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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

For the transition period from _____ to_______

Commission file number: 001-14092

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.

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of October 23, 2003:

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THE BOSTON BEER COMPANY, INC.
FORM 10-Q

QUARTERLY REPORT
SEPTEMBER 27, 2003

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

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

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

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

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

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

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 September 27, 2003 and the statement of consolidated operations and consolidated cash flows for the interim periods ending September 27, 2003 and September 28, 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 by generally accepted accounting principles for complete financial statements 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 September 27, 2003 and the results of its consolidated operations and consolidated cash flows for the interim periods ended September 27, 2003 and September 28, 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 September 27, 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 $128,000 and $21,000 during the nine months ended September 27, 2003 and September 28, 2002, respectively.

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 $12.0 million at September 27, 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 September 27, 2003 totaled $10.9 million (based on the exchange rate at September 27, 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 third quarter 2003, the Company repurchased 781,100 shares of its outstanding Class A Common Stock, for an aggregate purchase price of $11.9 million. On August 19, 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 $80.0 million. Subsequent to quarter-end, and through October 23, 2003, the Company has repurchased an additional 32,200 shares, for an aggregate repurchase price of $524,000. For the nine months ended September 27, 2003 and to date, the Company has repurchased a total of 2.1 and 7.1 million shares, respectively, under this program, at a cost of $29.2 million and $74.7 million, respectively.

I.

Legal Proceedings

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 produce 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. Hearings on the matter have taken place and the Company expects that the arbitrators will render a decision during the fourth quarter 2003. It is not possible, at this point, to predict the outcome of the arbitration.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of the Company for the three and nine-month periods ended September 27, 2003 as compared to the three and nine-month periods ended September 28, 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 September 27, 2003 compared to Three Months Ended September 28, 2002

Net revenue. Net revenue decreased by $1.0 million or 1.8% to $55.5 million for the three months ended September 27, 2003 from the three months ended September 28, 2002. The decrease is due to a decline in volume of the Company’s core brands coupled with a 1% decline in net revenue per barrel as compared to the third quarter 2002.

Volume. Total volume decreased by 0.8% or 3,000 barrels to 333,000 barrels in the three months ended September 27, 2003 as compared to the same period 2002, due to a decline in Sam Adams Light® and Samuel Adams® Signature Series, partially offset by increases in Twisted Tea®, Samuel Adams Boston Lager® and Samuel Adams® Seasonal Brands. During the third quarter 2002, Sam Adams Light® was launched in a substantial number of the Company’s markets and as a result, shipments of Sam Adams Light® were higher than normal levels as inventory was loaded into these markets.

Wholesalers had increased inventory levels by approximately 10,000 barrels during the third quarter 2002 as compared to an increase of approximately 2,000 barrels in the same period 2003.

Selling Price. The selling price per barrel of core brands decreased by approximately 1.0% to $166.80 per barrel for the quarter ended September 27, 2003. This decrease is primarily due to changes in the packaging mix. The ratio of bottles to kegs decreased, with bottles representing 71.8% of total shipments in the net three months ended September 27, 2003 as compared to 74.4% for the same period last year. The shift in the mix to kegs from bottles reduced net revenue per barrel, as the selling price per equivalent barrel is higher for bottles than for kegs. This shift is primarily due to the higher shipment volume of Sam Adams Light® during the third quarter 2002 when the product was launched, as this product was only available in bottles in most markets.

Gross Profit. Gross profit was 58.9% as a percentage of net revenue or $98.17 per barrel for the quarter ended September 27, 2003, as compared to 58.3% and $98.25 for the quarter ended September 28, 2002.

Cost of sales decreased by $1.56 per barrel to $68.63 per barrel, or 41.1% as a percentage of net revenue for the quarter ended September 27, 2003, as compared to 41.7% as a percentage of net revenue or $70.19 per barrel for the quarter ended September 28, 2002. This was due primarily to changes in the packaging mix as the cost of sales per equivalent barrel is higher for bottles than kegs (refer to the selling price discussion above for additional information relating to the packaging mix).

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Advertising, Promotional and Selling. As a percentage of net revenue, advertising, promotional and selling expenses were 40.0% for the quarter ended September 27, 2003, as compared to 51.9% for the quarter ended September 28, 2002. Advertising, promotional and selling expenses decreased by $7.1 million or 24.3% to $22.2 million for the three months ended September 27, 2003, compared to the three months ended September 28, 2002. This decrease is primarily due to the high level of support for the launch of Sam Adams Light® during the quarter ended September 28, 2002.

General and Administrative. General and administrative expenses increased by 28.0% or $951,000 to $4.3 million for the quarter ended September 27, 2003 as compared to the same period last year. This increase was primarily due to higher legal fees incurred during the third quarter 2003 related to arbitration proceedings with Miller Brewing Company.

Interest income, net. Interest income decreased by 14.1% to $287,000 for the quarter ended September 27, 2003 from $334,000 for the quarter ended September 28, 2002. This decrease is primarily due to lower average cash and investment balances during the third quarter 2003 as compared to the same period last year.

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 certain of the Company’s corporate entities.

Nine Months Ended September 27, 2003 compared to Nine Months Ended September 28, 2002

Net revenue. Net revenue decreased by $3.9 million or 2.4% to $157.2 million for the nine months ended September 27, 2003 from $161.1 million for the nine months ended September 28, 2002. The decrease is primarily due to a decline in volume of the Company’s core brands, slightly offset by an increase in net revenue per barrel.

Volume. Total volume decreased by 3.2% or 31,000 barrels to 933,000 barrels in the nine months ended September 27, 2003 from the same period 2002, due to declines 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 nine months of 2002, Sam Adams Light® was not distributed in all of the Company’s markets as the national roll out of the product began in January 2002, excluding test markets. By the end of the nine months ended September 28, 2002, Sam Adams Light® was in markets representing over 85% of the Company’s total 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 during the first half of 2003, world events during the first quarter of 2003 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 nine months 2003 as compared to the same period 2002 was an inventory build at wholesalers that began in January 2002 as the Company was rolling out Sam Adams Light®. Wholesalers had increased inventory levels by approximately 75,000 barrels during the first nine months 2002 as compared to approximately 26,000 barrels in 2003. During the fourth quarter of 2002, inventory levels decreased by approximately 40,000 barrels, ending the year with a cumulative inventory build of approximately 35,000 barrels. As of September 27, 2003, the Company believes inventory levels are approximately 10,000 barrels higher than normal levels for this time of year and expects to return to normal year end inventory levels or less by December 27, 2003.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Selling Price. The selling price per barrel increased by approximately 1% to $168.47 per barrel for the nine months ended September 27, 2003. This increase is due to normal price increases.

Gross Profit. Gross profit was 59.5% as a percentage of net revenue or $100.32 per barrel for the nine months ended September 27, 2003, as compared to 59.4% and $99.21 for the nine months ended September 28, 2002. The increase per barrel was primarily due to price increases, partially offset by an increase in cost of sales.

Cost of sales increased by $.27 per barrel to $68.16 per barrel or 40.5% as a percentage of net revenue for the nine months ended September 27, 2003, as compared to $67.89 per barrel or 40.6% as a percentage of net revenue for the nine months ended September 28, 2002. This was due primarily to changes in the product mix and normal increases in brewing costs. The Company anticipates slightly higher margins for the full year 2003 than in 2002.

Advertising, Promotional and Selling. As a percentage of net revenue, advertising, promotional and selling expenses were 45.5% for the nine months ended September 27, 2003, as compared to 47.0% for the nine months ended September 28, 2002. Advertising, promotional and selling expenses decreased by $4.1 million or 5.4% to $71.6 million for the nine months ended September 27, 2003, compared to the nine months ended September 28, 2002. This decrease is primarily due to the high level of support for the launch of Sam Adams Light® during the nine months ended September 28, 2002.

General and Administrative. General and administrative expenses increased by 10.0% or $1.1 million to $11.8 million for the nine months ended September 27, 2003 as compared to the same period last year. The increase was primarily due to significant legal fees incurred during the nine months ended September 27, 2003 related to arbitration proceedings with Miller Brewing Company.

Interest income, net. Interest income increased by 28.7% to $941,000 for the nine months ended September 27, 2003 from $731,000 for the same period ended September 28, 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 certain of the Company’s corporate entities.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments decreased by $17.9 million to $34.8 million as of September 27, 2003 as compared to December 28, 2002. For the nine months ended September 27, 2003, the decrease in cash and short-term investments was primarily due to $29.2 million of cash used in financing activities to repurchase shares of the Company’s Class A Common Stock, partially offset by $11.9 million in cash provided by operations.

The Company utilized $29.2 million of cash during the nine months ended September 27, 2003 to repurchase 2.1 million shares of its outstanding Class A Common Stock, as compared to $9.9 million during the same period 2002. On August 19, 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 $80.0 million. Through October 23, 2003, the Company has repurchased a total of 7.1 million shares under this program, at a cost of $74.7 million.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash provided by operations during the period ending September 27, 2003 increased by $300,000 to $11.9 million as compared to the same period last year. The increase was primarily due to a change in distributor credit terms that occurred during the third quarter of 2003 that reduced the accounts receivable balance by approximately $5 million for the period ended September 27, 2003 as compared to the period ended September 28, 2002. This increase was substantially offset by timing differences relating to accounts payable.

With working capital of $38.5 million and $45.0 million in unused bank lines of credit as of September 27, 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 September 27, 2003, or as of the date of this filing.

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 produce 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. Hearings on the matter have taken place and the Company expects that the arbitrators will reach a decision during the fourth quarter 2003. It is not possible, at this point, to predict the outcome of the arbitration.

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. The ultimate decision regarding production beyond May 2004 will, of course, depend on a number of factors, including the outcome of the Miller arbitration and other alternatives then available to the Company. Accordingly, additional capital or operating costs, if any, that the Company might actually incur in securing access to future capacity and ensuring that its products are produced to its quality and service requirements, remain uncertain.

Contractual Obligations

The following table presents contractual obligations as of September 27, 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

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 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

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Item 4. CONTROLS AND PROCEDURES

On September 8, 2003, William F. Urich joined the Company as its Treasurer and Chief Financial Officer.

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(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 27, 2003, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified.

During the three month period ended September 27, 2003, there were no significant changes in the Company’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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