L. Common Stock and Share-Based Compensation

Class A Common Stock

The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that the approval of the holders of the Class A Common Stock is required for (a) certain future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) certain alterations of rights or terms of the Class A or Class B Common Stock as set forth in the Articles of Organization of the Company, (c) other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Company’s assets.

Class B Common Stock

The Class B Common Stock has full voting rights, including the right to (1) elect a majority of the members of the Company’s Board of Directors and (2) approve all (a) amendments to the Company’s Articles of Organization, (b) mergers or consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Company’s assets, and (d) equity-based and other executive compensation and other significant corporate matters. The Company’s Class B Common Stock is not listed for trading. Each share of Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of any Class B holder, and participates equally in earnings.

All distributions with respect to the Company’s capital stock are restricted by the Company’s credit agreement, with the exception of distributions of capital stock from subsidiaries to The Boston Beer Company, Inc. and Boston Beer Corporation, repurchase from former employees of non-vested investment shares of Class A Common Stock issued under the Company’s equity incentive plan, redemption of certain shares of Class A Common Stock as approved by the Board of Directors and payment of cash dividends to its holders of common stock.

Employee Stock Compensation Plan

The Company’s Employee Equity Incentive Plan (the “Equity Plan”) currently provides for the grant of discretionary options and restricted stock awards to employees, and provides for shares to be sold to employees of the Company at a discounted purchase price under its investment share program. The Equity 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 options granted to members of senior management, based on the Company’s performance. Generally, the maximum contractual term of stock options is ten years, although the Board of Directors may grant options that exceed the ten-year term. During fiscal 2016, 2015, and 2014, the Company granted options to purchase 786,450, 18,723, and 7,090 shares, respectively, of its Class A Common Stock to employees at market price on the grant dates. Of the 2016 option grants, 574,507 shares relate to a special long-term service-based retention stock option issued to the Chief Executive Officer, 173,135 shares relate to other special long-term service-based retention stock options and 38,808 shares relate to performance-based stock options. Of the 2015 option grants, 14,742 shares relate to performance-based option grants and 3,981 relate to special long-term service-based retention stock options. Of the 2014 option grants, all shares relate to performance-based option grants.

On January 1, 2017, the Company granted options to purchase an aggregate of 5,185 shares of the Company’s Class A Common Stock with a weighted average fair value of $81.95 per share, of which all shares relate to performance-based stock options.

Restricted stock awards are also granted at the Board of Directors’ discretion. During fiscal 2016, 2015, and 2014, the Company granted 21,653, 6,092, and 16,432 shares, respectively, of restricted stock awards to certain senior managers and key employees, all of which are service-based and vest ratably over service periods of three to five years.

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 fiscal 2016, 2015, and 2014, employees elected to purchase an aggregate of 9,199, 8,301, and 8,516 investment shares, respectively.

On January 1, 2017, the Company granted 12,358 shares of restricted stock awards to certain senior managers and key employees of which all shares vest ratably over service periods of five years. On January 1, 2017, employees elected to purchase 9,977 shares under the investment share program.

The Company has reserved 6.7 million shares of Class A Common Stock for issuance pursuant to the Equity Plan, of which 0.7 million shares were available for grant as of December 31, 2016. Shares reserved for issuance under cancelled employee stock options and forfeited restricted stock are returned to the reserve under the Equity Plan for future grants or purchases. The Company also purchases unvested investment shares from employees who have left the Company at the lesser of (i) the price paid for the shares when the employee acquired the shares or (ii) the fair market value of the shares as of the date next preceding the date on which the shares are called for redemption by the Company. These shares are also returned to the reserve under the Equity Plan for future grants or purchases.

Non-Employee Director Options

The Company has a stock option plan for non-employee directors of the Company (the “Non-Employee Director Plan”), pursuant to which each non-employee director of the Company is granted an option to purchase shares of the 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 fiscal 2016, 2015, and 2014 the Company granted options to purchase an aggregate of 14,040, 5,640, and 6,696 shares of the Company’s Class A Common Stock to non-employee directors, respectively.

The Company has reserved 0.6 million shares of Class A Common Stock for issuance pursuant to the Non-Employee Director Plan, of which 0.1 million shares were available for grant as of December 31, 2016. Cancelled non-employee directors’ stock options are returned to the reserve under the Non-Employee Director Plan for future grants.

Option Activity

Information related to stock options under the Equity Plan and the Non-Employee Director Plan is summarized as follows:


	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term in Years		Aggregate Intrinsic Value (in thousands)
Outstanding at December 26, 2015		1,127,162		$	63.99
Granted		800,490			197.56
Forfeited		(40,352	)		196.86
Expired		(1,980	)		241.79
Exercised		(537,087	)		74.71

Outstanding at December 31, 2016		1,348,233		$	141.98		6.44	$	61,632

Exercisable at December 31, 2016		196,522		$	86.52		4.14	$	17,210

Vested and expected to vest at December 31, 2016		744,866		$	97.34		4.39	$	59,410

Of the total options outstanding at December 31, 2016, 72,573 shares were performance-based options granted to multiple key employees and 574,507 shares were service-based options granted to the Chief Executive Officer that are not expected to vest as a result of the planned retirement in 2018.

Stock Option Grants to Chief Executive Officer

On January 1, 2008, the Company granted the Chief Executive Officer an option to purchase 753,864 shares of its Class A Common Stock, which vests over a five-year period, commencing on January 1, 2014, at the rate of 20% per year. The exercise price is determined by multiplying $42.00 by the aggregate change in the DJ Wilshire 5000 Index from and after January 1, 2008 through the close of business on the trading date next preceding each date on which the option is exercised. The exercise price will not be less than $37.65 per share and the excess of the fair value of the Company’s Class A Common Stock cannot exceed $70 per share over the exercise price. At December 31, 2016 and December 26, 2015, 301,546 shares and 452,319 shares of the stock option remained outstanding, respectively. If the outstanding shares at December 31, 2016 were exercised on that date, the exercise price would have been $99.85 per share. If the outstanding shares at December 26, 2015 were exercised on that date, the exercise price would have been $135.40 per share. Reflected in the table above is the minimum exercise price of $37.65. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per share to be $8.41, and recorded stock-based compensation expense of $0.3, $0.5, and $0.7, million related to this option in the fiscal 2016, 2015, and 2014, respectively.

On January 1, 2016, the Company granted the Chief Executive Officer an option to purchase 574,507 shares of its Class A Common Stock, which vests over a five-year period, commencing on January 1, 2019, at the rate of 20% per year. The exercise price is determined by multiplying $201.91 by the aggregate percentage change in the DJ Wilshire 5000 Index from and after January 1, 2016 through the close of business on the trading date next preceding each date on which the option is exercised, plus an additional 1.5 percentage points per annum, prorated for partial years. The exercise price will not be less than $201.91 per share and the excess of the fair value of the Company’s Class A Common Stock cannot exceed $150 per share over the exercise price. At December 31, 2016, the stock option remained unexercised as to 574,507 shares. If the stock option had been exercised on December 31, 2016, the exercise price would have been $226.72 per share. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per share to be $39.16. As a result of the Chief Executive Officer’s planned retirement in 2018, the Company estimated a 100% forfeiture rate related to this grant and in the fourth quarter of fiscal 2016 the Company reversed a total of $3.6 million in stock-based compensation expense that had been recorded during the first three quarters of fiscal 2016.

Stock-Based Compensation

The following table provides information regarding stock-based compensation expense included in operating expenses in the accompanying consolidated statements of comprehensive income:


	2016		2015		2014
	(in thousands)
Amounts included in advertising, promotional and selling expenses	$	2,507	$	2,943	$	3,342
Amounts included in general and administrative expenses		3,641		3,722		3,515

Total stock-based compensation expense	$	6,148	$	6,665	$	6,857

Amounts related to performance-based stock awards included in total stock-based compensation expense	$	203	$	831	$	1,378

As permitted by ASC 718, the Company uses a lattice model, such as the binomial option-pricing model, to estimate the fair values of stock options. 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 2016, 2015, and 2014 was $87.70, $128.54, and $106.81 per share, respectively, as calculated using a binomial option-pricing model. This excludes the January 1, 2016 stock options granted to the Chief Executive Officer with a weighted-average fair value of $39.16, as calculated using the Monte Carlo Simulation pricing model.

Weighted average assumptions used to estimate fair values of stock options on the date of grants are as follows:


	2016		2015		2014
Expected volatility		34.0%		34.2%		34.3%
Risk-free interest rate		2.16%		2.16%		2.83%
Expected dividends		0%		0%		0%
Exercise factor		2.68 times		3.0 times		3.4 times
Discount for post-vesting restrictions		0.0%		0.0%		0.0%

Expected volatility is based on the Company’s historical realized volatility. 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 option-pricing 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 is based on the Company’s traded stock price on the date of the grants. Fair value of investment shares is calculated using the binomial option-pricing model.

The Company uses the straight-line attribution method in recognizing stock-based compensation expense for awards that vest based on service conditions. For awards that vest subject to performance conditions, compensation expense is recognized ratably for each tranche of the award over the performance period if it is probable that performance conditions will be met.

Under ASC 718, compensation expense is recognized less estimated forfeitures. Because most of the Company’s equity awards vest on January 1^st each year, the Company recognized stock-based compensation expense related to those awards, net of actual forfeitures. For equity awards that do not vest on January 1^st, the estimated forfeiture rate used was 5.0%, with the exception of the Chief Executive Officer’s 2016 equity award which used a 100% forfeiture rate as a result of the planned retirement in 2018. The forfeiture rate was based upon historical experience and the Company periodically reviews this rate to ensure proper projection of future forfeitures.

The total fair value of options vested during 2016, 2015, and 2014 was $9.9 million, $4.1 million, and $3.8 million, respectively. The aggregate intrinsic value of stock options exercised during 2016, 2015, and 2014 was $52.7 million, $37.7 million, and $45.8 million, respectively.

Based on equity awards outstanding as of December 31, 2016, there is $23.0 million of unrecognized compensation costs, net of estimated forfeitures, related to unvested share-based compensation arrangements that are expected to vest. Such costs are expected to be recognized over a weighted-average period of 3.09 years. The following table summarizes the estimated future annual stock-based compensation expense related to share-based arrangements existing as of December 31, 2016 that are expected to vest (in thousands):


2017	$	5,707
2018		5,253
2019		3,952
2020		2,606
2021		2,060
Thereafter		3,422

Total	$	23,000

Non-Vested Shares Activity

The following table summarizes vesting activities of shares issued under the investment share program and restricted stock awards:


	Number of Shares			Weighted Average Fair Value
Non-vested at December 26, 2015		60,922		$	150.03
Granted		30,852			161.84
Vested		(19,740	)		114.12
Forfeited		(7,066	)		152.40

Non-vested at December 31, 2016		64,968		$	166.29

19,740 shares vested in 2016 with a weighted average fair value of $114.12. 25,732 shares vested in 2015 with a weighted average fair value of $79.44. 38,329 shares vested in 2014 with a weighted average fair value of $53.82.

Stock Repurchase Program

In 1998, the Board of Directors authorized management to implement a stock repurchase program. As of December 31, 2016, the Company has repurchased a cumulative total of approximately 12.5 million shares of its Class A Common Stock for an aggregate purchase price of approximately $607.8 million as follows:


	Number of Shares		Aggregate Purchase Price
			(in thousands)
Repurchased at December 28, 2013		10,892,459	$	299,528
2014 repurchases		29,474		7,859

Repurchased at December 27, 2014		10,921,933		307,387
2015 repurchases		616,747		138,705

Repurchased at December 26, 2015		11,538,680		446,092
2016 repurchases		944,876		161,658

Repurchased at December 31, 2016		12,483,556	$	607,750