UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 26, 2004

OR

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 August 4, 2004:

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THE BOSTON BEER COMPANY, INC.
FORM 10-Q

QUARTERLY REPORT
JUNE 26, 2004

TABLE OF CONTENTS

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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

     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 June 26, 2004 and the statement of consolidated operations and consolidated cash flows for the interim periods ending June 26, 2004 and June 28, 2003 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 27, 2003.

Management’s Opinion

In the opinion of the Company’s management, the Company’s unaudited consolidated financial position as of June 26, 2004 and the results of its consolidated operations and consolidated cash flows for the interim periods ended June 26, 2004 and June 28, 2003, 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 26, 2004 and December 27, 2003 were as follows (table in thousands):

The Company recorded a realized loss of approximately $229,000 during the period ended June 26, 2004 and a realized gain of approximately $28,000 during the period ended June 28, 2003.

C. Inventories

Inventories, which consist principally of hops, brewing 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. Advertising and Sales Promotions

The total amount of sales incentives, samples and other promotional discounts included within the advertising, promotional and selling line item in the accompanying consolidated statements of income was $0.9 million and $0.8 million for the quarters ended June 26, 2004 and June 28, 2003, respectively, and $1.7 million and $1.9 million for the six months ended June 26, 2004 and June 28, 2003, respectively.

E. Net Income per Share

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

F. Comprehensive Income

Comprehensive income is as follows (in thousands):

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

Components of accumulated other comprehensive income are as follow (in thousands):

G. Commitments and Contingencies

Purchase Commitments

The Company had outstanding purchase commitments related to advertising contracts of approximately $5.6 million and $10.2 million at June 26, 2004 and December 27, 2003, respectively. These purchase commitments reflect amounts that are non-cancelable.

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 26, 2004 totaled $11.1 million (based on the exchange rate at June 26, 2004), compared to $11.0 million at December 27, 2003.

H. 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.

I. Subsequent Event

     The Company has chosen not to exercise its option to extend its contract brewing relationship with High Falls Brewing Company, LLC (High Falls) in Rochester, New York and expects the contract to terminate on December 1, 2004. The agreement between the Company and High Falls provides for High Falls’ repayment of certain capital investments made by the Company, which have a contractual value in excess of $2.0 million. At December 1, 2004, the Company’s unamortized net book value of these capital investments is anticipated to be in excess of $1.6 million. In a letter from High Falls received by the Company on August 3, 2004, High Falls stated that it does not expect to be in a position to immediately repay the amounts due under the contract. The Company believes that it has several alternatives available to recover the amounts due from High Falls. The Company has not accrued any reserves with respect to the High Falls situation at this time, but is currently evaluating the implications of this communication.

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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 significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of the Company for the three and six-month periods ended June 26, 2004 as compared to the three and six-month periods ended June 28, 2003. 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 27, 2003.

RESULTS OF OPERATIONS

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

Three Months Ended June 26, 2004 compared to Three Months Ended June 28, 2003

Net revenue. Net revenue increased by $5.7 million or 10.1% to $62.0 million for the three months ended June 26, 2004 as compared to the three months ended June 28, 2003. The increase is primarily due to an increase in shipment volume of Boston Beer’s core brands.

Volume. Total shipment volume increased by 10.0% or 33,000 barrels to 363,000 barrels in the three months ended June 26, 2004 from the same period 2003, due to an increase in shipments of Samuel Adams Boston Lager®, Seasonal Brands, Twisted Tea® and Brewmaster’s Collection, and an increase in contract brewing, offset by declines in Sam Adams Light®.

Shipments of core products exceeded depletions for the second quarter 2004 by approximately 33,000 barrels. Shipment volume trends were higher than the trends for depletions for the second quarter, primarily due to a normal wholesaler inventory build for the peak summer selling season. Wholesaler inventory levels at the end of the second quarter appear reasonable and represented the same levels as at the end of the second quarter 2003.

Selling Price. The selling price per barrel of core brands increased by 0.1% to $170.85 per barrel for the quarter ended June 26, 2004 as compared to the same period last year. This increase is due to price increases, offset by a shift in the package mix from bottles to kegs, and the increase in contract brewing which has lower revenue per barrel. The package shift is primarily due to a decrease in shipments of Sam Adams Light®, which is primarily sold in bottles.

Gross Profit. Gross profit was 60.5% as a percentage of net revenue or $103.34 per barrel for the quarter ended June 26, 2004, as compared to 61.0% and $104.10 for the quarter ended June 28, 2003. This decrease per barrel is due to an increase in cost of sales and an increase in contract brewing volume (which has lower margins), offset by price increases.

Cost of goods sold increased by $0.94 per barrel to $67.50 per barrel, or 39.5% as a percentage of net revenue for the quarter ended June 26, 2004, as compared to 39.0% as a percentage of net revenue or $66.56 per barrel for the quarter ended June 28, 2003. The increase is due primarily to higher packaging material costs as compared to last year.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to distributor locations in its advertising, promotional and selling expense line item. As such, the

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

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 decreased by $0.8 million to $25.2 million or 40.7% of net revenue for the three months ended June 26, 2004, compared to $26.0 million or 46.2% of net revenue for the three months ended June 28, 2003. The decrease was primarily driven by more effective purchasing of media in 2004 and lower point-of-sale expenditures in 2004 as compared to the same period in 2003, which included an investment in new style tap handles. This decrease was offset by an increase in freight costs.

General and Administrative. General and administrative expenses decreased by 1.1% or $39,000 to $3.6 million for the quarter ended June 26, 2004 as compared to the same period last year, primarily due to a decrease in legal and insurance expenses.

Total other (expense) income, net. Other (expense) income decreased by $0.3 million during the quarter ended June 26, 2004 as compared to the quarter ended June 28, 2003. This decrease is primarily due to a $0.2 million loss incurred on the sale of available-for-sale securities in the quarter ended June 26, 2004, coupled with lower interest rates in 2004.

Six Months Ended June 26, 2004 compared to Six Months Ended June 28, 2003

Net revenue. Net revenue increased by $5.0 million or 5.0% to $106.7 million for the six months ended June 26, 2004 from $101.6 million for the six months ended June 28, 2003. The increase is primarily due to an increase in the shipment volume of Boston Beer’s core brands and price increases, offset by a shift in the package mix from bottles to kegs.

Volume. Total shipment volume increased by 4.3% or 26,000 barrels to 626,000 barrels for the six months ended June 26, 2004 from the same period 2003, due to an increase in shipments of Samuel Adams Boston Lager®, Seasonal Brands and Twisted Tea®, and an increase in contract brewing volume, offset by a decline in Sam Adams Light®.

Shipments of core products exceeded depletions year to date by approximately 43,000 barrels. Shipment volume trends were higher than the trends for depletions for the first six months of 2004, primarily due to a normal wholesaler inventory build for the peak summer selling season. Wholesaler inventory levels as of June 26, 2004 appear reasonable and represented the same levels as at the end of the second quarter 2003.

Selling Price. The selling price per barrel increased by approximately 0.6% to $170.40 per barrel for the six months ended June 26, 2004 as compared to the prior year. This increase is due to price increases, offset by a shift in the packaging mix from bottles to kegs and an increase in contract brewing volume. The ratio of kegs to bottles increased during this period, with kegs representing 28.8% of total shipments in the six months ended June 26, 2004, as compared to 27.3% for the same period last year. The shift in the mix to kegs from bottles decreased revenue per barrel, as the selling price per equivalent barrel is lower for kegs than for bottles. This shift is primarily due to the declines in Sam Adams Light®, as this product is primarily available in bottles. Contract brewing has lower revenue per barrel than core products.

Gross Profit. Gross profit was 60.1% as a percentage of net revenue or $102.39 per barrel for the six months ended June 26, 2004, as compared to 59.9% and $101.50 for the six months ended June 28, 2003. The increase per barrel was primarily due to price increases offset by an increase in cost of goods sold per barrel and the increase in contract brewing volume. Contract brewing has lower margins than core products.

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

While the Company expects its gross profit percentage for the full year 2004 to be similar to the full year 2003, increasing cost pressures relating to packaging materials and utility costs could result in a reduction of the 2004 gross profit percentage.

Cost of goods sold increased by $0.12 per barrel to $68.01 per barrel but decreased to 39.9% as a percentage of net revenue for the six months ended June 26, 2004, as compared to $67.90 per barrel or 40.1% as a percentage of net revenue for the six months ended June 28, 2003. The increase per barrel is primarily due to an increase in the cost of packaging materials as compared to the prior year.

Advertising, Promotional and Selling. Advertising, promotional and selling expenses decreased by $2.6 million to $46.7 million or 43.8% of net revenue for the six months ended June 26, 2004, compared to $49.3 million or 48.5% of net revenue for the six months ended June 28, 2003. The decrease was primarily driven by more effective purchasing of television advertising in 2004 and lower point-of-sale expenditures in 2004 as compared to the same period in 2003. This decrease was offset by an increase in freight costs. The Company is expecting increased freight cost pressures for the remainder of the year, which could adversely affect earnings.

The Company is currently finalizing the development of a new television advertising campaign for Sam Adams Light® for airing in the second half of 2004. The Company will evaluate the new campaign’s effectiveness and determine what level of media spending is appropriate to support the brand.

General and Administrative. General and administrative expenses decreased by 8.5% or $0.6 million to $6.8 million for the six months ended June 26, 2004 as compared to the same period last year, primarily due to a decrease in legal expenses and insurance premiums. Despite lower legal costs during the first half of 2004, legal costs may increase in the second half of 2004 over 2003, due to the uncertainty of the defense costs associated with the pending class action lawsuits as described in Part II, Item 1.

Total other (expense) income, net. Interest income decreased by $0.5 million to $0.1 million for the six months ended June 26, 2004 as compared to the same period ended June 28, 2003. This decrease is primarily due to a $0.2 million loss incurred in 2004 on the sale of available-for-sale securities, as well as lower interest rates in 2004.

Provision for income taxes. The Company’s effective tax rate decreased to approximately 37.8% for the three months ended June 26, 2004 from 38.0% for the same period last year. The Company currently estimates that its effective tax rate for fiscal year 2004 will be approximately 37.8%.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments increased by $12.2 million to $55.1 million as of June 26, 2004 from $42.9 million as of December 27, 2003. The increase is primarily due to $12.0 million of cash provided by operating activities, primarily driven by net income before depreciation expense.

As compared to the six months ended June 28, 2003, cash from operating activities increased by $14.6 million due to an increase in net income of $3.7 million, declines in income taxes receivable and trade receivables during the current quarter, and timing dif