Boston Beer Company - 10-Q quarterly report FY

 

 

For the quarterly period ended                      April 1, 2006

For the transition period from .......... to ..........

Commission file number: 1-14092

(Exact name of registrant as specified in its charter)

75 Arlington Street, Boston, Massachusetts
(Address of principal executive offices)
02116
(Zip Code)

(617) 368-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x       No 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 filerx    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 issuer’s classes of common stock, as of May 5, 2006:

 

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements

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 Company’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Management’s Opinion
In the opinion of the Company’s management, the Company’s 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.

The Company’s 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.

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:

The following table sets forth the computation of basic and diluted earnings per share:

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.

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.

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.

Aggregate minimum annual rental payments under lease agreements are as follows:

The Company’s 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 Company’s 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 Company’s 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 Company’s 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 employee’s 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.

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 Company’s 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 Company’s Class A Common Stock to a non-employee director.

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.

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:

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 statement’s 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 Company’s 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

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 Company’s 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:

Expected volatility is based on the Company’s historical realized volatility. Expected life of an option is based on the Company’s 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 Company’s historical experience.

Fair value of restricted stock awards granted during the interim period ended April 1, 2006 was based on the Company’s 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

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.

Stock option activity during the three months ended April 1, 2006 is as follows:

The following table summarizes information about stock options outstanding at April 1, 2006:

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.

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:

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 Company’s existing contract relationship with Miller Brewing Company, effective October 31, 2008; the termination is in accordance with the contract and the 2003 arbitration award.

PART I.    Item 2. MANAGEMENT’S 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Boston Beer’s flagship product is Samuel Adams Boston Lagerâ. For purposes of this discussion, Boston Beer’s “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.

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 Beer’s 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 AdamsâBrewmaster’s 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 Company’s 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.

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 Company’s 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 Company’s 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

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 Company’s 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 Company’s 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.

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 Company’s 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.

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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

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 Company’s 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 Company’s 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 Company’s business and results of operations. The Company’s $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.

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.

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.

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 Company’s existing contract relationship with Miller Brewing Company, effective October 31, 2008; the termination is in accordance with the contract and the 2003 arbitration award.

There were no other material changes outside of the ordinary course of the Company’s business to contractual obligations during the three month period ended April 1, 2006.

There were no material changes to the Company’s 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 Company’s 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.

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 Company’s future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Since December 31, 2005, there have been no significant changes in the Company’s exposures to interest rate or foreign currency rate fluctuations. The Company currently does not enter into derivatives or other market risk sensitive instruments for the purpose of hedging or for trading purposes.

As of April 1, 2006, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s 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 Company’s 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 Company’s 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.

There was no change in the Company’s 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 Company’s internal control over financial reporting.

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 Company’s 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 Company’s 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.

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s 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.

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:

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 Company’s 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.

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.