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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

For the transition period from      to     

Commission file number: 1-14092

THE BOSTON BEER COMPANY, INC.

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  [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

Yes  [X]         No  [   ]

Number of shares outstanding of each of the issuer’s classes of common stock, as of July 25, 2003:

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THE BOSTON BEER COMPANY, INC.
FORM 10-Q

QUARTERLY REPORT
JUNE 28, 2003

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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

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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

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

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

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.      Organization and Basis of Presentation

The Boston Beer Company, Inc. and its subsidiaries (the “Company”) are engaged in the business of brewing and selling malt beverages and cider products throughout the United States and in selected international markets. The accompanying consolidated statement of financial position as of June 28, 2003 and the statement of consolidated operations and consolidated cash flows for the interim periods ending June 28, 2003 and June 29, 2002 have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America 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 28, 2002.

Management’s Opinion

In the opinion of the Company’s management, the Company’s unaudited consolidated financial position as of June 28, 2003 and the results of its consolidated operations and consolidated cash flows for the interim periods ended June 28, 2003 and June 29, 2002, 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.      Short-Term Investments

Short-term investments as of June 28, 2003 and December 28, 2002 were classified as follows, depending upon the Company’s intent and the nature of the investment:

The Company recorded realized gains of approximately $28,000 during the period ended June 28, 2003. There were no realized gains or losses recorded during the period ended June 29, 2002.

C.      Inventories

Inventories, which consist principally of hops, brewery materials and packaging, are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market.

Inventories consist of the following (in thousands):

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

D.      Net Income per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

E.      Comprehensive Income

Comprehensive income is as follows (in thousands):

F.      Commitments and Contingencies

Purchase Commitments

The Company had outstanding purchase commitments related to advertising contracts of approximately $17.2 million at June 28, 2003, compared to $22.0 million at December 28, 2002.

The Company has entered into contracts for the supply of a portion of its hops requirements. These purchase contracts, which extend through crop year 2008, specify both the quantities and prices to which the Company is committed. The prices of these contracts are denominated in euros. Hops purchase commitments outstanding at June 28, 2003 totaled $10.8 million (based on the exchange rate at June 28, 2003), compared to $13.4 million at December 28, 2002.

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

G.      Common Stock

Stock Compensation Plans

The Company follows the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and applies APB Opinion No. 25 and related interpretations for the Employee Equity Incentive Plan and the Stock Option Plan for Non-Employee Directors. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

H.      Treasury Stock

During the second quarter, the Company repurchased 908,000 shares of its outstanding Class A Common Stock, for an aggregate purchase price of $12.4 million. On June 10, 2003, the Company’s Board of Directors authorized an additional $10.0 million for the repurchase of the Company’s Class A Common Stock, increasing the aggregate expenditure limitation to $70.0 million. Subsequent to quarter-end, and through July 25, 2003, the Company has repurchased an additional 467,000 shares, for an aggregate repurchase price of $6.9 million, under the newly authorized expenditure limitation. To date, the Company has repurchased a total of 6.8 million shares under this program, at a cost of $69.2 million.

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The following is a discussion of the financial condition and results of operations of the Company for the three and six-month periods ended June 28, 2003 as compared to the three and six-month periods ended June 29, 2002. This discussion should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements of the Company and Notes thereto included in the Company’s Form 10-K for the fiscal year ended December 28, 2002.

RESULTS OF OPERATIONS

Boston Beer’s flagship product is Samuel Adams Boston Lager®. For purposes of this discussion, the Company’s “core brands” include all products sold under the Samuel Adams®, Sam Adams®, HardCore® and Twisted Tea® trademarks. “Core brands” do not include the products brewed at the Cincinnati Brewery under contract arrangements for third parties. Volume produced under contract arrangements is referred to below as “non-core products.”

Three Months Ended June 28, 2003 compared to Three Months Ended June 29, 2002

Net sales. Net sales decreased by $2.5 million or 4.3% to $56.3 million for the three months ended June 28, 2003 from $58.9 million for the three months ended June 29, 2002. The decrease is primarily due to a decrease in volume of the Company’s core brands, only partially offset by an increase in net revenue per barrel.

Volume. Total volume decreased by 6.5% or 23,000 barrels to 330,000 barrels in the three months ended June 28, 2003 from the same period 2002, due to a decline in Samuel Adams Boston Lager®, Samuel Adams® Signature Series and Seasonal Brands, partially offset by an increase in Sam Adams Light® and Twisted Tea®. During the second quarter 2003, Sam Adams Light® was distributed in all of the Company’s markets and comprised approximately 20% of the Company’s volume. In contrast, during the second quarter 2002, Sam Adams Light® comprised approximately 13% of the Company’s volume.

The Company believes that the declines experienced in Samuel Adams’ flagship brand and other core brands were due to a combination of factors, including a weak economy, poor weather conditions in the Northeast, recent world events and cannibalization of other Samuel Adams® beers by Sam Adams Light®. The Company is actively working to minimize effects of this cannibalization.

Further impacting the Company’s shipment volume for the three months ended June 28, 2003 as compared to the same period 2002 was an inventory build that began in January 2002 as the Company was rolling out Sam Adams Light®. Wholesalers had increased inventory levels by 37,000 barrels during the second quarter 2002 as compared to an increase of 8,000 barrels in the same period 2003. As noted in the Liquidity and Capital Resources section, the Company plans to implement new distributor credit terms during the second half of 2003 that may result in lower wholesaler inventories, which could further reduce shipments in the second half of 2003 as compared to the same period 2002.

Selling Price. The selling price per barrel of core brands increased by approximately 2.3% to $170.66 per barrel for the quarter ended June 28, 2003. This increase is due mainly to normal price increases, as well as to changes in the product mix.

Gross Profit. Gross profit was 61.0% as a percentage of net sales or $104.10 per barrel for the quarter ended June 28, 2003, as compared to 60.3% and $100.58 for the quarter ended June 29, 2002. The increase per barrel was primarily due to price increases and changes in the product mix.

Cost of sales increased by $0.36 per barrel to $66.56 per barrel, or 39.0% as a percentage of net sales for the quarter ended June 28, 2003, as compared to 39.7% as a percentage of net sales or $66.20 per barrel for the quarter ended June 29, 2002. This was due primarily to changes in the product mix and increases in brewing costs. Assuming pricing stability, the Company anticipates slightly higher margins for the full year 2003 than in 2002, through potential cost improvements.

Advertising, Promotional and Selling. As a percentage of net sales, advertising, promotional and selling expenses were 46.2% for the quarter ended June 28, 2003, as compared to 41.8% for the quarter ended June 29, 2002. Advertising, promotional and selling expenses increased by $1.4 million or 5.7% to $26.0 million for the three months ended June 28, 2003, compared to $24.6 million for the three months ended June 29, 2002. This increase is primarily due to the continued high level of support of the

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entire Samuel Adams® brand, as well as the purchase of new tap handles. During the second half of 2003, the Company expects to spend approximately $10 million less in advertising, promotional and selling expense than in the same period 2002, when the Company was investing heavily in the Sam Adams Light® national launch.

General and Administrative. General and administrative expenses decreased by 11.7% or $484,000 to $3.7 million for the quarter ended June 28, 2003 as compared to the same period last year, primarily due to a decrease in salaries and benefits. This decrease is the result of fewer employees in 2003.

Interest income, net. Interest income increased by 31.3% to $260,000 for the quarter ended June 28, 2003 from $198,000 for the quarter ended June 29, 2002. This increase is primarily due to moving funds into higher yielding investments in 2003.

Provision for income taxes. The Company anticipates that its effective tax rate will be approximately 38.0% for the year ending December 27, 2003. The overall decrease in the effective tax rate for 2003 is due to both the shifting of investments from taxable to tax-exempt instruments, as well as a restructuring of the Company’s corporate entities.

Six Months Ended June 28, 2003 compared to Six Months Ended June 29, 2002

Net sales. Net sales decreased by $2.9 million or 2.8% to $101.6 million for the six months ended June 28, 2003 from $104.5 million for the six months ended June 29, 2002. The decrease is primarily due to a decrease in volume of the Company’s core brands, only partially offset by an increase in net revenue per barrel.

Volume. Total volume decreased by 4.5% or 28,000 barrels to 600,000 barrels in the six months ended June 28, 2003 from the same period 2002, due to a decline in Samuel Adams Boston Lager®, Samuel Adams® Signature Series and Seasonal Brands, partially offset by an increase in Sam Adams Light® and Twisted Tea®. During the first six months of 2003, Sam Adams Light® was distributed in all of the Company’s markets and comprised approximately 20% of the Company’s volume. In contrast, during the first six months of 2002, Sam Adams Light® comprised approximately 12% of the Company’s volume.

The Company believes that the declines experienced in Samuel Adams’ flagship brand and other core brands were due to a combination of factors, including a weak economy, poor weather conditions in the Northeast, recent world events and cannibalization of other Samuel Adams® beers by Sam Adams Light®. The Company is actively working to minimize effects of this cannibalization.

Further impacting the Company’s shipment volume for the first six months 2003 as compared to the same period 2002 was an inventory build that began in January 2002 as the Company was rolling out Sam Adams Light®. Wholesalers had increased inventory levels by 62,000 barrels during the first six months 2002 as compared to 24,000 barrels in 2003. During the second half of 2002, inventory levels decreased by 27,000 barrels, ending the year with a cumulative inventory build of approximately 35,000 barrels. As of June 28, 2003, the Company believes inventory levels are approximately 15,000 barrels higher than normal levels and expect this excess inventory to be reduced during the remainder of 2003. As noted in the Liquidity and Capital Resources section, the Company plans to implement new distributor credit terms during the second half of 2003 that may result in lower wholesaler inventories, which could further reduce shipments in the second half of 2003 as compared to the same period 2002.

Selling Price. The selling price per barrel increased by approximately 1.8% to $169.40 per barrel for the six months ended June 28, 2003. This increase is due mainly to normal price increases, as well as to changes in the packaging and product mix. The ratio of bottles to kegs increased during this period, with bottles representing 72.7% of total shipments in the six months ended June 28, 2003, as compared to 71.5% for the same period last year. The shift in the mix to bottles from kegs increased revenue per barrel, as the selling price per equivalent barrel is higher for bottles than for kegs. This shift is primarily due to the national rollout of Sam Adams Light®, as this product is primarily available in bottles.

Gross Profit. Gross profit was 59.9% as a percentage of net sales or $101.50 per barrel for the six months ended June 28, 2003, as compared to 59.9% and $99.76 for the six months ended June 29, 2002. The increase per barrel was primarily due to price increases and changes in the product and packaging mix, offset by an increase in the returns allowance to reflect increased wholesaler inventories for Seasonal Brands.

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Cost of sales increased by $1.21 per barrel to 40.1% as a percentage of net sales or $67.90 per barrel for the six months ended June 28, 2003, as compared to 40.1% as a percentage of net sales or $66.69 per barrel for the six months ended June 29, 2002. This was due primarily to increases in natural gas costs and sewerage charges incurred at the Cincinnati Brewery, as well as changes in the packaging and product mix and brewing costs. Assuming pricing stability, the Company anticipates slightly higher margins for the full year 2003 than in 2002, through potential cost improvements.

Advertising, Promotional and Selling. As a percentage of net sales, advertising, promotional and selling expenses were 48.5% for the six months ended June 28, 2003, as compared to 44.3% for the six months ended June 29, 2002. Advertising, promotional and selling expenses increased by $3.0 million or 6.6% to $49.3 million for the six months ended June 28, 2003, compared to $46.3 million for the six months ended June 29, 2002. This increase is primarily due to the continued high level of support of Sam Adams Light® and the entire Samuel Adams® brand. During the second half of 2003, the Company expects to spend approximately $10 million less in advertising, promotional and selling expense than in the same period 2002, when the Company was investing heavily in the Sam Adams Light® national launch.

General and Administrative. General and administrative expenses decreased by 1.3% or $101,000 to $7.5 million for the six months ended June 28, 2003 as compared to the same period last year, primarily due to a decrease in salaries and benefits, offset by other employee-related costs and increases in insurance premiums.

Interest income, net. Interest income increased by 64.7% to $654,000 for the six months ended June 28, 2003 from $397,000 for the same period ended June 29, 2002. This increase is primarily due to the receipt of distributions from certain investments in the first quarter, as well as moving funds into higher yielding investments in 2003.

Provision for income taxes. The Company anticipates that its effective tax rate will be approximately 38.0% for the year ending December 27, 2003. The overall decrease in the effective tax rate for 2003 is due to both the shifting of investments from taxable to tax-exempt instruments, as well as a restructuring of the Company’s corporate entities.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments decreased by $20.6 million to $32.0 million as of June 28, 2003 from $52.6 million as of December 28, 2002. For the six months ended June 28, 2003, the decrease in cash and short-term investments was primarily due to cash used in financing activities to repurchase the Company’s Class A Common Stock. The Company plans to implement new distributor credit terms during the second half of 2003 that may reduce receivable balances in the third quarter of 2003 and in the first quarter of 2004.

During the second quarter of 2003, the Company repurchased 908,000 shares of its outstanding Class A Common Stock, for an aggregate purchase price of $12.4 million. On June 10, 2003, the Company’s Board of Directors authorized an additional $10.0 million for the repurchase of the Company’s Class A Common Stock, increasing the aggregate expenditure limitation to $70.0 million. As of July 25, 2003, the Company has repurchased an additional 467,000 shares, for an aggregate repurchase price of $6.9 million, under the newly authorized expenditure limitation. To date, the Company has repurchased a total of 6.8 million shares under this program, at a cost of $69.2 million.

The Company utilized $630,000 for the purchase of capital equipment during the three months ended June 28, 2003 as compared to $377,000 during the same period last year. Purchases during the second quarter of 2003 consisted primarily of kegs.

With working capital of $45.7 million and $45.0 million in unused bank lines of credit as of June 28, 2003, the Company believes that its existing resources should be sufficient to meet the Company’s short-term and long-term operating and capital requirements. The Company was in compliance with all covenants, and there were no amounts outstanding under the Company’s credit facilities as of June 28, 2003, or as of the date of this filing.

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THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES

Brewery-Related Transactions

During the fourth quarter of 2002, Miller Brewing Company filed with the American Arbitration Association a demand for arbitration with respect to its right to terminate its obligation to continue production of certain of the Company’s products under a contract brewing agreement after May 30, 2004. In its response, the Company, in addition to denying that Miller has the right to terminate, also asserted certain counterclaims against Miller. The arbitrators have been selected and discovery is underway. It is not possible, at this point, to predict the actual outcome of the arbitration. Miller closed the Tumwater Brewery as of July 1, 2003, and has moved the Tumwater production to the Eden Brewery, with Miller assuming the cost of the incremental freight to the areas previously supplied by the Tumwater Brewery. The Company maintains ongoing discussions with its contract breweries and potential contract breweries and continues to believe that, regardless of the outcome of the Miller arbitration, it will be able to maintain sources of supply adequate to meet the expected demand for the Company’s products beyond May 2004. However, the Company is unable at this time to quantify any additional costs, capital or operating, if any, that it might incur in securing access to such capacity and ensuring that its products are produced to its quality and service requirements.

Contractual Obligations

The following table presents contractual obligations as of June 28, 2003.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

Inventory Reserves

The reused glass reserve accounts for a significant portion of the inventory obsolescence reserve. The Company’s accounting policy for reused glass inventory is to recognize a loss by establishing a reserve to the extent that inventory levels exceed expected usage. Based upon the amount of reused glass that is recycled and available, the Company determines in advance what quantity of this glass will be used for bottling, and a reserve is computed based upon an estimated percentage of glass that may not be able to be utilized. The computation of this reserve considers brewery capacity for bottling with reused glass, the amount of reused glass that is available and possible packaging obsolescence. Actual results may materially differ from management’s estimates.

An additional component of the inventory obsolescence reserve is the excess hops inventory reserve. The Company’s accounting policy for hops inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed forecasted usage requirements. The computation of the excess hop inventory and purchase commitment reserve is based on the age of the hops on-hand and requires management to make certain assumptions

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regarding future sales growth, product mix, cancellation costs, and supply, among others. The Company will continue to manage hop inventory and contract levels as necessary. The current levels are deemed adequate, based upon foreseeable future brewing requirements. Actual results may materially differ from management’s estimates.

Promotional Activities Accrual

Throughout the year, the Company’s sales force engages in numerous promotional activities, and this requires that management make certain estimates and assumptions that affect the reported amounts of related liabilities at the date of the financial statements and the reported amounts of expenditures during the reporting period. Actual results could differ from those estimates.

Distributor Promotional Discount Allowance

The Company enters into discount agreements with its various wholesalers for certain periods of time. The agreed-upon discount rates are applied to the wholesalers’ sales to retailers in order to determine the total discounted amount. The computation of the discount accrual requires that management make certain estimates and assumptions that affect the reported amounts of related assets at the date of the financial statements and the reported amounts of revenue during the reporting period. Actual results could differ from those estimates.

FORWARD-LOOKING STATEMENTS

In this 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 events or circumstances after the date factor that may emerge, 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 Form 10-Q.

Since December 28, 2002, 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.

Within the forty-five day period prior to the date of this report, 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 Interim 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-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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			Miller Brewing Company (“Miller”) filed a Demand for Arbitration with the American Arbitration Association seeking a determination as to whether Miller has the right to terminate its existing contractual obligations to the Company, effective May 30, 2004. The Company has filed an answer to the Demand, asserting certain counterclaims. Discovery in the proceedings is underway, but the Company is not, however, able to determine the likely outcome of the proceedings at this time.
			The Company is party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will, individually or in the aggregate, have a material adverse effect upon its financial condition or results of operations.

Not Applicable

Not Applicable

			The Company held its Annual Meeting of Stockholders on May 28, 2003. The following items were voted upon at that time.
			“RESOLVED: That Pearson C. Cummin, III, Robert N. Hiatt and James C. Kautz be, and they hereby are, elected Class A Directors of the Corporation, to serve for a term of one year, ending on the date of the 2004 Annual Meeting of Stockholders in accordance with the By-Laws and until their respective successors are duly chosen and qualified.”
			The results of the vote were, as follows:
			Election of Class A Directors:

			Mr. C. James Koch, as the sole holder of the Corporation’s Class B Common Stock, voted on the election of four (4) Class B Directors.
			“RESOLVED: That C. James Koch, Charles Joseph Koch, Martin F. Roper and Jean-Michel Valette be, and they hereby are, elected Class B Directors of the Corporation to serve for a term of one year ending on the date of the 2004 Annual Meeting of Stockholders in accordance with the By-Laws and until their respective successors are duly chosen and qualified.”

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			The results of the vote were, as follows:
			Election of Class B Directors:

Not Applicable

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