e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS
(State or other jurisdiction of incorporation
or organization)
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04-3284048
(I.R.S. Employer
Identification No.) |
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)
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 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 þ 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 þ
Number of shares outstanding of each of the issuers classes of common stock, as of May 4, 2007:
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Class A Common Stock, $.01 par value
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10,207,167 |
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Class B Common Stock, $.01 par value
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4,107,355 |
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(Title of each class)
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(Number of shares)
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THE BOSTON BEER COMPANY, INC.
FORM 10-Q
QUARTERLY REPORT
MARCH 31, 2007
TABLE OF CONTENTS
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PAGE |
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FINANCIAL INFORMATION |
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Item 1. Consolidated Financial Statements |
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Consolidated Balance Sheets as of March 31, 2007 and December 30, 2006
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3 |
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Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and April 1, 2006
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4 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and April 1, 2006
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5 |
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Notes to Consolidated Financial Statements
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6-8 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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9-14 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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14 |
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Item 4. Controls and Procedures
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14-15 |
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OTHER INFORMATION |
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Item 1. Legal Proceedings
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15 |
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Item 1A. Risk Factors
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15 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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16 |
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Item 3. Defaults Upon Senior Securities
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16 |
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Item 4. Submission of Matters to a Vote of Security Holders
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16 |
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Item 5. Other Information
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16 |
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Item 6. Exhibits
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17 |
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18 |
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EX-10.55 Amended and Restated Brewing Services Agreement between City Brewing Company LLC and Boston Beer Corporation effective as of August 1, 2006, as amended by Amendment dated April 10, 2007. |
EX-10.56 Addendum to Production Agreement between Miller Brewing Company and Boston Beer Corporation effective August 31, 2006. |
EX-10.57 Brewing Services Agreement between CBC Latrobe Acquisition, LLC and Boston Beer Corporation dated March 28, 2007. |
EX-31.1 Section 302 Certification of C.E.O. |
EX-31.2 Section 302 Certification of C.F.O. |
EX-32.1 Section 906 Certification of C.E.O. |
EX-32.2 Section 906 Certification of C.F.O. |
2
PART I. Item 1. FINANCIAL INFORMATION
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(in thousands, except share data)
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March 31, |
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December 30, |
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2007 |
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2006 |
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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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$ |
61,449 |
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$ |
63,147 |
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Short-term investments |
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20,025 |
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19,223 |
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Accounts receivable, net of allowance for
doubtful accounts of $484 and $451 as of March
31, 2007 and December 30, 2006, respectively |
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19,737 |
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17,770 |
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Inventories |
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18,951 |
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17,034 |
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Prepaid expenses and other assets |
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4,398 |
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2,721 |
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Deferred income taxes |
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667 |
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667 |
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Total current assets |
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125,227 |
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120,562 |
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Property, plant and equipment, net |
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31,887 |
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30,699 |
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Other assets |
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1,797 |
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1,837 |
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Goodwill |
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1,377 |
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1,377 |
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Total assets |
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$ |
160,288 |
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$ |
154,475 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
14,622 |
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$ |
17,942 |
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Accrued expenses |
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22,184 |
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22,928 |
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Total current liabilities |
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36,806 |
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40,870 |
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Deferred income taxes |
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1,494 |
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1,494 |
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Other liabilities |
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3,420 |
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3,522 |
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Total liabilities |
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41,720 |
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45,886 |
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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; 10,199,426 and
9,992,347 issued and outstanding as of March
31, 2007 and December 30, 2006, respectively |
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102 |
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100 |
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Class B Common Stock, $.01 par value; 4,200,000
shares authorized; 4,107,355 issued and
outstanding |
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41 |
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41 |
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Additional paid-in-capital |
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84,367 |
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80,158 |
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Accumulated other comprehensive loss, net of tax |
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(197 |
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(197 |
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Retained earnings |
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34,255 |
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28,487 |
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Total stockholders equity |
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118,568 |
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108,589 |
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Total liabilities and stockholders equity |
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$ |
160,288 |
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$ |
154,475 |
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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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March 31, |
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April 1, |
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2007 |
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2006 |
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Revenue |
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$ |
79,734 |
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$ |
62,738 |
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Less excise taxes |
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7,286 |
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5,850 |
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Net revenue |
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72,448 |
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56,888 |
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Cost of goods sold |
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32,126 |
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24,215 |
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Gross profit |
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40,322 |
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32,673 |
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Operating expenses: |
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Advertising, promotional and selling expenses |
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26,506 |
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25,378 |
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General and administrative expenses |
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5,298 |
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4,926 |
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Total operating expenses |
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31,804 |
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30,304 |
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Operating income |
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8,518 |
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2,369 |
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Other income, net: |
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Interest income |
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965 |
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588 |
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Other income, net |
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167 |
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61 |
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Total other income, net |
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1,132 |
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649 |
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Income before provision for income taxes |
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9,650 |
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3,018 |
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Provision for income taxes |
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3,882 |
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1,197 |
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Net income |
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$ |
5,768 |
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$ |
1,821 |
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Net income per common share basic |
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$ |
0.41 |
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$ |
0.13 |
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Net income per common share diluted |
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$ |
0.40 |
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$ |
0.13 |
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Weighted-average number of common shares basic |
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14,118 |
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13,856 |
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Weighted-average number of common shares diluted |
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14,595 |
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14,293 |
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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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March 31, |
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April 1, |
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2007 |
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2006 |
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Cash flows provided by (used in) operating activities: |
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Net income |
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$ |
5,768 |
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$ |
1,821 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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1,386 |
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1,131 |
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(Gain) loss on disposal of property, plant and equipment |
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(2 |
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26 |
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Bad debt expense |
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33 |
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105 |
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Stock-based compensation expense |
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486 |
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378 |
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Excess tax benefit from stock-based compensation arrangements |
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(1,270 |
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(587 |
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Purchases of trading securities |
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(10,665 |
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(6,050 |
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Proceeds from sale of trading securities |
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9,863 |
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28,475 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(2,000 |
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(6,391 |
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Inventories |
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(1,917 |
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282 |
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Prepaid expenses and other assets |
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(917 |
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(458 |
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Accounts payable |
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(3,320 |
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(805 |
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Accrued expenses |
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526 |
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196 |
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Other liabilities |
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(102 |
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(49 |
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Net cash provided by (used in) operating activities |
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(2,131 |
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18,074 |
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Cash flows used in investing activities: |
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Purchases of property, plant and equipment |
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(2,538 |
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(907 |
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Proceeds from disposal of property, plant and equipment |
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2 |
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1 |
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Increase in other assets |
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(45 |
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Net cash used in investing activities |
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(2,536 |
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(951 |
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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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1,620 |
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1,764 |
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Excess tax benefit from stock-based compensation arrangements |
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1,270 |
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587 |
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Net proceeds from sale of investment shares |
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79 |
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38 |
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Net cash provided by financing activities |
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2,969 |
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534 |
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Change in cash and cash equivalents |
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(1,698 |
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17,657 |
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Cash and cash equivalents at beginning of period |
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63,147 |
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41,516 |
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Cash and cash equivalents at end of period |
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$ |
61,449 |
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$ |
59,173 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
592 |
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$ |
255 |
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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. |
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Organization and Basis of Presentation |
The Boston Beer Company, Inc. and its 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® beer 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 March 31, 2007 and the statements of consolidated operations and consolidated cash
flows for the interim periods ended March 31, 2007 and April 1, 2006 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 30, 2006.
Managements Opinion
In the opinion of the Companys management, the Companys unaudited consolidated financial position
as of March 31, 2007 and the results of its consolidated operations and consolidated cash flows for
the interim periods ended March 31, 2007 and April 1, 2006, reflect all adjustments (consisting
only of normal and recurring adjustments) necessary to present fairly the results of the interim
periods presented. The operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
B. |
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Short-Term Investments |
The Companys short-term investments consisted of municipal auction rate securities as of March
31, 2007 and December 30, 2006, and were classified as trading securities which are recorded at
fair market value and whose change in fair market value is recorded in earnings.
The Company recorded no realized gains or losses on short-term investments for the interim periods
ended March 31, 2007 and April 1, 2006.
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:
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March 31, |
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December 30, |
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2007 |
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2006 |
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(in thousands) |
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Raw materials |
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$ |
12,465 |
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$ |
11,767 |
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Work in process |
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4,126 |
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3,483 |
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Finished goods |
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2,360 |
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1,784 |
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$ |
18,951 |
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$ |
17,034 |
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6
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted net income per share:
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Three months ended |
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March 31, 2007 |
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April 1, 2006 |
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(in thousands, except per share data) |
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Net income |
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$ |
5,768 |
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$ |
1,821 |
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Shares used in net income per common share basic |
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14,118 |
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13,856 |
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Effect of dilutive securities: |
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Stock options |
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460 |
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429 |
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Non-vested investment shares and restricted stock |
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17 |
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8 |
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Dilutive potential common shares |
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477 |
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437 |
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Shares used in net income per common share diluted |
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14,595 |
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14,293 |
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Net income per common share basic |
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$ |
0.41 |
|
|
$ |
0.13 |
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Net income per common share diluted |
|
$ |
0.40 |
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$ |
0.13 |
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Comprehensive income represents net income, plus minimum pension liability adjustment. The minimum
pension liability adjustments for the interim periods ended March 31, 2007 and April 1, 2006 were
not material.
F. |
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Commitments and Contingencies |
Purchase Commitments
The Company had outstanding non-cancelable purchase commitments related to advertising contracts
of approximately $10.6 million at March 31, 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. Hops purchase
commitments outstanding at March 31, 2007 totaled $23.6 million, based on the exchange rates on
that date.
Other outstanding purchase commitments totaled $1.2 million at March 31, 2007.
7
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Arrangements with Contract Breweries
On March 28, 2007, the Company entered into a Brewing Services Agreement (the Agreement) with
CBC Latrobe Acquisition, LLC (CBC), a Pennsylvania limited liability company whose sole member
is City Brewing Company, LLC of Lacrosse, Wisconsin (City Brewing). Under the Agreement, the
Company will be able to brew and package certain of its products at the brewery located in
Latrobe, Pennsylvania that was acquired by CBC in 2006. Pursuant to the Agreement, CBC will
ensure that a certain minimum capacity will be available to the Company throughout the term of
the Agreement. The Company has committed to minimum production levels at the brewery during the
2007 and 2008 calendar years. As a material part of the Agreement, the Company will purchase
equipment to be installed at the brewery in Latrobe for upgrades to the brew house, storage of
the Companys proprietary yeasts, and packaging of the Companys products. Under the Agreement,
CBC will be able to purchase such equipment from the Company at or prior to the end of the
initial term of the Agreement at the amortized value of such equipment. City Brewing, with whom
the Company currently has a brewing services agreement with respect to production at City
Brewings brewery located in Lacrosse, Wisconsin, has guaranteed the performance of the Agreement
by CBC. As part of the discussion with City Brewing, the Company is in discussions to acquire an
ownership interest in the Latrobe Brewery. The expected capital expenditures related to the
Agreement and these discussions are between $3 million and $7 million.
G. Income Taxes
The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN No. 48), which is an interpretation of SFAS No. 109, Accounting
for Income Taxes, in the first quarter of 2007. 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 adoption of FIN No. 48 did not result in an adjustment to the beginning balance of retained
earnings and also did not result in any material adjustments to reserves for uncertain tax
positions. As of the Companys adoption date of December 31, 2006, the Company had approximately
$5.9 million of gross unrecognized income tax benefits. Of this total, $3.9 million (state
amounts net of federal benefit) represent the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate.
The Companys practice is to classify interest and penalties related to income tax matters in
income tax expense. As of its adoption date of December 31, 2006, the Company had $1.1 million
accrued for interest and penalties.
The Company is subject to federal income tax as well as income tax of multiple state
jurisdictions. The Companys federal income tax returns remain subject to examination for fiscal
years 2003 through 2005. The Companys state income tax returns remain subject to examination
for fiscal years 2003 through 2005. Federal income tax returns for 2004 and 2005, as well as
certain state income tax returns for 2002 and 2003, are currently under examination.
Depending upon the outcome of state income tax return examinations that the Company is currently
undergoing, it is reasonably possible that certain of the Companys amounts of unrecognized tax
benefits could significantly decrease within twelve months of the date of this report. Based on
the information that is available, the Company is not able to determine the amount of the
possible decrease to its unrecognized tax benefits.
8
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 March 31, 2007 as compared to the three-month period ended April 1, 2006. 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 30,
2006.
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 products brewed at the Companys brewery, located in Cincinnati, Ohio under contract
arrangements for third parties. Volume produced under contract arrangements is referred to below
as non-core products.
Three Months Ended March 31, 2007 compared to Three Months Ended April 1, 2006
Net revenue. Net revenue increased by $15.6 million or 27.4% to $72.4 million for the three months
ended March 31, 2007, as compared to $56.9 million for the three months ended April 1, 2006. The
increase was primarily due to an increase in the volume of Boston Beers core brands, as well as an
increase in net revenue per barrel of approximately 3%.
Volume. Total shipment volume increased by 22.2% to 396,000 barrels for the three months ended
March 31, 2007, as compared to 324,000 barrels for the three months ended April 1, 2006. Shipment
volume for the non-core products decreased by 3,000 barrels to 5,000 barrels. Shipment volume for
the core brands increased by 23.7% to 391,000 barrels, due primarily to increases in the Samuel
Adams® brand family offset by a slight decline in the Twisted
Tea® brand family shipments. The growth in the Samuel
Adams® brand family shipments was driven by double-digit growth rates in
Samuel Adams Boston Lager®, Samuel Adams® Seasonals,
Samuel Adams® Brewmasters Collection and Sam Adams
Light®.
Shipments to date and orders in-hand suggest that core shipments for the second fiscal
quarter of 2007 could be up approximately 10%, resulting in the first
half of 2007 shipments being up approximately 15%, 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.
Depletions, or sales by the wholesalers to retailers, of the Companys core products for the first
quarter of 2007 increased by approximately 18% over the same period
in 2006. The Company believes
that wholesaler inventory levels at March 31, 2007 were ahead of preferred levels for
this time of year, as reflected in shipments exceeding depletions by a larger amount than would be
usual for the first quarter. The Company expects this inventory build to unwind through the rest of
the year.
Net Selling Price. The selling price per barrel for core brands increased by 3.2% to $184.11 per
barrel for the three months ended March 31, 2007, as compared to $178.49 for the same period last
year. This increase in net revenue per barrel is due to price increases implemented in the first
quarter and favorable changes in package and product mix.
Gross profit. Gross profit for core products was $102.70 per barrel for the three months ended
March 31, 2007, as compared to $103.09 for the three months ended April 1, 2006. Gross margin for
core products was 55.8% for the three months ended March 31, 2007, as compared to 57.8% for the
three months ended
April 1, 2006. The decrease in gross profit per barrel and gross margin is primarily due to an
increase in cost of goods sold per barrel as compared to the prior year, only partially offset by
price increases.
9
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cost of goods sold for core brands increased by $6.02 per barrel to $81.41 per barrel and was 44.2%
as a percentage of net revenue for the three months ended March 31, 2007, as compared to $75.40 per
barrel and 42.2% as a percentage of net revenue for the three months ended April 1, 2006. The
increase is due primarily to higher package material and ingredient costs and a slight shift in
product mix. The Company expects most of these cost pressures to continue during the remainder of
the year.
Based on current cost increase knowledge and preliminary pricing expectations, 2007 full year gross
margin as a percent of net revenue could be down as much as two percentage points below full year
2006 levels.
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
$1.1 million, or 4.4%, to $26.5 million for the three months ended March 31, 2007, as compared to
$25.4 million for the three months ended April 1, 2006. The increase is primarily due to increases
in freight expenses to wholesalers and advertising. Advertising, promotional and selling expenses
for core brands were 36.8% of net revenue, or $67.79 per barrel, for the three months ended March
31, 2007, as compared to 45.0% of net revenue, or $80.31 per barrel, for the three months ended
April 1, 2006. 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 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 $0.4 million, or
7.5%, to $5.3 million for the three months ended March 31, 2007, as compared to $4.9 million for
the same period last year. The increase primarily reflects increases in salary and benefit costs.
Total other income, net. Total other income, net increased by $0.5 million to $1.1 million for the
three months ended March 31, 2007 primarily due to higher interest rates earned on increased
average cash and investment balances during the first fiscal quarter of 2007 as compared to the
same period in 2006.
Provision for income taxes. The Companys effective tax rate increased to approximately 40.2% for
the three months ended March 31, 2007 from 39.7% for the same period last year. This increase in
the effective tax rate is due to an increase in state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.7 million to $61.4 million as of March 31, 2007 from
$63.1 million as of December 30, 2006. For the three months ended March 31, 2007, the decrease
in cash and cash equivalents was mainly due to the timing of sales of trading securities and
capital expenditures primarily related to the new brewery project. These decreases were
partially offset by an increase in net income and cash provided by financing activities related
to stock-based compensation arrangements.
10
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cash flows used in operating activities were $2.1 million and cash provided by operating activities
were $18.1 million for the fiscal quarters ended March 31, 2007 and April 1, 2006, respectively.
Cash provided by operating activities were significantly lower due to a $23.2 million decrease in
net proceeds of trading securities offset by a $4.0 million increase in net income.
Cash flows used in investing activities increased by $1.6 million due to higher capital
expenditures in the first quarter 2007 primarily related to the new brewery project.
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 take advantage of the excess capacity at those breweries,
providing the Company flexibility, 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® and Twisted Tea® brand products. The
Companys current best estimate is that total project costs could be between $170 million and $210
million. 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 given the growth of the craft beer category and known and unknown risks in supply chain
alternatives.
During the quarter ended March 31, 2007, the Companys cash was primarily invested in high-grade
taxable and tax-exempt 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 expenses
associated with the selection and management of investment securities.
Cash flows provided by financing activities was $3.0 million for the quarter ended March 31, 2007
as compared to $0.5 million for the same period last year, primarily due to a lower level of
repurchases of the Companys Class A Common Stock under its Stock Repurchase Program.
During the three months ended March 31, 2007, the Company did not repurchase any of its Class A
Common Stock. Through May 4, 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 Stock Repurchase Program set by its Board of
Directors. As of May 4, 2007, the Company had 10.2 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, may continue the Stock Repurchase Program within the parameters set by the Board of
Directors.
11
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
With working capital of $88.4 million and $20.0 million in unused credit facilities as of March 31,
2007, 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 expenditures in 2007. The Company has increased its
estimates of total capital expenditures in 2007 to be between $17.0 and $21.0 million, primarily
driven by the need to purchase additional kegs to support its draft business. This revised
estimate includes an investment between $3 million and $7 million in the Latrobe Brewery to support
the restarting of the historic brew house and modifications to accommodate the Companys beers.
Consistent with Boston Beers commitment to the brewery, the parties are discussing the possibility
of Boston Beer acquiring an ownership interest in the brewing facility. This capital expenditure
estimate 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. If the Company pursues this strategy, the Company would potentially seek alternative
forms of funding including, but not limited to, borrowing arrangements with lending institutions.
The Companys $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.
2007 Outlook
The Company still expects 2007 earnings per diluted share to be between $1.42 and $1.55, absent any
significant change in currently planned levels of brand support. The earnings per share range
estimate does not include any significant brewery expenses associated with new brewery construction
or ownership. As of March 31, 2007, the Company had capitalized $3.0 million of new brewery
project expenses that would need to be expensed if a decision were made not to proceed with the 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 POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance Sheet Arrangements
At March 31, 2007, the Company did not have off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K.
12
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Contractual Obligations
On March 28, 2007, the Company entered into a Brewing Services Agreement (the Agreement) with CBC
Latrobe Acquisition, LLC (CBC), a Pennsylvania limited liability company whose sole member is
City Brewing Company, LLC of Lacrosse, Wisconsin (City Brewing). Under the Agreement, the Company
will be able to brew and package certain of its products at the brewery located in Latrobe,
Pennsylvania that was acquired by CBC in 2006. Pursuant to the Agreement, CBC will ensure that a
certain minimum capacity will be available to the Company throughout the term of the Agreement. The
Company has committed to minimum production levels at the brewery during the 2007 and 2008 calendar
years. As a material part of the Agreement, the Company will purchase equipment to be installed at
the brewery in Latrobe for upgrades to the brew house, storage of the Companys proprietary yeasts,
and packaging of the Companys products. Under the Agreement, CBC will be able to purchase such
equipment from the Company at or prior to the end of the initial term of the Agreement at the
amortized value of such equipment. City Brewing, with whom the Company currently has a brewing
services agreement with respect to production at City Brewings brewery located in Lacrosse,
Wisconsin, has guaranteed the performance of the Agreement by CBC. As part of the discussion with
City Brewing, the Company is in discussions to acquire an ownership interest in the Latrobe
Brewery. The expected capital expenditures related to the Agreement and these discussions are
between $3 million and $7 million.
There were no other material changes outside of the ordinary course of the Companys business to
contractual obligations during the three month period ended March 31, 2007.
Critical Accounting Policies
There were no material changes to the Companys critical accounting policies during the three month
period ended March 31, 2007.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (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 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.
13
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits
companies to choose to measure many financial instruments at fair value, that are not currently
required to be measured at fair value, at specified election dates under its fair value option.
Unrealized gains and losses on items for which the fair value option has been elected are reported
in earnings at each subsequent reporting date. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. The Company is required to
adopt the provisions of SFAS No. 159 in the first quarter of 2008. The Company is in the process of
evaluating the impact of SFAS No. 159 on its 2008 consolidated financial position, operations and
cash flows.
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 30, 2006.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 30, 2006, 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 March 31, 2007, 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 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.
14
There was no change in the Companys internal control over financial reporting that occurred
during the quarter ended March 31, 2007 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 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 April 2007, RICAs motion for summary judgment was denied and the court found that
RICA has a duty to defend the Company in these underlying actions.
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 Royal and MBIC have appealed this
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 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 30, 2006, 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.
15
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of May 4, 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.
During the three months ended March 31, 2007, the Company repurchased 268 shares of its Class A
Common Stock as illustrated in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Value of Shares |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
that May Yet be |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Purchased Under the |
Period |
|
Shares Purchased |
|
per Share |
|
Programs |
|
Plans or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 to February 3, 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
7,396,644 |
|
February 4, 2007 to March 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,396,644 |
|
March 4, 2007 to March 31, 2007 |
|
|
268 |
|
|
|
12.61 |
|
|
|
|
|
|
|
7,396,644 |
|
|
|
|
Total |
|
|
268 |
|
|
$ |
12.61 |
|
|
|
|
|
|
$ |
7,396,644 |
|
|
|
|
All shares purchased during the current period represent repurchases of unvested investment shares
issued under the Investment Share Program of the Companys Employee Equity Incentive Plan.
As of May 4, 2007, the Company had 10.2 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 February 2007, the sole holder of the Companys Class B Common Stock accepted the
recommendations of the Compensation Committee of the Companys Board of Directors with respect to
the bonus to be paid to the Companys CEO for his performance against his 2006 bonus goals and with
respect to the CEOs annual base salary for 2007.
Item 5. OTHER INFORMATION
Not Applicable
16
|
|
|
Exhibit No. |
|
Title |
|
|
|
*+10.55
|
|
Amended and Restated Brewing Services Agreement between City
Brewing Company LLC and Boston Beer Corporation effective as
of August 1, 2006, as amended by Amendment dated April 10,
2007 and effective August 31, 2006. |
|
|
|
*10.56
|
|
Addendum to Production Agreement between Miller Brewing
Company and Boston Beer Corporation effective August 31, 2006. |
|
|
|
*+10.57
|
|
Brewing Services Agreement between CBC Latrobe Acquisition,
LLC and Boston Beer Corporation dated March 28, 2007. |
|
|
|
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 |
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*32.1
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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 |
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*32.2
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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 |
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* |
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Filed with this report |
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+ |
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Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed with the
Securities and Exchange Commission. |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
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THE BOSTON BEER COMPANY, INC. (Registrant) |
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Date: May 10, 2007 |
By: |
/s/ Martin F. Roper
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Martin F. Roper |
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President and Chief Executive Officer
(principal executive officer) |
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Date: May 10, 2007 |
By: |
/s/ William F. Urich
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William F. Urich |
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Chief Financial Officer
(principal accounting and financial officer) |
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18