
|
|
$ |
0.01 |
|
|
0.91 years |
$7.16 - $9.53 |
|
|
399,560 |
|
|
3.09 years |
|
$ |
8.95 |
|
|
|
399,560 |
|
|
$ |
8.95 |
|
|
3.09 years |
$11.09 - $16.64 |
|
|
510,463 |
|
|
5.08 years |
|
$ |
14.47 |
|
|
|
380,563 |
|
|
$ |
14.20 |
|
|
4.43 years |
$17.55 - $26.33 |
|
|
857,120 |
|
|
8.13 years |
|
$ |
21.14 |
|
|
|
201,430 |
|
|
$ |
19.39 |
|
|
6.63 years |
$29.30 - $35.09 |
|
|
27,500 |
|
|
0.93 years |
|
$ |
32.46 |
|
|
|
17,500 |
|
|
$ |
30.95 |
|
|
0.93 years |
|
|
|
|
|
|
|
|
|
1,796,560 |
|
|
6.03 years |
|
$ |
16.68 |
|
|
|
1,000,970 |
|
|
$ |
13.42 |
|
|
4.27 years |
|
|
|
|
|
|
11
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total fair value of options vested during the interim period ended April 1, 2006 was $1.0
million. The aggregate intrinsic value of stock options exercised during the interim period
ended April 1, 2006 was $1.5 million. The aggregate intrinsic value of outstanding and
exercisable stock options as of April 1, 2006 was $17.1 million and $12.8 million, respectively.
Non-Vested
Shares Activity
The
following table summarizes vesting activities of shares issued under the
investment share program and restricted stock awards during the
interim period ended April 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Fair |
|
|
|
of
Shares |
|
|
Value |
|
Non-vested
at December 31, 2005 |
|
|
70,583 |
|
|
$ |
8.50 |
|
Granted |
|
|
51,656 |
|
|
|
20.38 |
|
Vested
|
|
|
(22,753 |
) |
|
|
7.58 |
|
Forfeited |
|
|
(6,124 |
) |
|
|
13.85 |
|
Non-vested
at April 1, 2006
|
|
|
93,362 |
|
|
$ |
14.95 |
|
H. Subsequent Events
Effective April 3, 2006, the Company amended certain of the payment terms under its production
contract with High Falls Brewing Company, LLC (High Falls) to provide that the Company will
henceforth buy directly or prepay High Falls for certain raw materials used in the brewing
process, so that ownership of these materials and work in process rests with the Company.
Consistent with the amendment, the Company paid for and took title to raw materials then on hand
at High Falls. The Company has the right to rescind the amendment on thirty days notice.
Subsequent to April 1, 2006, the Company received the anticipated notice from Miller Brewing
Company terminating the Companys existing contract relationship with Miller Brewing Company,
effective October 31, 2008; the termination is in accordance with the contract and the 2003
arbitration award.
12
PART I. Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the significant factors affecting the consolidated operating
results, financial condition and liquidity and cash flows of the Company for the three-month period
ended April 1, 2006 as compared to the three-month period ended March 26, 2005. This discussion
should be read in conjunction with the Managements Discussion and Analysis of Financial Condition
and Results of Operations, and the Consolidated Financial Statements of the Company and Notes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
RESULTS OF OPERATIONS
Boston Beers flagship product is Samuel Adams Boston Lagerâ. For purposes of this
discussion, Boston Beers core brands include all products sold under the Samuel Adamsâ,
Sam Adamsâ, Twisted Teaâ and HardCoreâ trademarks. Core brands do not
include the immaterial amount of products brewed at the Cincinnati Brewery under contract
arrangements for third parties.
Three Months Ended April 1, 2006 compared to Three Months Ended March 26, 2005
Net revenue. Net revenue increased by $8.2 million or 16.8% to $56.9 million for the three months
ended April 1, 2006, as compared to $48.7 million for the three months ended March 26, 2005. The
increase was primarily due to an increase in the volume of Boston Beers core brands as well as
price increases of approximately 2% implemented during the first quarter of 2006.
Volume. Total shipment volume increased by 15.7% to 324,000 barrels for the three months ended
April 1, 2006, as compared to 280,000 barrels for the three months ended March 26, 2005.
Contract shipment volume increased by 6,000 barrels for the first quarter 2006, over the three
months ended March 26, 2005. Volume for the core brands increased by 13.7% to 316,000 barrels
for the three months ended April 1, 2006, as compared to 278,000 barrels for the three months
ended March 26, 2005, due primarily to increased shipments of the Samuel Adamsâ
Brewmasters Collection, Samuel Adamsâ Seasonal brands and Twisted Teaâ, and to a
lesser extent, increased shipments of Sam Adams Lightâ.
Shipments and orders in-hand for core brands suggests that shipments for the second quarter 2006
will be up approximately 17.0% compared to the same period last year. Actual shipments may
differ from this estimate and no inferences should be drawn with respect to shipments in future
periods.
Depletions, or sales by the wholesalers to retailers, of the Companys core products for the first
quarter of 2006 increased by approximately 18% over the same period in 2005. The Company believes
that current wholesalers inventories are at appropriate levels.
Selling Price. The selling price per barrel for core brands increased by 2.1% to $178.49 per barrel
for the three months ended April 1, 2006, as compared to $174.82 for the same period last year.
This increase is primarily due to the price increases implemented in the first quarter of 2006.
Gross profit. Gross profit for core products was $103.09 per barrel for the three months ended
April 1, 2006, as compared to $107.31 for the three months ended March 26, 2005. Gross margin for
core products was 57.8% for the three months ended April 1, 2006, as compared to 61.4% for the
three months ended March 26, 2005. The decreases in gross profit per barrel and gross margin are
primarily due to an increase in production, packaging, utility and in-bound freight costs, the
latter of which resulted from higher fuel costs. Additionally, gross profit per barrel and gross
margin were negatively impacted by increased state excise taxes related to Twisted Tea® due to
changes in regulations. The cost increases that drove the decrease in gross margin are somewhat
offset by the increase in selling prices.
Cost of goods sold for core brands increased by $7.89 per barrel to $75.40 per barrel for the three
months ended April 1, 2006, as compared to $67.51 per barrel for the three months ended March 26,
2005. The increase is due primarily to higher manufacturing costs, including increases in utility,
packaging material
and in-bound freight costs, increased manufacturing costs related to Twisted Tea® as a result of
changes in formulation and new regulation requirements, and a shift in the product mix.
13
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company includes freight charges related to the movement of finished goods from its
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
$5.6 million, or 28.1%, to $25.4 million for the three months ended April 1, 2006, as compared to
$19.8 million for the three months ended March 26, 2005. Advertising, promotional and selling
expenses for core brands were 45.0% of net revenue, or $80.31 per barrel, for the three months
ended April 1, 2006, as compared to 40.8% of net revenue, or $71.25 per barrel, for the three
months ended March 26, 2005. The increase is primarily due to the timing of point of sale
merchandise costs, promotional commitment expenditures and advertising spending relating to the
Take Pride in Your Beer campaign, all of which had limited spending in the first quarter of 2005.
Increased freight costs for delivering products to customers due to rising fuel prices and the
introduction of new tap handles in the first quarter 2006 also contributed to higher advertising,
promotional and selling expenses. To a lesser extent, salary increases and stock-based
compensation expense related to the sales force, the latter of which is being recognized upon the
adoption of Statement of Financial Accounting Standards No. 123 (revised) (SFAS No. 123R) on
January 1, 2006, contributed to the increase in advertising, promotional and selling expenses.
The Company conducts certain advertising and promotional activities in the wholesalers markets,
and the wholesalers make contributions to the Company for such efforts. These amounts are included
in the 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 $0.9 million, or
22.5%, to $4.9 million for the three months ended April 1, 2006, as compared to $4.0 million for
the same period last year. The increase primarily reflects an increase in salary and benefit
costs, stock-based compensation expense, insurance costs and legal fees.
Stock-Based Compensation Expense. For the interim period ended April 1, 2006, an aggregate of
$0.4 million in stock-based compensation expense is included in advertising, promotional and
selling expense and general and administrative expenses. On January 1, 2006, the Company adopted
SFAS No. 123R, which generally requires recognition of share-based compensation costs based on
fair value in financial statements. Prior to the adoption of SFAS No. 123R, the Company
accounted for share-based compensation using the intrinsic value method under Accounting
Principals 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 interim
period ended April 1, 2006, the effect of the adoption of SFAS No. 123R was a decrease to income
before provision for income taxes by $0.3 million and a decrease to net income by $0.2 million,
or $0.01 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 interim period ended March 26, 2005, such expense
would have decreased income before provision for income taxes by $0.4 million and net income by
$0.3 million, or $0.02 per basic and diluted common share.
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
14
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 interim period ended March 26, 2005 was $9.21 per
share, as calculated using the Black-Scholes
option-pricing model. The weighted-average fair value of stock options granted during the interim
period ended April 1, 2006 was $8.78 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 the
interim period ended April 1, 2006, the weighted-average fair
value would have been $10.81 per share and
stock-based compensation expense for the period would have been higher by $41,000.
Under SFAS No. 123R, compensation expense is recognized less estimated forfeitures. For the
interim period ended April 1, 2006, the estimated forfeiture
rate used on awards that vest based on service conditions was 15%, or $52,000. The forfeiture
rate was based upon historical experience and the Company periodically reviews this rate to
ensure proper projection of future forfeitures. Additionally, based on historical experience,
there are no significant differences in actual forfeiture rates between groups of employees. No
compensation expense was recognized for certain performance-based employee stock options during
the interim period ended April 1, 2006, nor will any be
recognized until such time when the Company can estimate that
it is probable that performance targets will be met. For pro forma compensation expense disclosure
purposes for the interim period ended March 26, 2005, forfeitures were recognized as occurred
according to SFAS No. 123.
As of April 1, 2006, there were $3.2 million of unrecognized compensation costs, net of estimated
forfeitures, related to unvested share-based compensation arrangements that are expected to vest.
That cost is recognized based on service condition and is expected to be recognized over a
weighted-average period of 2.3 years. In addition, as of April 1, 2006, there were $4.0 million of
unrecognized compensation costs related to an aggregate of 445,600 shares of unvested employee
stock options with vesting requirements based on the achievement of various performance targets
through 2010. Assuming performance targets will be met, unrecognized compensation costs associated
with these performance-based employee stock options are expected to be recognized over a
weighted-average period of 2.3 years.
Total other income, net. Other income increased by $0.2 million during the quarter ended April 1,
2006 as compared to the quarter ended March 26, 2005. This increase is due to higher interest
yields in the investment portfolio, offset by other miscellaneous expenses.
Provision for income taxes. The Companys effective tax rate increased to approximately 39.7% for
the three months ended April 1, 2006 from 38.7% for the same period last year. The increase in the
effective tax rate, as compared to the prior year, is due to changes in the apportionment of income
among states.
2006
Outlook
Based on current known information, the Company is facing overall production and freight cost
increases of between 5% and 10% over full year 2005, which could vary depending on actual energy
costs during 2006, as well as other factors, and 2006 gross margin could be down 1% to 2% below
full year 2005.
The Company still expects 2006 earnings per diluted share to be between $1.10 and $1.18, absent
any significant change in currently planned levels of brand support and before accounting for the
impact of the adoption of FASB 123R, Share-Based Compensation, based on volume increases above the
original expectation for the full year offsetting these cost
pressures. The Company estimates that its adoption of SFAS
No. 123R will reduce earnings per diluted share by between $0.06
and $0.11 in
2006, including a $0.01 per diluted share impact which has been
recorded in the first quarter of 2006.
This impact will depend on the vesting of certain performance-based options. The Companys
ability to attain earnings growth in 2006 is dependent on achieving 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 investment in support of its brands in order to grow volume and earnings.
15
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $17.7 million to $59.2 million as of April 1, 2006 from
$41.5 million as of December 31, 2005. For the three months ended April 1, 2006, the increase in
cash and cash equivalents was mainly due to cash flows from operating activities, which were due
primarily to the sale of short-term investments, and this increase was slightly offset by cash
used in investing activities for the purchase of property, plant and equipment.
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, while this amount was presented in operating cash flow activities prior
to the adoption of SFAS No. 123R. Consequently, the adoption of SFAS No. 123R decreased cash
flow from operating activities and increased cash flow from financing activities by $0.6 million
for the interim period ended April 1, 2006. Total cash flow remains unchanged from what would
have been reported under the prior accounting rules.
Cash flows from operating activities were $18.1 million and $4.4 million for the fiscal quarters
ended April 1, 2006 and March 26, 2005, respectively. The increase in cash flows from operating
activities during the first quarter 2005 as compared to the prior year was primarily due to the
sale of $22.4 million of short-term investments. This increase was partially offset by an
increase in accounts receivable, which is due mainly to the increase in shipment volume in the
first quarter 2006, and a decrease in net income for the first quarter 2006.
Cash flows
used in investing activities decreased by $1.5 million due to higher purchases of
property, plant and equipment in the first quarter 2005 related to the expansion of the
Cincinnati Brewery.
During the quarter ended April 1, 2006, the Companys cash was primarily invested in high-grade
taxable and tax-exempt money market funds and high-grade municipal auction rate securities with
short-term maturities. The objective is to preserve principal, maintain liquidity, optimize
return on investment and minimize expenses associated with the selection and management of
investment securities. As of April 1, 2006, the Company had liquidated all of its short-term
investments in municipal auction rate securities and invested the proceeds in highly liquid money
market funds.
The Company continues to evaluate its long term production strategy, including potential ownership
or construction of a new brewery, or new contract relationships. Subsequent to April 1, 2006, the
Company received the anticipated notice from Miller Brewing Company terminating the Companys
existing contract relationship with Miller Brewing Company, effective October 31, 2008; the
termination is in accordance with the contract and the 2003 arbitration award. While the Company
believes that there will be adequate other contract capacity to absorb its production requirements
at acceptable economics, there is no guarantee that the current economics can be maintained.
Accordingly, the Company is accelerating its review of available production options. If the
Company chooses to execute a strategy of 100% production capacity ownership and builds a brewery,
it currently estimates that, based on building a brewery in the
Northeast, this could require a capital investment of $70.0 to $90.0 million over
two years, with the expectation that there would be some improvement in operating and freight
costs resulting from this investment. This estimate could change based on the actual production
capacity and capability built and also based upon the Companys
consideration of long-term production and freight solutions for other
areas of the United States. The Company currently estimates total capital expenditures in 2006
to be between $7.0 and $10.0 million, but this estimate could change significantly based on the
outcome of the Companys evaluation of its long term production strategy.
Cash flows
from financing activities decreased by $0.2 million for the quarter ended April 1,
2006 as compared to the same period last year primarily due to repurchases of the Companys Class
A Common Stock under its Stock Repurchase Program, partially offset by an increase in stock
option exercises and an increase due to including cash retained as a
result of tax benefits in excess of recognized compensation costs
relating to share-based awards as a financing activity upon the
adoption of SFAS No. 123R.
During the three months ended April 1, 2006, the Company repurchased $1.9 million of its Class A
Common Stock. Through May 9, 2006, the Company has repurchased a cumulative total of approximately
7.7 million shares of its Class A Common Stock for an aggregate purchase price of $89.2 million,
and had $10.8 million remaining on the $100.0 million share buyback program set by its Board of
Directors. As of
16
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
May 9,
2006, the Company had 9.9 million shares of Class A Common Stock and 4.1 million shares of
Class B Common Stock outstanding. The Company continues to evaluate the best way to utilize its
excess cash balance, and absent significant capital needs for its production strategy, expects to
continue the stock repurchase program within the parameters set by the Board of Directors.
With working capital of $63.6 million and $20.0 million in unused credit facilities as of April
1, 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 its current projections of capital expenditure. However, the current projections do not
include any major brewery investments that could be required to transition the Companys brewing
strategy to the 100% production capacity ownership currently under evaluation. If the Company
pursues this strategy, it would potentially seek alternative forms of funding, including, but not
limited to borrowing arrangements with lending institutions. In such event, adequate funds may
not be available when needed, or, may be available only on terms which could have a negative
impact on the Companys business and results of operations. The Companys $20.0 million credit
facility expires on March 31, 2007. As of the date of this filing, the Company is not in
violation of any of its covenants under the credit facility and there are no amounts outstanding
under the credit facility.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance Sheet Arrangements
At April 1, 2006, the Company did not have off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
On March 24, 2006, the Company entered into a new 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.
The Company has lease commitments for office space and equipment, and minimum annual rental
payments under these agreements are as follows.
|
|
|
|
|
|
|
(in thousands) |
Under 1 year |
|
$ |
755 |
|
1-3 years |
|
|
1,444 |
|
3-5 years |
|
|
1,305 |
|
Thereafter |
|
|
4,241 |
|
|
|
|
|
Total |
|
$ |
7,745 |
|
|
|
|
|
Effective April 3, 2006, the Company amended certain of the payment terms under its production
contract with High Falls Brewing Company, LLC (High Falls) to provide that the Company will
henceforth buy directly or prepay High Falls for certain raw materials used in the brewing
process, so that ownership of these materials and work in process rests with the Company. In
connection with the amendment, the Company paid for and took title to raw materials then on hand
at High Falls. The Company has the right to rescind the amendment on 30 days notice.
Subsequent to April 1, 2006, the Company received the anticipated notice from Miller Brewing
Company terminating the Companys existing contract relationship with Miller Brewing Company,
effective October 31, 2008; the termination is in accordance with the contract and the 2003
arbitration award.
17
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
There were no other material changes outside of the ordinary course of the Companys business to
contractual obligations during the three month period ended April 1, 2006.
Critical Accounting Policies
There were no material changes to the Companys critical accounting policies during the three month
period ended April 1, 2006. except as follows:
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the fair value recognition
provisions of Statement of Financial Accounting Standards
(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 models 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. Changes in the
subjective assumptions can materially affect the amount of stock-based compensation
expense recognized on the consolidated statements of income.
FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q and in other documents incorporated herein, as well as in
oral statements made by the Company, statements that are prefaced with the words may, will,
expect, anticipate, continue, estimate, project, intend, designed and similar
expressions, are intended to identify forward-looking statements regarding events, conditions,
and financial trends that may affect the 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 subsequent events or circumstances. Forward-looking
statements should not be relied upon as a prediction of actual future financial condition or
results. These forward-looking statements, like any forward-looking statements, involve risks and
uncertainties that could cause actual results to differ materially from those projected or
unanticipated. Such risks and uncertainties include the factors set forth below in addition to
the other information set forth in this Quarterly Report on Form 10-Q and in the section titled
Other Risks and Uncertainties in the Companys Annual Report on Form 10-K for the year ended
December 31, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 2005, there have been no significant changes in the Companys exposures to
interest rate or foreign currency rate fluctuations. The Company currently does not enter into
derivatives or other market risk sensitive instruments for the purpose of hedging or for trading
purposes.
Item 4. CONTROLS AND PROCEDURES
As of April 1, 2006, the Company conducted an evaluation under the supervision and with the
participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer (its principal executive officer and principal financial officer,
respectively) regarding the effectiveness of the design and operation of the Companys disclosure
controls and procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the
Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and
procedures were effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the requisite time periods and that such disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated
18
and communicated to its management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
There was no change in the Companys internal control over financial reporting that occurred
during the quarter ended April 1, 2006 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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 consumers 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. In September 2005, one of the complaints was withdrawn by the plaintiffs.
In February 2006, two of the complaints were dismissed; however, the plaintiffs have appealed the
dismissal in one of the actions. The actions are in their earliest stages and it is not possible
at this time to determine their likely 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 seeking declaratory judgment that Royal owes no duty to
defend or indemnify the Company in five underlying actions filed in states other than Ohio. 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. While all three declaratory judgment actions against
the Company are in their very early stages, the Company believes 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 1A. RISK FACTORS
In
addition to the other information set forth in this report, careful
consideration should be given to the
factors discussed in Part I, Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2005, which could materially affect the
Companys business, financial condition or future
results. The risks described in the Companys Annual Report on Form 10-K are
not the only risks facing the
Company. Additional risks and uncertainties not currently known to
the Company or that it currently deems to
be immaterial also may materially adversely affect its business, financial condition and/or
operating results.
19
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of April 1, 2006, the Company has repurchased a cumulative total of approximately 7.7 million
shares of its Class A Common Stock for an aggregate purchase price of $89.2 million and had $10.8
million remaining on the $100.0 million share buyback expenditure limit.
During the three months ended April 1, 2006, the Company repurchased $1.9 million or 0.1 million
shares of its Class A Common Stock as illustrated in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares that |
|
|
|
Total Number |
|
|
Average |
|
|
as Part of Publicly |
|
|
May Yet be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced Plans |
|
|
Purchased Under the |
|
Period |
|
Purchased |
|
|
per Share |
|
|
or Programs |
|
|
Plans or Programs |
|
|
January 1,
2006 to February 4, 2006 |
|
|
42,437 |
|
|
$ |
25.50 |
|
|
|
42,437 |
|
|
$ |
11,600,558 |
|
February 5, 2006 to March 4, 2006 |
|
|
30,402 |
|
|
$ |
25.41 |
|
|
|
30,194 |
|
|
$ |
10,829,058 |
|
March 5, 2006 to April 1, 2006 |
|
|
4,395 |
|
|
$ |
12.35 |
|
|
|
|
|
|
$ |
10,829,058 |
|
|
|
|
Total |
|
|
77,234 |
|
|
$ |
24.72 |
|
|
|
72,631 |
|
|
$ |
10,829,058 |
|
|
|
|
Of the shares that were purchased during the period, 4,603 shares represent repurchases of unvested
investment shares issued under the Investment Share Program of the Companys Employee Equity
Incentive Plan.
As of April 1, 2006, the Company had 9.9 million shares of Class A Common Stock outstanding and 4.1
million shares of Class B Common Stock outstanding.
|
|
|
Item 3.
|
|
DEFAULTS UPON SENIOR SECURITIES |
|
|
|
|
|
Not Applicable |
|
|
|
Item 4.
|
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
|
|
|
|
In January 2006, the sole holder of the Companys Class B Common Stock increased
the number of Class B Directors by one so that there would be five (5) Class B
Directors and appointed Jay Margolis as a Class B Director of the Company to serve
until the next annual meeting of Class B Stockholders and until his successor is
duly elected and qualified. |
|
|
|
|
|
In February 2006, the sole holder of the Companys Class B Common Stock approved in
all respects the action of the Compensation Committee of the Board of Directors
setting the bonus to be paid to the Companys Chief Executive Officer for his
performance against 2005 goals and his 2006 base annual salary. |
|
|
|
Item 5.
|
|
OTHER INFORMATION |
|
|
|
|
|
Not Applicable |
|
|
|
Exhibit No. |
|
Title |
|
|
|
*+10.5
|
|
Office Lease Agreement between Boston Design Center LLC and Boston Beer
Corporation dated March 24, 2006. |
20
|
|
|
11.1
|
|
The information required by Exhibit 11 has been
included in Note D of the notes to the consolidated financial statements. |
|
|
|
*31.1
|
|
Certification of the President and Chief Executive
Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
*31.2
|
|
Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
*32.1
|
|
Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
*32.2
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Filed with this report |
|
+ |
|
Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed with the
Securities and Exchange Commission. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
THE BOSTON BEER COMPANY, INC.
(Registrant)
|
|
Date: May 11, 2006 |
By: |
/s/ Martin F. Roper
|
|
|
|
Martin F. Roper |
|
|
|
President and Chief Executive
Officer (principal executive officer) |
|
|
|
|
|
Date: May 11, 2006 |
By: |
/s/ William F. Urich
|
|
|
|
William F. Urich |
|
|
|
Chief Financial Officer (principal accounting and financial
officer) |
|
|
22