CRAFT BREW ALLIANCE, INC. (HOOK)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/14/2012
Filed Period 12/31/2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
____________________
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26542
CRAFT BREW ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
91-1141254
(I.R.S. Employer Identification No.)
929 North Russell Street
Portland, Oregon
(Address of principal executive offices)
97227-1733
(Zip Code)
Registrant’s telephone number, including area code: (503) 331-7270
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.005 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
____________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer
o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the common equity held by non-affiliates of the registrant as of the last day of the registrant’s most recently completed second
quarter on June 30, 2011 (based upon the closing price of the registrant’s common stock, as reported by the NASDAQ Stock Market, of $8.61 per share) was
$89,701,391.
The number of shares outstanding of the registrant’s common stock as of March 5, 2012 was 18,844,817 shares.
Portions of the registrant’s definitive Proxy Statement for the 2012 Annual Shareholders’ Meeting are incorporated by reference into Part III.
Documents Incorporated by Reference
CRAFT BREW ALLIANCE, INC.
2011 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PART II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”
“project,” “will,” ”may,” “plan” and similar expressions or their negatives identify forward-looking statements, which generally are not historical in
nature. These statements are based upon assumptions and projections that we believe are reasonable, but are by their nature inherently uncertain. Many
possible events or factors could affect our future financial results and performance, and could cause actual results or performance to differ materially from
those expressed, including those risks and uncertainties described in “Item 1A. - Risk Factors” and those described from time to time in our future reports
filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on these forward-looking statements, which speak
only as of the date of this annual report.
In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry
publications, U.S. government sources or other third parties. Although we attempt to utilize third-party sources of information that we believe to be materially
complete, accurate and reliable, there is no assurance of the accuracy, completeness or reliability of third-party information.
THIRD-PARTY INFORMATION
PART I
Item 1.
Business
Overview
Craft Brew Alliance (formerly known as Craft Brewers Alliance) is the union of three unique pioneering craft breweries:
Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;
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• Widmer Brothers Brewing founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon; and
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Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii.
Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beers in
the United States. Today, as an independent craft brewer, we possess several distinct and ownable advantages unique in the craft beer category. These
advantages are rooted and leveraged through the combination of our innovative portfolio of distinct, authentic brands; national sales and marketing reach with
seamless national distribution; bi-coastal breweries with significant available capacity; and five brew pubs supporting consumer awareness and research and
development.
We operate in two segments: Beer Related operations and Pubs and Other. Beer Related operations include the brewing and sale of craft beers from our five
breweries. Pubs and Other operations primarily include our five pubs, four of which are located adjacent to our breweries.
We proudly brew our Widmer Brothers, Redhook and Kona beers in each of our three company-owned mainland production breweries that are located in
Portsmouth, New Hampshire (“New Hampshire Brewery”); Portland, Oregon (the “Oregon Brewery”), which is our largest brewery; and in the Seattle suburb
of Woodinville, Washington (“Washington Brewery”). Our brewery located in Kailua-Kona, Hawaii (“Hawaiian Brewery”) brews our Kona branded beers.
We also own and operate a small manual style brewery, primarily used for small batch production and innovative brews, at the Rose Quarter in Portland,
Oregon.
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In all 50 states, we are wholly aligned with the distributors who are part of the Anheuser-Busch, LLC (“A-B”) distribution network. We sell our beers
primarily to these wholesalers via a Master Distributor Agreement (“A-B Distributor Agreement”) with A-B. Redhook and Widmer Brothers beers are
distributed in all 50 states and Kona beers are distributed in 29 states. Separate from our A-B wholesalers, we maintain an independent sales and marketing
organization complete with resources across the key functions of brand management, field marketing, field sales, and national retail sales.
Acquisition of Kona Brewery, LLC (“Kona”)
As a result of the closing of the merger with Kona Brewing Co., Inc. (the “KBC Merger”) on October 1, 2010, Kona became a wholly-owned subsidiary and,
accordingly, Kona’s results of operations are included in our consolidated results of operations from that date. Prior to the KBC Merger, we accounted for our
20% equity ownership interest in Kona under the equity method of accounting. We acquired Kona Brewing Co., Inc. (“KBC”) in exchange for $6.2 million in
cash and 1,667,000 shares of our common stock with a value of $11.7 million.
Sale of Equity Interest in Fulton Street Brewery, LLC (“FSB”)
On May 2, 2011 we sold our 42% equity interest in FSB to A-B for $16.3 million.
Industry Background
We are a brewer in the craft brewing segment of the U.S. brewing industry. The domestic beer market is comprised of ales and lagers produced by large
domestic brewers, international brewers and craft brewers. Shipments of craft beer in the United States are estimated by industry sources to have increased by
approximately 14.5% in 2011 over 2010 and by 11.4% for 2010 over 2009. Although the overall domestic market experienced a decrease in 2011, the craft
beer segment continued its growth and captured market share from the rest of the domestic market. Craft beer shipments in 2011 and 2010 were
approximately 5.5% and 4.9%, respectively, of total beer shipped in the U.S. Approximately 11.3 million barrels and 9.9 million barrels, respectively, were
shipped in the United States by the craft beer segment during 2011 and 2010, while total beer sold in the U.S., including imported beer, was 204.9 million
barrels and 208.0 million barrels, respectively. Compared with the other segments of the U.S. brewing industry, craft brewing is a relative newcomer. Twenty
years ago, Redhook and Widmer Brothers Brewery were among the approximately 200 craft breweries in operation. At the end of 2011, the number of craft
breweries in operation had grown to 1,900. Industry sources estimate that craft beer produced by regional and national craft brewers, similar to us, accounts
for approximately two-thirds of total craft beer sales, with one-third of the production brewed by smaller craft breweries.
The recent competitive environment has been characterized by two divergent trends; the number and diversity of craft brewers have significantly increased
while, simultaneously, the national domestic brewers have acquired or been acquired by other national domestic and foreign brewers. In 2011, according to
industry sources, A-B and MillerCoors accounted for more than 85% of total beer shipped in the United States, excluding imports. Certain national domestic
brewers have invested in existing smaller craft breweries and created separate craft-focused divisions in an effort to capitalize on the growing craft beer
segment.
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Business Strategy
Our consumer mission is to satisfy more consumers, at more times, in more locations through more authentic, distinct craft beer and brands than any other
competitor.
The central elements of our business strategy include:
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An innovative portfolio of distinct, authentic craft beer brands. We have brought together a collection of brands from original innovators in the
craft beer industry to enable us to match individual brands to a variety of consumer preferences. Through beer taste profiles and brand personalities,
customers are able to forge a strong relationship with the targeted brands. The breadth of our product offerings also provides consumers with the
opportunity to match specific consumer occasions with a product in our brand families.
National sales and marketing reach combined with seamless national distribution. We believe that we are able to leverage our national sales and
marketing capabilities and complementary brand families to create a unique identity in the distribution channel and with the consumer. We believe
that the combination of the complementary brand families promoted by one integrated sales and marketing organization delivers both financial
benefits and greater impact at the point of sale. We have invested in technologies that allow us to not only focus our brand families and product
offerings on those markets and regions that represent the most significant opportunities, but also measure the results of those efforts. Our sales force
has been structured to be able to call on all retail channels nationally, including grocery, drug and convenience stores, where most other craft
brewers are not able to do so.
We distribute our products in substantially all of our markets through A-B’s wholesale distribution network. A-B’s domestic network consists of
more than 510 independent wholesale distributors, most of which are geographically contiguous, and 14 wholesale distributors owned and operated
by A-B. This distribution relationship with A-B has offered efficiencies in logistics and product delivery, state reporting and licensing, billing and
collections. We have realized these efficiencies while maintaining full autonomy over the production, sale and marketing of our products as an
independent company. Recent developments in the relationship between A-B and its independent wholesalers have led to an increase in craft and
specialty brewers with access to this channel.
Bi-coastal brewing capability with significant additional capacity. Our breweries are located on both coasts and in Hawaii, which allows for
efficient brewing and distribution of our beers. Each of our breweries is modern and has flexible production capabilities. Our New Hampshire and
Oregon Breweries have room for bolt-on capacity additions. We prefer to own and operate all of our breweries to optimize the quality and
consistency of our products and to achieve greater control over our production costs. We may engage third party brewers to provide contract
brewing from time to time to further expand our packaging and brand offerings. We believe that maximizing the production under our direct
ownership and through selection of accomplished and expert partners is critical to our success. Further, we believe that our ability to engage in
ongoing product innovation and to control product quality provides critical competitive advantages. Our highly automated breweries are designed
to produce beer in smaller batches relative to the national domestic brewers, thereby allowing us to brew a wide variety of brand offerings. We
believe that our investment in brewing and logistic technologies enables us to minimize brewery operating costs and consistently produce
innovative beer styles and tastes.
Five brew-pub restaurants supporting consumer awareness and research and development. Our five brew-pub restaurants allow us to interact
directly with over one million consumers annually in our home markets, which creates a sense of brand loyalty. Our brewers are continually
experimenting with new and different varieties of hops and malts in all styles of beer. Our brew-pubs provide us with the opportunity to bring those
beers to market in test-size batches in order to understand their strengths prior to releasing them on a national level.
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Beers
Our beer portfolio is comprised of the Widmer Brothers, Redhook and Kona brand families.
We produce a variety of specialty craft beers using traditional European brewing methods adapted by American innovation and invention. We brew our beers
using high-quality hops, malted barley, wheat, rye and other natural and traditional ingredients. To help maintain full flavor, our products are not pasteurized
and we apply a freshness date to our products for the benefit of wholesalers and consumers. We generally distribute our products in glass bottles and kegs.
Within each brand family, we have created several types and styles of craft beer that align with a variety of consumer taste preferences. We have created year-
round brands and flagship brands that help define our brand families’ identities; these are the brands that consumers usually think of when they think of our
brand families, and are usually the most widely available.
Seasonal brand offerings provide the consumer compelling variety on the retail shelf or at the pub, restaurant or bar. Many of these brand offerings are brewed
to match the seasonal change in weather, specific events (e.g. Oktoberfest) or popular activities and are replaced with new offerings when the season or
conditions change. These brands allow our brewers to experiment and innovate with ingredients and brewing styles. Additionally, each of the brand families
has developed a wide range of high-end brands, some of which are offered as limited releases, that are offered exclusively at our restaurants and pubs.
Given the long relationship that many consumers have had with each of the brands and the growing consumer interest in high-end craft beers, we have also
developed a select group of higher-end specialty beers that are brewed, bottled and packaged in a manner befitting the unique nature of these beers. Our high-
end brands are marketed toward the beer connoisseur, a rapidly emerging class of consumer within the craft beer segment. We have deliberately limited the
shipment volumes associated with our high-end beers to retain the rarity and uniqueness of these beers to the connoisseur community.
The brands within each of the brand families are categorized below, with details provided for key year round contributors within each of the families. These
brands are usually offered both in draft and packaged formats.
Widmer Brothers Beers
The Widmer Brothers beers are unique interpretations of classic beer styles meant to expand beer drinkers’ perceptions of these styles; they frequently use
newly developed hop varieties and unusual ingredients in their recipes. Key brands within the Widmer Brothers brand family are:
Widmer Brothers Hefeweizen
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Widmer Brothers Hefeweizen. The top selling beer within the brand family is a golden, cloudy wheat beer with a pronounced citrus aroma and
flavor. This beer is intentionally left unfiltered to create its unique appearance and flavor profile and is usually served with a lemon slice to enhance
the beer’s natural citrus notes. This beer’s relatively low alcohol content by volume makes it perfect for consumption as a session beer. Its most
recent award, among many, was the 2008 World Beer Cup Gold medal winner for the American-style Hefeweizen category.
Widmer Brothers core beers
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Drifter Pale Ale (“Drifter”). Drifter possesses a unique citrus character, smooth drinkability, and a distinctive hop character. Brewed with generous
amounts of Summit hops, a variety known for its intense citrus flavors and aromas, this beer has a taste unique to the Pale Ale category. This beer
started as a seasonal offering, becoming a year round brand in 2009, and was a Great American Beer Festival (“GABF”) Silver Medal Winner in
2006 for the American-style Pale Ale category.
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Drop Top Amber Ale. A 2010 World Beer Cup Gold Medal Winner and a 2008 GABF Gold Medal Winner.
Rotator India Pale Ale (“IPA”). Rotator IPA is a unique series of beers, offered in limited quantities, which change throughout the year to highlight
different hops and styles.
Widmer Brothers high-end beers
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Series 924. Named for the Oregon Brewery’s address, the beers in this brand are made for those who share our passion for the art of brewing and
the taste for authentic beers. Initial beers in the 924 Series include the Nelson Imperial IPA and the Pitch Black IPA, which is a Pacific Northwest
twist on a traditional IPA, brewed in the style of a Cascadian Dark, an emerging style. Beers in this brand are offered as a draft product and as a
four pack for bottles. Pitch Black IPA was the 2009 GABF Gold Medal Winner.
Brothers’ Reserve. This brand is the specialty high-end offering for the Widmer Brothers brand, with only two offerings a year. The beers chosen
for this brand reflect the passion and uniqueness of the Widmer brothers and are extremely limited. The brand is focused on the knowledgeable and
enthusiastic beer lover who is looking for something exclusive, rare and collectible.
Alchemy Project. Named for the proprietary hop blend that serves as the foundation for many Widmer Brothers beers, the Alchemy Project is a new
series of vintage-dated beers that can be enjoyed immediately or cellared for years. Barrel Aged Brrbon ’11 was the first release under the Alchemy
Project in the fall of 2011.
Widmer Brothers seasonal beers
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Citra Blonde. A very smooth, light, refreshing beer for summer time. Features Citra hops.
Okto. Full bodied with malty flavor, containing a floral aroma and finish. Available late summer and fall.
Brrr. A bold, hoppy northwest red ale brewed with a sweet candy finish for the cold winter months.
W Series. Designed to demonstrate our brewers’ creativity, brewing a variety of styles. Available as the Widmer Brothers spring seasonal.
Redhook Beers
The Redhook family of beers is comprised of sessionable (lower alcohol by volume) and approachable beers with character that push style boundaries without
being over the top. Key brands within the Redhook family are:
Redhook core beers
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Long Hammer IPA (“Long Hammer”). Long Hammer is the top-selling beer within the brand family and is an English pub-style bitter ale with a
bold hop aroma and profile that is not overpoweringly bitter.
Redhook Pilsner (“Pilsner”). Pilsner is the newest addition to Redhook’s core lineup; a crisp, easy-drinking, golden lager that is modeled after
historic beers originally brewed in Plzen, Czechoslovakia.
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Redhook ESB (“ESB”). ESB is modeled after the high-end Extra Special Bitters found in classic English pubs. ESB is a rich, full-bodied amber ale
with a smooth flavor profile featuring toasted malts and a pleasant finishing sweetness.
Copperhook Ale. A brilliant copper-colored ale with distinctive caramel notes and a clean refreshing finish.
Blueline Series. This brand is the high-end offering from the Redhook brand family for the West Coast beer drinker. These beers are hand crafted
by the brewers and are available at our Washington Brewery pub, as well as at select restaurants, bottle shops, and public houses in the Seattle,
Washington area.
Brewery Backyard Series. This brand is produced at our New Hampshire Brewery as a draft product available only at the brewery’s pub and at
select local establishments. These high-end beers are experimental in nature and designed to appeal to craft beer connoisseurs and the community
of self-described beer geeks. Like the Blueline Series, the Brewery Backyard Series is intended to be locally-relevant.
Redhook seasonal beers
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Nut Brown Ale. A medium-bodied, brown ale with a fresh aroma. Available late winter and spring.
Winterhook Winter Ale. Red chestnut in color and full-bodied with a toasty, complex profile. Available late fall and winter.
Wit. Redhook’s twist on the Belgian style is the addition of fresh ginger, which adds a refreshing snappiness to this lighter-bodied wheat beer.
Redhook Wit is available during the summer months.
Kona Beers
The Kona brand family is comprised of beers that deliver the authentic essence of the Hawaiian Islands that is “Always Aloha.” The Aloha Series in the Kona
brand family uses ingredients that are unique to the Islands. Key brands within the Kona brand family are:
Kona core beers
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Longboard Island Lager (“Longboard”). Kona’s top selling beer and flagship brand is a traditionally brewed lager with a delicate, slightly spicy
hop aroma that is complimented by a fresh, malt-forward flavor and a smooth, refreshing finish.
Fire Rock Pale Ale (“Fire Rock”). Fire Rock is a crisp, “Hawaiian Style” pale ale with pronounced citrus and floral hop aromas and flavors that are
backed up by a generous malt profile.
Kona seasonal beers
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Koko Brown Ale (“Koko”). Koko is an American brown ale with a deep amber color and rich mahogany hues. This ale has a smoky, roasted nut
aroma and flavor, with a coconut twist. Koko Brown Ale is Kona’s spring seasonal.
Pipeline Porter (“Pipeline”). Pipeline is smooth and dark, with a distinctive, roasty aroma and earthy flavor. This ale is brewed with fresh 100%
Kona coffee to impart a rich complexity not found in many beers. Available fall and winter.
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Wailua Wheat (“Wailua”). Wailua is a golden, sun-colored ale with a bright, citrusy flavor. This beer is brewed with a touch of tropical passion
fruit to impart a slightly tart and crisp finish. Available late spring and summer.
Kona variety packs
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Kona Island Hopper and Big Kahuna Variety Packs. Kona offers two variety packs: Island Hopper variety 12-packs and Big Kahuna variety 24-
packs. Both packages include the brewery’s flagship Longboard Island Lager along with Fire Rock Pale Ale and then two of our Aloha Series
seasonal offerings: Koko Brown, Wailua Wheat, and Pipeline Porter.
New Products and Brands
In an effort to stay current with consumer style and flavor preferences, we routinely analyze consumer trends and behavior, trends in other food and beverage
segments, and our brand families and product offerings to identify beer styles or consumer taste preferences that appear to be under-served or not currently
addressed. After identifying a potential new product offering, we will either tap into our brewing recipe library to determine if we have offered the targeted
style either on a one-time basis or as a limited seasonal run or will use our pilot brewing system to create an experimental new beer. We may then offer this
experimental new brew directly to consumers through on-premise test marketing at our own pubs and at exclusive retail sites. If the initial consumer
reception of an experimental or new brew appears to meet the desired taste profile, we develop a brand identity to solidify the consumer perception of the
product. We believe that our continued success is based on our ability to be attentive and responsive to consumer desires for new and distinctive tastes, and
our capacity to meet these desires with original and novel taste profiles while maintaining consistently high product quality.
Contract Brewing
In order to profitably use excess capacity, we have entered into two contract brewing arrangements under which we produce beer in volumes and per
specifications as designated by third parties. During 2011, we shipped 49,300 barrels under these contract brewing arrangements. We believe our
relationships with our contract brewing clients are strong and we expect volumes to remain consistent in future periods.
Brewing Operations
Brewing Facilities
We use highly automated brewing equipment at our four production breweries and also operate a smaller, manual brewpub-style brewing system. Our
breweries consist of the following:
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Oregon Brewery. Our Oregon Brewery is our largest capacity production brewery, consisting of a 230 barrel brewing system with an annual
capacity of 455,000 barrels.
Washington Brewery. Our Washington Brewery utilizes a 100 barrel brewing system and has an annual capacity of 220,000 barrels.
New Hampshire Brewery. Our New Hampshire Brewery utilizes a 100 barrel brewing system and has an annual capacity of 215,000 barrels. It
uses an anaerobic waste-water treatment facility that completes the process cycle.
Hawaiian Brewery. Our Hawaiian Brewery, which was acquired with the KBC Merger, utilizes a 25 barrel brewing system and has an annual
capacity of 10,000 barrels. During 2010, the Hawaiian Brewery installed a 229-kilowatt photovoltaic solar energy generating system to supply
approximately 50 percent of its energy requirements through renewable energy.
Rose Quarter Brewery. Our Rose Quarter Brewery maintains a 10 barrel pilot brewing system at the Rose Quarter sports arena in Portland,
Oregon and is our smallest brewery.
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Packaging
We package our craft beers in bottles, kegs and, for the Hefeweizen brand, 5-liter steel cans. All of our production breweries, with the exception of the
Hawaiian Brewery, have fully automated bottling and keg lines. The bottle filler at all of the breweries utilizes a carbon dioxide environment during bottling,
ensuring that minimal oxygen is dissolved in the beer, extending the shelf life. During 2011, we launched new packaging for the Redhook brand family,
including a unique glass bottle for all of the brands offered off premise. In February 2012, we added a small, manually operated canning line for our Kona
Longboard Island Lager. We offer an assortment of packages to highlight the unique characteristics of each of our beers and to provide greater opportunities
for customers to drink our beers in more locations and at more events and occasions, matching the active lifestyles and preferences of a greater number of our
consumers.
Quality Control
We monitor production and quality control at all of our breweries, with central coordination at the Oregon Brewery. All of the breweries have an on-site
laboratory where microbiologists and lab technicians supervise on-site yeast propagation, monitor product quality, test products, measure color and bitterness,
and test for oxidation and unwanted bacteria. We also regularly utilize outside laboratories for independent product analysis. In addition, every batch of beer
that we produce goes through a panel of internal testers (our taste panel) who ensure it meets our taste and profile standards.
Ingredients and Raw Materials
We currently purchase a significant portion of our malted barley from two suppliers and our premium-quality select hops, mostly grown in the Pacific
Northwest, from competitive sources. We also periodically purchase small lots of hops from international sources, such as New Zealand and Western Europe,
which we use to achieve a special hop character in certain beers. In order to ensure the supply of the hop varieties used in our products, we enter into supply
contracts for our hop requirements. We believe that comparable quality malted barley and hops are available from alternate sources at competitive prices,
although there can be no assurance that pricing would be consistent with our current arrangements. We currently cultivate our own yeast supply for certain
strains and maintain a separate, secure supply in-house. We have access to multiple competitive sources for packaging materials, such as labels, six-pack
carriers, crowns, cans and shipping cases.
Distribution
We are the only craft brewer in the U.S. to have a wholly aligned distribution network through our partnership with A-B. This partnership provides us
seamless national distribution, which results in both a highly effective distribution presence in each market and distribution and administrative efficiencies.
Our products are delivered to these retail outlets through this network of local distributors. Our beers are available for sale directly to consumers in draft and
bottles at restaurants, bars and liquor stores, as well as in bottles at supermarkets, warehouse clubs, convenience stores and drug stores. We sell beer directly
to consumers at our brew pubs and breweries.
Our products are distributed in all 50 states, pursuant to a master distributor agreement with A-B that allows us access to A-B’s national distribution network.
For additional information regarding our relationship with A-B, see “Relationship with A-B” below. A-B distributes beer throughout the United States through
a network of more than 510 independently owned and operated wholesale distributors, most of whom are geographically contiguous, and 14 wholesale
distributors owned and operated directly by A-B. According to industry sources, A-B’s products accounted for 47.9% of total beer shipped by volume in the
United States in 2011. Management believes that our competitors in the craft beer segment generally negotiate distribution relationships separately with
distributors in each locality and, as a result, typically distribute through a variety of wholesalers representing differing national beer brands with
uncoordinated territorial boundaries.
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In 2011 and 2010, we sold approximately 611,200 barrels and 574,900 barrels, respectively, to the wholesalers in A-B’s distribution network through the A-B
Distributor Agreement, accounting for 90.9% and 94.6%, respectively, of our shipment volume for the corresponding periods.
Sales and Marketing
We promote our products through a variety of means, including i) creating and executing a range of advertising programs; ii) training and educating
wholesalers and retailers about our products; iii) promoting our name, product offerings and brands, and experimental beers at local festivals, venues and
pubs; iv) selling our beers in the restaurants and pubs operated by us; and v) targeted discounting to create competitive advantage within the market place.
We advertise our products through an assortment of media, including television, radio, billboard, print and social media, including Facebook and Twitter, in
key markets and by participating in co-operative programs with our distributors whereby our spending is matched by the distributor. We believe that the
financial commitment by the distributor helps align the distributor’s interests with ours, and the distributor’s knowledge of the local market results in an
advertising and promotion program that is targeted in a manner that will best promote our products.
Our breweries also play a significant role in increasing consumer awareness of our products and enhancing our image as a craft brewer. Many visitors take
tours at our breweries and all of our production breweries have a retail restaurant or pub where our products are served. In addition, several of the breweries
have meeting rooms that the public can rent for business meetings, parties and holiday events, and that we use to entertain and educate distributors, retailers
and the media about our products. At our pubs, we also sell various items of apparel and memorabilia bearing our trademarks, which creates further awareness
of our beers and reinforces our quality image.
To further promote retail bottled product sales and in response to local competitive conditions, we regularly recommend that wholesalers offer discounts to
retailers in most of our markets. Distributors usually share in the cost of these price discounts.
Relationship with Anheuser-Busch, LLC
Exchange Agreement
We have an agreement with A-B (the “Exchange Agreement”), which entitles A-B to designate two members of our board of directors. A-B also generally has
the right to have a designee on each committee of the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a
committee formed to review or determine transactions or proposed transactions between A-B and us. The Exchange Agreement also contains limitations on
our ability to take certain actions without A-B’s prior consent, including, but not limited to, our ability to issue equity securities or acquire or sell assets or
stock, amend our Articles of Incorporation or bylaws, grant board representation rights, enter into certain transactions with affiliates, distribute our products in
the United States other than through A-B or as provided in the A-B Distributor Agreement, or voluntarily delist or terminate our listing on the Nasdaq Stock
Market.
Distributor Agreement
The A-B Distributor Agreement provides for the distribution of Widmer Brothers, Redhook, and Kona beers in all states, territories and possessions of the
United States, including the District of Columbia and (except with respect to Kona beers) all U.S. military, diplomatic, and governmental installations in a
U.S. territory or possession. Under the A-B Distributor Agreement, we granted A-B the right of first refusal to distribute our products, including any new
products (other than new products that we acquire). We are responsible for marketing our products to A-B’s distributors, as well as to retailers and consumers.
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The A-B Distributor Agreement has a term that expires on December 31, 2018, subject to automatic renewal for an additional ten-year period unless A-B
provides written notice of non-renewal to us on or prior to June 30, 2018. The A-B Distributor Agreement is also subject to immediate termination, by either
party, upon the occurrence of certain events as defined in the agreement, including the following:
•
•
•
a material default by the other party in the performance of the A-B Distributor Agreement or any other agreement between the parties;
certain bankruptcy and insolvency events; or
any material misrepresentation made by the other party under or in the course of performance of the A-B Distributor Agreement.
Additionally, the A-B Distributor Agreement may be terminated by A-B, upon six months’ prior written notice to us upon the occurrence of any of the
following events:
•
•
•
•
•
we engage in certain incompatible conduct that is not cured to A-B's satisfaction (at A-B’s sole discretion) within 30 days. Incompatible conduct is
defined as any act or omission that, in A-B’s opinion, damages the reputation or image of A-B or the brewing industry;
any A-B competitor or affiliate thereof acquires 10% or more of our outstanding equity securities, and that entity designates one or more persons to
our board of directors;
our current chief executive officer ceases to function in that role or is terminated, and a satisfactory successor, in A-B’s opinion, is not appointed
within six months;
we are merged or consolidated into or with any other entity or any other entity merges or consolidates into or with us without A-B’s prior approval;
or
A-B, its subsidiaries, affiliates, or parent, incur any obligation or expense as a result of a claim asserted against them by or in our name, its affiliates
or shareholders, and we do not reimburse and indemnify A-B and its corporate affiliates on demand for the entire amount of the obligation or
expense.
As of both December 31, 2011 and 2010, A-B owned approximately 32.2% of our outstanding common stock.
Fees
We pay fees to A-B in connection with the sale of our products, including margin fees, invoicing, staging and cooperage handling fees, inventory manager
fees and a wholesaler support center (“WSC”) fees.
In instances when we ship our products to A-B’s WSC rather than directly to the wholesaler, A-B’s WSC assists us by consolidating small wholesaler orders
with orders of other A-B products prior to shipping to the wholesaler.
See Note 19 of Notes to Consolidated Financial Statements for additional information.
Seasonality
Our sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting low sales levels relative to the second and third
quarters. Accordingly, our results for any particular quarter are not likely to be indicative of the results to be achieved for the full year.
Competition
We compete in the craft brewing market as well as in the much larger specialty beer market, which encompasses producers of imported beers, major national
brewers that have introduced fuller-flavored products, and large spirit companies and national brewers that produce flavored alcohol beverages. Beyond the
beer market, craft brewers have also faced increasing competition from producers of wines and spirits.
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Competition within the domestic craft beer segment and the specialty beer market is based on product quality, taste, consistency and freshness, ability to
differentiate products, promotional methods and product support, marketing, transportation costs, distribution coverage, local appeal and price.
The craft beer segment is increasingly competitive due to the proliferation of small craft brewers, including contract brewers, and the large number of
products offered by such brewers. Craft brewers have also encountered more competition as their peers expand distribution. Competition also varies by
regional market. Depending on the local market preferences and distribution, we have encountered strong competition from microbreweries, regional specialty
brewers and several national craft brewers. Because of the large number of participants and number of different products offered in this segment, the
competition for bottled product placements and especially for draft beer placements has intensified. Although certain of these competitors distribute their
products nationally and may have greater financial and other resources than we have, we believe that we possess certain competitive advantages, including
our broad array of brand offerings within our three brand families and the scale of our production breweries.
We also compete against producers of imported brands, such as Heineken, Corona Extra and Guinness. Most of these foreign brewers have significantly
greater financial resources than we have. Although imported beers currently account for a greater share of the U.S. beer market than craft beers, we believe
that craft brewers possess certain competitive advantages over some importers, including lower transportation costs, no importation costs, proximity to and
familiarity with local consumers, a higher degree of product freshness, eligibility for lower federal excise taxes and absence of currency fluctuations.
In response to the growth of the craft beer segment, most of the major domestic national brewers have introduced fuller-flavored beers, including well-funded
significant product launches in the wheat category. While these product offerings are intended to compete with craft beers, many of them are brewed
according to methods used by these brewers in their other product offerings. The major national brewers have significantly greater financial resources than us
and have access to a greater array of advertising and marketing tools to create product awareness of these offerings. Although increased participation by the
major national brewers increases competition for market share and can heighten price sensitivity within the craft beer segment, we believe that their
participation tends to increase advertising, distribution and consumer education and awareness of craft beers, and thus may ultimately contribute to further
growth of this industry segment.
In the past several years, several major distilled spirits producers and national brewers have introduced flavored alcohol beverages. Products such as Smirnoff
Ice, Bacardi Silver and Mike’s Hard Lemonade have captured sizable market share in the higher-priced end of the malt beverage industry. We believe sales
of these products, along with strong growth in the imported and craft beer segments of the malt beverage industry, contributed to an increase in the overall
U.S. alcohol market. These products are particularly popular in certain regions and markets in which we sell our products.
Competition for consumers of craft beers has also come from wine and spirits. This growth appears to be attributable to competitive pricing, television
advertising, increased merchandising and increased consumer interest in wine and spirits. Recently, the wine industry has been aided, on a limited basis, by its
ability to sell outside of the three-tier system, allowing sales to be made directly to the consumer. While the craft beer segment competes with wine and
spirits, it also benefits from many of the same advantages enjoyed by wine and spirit producers. These include consumers who allow themselves affordable
luxuries in the form of high quality alcoholic beverages.
A significant portion of our sales continues to be in the Pacific Northwest and in California, which we believe are among the most competitive craft beer
markets in the United States, both in terms of number of participants and consumer awareness. We believe that these areas offer significant competition for
our products, not only from other craft brewers but also from the growing wine market and from flavored alcohol beverages. Our recent marketing efforts
have been focused on creating appealing new brands and better communicating the attributes of our stable of existing beers, highlighting and strengthening
the identities to better match the preferences and lifestyles of a greater number of consumers. We believe that our broad array of beers and brands enables us
to offer an assortment of flavors and experiences that appeal to more people.
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Segment and Enterprise-Wide Information
See Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for the required segment and
enterprise-wide information.
Regulation
Our business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary for our brewery and pub operations and
the sale of alcoholic beverages are required from a number of agencies, including the U.S. Treasury Department, the Alcohol and Tobacco Tax and Trade
Bureau (“TTB”), the U.S. Department of Agriculture, the U.S. Food and Drug Administration, state alcohol regulatory agencies, and state and local health,
sanitation, safety, fire and environmental agencies. In addition, the beer industry is subject to substantial federal and state excise taxes, although smaller
brewers producing less than two million barrels annually, including us, benefit from favorable treatment.
We operate our breweries under federal licensing requirements imposed by the TTB. The TTB requires the filing of a “Brewer’s Notice” upon the
establishment of a commercial brewery and the filing of an amended Brewer’s Notice any time there is a material change in the brewing or warehousing
locations, brewing or packaging equipment, brewery ownership, or officers or directors. Our operations are subject to audit and inspection by the TTB at any
time.
Management believes that we currently have all of the licenses, permits and approvals required for our current operations. Existing permits or licenses could
be revoked if we fail to comply with the terms of such permits or licenses and additional permits or licenses may be required in the future for our current
operations or as a result of expanding our operations in the future.
The U.S. federal government currently levies an excise tax of $18 per barrel on beer sold for consumption in the United States; however, brewers that produce
less than two million barrels annually are taxed at $7 per barrel on the first 60,000 barrels shipped, with shipments above this amount taxed at the normal rate.
Certain states also levy excise taxes on alcoholic beverages. It is possible that excise taxes may be increased in the future by the federal government or any
state government or both. In the past, increases in excise taxes on alcoholic beverages have been considered in connection with various governmental budget-
balancing or funding proposals.
Federal and State Environmental Regulation
Our brewing operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, air
emissions, water discharges and the handling and disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violate any
such regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, we could be
adversely affected.
Dram Shop Laws
The serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being held liable to third parties
for injuries caused by the intoxicated customer. Our restaurants and pubs have addressed this issue by maintaining reasonable hours of operation and routinely
performing training for personnel.
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Trademarks
We have obtained U.S. trademark registrations for our numerous products, including our proprietary bottle designs. Trademark registrations generally include
specific product names, marks and label designs. The Widmer Brothers, Redhook, and Kona Brewing marks and certain other marks are also registered in
various foreign countries. We regard our Widmer Brothers, Redhook, Kona Brewing and other trademarks as having substantial value and as being an
important factor in the marketing of our products. We are not aware of any infringing uses that could materially affect our current business or any prior claim
to the trademarks that would prevent us from using such trademarks in our business. Our policy is to pursue registration of our trademarks in our markets
whenever possible and to oppose vigorously any infringement of our trademarks.
Employees
At December 31, 2011, we employed approximately 675 people, including 330 employees in the pubs, restaurant and retail stores, 180 employees in
production, 120 employees in sales and marketing and 45 employees in corporate and administration. The pubs and restaurants have 195 part-time employees
and 20 seasonal or temporary employees, both of which are included in the totals above. None of our employees are represented by a union or employed
under a collective bargaining agreement. We believe our relations with our employees to be good.
Available Information
Our Internet address is www.craftbrew.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements and any amendments to those reports, as soon as reasonably practicable after we electronically file such
material with or furnish them to the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of
our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
Item 1A.
Risk Factors
If we are unable to gauge trends and react to changing consumer preferences in a timely manner, our sales and market share will decrease.
The costs and management attention involved in maintaining an innovative brand portfolio have been, and are expected to continue to be, significant. If we
have not gauged consumer preferences correctly, or are unable to maintain consistently high quality beers as we develop new brands, our overall brand image
may be damaged. If this were to occur, our future sales, results of operations and cash flows would be adversely affected.
Increased competition could adversely affect sales and results of operations.
We compete in the highly competitive craft brewing market, as well as in the much larger specialty beer category, which includes the imported beer segment
and fuller-flavored beer offered by major national brewers. We also face increasing competition from producers of wine, spirits and flavored alcohol
beverages offered by the larger spirit producers and national brewers. Increased competition could cause our future sales and results of operations to be
adversely affected.
Our information systems may experience an interruption or breach in security.
We rely on computer information systems in the conduct of our business. We have policies and procedures in place to protect against and reduce the
occurrence of failures, interruptions, or breaches of security of these systems. However, there can be no assurances that these policies and procedures will
eliminate the occurrence of failures, interruptions or breaches of security or that they will adequately restore our systems or minimize any such events. The
occurrence of a failure, interruption or breach of security of our computer information systems could result in loss of intellectual property, delays in our
production, loss of critical information, or other events, any of which could harm our future sales or operating results.
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Our business is sensitive to reductions in discretionary consumer spending.
Consumer demand for luxury or perceived luxury goods, including craft beer, is sensitive to downturns in the economy and the corresponding impact on
discretionary spending. There is no assurance that the craft brewing segment will continue to experience growth in future periods. Changes in discretionary
consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, job losses and the resultant
rising unemployment rate, perceived or actual disposable consumer income and wealth, and changes in consumer confidence in the economy, could
significantly reduce customer demand for craft beer in general, and the products we offer specifically. Furthermore, our consumers may choose to replace our
products with the fuller-flavored national brands or other more affordable, although lower quality, alternatives available in the market. Any such decline in
consumption of our products would likely have a significant negative impact on our operating results.
We are dependent upon our continuing relationship with Anheuser-Busch, LLC and the current distribution network.
Substantially all of our products are sold and distributed through A-B’s distribution network. If the A-B Distributor Agreement were terminated, we would be
faced with a number of operational tasks, including implementing information technology systems to manage our supply chain, order management and
logistics, establishing and maintaining direct contracts with the existing wholesaler network or negotiating agreements with replacement wholesalers on an
individual basis, and enhancing our credit evaluation, billing, accounts receivable, and regulatory processes. Such an undertaking would require significant
effort and substantial time to complete, during which the distribution of our products could be impaired. While we believe that the total one-time and
recurring costs associated with such an undertaking may be lower than the total fees paid under the current arrangement with A-B, there can be no assurance
that costs of such an undertaking would not exceed the total fees currently paid to A-B.
Other products developed or introduced by A-B or its parent may reduce wholesaler attention and financial resources committed to our products. There is no
assurance that we will be able to successfully compete in the marketplace against other A-B supported products or beers produced by other companies. A
reduction in the level of A-B’s support of our products could cause our sales and results of operations to be adversely affected.
We are dependent on our wholesalers for the sale of our products.
Although substantially all of our products are sold and distributed through A-B, we continue to rely heavily on wholesalers, most of which are independent,
for the sale of our products to retailers. Any disruption in the ability of the wholesalers, A-B, or us to distribute products efficiently due to any significant
operational problems, such as wide-spread labor union strikes or the loss of a major wholesaler as a customer, could hinder our ability to get our products to
retailers and could have a material adverse impact on our sales, results of operations and cash flows.
In 2008, A-B modified the restrictions around its program associated with its decade-long policy of rewarding financial incentives to those wholesalers and
distributors that did not distribute malt beverage products other than those within the A-B brand family or affiliated entities, including our products. The
modified program now allows A-B wholesalers to carry a small volume of competitive brands without foregoing all of the financial incentives associated with
its incentive program. Media reports indicated that at the height of this program, 70 percent of A-B sales were made through wholesalers and distributors
carrying only the A-B and alliance brands, but this amount has steadily declined to its present level of under 60 percent. Under the current version of the
program, a second tier is available for those wholesalers who may be permitted to carry up to three percent of their volume in competitive beer brands and
non-alcohol brands while retaining some of the financial benefits of the incentive program. In the opinion of our management, the modification has led to
increased direct competition for us for the attention and focus of A-B wholesalers, as many specialty, regional and local craft brewers are now using the same
distributors through which we market our products, and this could have a material impact on our sales, results of operations and cash flows.
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Our agreements with A-B place limitations on our ability to engage in or reject certain transactions, including acquisitions and changes of control.
The Exchange Agreement requires us to obtain the consent of A-B prior to taking certain actions. The practical effect of these restrictions is to grant A-B the
ability to veto certain transactions that management may believe to be in the best interest of our shareholders, including our expansion through acquisitions of
other craft brewers or new brands, mergers with other brewing companies or distribution of our products outside of the United States. As a result, our
financial condition, results of operations, cash flows and the trading price of our common stock may be adversely affected.
A-B holds certain rights affecting corporate governance and significant corporate transactions. As of December 31, 2011, A-B owns approximately 32.2%
of our outstanding common stock and, under the Exchange Agreement, has the right to appoint two designees to our board of directors. A-B also generally has
the contractual right to have a designee on each of the board committees except where prohibited by law or stock exchange requirements, and in those cases
an A-B designee acts as an observer. As a result, A-B may have significant influence, particularly with respect to matters requiring approval of our
shareholders. This could limit the ability of other shareholders to influence corporate matters and may have the effect of delaying or preventing a third party
from acquiring control of us. In addition, A-B may have actual or potential interests that differ from our other shareholders.
We are dependent on certain A-B information systems and operational support.
We rely on components of A-B’s supply-chain and financial information systems to support our operations, particularly for the distribution of and payment
for our products. As the maintenance and upkeep of these systems is under A-B’s control, revisions to these systems and efforts to deal with any disruptions
will be made at A-B’s direction, which may result in delays in the restoration of systems critical to our operations. Any disruption in these critical information
services could have a material adverse effect on our financial condition, results of operations and cash flows. We may also incur incremental costs associated
with changes to either A-B’s information systems, operational support or the A-B distribution network, which could have a material adverse effect on our
financial condition, results of operations and cash flows.
Operating breweries at production levels substantially below their current designed capacities could negatively impact our financial results.
As of December 31, 2011, the annual working capacity of our breweries was approximately 900,000 barrels. Due to many factors, including seasonality and
production schedules of various draft products and bottled products and packages, actual production capacity will rarely, if ever, approach full working
capacity. We believe that capacity utilization of the breweries will fluctuate throughout the year, and even though we expect that capacity of our breweries
will be efficiently utilized during periods when our sales are strongest, there likely will be periods when the capacity utilization will be lower. If we
experience contraction in our sales volumes, the resulting excess capacity and unabsorbed overhead will have an adverse effect on our gross margins,
operating cash flows and overall financial performance. We periodically evaluate whether we expect to recover the costs of our production breweries over the
course of their useful lives. If facts and circumstances indicate that the carrying value of these long-lived assets may be impaired, an evaluation of
recoverability will be performed by comparing the carrying value of the assets to projected future undiscounted cash flows along with other quantitative and
qualitative analyses. If we determine that the carrying value of such assets does not appear to be recoverable, we will recognize an impairment loss by a
charge against current operations, which could have a material adverse effect on our results of operations.
Our sales are concentrated in the Pacific Northwest and California.
Nearly two-thirds of our sales in 2011 were in the Pacific Northwest and California and, consequently, our future sales may be adversely affected by changes
in economic and business conditions within these areas. We also believe these regions are among the most competitive craft beer markets in the United States,
both in terms of number of market participants and consumer awareness. The Pacific Northwest and California offer significant competition to our products,
not only from other craft brewers but also from wine producers and flavored alcohol beverages.
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The craft beer business is seasonal in nature, and we are likely to experience fluctuations in results of operations and financial condition.
Sales of craft beer products are somewhat seasonal, with the first and fourth quarters historically being lower and the rest of the year generating stronger sales.
Our sales volume may also be affected by weather conditions and selling days within a particular period. Therefore, the results for any given quarter will
likely not be indicative of the results that may be achieved for the full fiscal year. If an adverse event such as a regional economic downturn or poor weather
conditions should occur during the second and third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonal business.
Changes in consumer preferences or public attitudes about alcohol could decrease demand for our products.
If consumers were unwilling to accept our products or if general consumer trends caused a decrease in the demand for beer, including craft beer, it would
adversely impact our sales and results of operations. If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could draw
consumers away from the beer industry in general and our products specifically and have an adverse effect on our sales and results of operations. Further, the
alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over
alcohol-related social problems, including drunk driving, underage drinking and health consequences from the misuse of alcohol. As an outgrowth of these
concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be
imposed or that there may be renewed efforts to impose, at either the federal or state level, increased excise or other taxes on beer sold in the United States. If
beer in general were to fall out of favor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental
regulation, it would likely have a significant adverse impact on our financial condition, operating results and cash flows.
We are dependent upon the services of our key personnel.
If we lose the services of any members of senior management or key personnel for any reason, we may be unable to replace them with qualified personnel,
which could have a material adverse effect on our operations. Additionally, the loss of Terry Michaelson as our chief executive officer, and the failure to find
a replacement satisfactory to A-B, would be a default under the A-B Distributor Agreement.
Our gross margin may fluctuate.
Future gross margin may fluctuate and even decline as a result of many factors, including: product pricing levels; sales mix between draft and bottled product
sales and within the various bottled product packages; level of fixed and semi-variable operating costs; level of production at our breweries in relation to
current production capacity; availability and prices of raw materials, production inputs such as energy, and packaging materials; rates charged for freight; and
federal and state excise taxes. The high percentage of fixed and semi-variable operating costs causes our gross margin to be particularly sensitive to relatively
small changes in sales volume.
We are subject to governmental regulations affecting our breweries and pubs.
Federal, state and local laws and regulations govern the production and distribution of beer, including permitting, licensing, trade practices, labeling,
advertising and marketing, distributor relationships and various other matters. A variety of federal, state and local governmental authorities also levy various
taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Certain actions undertaken by
us may cause the Alcohol and Tobacco Tax and Trade Bureau or any particular state or jurisdiction to revoke its license or permit, restricting our ability to
conduct business. One or more regulatory authorities could determine that we have not complied with applicable licensing or permitting regulations or have
not maintained the approvals necessary for us to conduct business within our jurisdiction. If licenses, permits or approvals necessary for our brewery or pub
operations were unavailable or unduly delayed, or if any permits or licenses that we hold were to be revoked, our ability to conduct business may be disrupted,
which would have a material adverse effect on our financial condition, results of operations and cash flows.
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We believe that we currently have all of the licenses, permits and approvals required for our current operations. However, we do business in almost every
state through the A-B distribution network, and for many of these states, we rely on the licensing, permitting and approvals maintained by A-B. If a state or a
number of states required us to obtain our own licensing, permitting or approvals to operate within the state’s boundaries, a combination of events may occur,
including a disruption of sales or significant increases in compliance costs. If licenses, permits or approvals not previously required for the sale of our malt
beverage products were to be required, the ability to conduct our business could be disrupted, which may have a material adverse effect on our financial
condition, results of operations and cash flows.
An increase in excise taxes could adversely affect our financial condition and results of operations.
The U.S. federal government currently levies an excise tax of $18 per barrel on beer sold for consumption in the United States; however, brewers that produce
less than two million barrels annually are taxed at $7 per barrel on the first 60,000 barrels shipped, with the remainder of the shipments taxed at the normal
rate. Individual states that we operate in also impose excise taxes on beer and other alcohol beverages in varying amounts, which have been subject to change.
Federal and state legislators routinely consider various proposals to impose additional excise taxes on the production of alcoholic beverages, including beer.
Any such increases in excise taxes, if enacted, would adversely affect our financial condition, results of operations and cash flows.
Changes in state laws regarding distribution arrangements may adversely impact our operations. States in which we have a significant sales presence may
enact legislation that significantly alters the competitive environment for the beer industry. Any change in the competitive environment in those states could
have an adverse effect on our future sales and results of operations and may impact the financial stability of wholesalers on which we rely.
We may experience a shortage of kegs necessary to distribute draft beer.
We distribute our draft beer in kegs that are owned by us as well as leased from a third-party vendor, and, on a limited basis, from A-B. During periods when
we experience stronger sales, we may need to rely on kegs leased from A-B and the third-party vendor to address the additional demand. If shipments of draft
beer increase, we may experience a shortage of available kegs to fill sales orders. If we cannot meet our keg requirements through either lease or purchase, we
may be required to delay some draft shipments. Such delays could have an adverse impact on sales and relationships with wholesalers and A-B. We may also
decide to pursue other alternatives for leasing or purchasing kegs, but there is no assurance that we will be successful in securing additional kegs.
We are dependent on certain suppliers for key raw materials, packaging materials and production inputs.
Although we seek to maintain back-up and alternative suppliers for all key raw materials and production inputs, we are reliant on certain third parties for key
raw materials, packaging materials and utilities. Any disruption in the willingness or ability of these third parties to supply these critical components could
hinder our ability to continue production of our products, which could have a material adverse impact on our financial condition, results of operations and
cash flows.
Loss of income tax benefits could negatively impact our results of operations.
As of December 31, 2011, our deferred tax assets were primarily comprised of federal net operating losses (“NOLs”) of $4.5 million, or $1.5 million tax-
effected; state NOL carryforwards of $129,000 tax-effected; and federal and state alternative minimum tax credit carryforwards of $726,000 tax-effected. The
ultimate realization of deferred tax assets is dependent upon generating taxable income during the periods in which those temporary differences become
deductible. To the extent that we are unable to generate adequate taxable income in future periods, we may be required to record a valuation allowance to
provide for potentially expiring NOLs or other deferred tax assets. Any such allowance would generally be charged to earnings in the period of increase. In
addition, as NOLs are utilized, the potential for audit by federal and state jurisdictions will increase. The NOLs generated by us in 1997 through 2003 will be
used on the 2011 tax return, which means these NOLs can be audited. An audit of these NOLs could be time consuming and difficult given their age.
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A small number of shareholders hold a significant ownership percentage of the Company and uncertainty over their continuing ownership plans could
cause the market price of our common stock to decline.
As noted above, A-B has a significant ownership stake in us. In addition, the founders of Widmer Brothers Brewing Company (“WBBC”) and their close
family members own approximately 3.4 million shares, or 18.0%, of our common stock. Collectively, these two groups own 50.2% of our equity. All of these
shares are available for sale in the public market, subject to volume, manner of sale and other limitations under Rule 144 in the case of shares held by
shareholders who are affiliates of us. Such sales in the public market or the perception that such sales could occur may cause the market price of our common
stock to decline.
We do not intend to pay and are limited in our ability to declare or pay dividends; accordingly, shareholders must rely on stock appreciation for any
return on their investment in us.
We do not anticipate paying cash dividends. Further, under our loan agreement with Bank of America (“BofA”), we are not permitted to declare or pay a
dividend without BofA’s prior consent. As a result, only appreciation of the price of our common stock will provide a return to shareholders. Investors
seeking cash dividends should not invest in our common stock.
The fair value of our intangible assets, including goodwill, may become impaired.
As a result of the KBC Merger, we have recognized a significant increase in our total intangible assets, including goodwill. As of December 31, 2011, we had
$30.1 million in an assortment of intangible assets, on a net basis, which represented nearly 19% of our total assets. If any circumstances were to occur, such
as economic recession or other factors causing a reduction in consumer demand, or for any other reason we were to experience a significant decrease in sales
growth, which had a negative impact on our estimated cash flows associated with these assets, our analyses of these assets may conclude that a decrease in the
fair value of these assets occurred. If this were to occur, we would be required to recognize a potentially significant loss on impairment of these assets. Any
such impairment loss would be charged against current operations in the period of change.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We own and operate four highly-automated, small-batch breweries: the Hawaiian Brewery, the New Hampshire Brewery, the Oregon Brewery and the
Washington Brewery, as well as a small, manual brewpub-style brewing system at the Rose Quarter Brewery in Portland, Oregon. We lease the sites upon
which the Hawaiian Brewery, the New Hampshire Brewery, and the Rose Quarter Brewery are located, in addition to our office space and warehouse
locations in Portland, Oregon for our corporate, administrative and sales functions. These operating leases expire at various times between 2012 and 2047.
Certain of these leases are with related parties. See Notes 18 and 19 of Notes to Consolidated Financial Statements included elsewhere herein for further
discussion regarding these arrangements.
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Table of Contents
Certain information regarding our production breweries is as follows (in thousands of barrels):
Production Breweries
Oregon Brewery
Washington Brewery
New Hampshire Brewery
Hawaiian Brewery
Square
Footage
185,000
128,000
125,000
11,000
Current
Annual
Capacity
Estimated
December 31, 2012
Annual Capacity
Maximum
Annual
Capacity
455
220
215
10
900
645
220
215
10
1,090
650
280
280
10
1,220
As of December 31, 2011, the total capacity of all our breweries was approximately 900,000 barrels annually. As a result of adding fermentation capacity and
modifying our brewing schedules, we expect the total annual capacity of all of our breweries to increase to approximately 1,090,000 barrels by the end of
2012 based on our current product mix. Combined, our breweries have the potential to reach 1,220,000 barrels in annual production capacity when fully
optimized based on the currently available space and current product mix.
Substantially all of the personal property and the real properties associated with the Oregon Brewery and the Washington Brewery secure our loan agreement
with BofA. See Note 10 of Notes to Consolidated Financial Statements included elsewhere herein.
Item 3.
Legal Proceedings
We are involved, from time to time, in claims, proceedings and litigation arising in the normal course of business. We believe that, to the extent that any
pending or threatened litigation involving us or our properties exists, such litigation will not likely have a material adverse effect on our financial condition or
results of operations.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the trading symbol HOOK. The table below sets forth, for the fiscal quarters
indicated, the reported high and low sale prices of our common stock, as reported on the NASDAQ:
2010
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2011
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
High
$
$
2.73
5.15
9.94
8.27
9.59
10.17
8.95
7.22
Low
Low
2.16
2.31
4.40
6.01
6.96
8.10
5.31
5.08
We had 677 common shareholders of record as of March 5, 2012.
We have not declared or paid any dividends during our existence. Under the terms of our loan agreement with BofA, we may not declare or pay dividends
without BofA’s consent. We anticipate that, for the foreseeable future, all earnings will be retained for the operation and expansion of our business and that
we will not pay cash dividends. The payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend upon,
among other things, future earnings, capital and operating requirements, restrictions in future financing agreements, our general financial condition and
general business conditions.
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Table of Contents
Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this Form 10-K.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not repurchase any of our common stock during the fourth quarter of 2011.
Stock Performance Graph
The following line-graph presentation compares cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and
reinvestment of dividends, of (a) Craft Brew Alliance, Inc., (b) a broad-based equity market index and (c) an industry-specific index. The broad-based market
index used is the NASDAQ Composite Index and the industry-specific index used is the S&P 500 Beverages Index.
Company/Index
Craft Brew Alliance, Inc.
NASDAQ Composite
S&P 500 Beverages Index
Base
Period
12/31/06
12/31/07
12/31/08
Indexed Returns
Year Ended
12/31/09
12/31/10
12/31/11
$
100.00 $
100.00
100.00
127.88 $
109.81
120.72
23.08 $
65.29
96.55
46.15 $
93.95
116.09
142.12 $
109.84
133.09
115.77
107.86
139.14
21
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Item 6.
Selected Financial Data
The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
In thousands,
except per share amounts
Statement of Operations Data
Net sales(1)
Cost of sales
Gross profit
Selling, general and administrative expenses
- $
Loss on impairment of assets(2)
5,444 $
Operating income (loss)
Gain on sale of equity interest in Fulton Street Brewery, LLC $ 10,432 $
$ 15,692 $
Income before provision (benefit) for income taxes
6,041
Provision (benefit) for income taxes
9,651 $
Net income (loss)
Year Ended December 31,
2011 2010 2009 2008 2007
$149,197 $131,731 $124,713 $ 79,761 $41,470
104,011 98,064 97,230 65,646 36,785
$ 45,186 $ 33,667 $ 27,483 $ 14,115 $ 4,685
$ 39,742 $ 29,938 $ 24,911 $ 19,894 $ 8,257
$
-
2,347 $(36,761) $ (1,330)
$
-
1,073 $(37,655) $ (1,115)
186
(176)
(4,377)
887 $(33,278) $ (939)
- $
3,170 $
- $
2,786 $
1,100
1,686 $
- $ 30,589 $
- $
- $
$
Basic and diluted net income (loss) per share
$
0.51 $
0.10 $
0.05 $
(2.63) $ (0.11)
Shares used in basic per share calculations
Shares used in diluted per share calculations
18,834 17,523 17,004 12,660 8,331
18,931 17,568 17,041 12,660 8,331
December 31,
2011 2010 2009 2008 2007
Balance Sheet Data
Cash and cash equivalents
Working capital (deficit)
Total assets
Current portion of long-term debt and capital leases
Long-term debt and capital leases, net of current portion
Other long-term obligations
Shareholders’ equity
$
795 $
2,327
164 $
(4,435)
11 $
(2,527)
11 $ 5,527
(927) 5,714
158,908 158,266 141,585 147,805 71,390
15
2,460
31
24,675
16,261 11,388
8,082 1,988
104,509 94,196 80,632 79,281 60,080
1,481
24,685
8,210
1,394
31,834
596
13,188
(1) The increase in net sales in 2009 compared to 2008 and in 2008 compared to 2007 was primarily due to the merger with Widmer Brothers Brewing
Company, which occurred July 1, 2008.
(2) Loss on impairment of assets in 2008 included a $22.7 million charge for total impairment of goodwill, a $6.5 million charge for the partial write-down
of trademarks associated with the Widmer brand and a $1.4 million charge for the partial write down of equity-method investments.
22
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Craft Brew Alliance is the union of three unique pioneering craft brewers:
Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;
•
• Widmer Brothers Brewery founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon; and
•
Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii.
Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beers in
the United States. Today, as an independent craft brewer, we possess several distinct and ownable advantages, unique in the craft beer category. These
advantages are rooted and leveraged through the combination of our innovative quality craft beers, the strength of our distinct, authentic brand portfolio, our
seamless national distribution, our financial capabilities as a public company, our national sales and marketing reach, our owned brew pubs and our bi-coastal
breweries.
We operate in two segments: Beer Related operations and Pubs and Other. Beer Related operations include the brewing and sale of craft beers from our five
breweries: Widmer Brothers and the Rose Quarter in Portland, Oregon; two Redhook, one in Woodinville, Washington and one in Portsmouth, New
Hampshire; and Kona in Kona, Hawaii. Pubs and Other operations primarily include our five pubs, four of which are located adjacent to our Beer Related
operations.
We proudly brew our Widmer Brothers, Redhook and Kona beers in each of our three company-owned mainland production breweries that are located in
Portsmouth, New Hampshire (the “New Hampshire Brewery”); Portland, Oregon (the “Oregon Brewery”), which is our largest brewery; and in the Seattle
suburb of Woodinville, Washington (the “Washington Brewery”). Our brewery located in Kailua-Kona, Hawaii (the “Hawaiian Brewery”) brews our Kona
branded beers. We also own and operate a small manual style brewery, primarily used for small batch production and innovative brews, at the Rose Quarter in
Portland, Oregon. We sell our beers primarily to wholesalers via a Master Distributor Agreement (“A-B Distributor Agreement”) with Anheuser-Busch, LLC
(“A-B”). Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 29 states. Separate from our A-B wholesalers,
we maintain an independent sales and marketing organization complete with resources across the key functions of brand management, field marketing, field
sales, and national retail sales.
Following is a summary of our financial results:
2011
2010
2009
$
$
$
Net Sales
Net Income
149.2 million
131.7 million
124.7 million
$
$
$
9.7 million
1.7 million
0.9 million
Number of
Barrels Sold
672,600
607,800
587,500
The comparability of our results for 2011 relative to the results for 2010 and 2009 is significantly impacted by the merger with Kona Brewing Co., Inc.
(“KBC”), which closed October 1, 2010 (“KBC Merger”), and by the sale of our equity interest in Fulton Street Brewery, LLC (“FSB”) during the second
quarter of 2011. See Notes 7 and 8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more detailed information.
23
Table of Contents
Results of Operations
The following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Income expressed as a percentage of net
sales(1):
Sales
Less excise tax
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Merger related expenses
Operating income
Income from equity method investments
Gain on sale of Fulton Street Brewery
Interest expense
Interest and other income, net
Income before income taxes
Income tax provision
Net income
Year Ended December 31,
2010
2009
2011
107.9%
7.9
100.0
69.7
30.3
26.6
-
3.6
0.5
7.0
(0.6)
-
10.5
4.0
6.5%
106.9%
6.9
100.0
74.4
25.6
22.7
0.4
2.4
0.6
-
(1.1)
0.2
2.1
0.8
1.3%
106.9%
6.9
100.0
78.0
22.0
20.0
0.2
1.9
0.4
-
(1.7)
0.3
0.9
0.1
0.7%
(1) Percentages may not sum due to rounding.
Segment Information
Net sales, gross profit and gross margin information by segment was as follows (dollars in thousands):
Beer
2011
Net sales
Gross profit
Gross margin
2010
Net sales
Gross profit
Gross margin
2009
Net sales
Gross profit
Gross margin
$
$
$
$
$
$
$
$
$
$
117,563
31,607
26.9%
113,439
25,827
22.8%
24
Year Ended December 31,
Pubs
and Other
23,666
3,814
16.1%
$
$
$
$
Related
125,531
41,372
33.0%
14,168
2,060
14.5%
11,274
1,656
14.7%
$
$
$
$
Total
149,197
45,186
30.3%
131,731
33,667
25.6%
124,713
27,483
22.0%
Table of Contents
Sales by Category
The following tables set forth a comparison of sales by category (dollars in thousands):
Sales by Category
A-B and A-B related
Pubs and Other(1)
Contract brewing and other beer related
Alternating proprietorship
Gross sales
Excise taxes
Net sales
Sales by Category
A-B and A-B related
Pubs and Other(1)
Contract brewing and other beer related
Alternating proprietorship
Gross sales
Excise taxes
Net sales
Year Ended December 31,
2011
2010
Dollar
Change
% Change
130,137
23,666
7,197
-
161,000
(11,803)
149,197
$
$
$
114,296
14,168
2,542
9,846
140,852
(9,121)
$
131,731
15,841
9,498
4,655
(9,846)
20,148
(2,682)
17,466
13.9%
67.0%
183.1%
(100.0)%
14.3%
29.4%
13.3%
Year Ended December 31,
2010
2009
Dollar
Change
% Change
114,296
14,168
2,542
9,846
140,852
(9,121)
131,731
$
$
$
110,840
11,274
450
10,744
133,308
(8,595)
$
124,713
3,456
2,894
2,092
(898)
7,544
(526)
7,018
3.1%
25.7%
N/M
(8.4)%
5.7%
6.1%
5.6%
$
$
$
$
(1) Other sales include sales of promotional merchandise and other.
N/M – Not meaningful
Shipments by Category
Shipments by category were as follows (in barrels):
Year Ended
December 31,
2011
Shipments
2010
Shipments
Increase
%
Change
Change in
Depletions(1)
A-B
Contract brewing
Pubs and Other
Total
611,200
49,300
12,100
672,600
574,900
23,100
9,800
607,800
36,300
26,200
2,300
64,800
6.3%
113.4%
23.5%
10.7%
Year Ended
December 31,
2010
Shipments
2009
Shipments
Increase
%
Change
Change in
Depletions(1)
A-B
Contract brewing
Pubs and Other
Total
574,900
23,100
9,800
607,800
573,200
5,000
9,300
587,500
1,700
18,100
500
20,300
0.3%
362.0%
5.4%
3.5%
6.5%
1.6%
(1) Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.
25
Table of Contents
Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
Year Ended
December 31,
2011
Shipments
2010
Shipments
Increase
(Decrease)
%
Change
Change in
Depletions
Widmer Brothers
Redhook
Kona
Total(1)
271,200
179,300
172,800
623,300
277,200
174,100
133,400
584,700
(6,000)
5,200
39,400
38,600
(2.2)%
3.0%
29.5%
6.6%
Year Ended
December 31,
2010
Shipments
2009
Shipments
Increase
(Decrease)
%
Change
Change in
Depletions
Widmer Brothers
Redhook
Kona
Total(1)
277,200
174,100
133,400
584,700
285,700
183,600
113,200
582,500
(8,500)
(9,500)
20,200
2,200
(3.0)%
(5.2)%
17.8%
0.4%
(2.1)%
3.0%
29.0%
6.5%
(2.0)%
(3.3)%
18.5%
1.6%
(1) Total shipments by brand exclude private label shipments produced under our contract brewing arrangements.
The 6.6% increase in total shipments in 2011 compared to 2010 was primarily driven by our increased sales and marketing efforts and new brand and package
introductions, which began in the fourth quarter of 2010. The rate of change in depletions, or sales by the wholesalers to retailers, for the Widmer Brothers,
Redhook, and Kona beers increased 6.5% compared to 2010.
The increase in sales dollars to A-B and A-B related in 2011 compared to 2010 was primarily due to an increase in volume, higher selling prices for our beers
and a shift in product mix towards bottle and high-end product, both of which carry a higher price per unit than draft. Gross sales were also favorably
impacted by a decrease in the per barrel fee associated with sales to A-B as a result of amendments to our A-B Distributor Agreement, which is netted against
revenue. Our savings from both the 2010 and 2011 amendments to the A-B Distributor Agreement approximated $3.9 for 2011. The amount of increase in
sales realized for future periods may differ from these estimates due to the level, timing and geographic distribution of our shipments to A-B.
Exclusive of the impact of the favorable change in our per barrel margin fee, the average revenue per barrel on shipments of beer through the A-B distribution
network increased by 4.4% in 2011 compared to 2010 and 2.8% in 2010 compared to 2009, primarily due to pricing increases and a shift in product mix
towards both bottle and high-end product as mentioned above. Price changes implemented by us have generally followed craft beer market pricing trends.
During 2011, 2010 and 2009, we sold 90.9%, 94.6% and 97.6%, respectively, of our beer through A-B at wholesale pricing levels.
The following table sets forth a comparison of our shipments by package, excluding private label shipments produced under our contract brewing
arrangements (in barrels):
Year Ended
December 31,
Draft
Bottle
Total
2011
2010
2009
Shipments
% of Total
Shipments
% of Total
Shipments
% of Total
219,400
403,900
623,300
35.2%
64.8%
100.0%
227,100
357,600
584,700
38.8%
61.2%
100.0%
236,500
346,000
582,500
40.6%
59.4%
100.0%
The decrease in the Widmer Brothers brand shipments was primarily due to the continuing pressure on our Hefeweizen beer in the very competitive wheat
beer category in the craft segment. This increased competition from large, multi-national wheat beer competitors had a negative impact on Hefeweizen sales.
Partially offsetting this decrease was the success of our focus on the Core and High-End Widmer Brothers brands, which is fueling broader awareness of the
overall Widmer Brothers brand.
We believe the growth in our Redhook brand during 2011 was a result of our investments in new packaging, brand introductions, and marketing initiatives.
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Table of Contents
Kona continues to be one of the fastest growing brands in the craft category, as seen in the increase in shipments in 2011 compared to 2010 and 2010
compared to 2009. This is based on the consumer’s connection with the Always Aloha message and quality of the beer.
The increase in contract brewing sales in 2011 compared to 2010 was primarily due to an increase in shipments under an existing third-party contract and the
contribution of shipments under a new three-year contract brewing arrangement with FSB, which was entered into in the first quarter of 2011.
The increase in Pubs and Other sales in 2011 compared to 2010 was primarily due to the addition of pub operations acquired with the KBC Merger.
The increase in contract brewing sales in 2010 compared to 2009 was due to a full year of shipments in 2010 compared to roughly one quarter of shipments in
2009.
Prior to the KBC Merger, we earned revenue in connection with an alternating proprietorship agreement with Kona, including fees for leasing the Oregon
Brewery and sales of raw materials. Subsequent to the KBC Merger, any such intercompany activities are eliminated, including the revenues associated with
the alternating proprietorship agreement.
The increase in excise taxes in 2011 compared to 2010 was driven by three factors: i) increases in shipments; ii) the addition of excise taxes relating to
shipments of Kona beers that were previously recognized by Kona prior to the KBC Merger; and iii) a marginal tax rate increase after the KBC Merger as the
combined companies are eligible for only a single excise tax exemption. Increase in shipment volume was the most significant factor for the increase in excise
taxes in 2010 compared to 2009. Also contributing to the increases in both periods was an increase in the marginal tax rate for beer produced in Washington
state, which became effective in the second half of 2010.
Cost of Sales
Cost of sales includes purchased raw materials, direct labor, overhead and shipping costs.
Information regarding cost of sales was as follows (dollars in thousands):
Beer Related
Pubs and Other
Total
Beer Related
Pubs and Other
Total
Year Ended December 31,
2011
2010
Dollar
Change
% Change
$
$
$
$
84,159
19,852
104,011
2010
85,956
12,108
98,064
$
$
$
$
85,956
12,108
98,064
$
$
(1,797)
7,744
5,947
2009
87,612
9,618
97,230
$
$
(1,656)
2,490
834
(2.1)%
64.0%
6.1%
(1.9)%
25.9%
0.9%
The decrease in Beer Related cost of sales in 2011 compared to 2010 was primarily due to the elimination of costs associated with our Kona operations prior
to the KBC Merger, including elimination of all alternating proprietorship related costs, and improved performance and quality trends in 2011. This was
partially offset by the increase in shipments discussed above, including the mix shift from draft to bottle as the per barrel equivalent cost of bottle is more than
draft, as well as increased shipping costs due to fuel surcharges.
The decrease in Beer Related cost of sales in 2010 compared to 2009 was primarily due to decreases in unit costs for certain core production inputs, raw
materials, packaging materials and cooperage costs, partially offset by the increased shipments discussed above, as well as costs associated with a significant
quantity of beer in 2010 that did not meet our exacting quality standards, causing us to dispose of in-process and finished draft and packaged beer.
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Table of Contents
The increases in Pubs and Other cost of sales in 2011 compared to 2010 and in 2010 compared to 2009 were primarily associated with the acquired Kona pub
operations. These operations had a positive impact on our gross profit as discussed below.
Gross Profit
Information regarding gross profit was as follows (dollars in thousands):
Beer Related
Pubs and Other
Total
Beer Related
Pubs and Other
Total
$
$
Year Ended December 31,
2011
2010
$
$
41,372
3,814
45,186
2010
31,607
2,060
33,667
$
$
2009
Dollar
Change
9,765
1,754
11,519
$
$
31,607
2,060
33,667
$
$
25,827
1,656
27,483
$
$
5,780
404
6,184
% Change
30.9%
85.1%
34.2%
22.4%
24.4%
22.5%
Gross profit as a percentage of net sales, or gross margin rate, was as follows:
Beer Related
Pubs and Other
Overall
2011
Year Ended December 31,
2010
2009
33.0%
16.1%
30.3%
26.9%
14.5%
25.6%
22.8%
14.7%
22.0%
The increases in gross profit in 2011 compared to 2010 and in 2010 compared to 2009 were primarily due to the improvements in gross margin rate and the
increases in sales discussed above, which included the reduction in A-B fees. The improvements in gross margin rate were primarily due to an improved cost
structure related to our Kona operations following the KBC Merger, which included elimination of the alternating proprietorship revenue and cost of sales,
improved brewery performance and quality trends, increased capacity utilization and a shift in mix to our higher-end beer products. These improvements were
partially offset by the mix shift from draft to bottle sales as the barrel equivalent of bottle gross profit is lower than draft, as well as an increased cost of
shipping as a result of fuel surcharges.
Total approximate capacity utilization, which is calculated by dividing total shipments by the approximate working capacity, was 75%, 66% and 68% for the
years ended December 31, 2011, 2010 and 2009, respectively. Each year’s total capacity is calculated using the product mix actually experienced in the
specific year, which causes variances in total capacity from year-to-year, exclusive of changes to brewing equipment. Working capacity is the theoretical
maximum output of all of our breweries and is based on running each of our facilities 24 hours-per-day, seven days-per-week with full batches for each beer
brewed. Working capacity does not take into account demand fluctuations due to seasonality, the perishability of beer, or product mix evolving in favor of
higher-end, lower volume brands. Considering these constraints, capacity utilization is unlikely to exceed approximately 85% of working capacity in a given
12-month period, unless we utilize external contract brewing resources during peak periods. We entered into a three-year contract brewing agreement for
FSB during the first quarter of 2011, which contributed to the improvements in capacity utilization in 2011 compared to 2010.
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Table of Contents
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include compensation and related expenses for personnel, travel, outside services, expenses incurred
for our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a
public company.
Information regarding SG&A was as follows (dollars in thousands):
As a % of net sales
As a % of net sales
Year Ended December 31,
2011
$
39,742
26.6%
2010
2010
$
29,938
$
22.7%
2009
Dollar
Change
9,804
% Change
32.7%
$
29,938
22.7%
$
24,911
$
20.0%
5,027
20.2%
The increase in SG&A and SG&A as a percentage of net sales in 2011 compared to 2010 was primarily due to an increase in sales and marketing costs,
principally comprised of labor costs related to our national sales organization, packaging design and development, promotions and sponsorship activity, point
of sale and related trade merchandise, and brand platform enhancements. Administrative costs associated with the operations acquired with the KBC Merger
in October 2010 also contributed to the increases.
The increase in our sales and marketing expenditures reflect our investment in critical initiatives that have led to sales and profit growth. We expect that the
rate of increase in SG&A spending going forward will not be as significant as seen during 2011. In conjunction with our acquisition of Kona, sale of FSB, and
rebranding efforts, we are aggressively targeting growth through national retail sales and eastern U.S. expansion.
The increase in SG&A and SG&A as a percentage of net sales in 2010 compared to 2009 was due primarily to an increase in direct costs associated with sales
and marketing activities, and costs associated with the Kona operations following the acquisition in the fourth quarter of 2010.
We incur costs for the promotion of our products through a variety of advertising programs with our wholesalers and downstream retailers. These costs are
included in SG&A expenses. Local wholesalers often share in the cost of the program. Reimbursements from wholesalers for advertising and promotion
activities are recorded as a reduction to SG&A expenses. Pricing discounts to wholesalers are recorded as a reduction to sales. The wholesalers’ contribution
in the aggregate toward these activities was an immaterial percentage of net sales in 2011, 2010 and 2009. Depending on the industry and market conditions,
we may adjust our advertising and promotional efforts in a wholesaler’s market if a change occurs in a cost-sharing arrangement. The timing of these efforts
may also be adjusted due to opportunities available to us over the course of the year.
Merger-Related Expenses
Merger-related expenses of $559,000 in 2010 primarily included activities associated with the KBC Merger, including legal, consulting, accounting and other
professional fees, and severance costs.
Merger-related expenses of $225,000 in 2009 primarily included severance expenses associated with our 2008 merger with Widmer Brothers Brewing
Company (“WBBC”).
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Table of Contents
Income from Equity Method Investments
Income from equity method investments included our share of FSB’s net income through the date of sale in May 2011 and our share of Kona’s net income
through the date of the KBC Merger in October 2010. Since completion of the KBC Merger, Kona’s operating results have been included in our consolidated
operating results.
Income from equity method investments was as follows (in thousands):
FSB
Kona
Total
2011
Year Ended December 31,
2010
2009
$
$
691
-
691
$
$
696
146
842
$
$
441
111
552
Gain on Sale of FSB
Our pre-tax gain on the sale of FSB totaled $10.4 million, which resulted from proceeds of $16.3 million less the investment in FSB of $5.9 million.
Interest Expense
Information regarding interest expense was as follows (dollars in thousands):
Year Ended December 31,
$
$
2011
2010
918
1,497
$
$
2010
2009
1,497
$
2,139
$
Average debt outstanding
Average interest rate
Dollar
Change
% Change
(579)
(642)
(38.7)%
(30.0)%
2011
Year Ended December 31,
2010
$
20,163
3.43%
$
24,236
$
3.34%
2009
31,613
4.68%
The decrease in interest expense in 2011 compared to 2010 was due to the expiration of a non-qualifying interest rate swap in the fourth quarter of 2010 and
lower average outstanding borrowings. The increase in the average interest rate on outstanding borrowings was due to the reduction in the outstanding balance
on lower interest rate debt during 2011, partially offset by modifications we negotiated with our primary lender in the latter part of 2010 as a result of our
improved financial condition. The decrease in average outstanding borrowings was primarily the result of using a portion of the proceeds from the sale of FSB
to repay the $7.5 million outstanding on our line of credit.
The decrease in interest expense in 2010 compared to 2009 was due to higher debt balances in 2009 to support our capital project and working capital
requirements for 2009. We were able to pay down our outstanding borrowings during 2010. The lower average interest rate in 2010 compared to 2009 was
primarily due to our improved financial results and an associated decrease in our funded debt, and modifications we negotiated with our primary lender in the
latter part of 2010.
Income Tax Provision
Our effective income tax rate was 38.5%, 39.5% and 17.3% in 2011, 2010 and 2009, respectively. The effective income tax rates reflect the impact of non-
deductible expenses, primarily meals and entertainment and state and local taxes.
The rate in 2010 also reflects non-deductible merger-related expenses and a $100,000 reduction to our valuation allowance during the second quarter of 2010.
We made this reduction, eliminating the valuation allowance, due to the cumulative earnings generated and other evidence available to us regarding the
potential of fully utilizing our outstanding net operating loss carryforwards.
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Table of Contents
The income tax provision for 2009 also reflects the reversal of $900,000 of our $1.0 million valuation allowance, based on our assessment that it was more
likely than not that certain deferred tax assets would be realized. Our assessment was primarily based upon the future reversal of existing temporary
differences, primarily depreciation and amortization, and our 2009 operating results. This favorable effect was partially offset by the impact of non-deductible
expenses, a shift in the destination of our shipments, resulting in a greater apportionment of earnings and related deferred tax liabilities to states with higher
statutory tax rates than in prior periods, and the then-expected settlement with the Internal Revenue Service (“IRS”) regarding its examination of our income
tax returns for 2007 and 2008 filed by WBBC and related adjustments to deferred tax accounts recorded in the WBBC Merger.
Liquidity and Capital Resources
We have required capital primarily for the construction and development of our production breweries, to support our expansion and growth plans and to fund
our working capital needs. Historically, we have financed our capital requirements through cash flow from operations, bank borrowings and the sale of
common and preferred stock. We anticipate meeting our obligations for the twelve months beginning January 1, 2012 primarily from cash flows generated
from operations. In addition, we may borrow under our line of credit facility as the need arises. Capital resources available to us at December 31, 2011
included $795,000 of cash and $22.0 million available under our line of credit facility.
With the receipt of $15.7 million in cash related to the sale of our equity interest in FSB to A-B and reimbursement of certain transaction fees, we repaid the
$7.5 million of outstanding borrowings under our revolving line of credit. We anticipate that the remaining $0.8 million, which is being held in escrow, will
be released to us in two equal payments on May 2, 2012 and November 2, 2012, subject to indemnification claims, if any.
We had $795,000 and $164,000 of cash at December 31, 2011 and 2010, respectively. At December 31, 2011, we had working capital of $2.3 million
compared to a working capital deficit of $4.4 million at December 31, 2010. Our debt as a percentage of total capitalization (total debt and common
shareholders’ equity) was 11.7% and 22.4% at December 31, 2011 and 2010, respectively.
A summary of our cash flow information was as follows (dollars in thousands):
Cash flows provided by operating activities
Cash flows provided by (used in) investing activities
Cash flows used in financing activities
Increase in cash
Year Ended December 31,
2010
2011
2009
$
$
6,728
7,131
(13,228)
631
$
$
10,798
(10,313)
(332)
153
$
$
8,954
(2,167)
(6,787)
-
Cash provided by operating activities of $6.7 million in 2011 resulted from our net income of $9.7 million and net non-cash expense of $1.4 million, partially
offset by changes in our operating assets and liabilities as discussed in more detail below.
Accounts receivable, net increased $2.8 million to $13.3 million at December 31, 2011 compared to $10.5 million at December 31, 2010. This increase was
primarily due to a $1.4 million increase in our receivable from A-B, which totaled $8.3 million at December 31, 2011, as well as a $704,000 increase in our
receivable from FSB, which totaled $712,000 at December 31, 2011. Historically, we have not had collection problems related to our accounts receivable.
Inventories increased $0.7 million to $9.4 million at December 31, 2011 compared to $8.7 million at December 31, 2010, primarily due to an increase in
volume and demand.
Accounts payable decreased $2.8 million to $11.0 million at December 31, 2011 compared to $13.8 million at December 31, 2010, primarily due to a $3.2
million decrease in our payable to FSB, which totaled $127,000 at December 31, 2011. This was partially offset by a $256,000 increase in the portion of our
payable to A-B that is included in Accounts payable, which totaled $1.4 million at December 31, 2011, and increased inventory purchases to support our
increased level of sales.
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As of December 31, 2011, we had the following net operating loss carryforwards (“NOLs”) available to offset payment of future income taxes:
•
•
federal NOLs of $4.5 million, or $1.5 million tax-effected; and
state NOLs of $129,000 tax-effected.
We anticipate that we will utilize these remaining NOLs in the near future and, accordingly, once utilized, we will be required to satisfy our income tax
obligations with cash.
Capital expenditures of $8.5 million in 2011 were primarily for the purchase or retrofitting of equipment to upgrade our breweries and the planning and design
of a company-wide supply chain management system. For 2012, we anticipate capital expenditures of approximately $8.5 million to $9.5 million primarily for
investments in capacity and efficiency.
Cash flows used in financing activities primarily consisted of net repayments on our line of credit and other long-term debt obligations.
We have a loan agreement (as amended, the “Loan Agreement”) with BofA, which is presently comprised of a $22.0 million revolving line of credit (“Line of
Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $12.2 million term loan (“Term Loan”).
We may draw upon the Line of Credit for working capital and general corporate purposes. At December 31, 2011, we had no borrowings outstanding under
the Line of Credit and we were in compliance with the financial covenants associated with the Loan Agreement.
See Note 10 of Notes to Consolidated Financial Statements for additional information.
Contractual Commitments and Obligations
The following is a summary of our contractual commitments and obligations as of December 31, 2011 (in thousands):
Payments Due By Period
2015 and
2016
2013 and
2014
Contractual Obligation
Term loan
Interest on term loan(1)
Promissory notes
Interest on promissory notes
Note with related party
Interest on note with related party
Operating leases
Capital leases
Purchase commitments
Sponsorship obligations
Interest rate swap(2)
Total 2012
$12,240 $
907
600
492
519
37
418 $
156
-
144
173
21
17,697 1,341
6
17,134 13,354
2,953 1,574
387
$53,176 $17,574 $
574
23
942 $
293
-
288
346
16
2,141
11
3,168
1,299
187
8,691 $
1,065 $
268
600
60
-
-
2017 and
beyond
9,815
190
-
-
-
-
1,700 12,515
-
-
-
-
4,391 $ 22,520
6
612
80
-
(1) The variable interest rate on our term loan was 1.27% at December 31, 2011.
(2) The fixed rate on our interest rate swap is 4.48%. We pay that fixed rate less the Benchmark Rate, which, at December 31, 2011, was 0.27%.
See Notes 10, 11 and 18 of Notes to Consolidated Financial Statements for additional information.
Inflation
We believe that the impact of inflation was minimal on our business in 2011, 2010 and 2009.
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Critical Accounting Policies and Estimates
Our financial statements are based upon the selection and application of significant accounting policies that require management to make significant estimates
and assumptions. Judgments and uncertainties affecting the application of these policies may result in materially different amounts being reported under
different conditions or using different assumptions. Our estimates are based upon historical experience, market trends and financial forecasts and projections,
and upon various other assumptions that management believes to be reasonable under the circumstances at various points in time. Actual results may differ,
potentially significantly, from these estimates.
Goodwill
Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets
acquired. Goodwill is allocated to our reporting units based on relative fair value of the future benefit of the purchased and existing operations. Reporting
units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Our reporting units are
consistent with the operating segments identified in “Note 13. Segment Results and Concentrations” in Part II, Item 8 of this Form 10-K.
We perform an annual impairment assessment as of December 31 of each year, or more frequently if indicators of potential impairment exist, to determine
whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which
this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not
required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include, but are not limited to, macroeconomic
conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments,
entity specific factors such as strategies and financial performance. We are not required to perform a qualitative assessment for our annual impairment test and
may instead bypass the qualitative assessment and perform the two-step goodwill impairment test.
For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value, we perform
the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair
value, the second step includes determining the implied fair value of goodwill, which is then compared with the carrying amount to determine if an
impairment loss is recorded. We use a combination of valuation methods, market capitalization and income approach, to estimate the fair value of the
reporting units.
The significant estimates and assumptions used by management in assessing the recoverability of goodwill are estimated future cash flows, present value
discount rate, estimated growth of the overall craft beer segment, and other factors. If our estimated future cash flows were to significantly decline, an
impairment charge could result. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s
subjective judgment.
Indefinite-Lived Intangible Assets
We review indefinite-lived intangible assets, primarily comprised of our trademarks, domain name and recipes, for impairment annually and whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by
comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If it is determined that an individual asset
is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
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The assumptions and estimates used to determine future values and remaining useful lives of our intangible are complex and subjective. They can be affected
by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our
forecasts for specific product lines.
Long-Lived Asset Impairment
We evaluate potential impairment of our long-lived assets, including our distributor agreements, non-compete agreements and other intangible assets, when
facts and circumstances indicate that the carrying values of such long-lived assets may be impaired. In such cases, an evaluation of recoverability is performed
by comparing the carrying value of the assets to the projected future undiscounted cash flows and by preparing other quantitative and qualitative analyses.
Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss during the current period. We did not identify
indicators of impairment during 2011, 2010 or 2009.
Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us, as well as in kegs that have been leased from third parties. Kegs that are owned by us are reflected
as a component of Property, equipment and leasehold improvements in our Consolidated Balance Sheets at cost and are depreciated over the estimated useful
life of the keg. When draft beer is shipped to the wholesaler, regardless of whether the keg is owned or leased, we collect a refundable deposit, reflected as a
current liability in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler. When a wholesaler cannot
account for some of our kegs for which it is responsible, it pays us a fixed fee and forfeits its deposit for each keg determined to be lost. We have experienced
some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each wholesaler and retailer, the
similarities between kegs owned by most brewers, and the relatively low deposit collected on each keg when compared with the market value of the keg. We
believe that this is an industry-wide problem and our loss experience is typical of the industry. In order to estimate forfeited deposits attributable to lost kegs,
we periodically use internal records, A-B records, other third-party records, and historical information to estimate the physical count of kegs held by
wholesalers and A-B.
These estimates affect the amount recorded as brewery equipment and refundable deposits as of the date of the consolidated financial statements. The actual
liability for refundable deposits could differ from estimates.
Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B
wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B
or an independent wholesale distributor.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event.
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Table of Contents
Deferred Taxes
Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilized
tax credits and net operating loss carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To
the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax
assets. If we are unable to generate adequate taxable income in future periods or our assessment that it is more likely than not that certain deferred tax assets
will be realized is otherwise not accurate, we may incur charges in future periods to record a valuation allowance on our gross deferred tax assets.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition,
changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We have assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash and long-term
debt. To mitigate this risk, we entered into a five-year interest rate swap agreement, which expires July 1, 2013, to hedge the variability of interest payments
associated with our variable-rate borrowings. Through this swap agreement, we pay interest at a fixed rate of 4.48% and receive interest at a floating-rate of
the one-month LIBOR, which was 1.27% at December 31, 2011. Since the interest rate swap hedges the variability of interest payments on variable rate debt
with similar terms, it qualifies for cash flow hedge accounting treatment. This interest rate swap reduces our overall interest rate risk. We did not have any
unhedged variable rate debt outstanding at December 31, 2011.
Due to the nature of our highly liquid cash, an increase or decrease in interest rates would not materially affect the fair value of our cash, nor the related
interest income.
35
Table of Contents
Item 8.
Financial Statements and Supplementary Data
Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2011 is as follows:
2011 (In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income (loss)
Income from equity-method investments
Gain on sale of equity interest in Fulton Street Brewery, LLC
Other expense, net
Income before income taxes
Income tax provision
Net income
Basic and diluted net income per share
Shares used in basic per share calculation
Shares used in diluted per share calculation
2010 (In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Merger-related expenses
Operating income (loss)
Income from equity-method investments
Other expense, net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Basic and diluted net income (loss) per share
Shares used in basic per share calculation
Shares used in diluted per share calculation
1st Quarter
$
32,297 $
23,069
9,228
9,289
(61)
356
-
(269)
26
10
16 $
- $
18,819
18,928
2nd Quarter
3rd Quarter
4th Quarter
41,496 $
28,038
13,458
10,670
2,788
335
10,398
(253)
13,268
5,108
8,160 $
0.43 $
18,829
18,945
40,477 $
27,762
12,715
10,530
2,185
-
-
(183)
2,002
771
1,231 $
0.07 $
18,843
18,935
34,927
25,142
9,785
9,253
532
-
34
(170)
396
152
244
0.01
18,845
18,942
$
$
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
27,452 $
20,605
6,847
6,205
-
642
85
(346)
381
172
209 $
0.01 $
17,074
17,101
$
$
$
36
37,239 $
26,841
10,398
7,545
-
2,853
338
(334)
2,857
1,123
1,734 $
0.10 $
17,084
17,131
36,718 $
28,090
8,628
7,717
353
558
263
(282)
539
163
376 $
0.02 $
17,119
17,232
30,322
22,528
7,794
8,471
206
(883)
156
(264)
(991)
(358)
(633)
(0.03)
18,801
18,801
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Craft Brew Alliance, Inc.
We have audited the accompanying consolidated balance sheets of Craft Brew Alliance, Inc. (the “Company”) as of December 31, 2011 and 2010, and the
related consolidated statements of income, common shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Craft Brew
Alliance, Inc. as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2011, in conformity with generally accepted accounting principles in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Craft Brew Alliance, Inc.’s
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2012 expressed an unqualified opinion thereon.
/s/ Moss Adams LLP
Seattle, Washington
March 14, 2012
37
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
Table of Contents
Assets
Current assets:
Cash
Accounts receivable, net
Inventories
Deferred income tax asset, net
Other current assets
Total current assets
Property, equipment and leasehold improvements, net
Equity method investment in Fulton Street Brewery, LLC
Goodwill
Intangible and other assets, net
Total assets
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
Accrued salaries, wages and payroll taxes
Refundable deposits
Other accrued expenses
Current portion of long-term debt and capital lease obligations
Total current liabilities
Long-term debt and capital lease obligations, net of current portion
Fair value of derivative financial instruments
Deferred income tax liability, net
Other liabilities
Total liabilities
Commitments and contingencies
Common shareholders' equity:
$
$
$
Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 18,844,817 and 18,819,053
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total common shareholders' equity
Total liabilities and common shareholders' equity
$
The accompanying notes are an integral part of these financial statements.
38
December 31,
2011
2010
$
$
$
795
13,326
9,446
894
2,816
27,277
100,725
-
12,917
17,989
158,908
10,994
4,524
7,400
1,436
596
24,950
13,188
572
15,210
479
54,399
164
10,514
8,729
932
3,233
23,572
98,778
5,240
12,917
17,759
158,266
13,825
4,053
6,291
1,378
2,460
28,007
24,675
849
10,118
421
64,070
94
135,091
(356)
(30,320)
104,509
158,908
$
94
134,601
(528)
(39,971)
94,196
158,266
Table of Contents
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
2011 2010 2009
9,121
Sales
Less excise taxes
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
-
Merger related expenses
5,444
Operating income
Income from equity method investments
691
Gain on sale of equity interest in Fulton Street Brewery, LLC 10,432
(918)
Interest expense
Interest and other income, net
43
15,692
Income before income taxes
6,041
Income tax provision
9,651 $
Net income
$161,000 $140,852 $133,308
8,595
11,803
149,197 131,731 124,713
104,011 98,064 97,230
45,186 33,667 27,483
39,742 29,938 24,911
225
2,347
552
-
(2,139)
313
1,073
186
887
559
3,170
842
-
(1,497)
271
2,786
1,100
1,686 $
$
Basic and diluted net income per share
$
0.51 $
0.10 $
0.05
Shares used in basic per share calculations
18,834 17,523 17,004
Shares used in diluted per share calculations
18,931 17,568 17,041
The accompanying notes are an integral part of these financial statements.
39
Table of Contents
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(In thousands)
Balance at December 31, 2008
Issuance of shares under stock plans
Stock-based compensation
Compreshensive income:
Unrealized gains on derivative financial instruments, net of tax provision
of $117
Net income
Total comprehensive income
Balance at December 31, 2009
Issuance of shares under stock plans
Stock-based compensation
Issuance of shares pursuant to merger with Kona
Brewing Co., Inc.
Compreshensive income:
Unrealized losses on derivative financial instruments, net of tax benefit of
$31
Net income
Total comprehensive income
Balance at December 31, 2010
Issuance of shares under stock plans
Stock-based compensation
Compreshensive income:
Unrealized gains on derivative financial instruments, net of tax provision
of $105
Net income
Total comprehensive income
Balance at December 31, 2011
Total
Additional
Common
Paid-In Comprehensive Retained Shareholders'
Accumulated
Other
Common Stock
Shares Par Value Capital
16,948 $
108
18
85 $ 122,433 $
207
42
-
-
-
-
-
-
-
-
17,074
60
18
85
1
-
122,682
126
99
Loss
Deficit
Equity
(693) $ (42,544) $
-
-
-
-
215
-
-
887
(478) (41,657)
-
-
-
-
79,281
207
42
215
887
1,102
80,632
127
99
1,667
8
11,694
-
-
11,702
-
-
-
-
-
-
18,819
10
16
94
-
-
134,601
23
467
(50)
-
-
1,686
(528) (39,971)
-
-
-
-
-
-
-
-
-
-
172
-
-
9,651
18,845 $
94 $ 135,091 $
(356) $ (30,320) $
(50)
1,686
1,636
94,196
23
467
172
9,651
9,823
104,509
The accompanying notes are an integral part of these financial statements.
40
Table of Contents
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Income from equity method investments, net of distributions received
Gain on sale of equity interest in Fulton Street Brewery, LLC
(Gain) loss on sale or disposal of preperty, equipment and leasehold improvements
Deferred income taxes
Stock-based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Other current assets
Other assets
Accounts payable and other accrued expenses
Accrued salaries, wages and payroll taxes
Refundable deposits
Net cash provided by operating activities
Cash flows from investing activities:
Expenditures for property, equipment and leasehold improvements
Proceeds from sale of property, equipment and leasehold improvements
Cash paid for merger with Kona Brewing Co., Inc. and related entities, net
Proceeds received for federal grant assiciated with photovolatic system
Proceeds from the sale of equity interest in Fulton Street Brewery, LLC
Other
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Principal payments on debt and capital lease obligations
Net borrowings (repayments) under revolving line of credit
Proceeds from issuances of common stock
Debt issuance costs
Net cash used in financing activities
Increase in cash
Cash:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid (received) for income taxes, net
Supplemental disclosure of non-cash information:
Fair value of common stock issued in connection with acquisition of Kona Brewing Co., Inc. and related entities $
$
Receivable from sale of equity interest in Fulton Street Brewery, LLC
The accompanying notes are an integral part of these financial statements.
41
Year Ended December 31,
2011 2010 2009
$ 9,651 $ 1,686 $
887
7,204
(691)
(10,432)
(1)
5,025
467
(135)
7,044 7,313
(513)
(647)
-
-
31
102
(56)
1,082
42
99
(136)
(282)
(1,976)
(640)
418
(495)
(2,773)
471
635
2,017 1,391
(202)
1,445
791
590
72
36
(1,353) (1,162)
802
(1,230)
(306)
209
6,728 10,798 8,954
(8,488)
120
-
-
15,527
(28)
(4,669) (2,303)
136
-
-
-
-
7,131 (10,313) (2,167)
160
(6,206)
402
-
-
(5,751)
(7,500)
23
-
(13,228)
(1,505) (1,394)
1,100 (5,600)
207
127
(54)
-
(332) (6,787)
631
153
-
$
$
164
795 $
11
164 $
11
11
972 $ 1,625 $ 2,265
(760)
675
223
- $ 11,702 $
- $
836 $
-
-
Table of Contents
Note 1. Nature of Operations
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Overview
Craft Brew Alliance, Inc. was formed in 1981 to brew and sell craft beer. We produce, sell and market on a national basis innovative bottled and draft
products for the Widmer Brothers, Redhook and Kona brands at our five company-owned breweries and operate five pubs that promote our products, offer
dining and entertainment facilities and sell retail merchandise. Our common stock trades on the Nasdaq Stock Market under the trading symbol “HOOK.”
Our products are distributed domestically in all 50 states. This national footprint was established primarily through a series of distribution agreements with
Anheuser-Busch, LLC (“A-B”), a significant shareholder. In 2004, we and A-B entered into three agreements, an exchange and recapitalization agreement (as
amended, the “Exchange Agreement”), a distribution agreement (as amended, the “A-B Distributor Agreement”) and a registration rights agreement that
collectively constitute the framework of our existing relationship with A-B.
Under the present terms of the A-B Distribution Agreement, we distribute our products in substantially all of our markets through A-B’s seamless national
wholesale distributor network. A-B’s domestic wholesale distributor network consists of a significant number of independent wholesale distributors and
branches owned and operated by A-B. The A-B Distribution Agreement is subject to early termination, by either party, upon the occurrence of certain events.
The A-B Distribution Agreement expires December 31, 2018, but may be automatically renewed for an additional ten-year period absent A-B providing
written notice to the contrary on or prior to June 30, 2018.
Basis of Presentation
The consolidated financial statements include the accounts of Craft Brew Alliance, Inc. and our wholly owned subsidiaries. All intercompany transactions and
balances are eliminated in consolidation.
Note 2. Significant Accounting Policies
Cash
We maintain cash balances with financial institutions that may exceed federally insured limits. We did not have any cash equivalents at December 31, 2011 or
2010.
Accounts Receivable
Accounts receivable is primarily comprised of trade receivables due from wholesalers and A-B for beer and promotional product sales. Because of state liquor
laws and each wholesaler’s agreement with A-B, we do not have collectability issues related to the sale of our beer products. Accordingly, we do not
regularly provide an allowance for doubtful accounts for beer sales. We have provided an allowance for promotional merchandise receivables that have been
invoiced to the wholesaler, which reflects our best estimate of probable losses inherent in the accounts. We determine the allowance based on historical
customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance.
The allowance for doubtful accounts was $25,000 at both December 31, 2011 and 2010, respectively.
Activity related to our allowance for doubtful accounts was immaterial in 2011, 2010 and 2009.
Inventories
Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost or market. Pub food, beverages and supplies are stated at the
lower of cost or market.
We regularly review our inventories for the presence of obsolete product attributed to age, seasonality and quality. If our review indicates a reduction in utility
below the product’s carrying value, we reduce the product to a new cost basis. We record the cost of inventory for which we estimate we have more than a
twelve-month supply as a component of Intangible and other assets on our Consolidated Balance Sheets.
42
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost reduced by proceeds received under applicable cash grants, less accumulated depreciation
and accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of
equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or
losses are reflected in our Consolidated Statements of Income.
Depreciation and amortization of property, equipment and leasehold improvements is provided on the straight-line method over the following estimated useful
lives:
Buildings
Brewery equipment
Furniture, fixtures and other equipment
Leasehold improvements
30 – 50 years
10 – 25 years
2 - 10 years
5 years
The lesser of useful life or term of the lease
Valuation of Long-Lived Assets
We evaluate potential impairment of long-lived assets, including intangible assets, when facts and circumstances indicate that the carrying values of such
assets may be impaired. An evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash
flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, we recognize an
impairment loss in the current period in our Consolidated Statements of Income. We did not identify indicators of impairment during 2011, 2010 or 2009.
Intangible assets with finite lives are amortized using a straight line basis of accounting. Intangible assets and their respective estimated lives are as follows:
Trade name and trademark
Recipes
Distributor agreements
Non-compete agreements
Indefinite
Indefinite
15 years
5 years
Goodwill
We evaluate the recoverability of goodwill annually by performing a qualitative assessment to determine whether it is more likely than not that the fair value
of the reporting unit is less than the carrying amount. If the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill
impairment is not performed. If the fair value of the reporting unit is less than the carrying unit, we perform a quantitative two-step impairment test. The first
step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step
of the impairment test is performed to measure the amount of any impairment loss. Additional impairment assessments may be performed on an interim basis
if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying amount of goodwill has been impaired.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist primarily of trademarks, domain name and recipes, which are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired. Recoverability of indefinite-lived intangible assets is measured by comparing the
carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If it is determined that an individual asset is impaired,
the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Based on the impairment tests
performed, there was no impairment of indefinite-lived intangible assets in 2011, 2010, and 2009.
Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us as well as in kegs that have been leased from third parties. Kegs that are owned by us are reflected in
our Consolidated Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, regardless
of whether the keg is owned or leased, we collect a refundable deposit, presented as a current liability – Refundable deposits in our Consolidated Balance
Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler. See discussion at Note 19, “Related-Party Transactions” for impact of lost kegs
on our brewery equipment.
43
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
We have experienced some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each
wholesaler and retailer, the homogeneous nature of kegs owned by most brewers, and the relatively small deposit collected for each keg when compared with
its market value. We believe that this is an industry-wide problem and that our loss experience is not atypical. In order to estimate forfeited deposits
attributable to lost kegs, we periodically use internal records, records maintained by A-B, records maintained by other third party vendors and historical
information to estimate the physical count of kegs held by wholesalers and A-B. These estimates affect the amount recorded as equipment and refundable
deposits as of the date of the consolidated financial statements. The actual liability for refundable deposits may differ from estimates. As of December 31,
2011 and 2010, our Consolidated Balance Sheets included $7.1 million and $6.0 million, respectively, in refundable deposits on kegs and $5.1 million and
$4.1 million, respectively, in keg equipment, net of accumulated depreciation.
Fair Value of Financial Instruments
We believe the carrying amounts of cash, accounts receivable, accounts payable and other accrued expenses are a reasonable approximation of the fair value
of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
We had fixed-rate debt outstanding as follows (in thousands):
Fixed-rate debt on balance sheet
Fair value of fixed-rate debt
December 31,
2011
2010
$
$
1,544
1,615
$
$
6,996
7,541
Derivative financial instruments are recorded at fair value in our Consolidated Balance Sheets with gains or losses reported either in the Consolidated
Statements of Income or as a component of Comprehensive income depending on their classification. Derivative financial instruments are utilized to reduce
interest rate risk. We do not hold or issue derivative financial instruments for trading purposes.
Concentrations of Risk
Financial instruments that potentially subject us to credit risk consist principally of trade accounts receivable. While wholesale distributors and A-B account
for substantially all trade accounts receivable, this concentration risk is limited due to the number of distributors, their geographic dispersion and state laws
regulating the financial affairs of distributors of alcoholic beverages.
Comprehensive Income
Comprehensive income included deferred gains and losses on unrealized derivative hedge transactions.
Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B
wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B
or an independent wholesale distributor.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event.
44
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Excise Taxes
The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing less than two million barrels of beer per
calendar year, the federal excise tax is $7 per barrel on the first 60,000 barrels of beer removed for consumption or sale during the calendar year, and $18 per
barrel for each barrel in excess of 60,000 barrels. Individual states also impose excise taxes on alcoholic beverages in varying amounts. As presented in our
Consolidated Statements of Income, Sales reflects the amounts invoiced to A-B, wholesale distributors and other customers. Excise taxes due to federal and
state agencies are not collected from our customers, but rather are our responsibility. Net sales, as presented in our Consolidated Statements of Income, are
reduced by applicable federal and state excise taxes.
Shipping and Handling Costs
Costs incurred to ship our product are included in Cost of sales in our Consolidated Statements of Income.
Advertising Expenses
Advertising costs, consisting of television, radio, print, outdoor advertising, on-line and social media, sponsorships, trade events, promotions and printed
product information, as well as costs to produce these media, are expensed as incurred. The costs associated with point of sale display items and related
promotional merchandise are inventoried and charged to expense when first used. For the years ended December 31, 2011, 2010 and 2009, we recognized
costs for all of these activities totaling $11.9 million, $9.5 million and $6.6 million, respectively, which are reflected as Selling, general and administrative
expenses in our Consolidated Statements of Income.
Advertising expenses are included in selling, general and administrative expenses and frequently involve the local wholesaler sharing in the cost of the
program. Reimbursements from wholesalers for advertising and promotion activities are recorded as a reduction to Selling, general and administrative
expenses in our Consolidated Statements of Income. Pricing discounts to wholesalers are recorded as a reduction of Sales in our Consolidated Statements of
Income.
Stock-Based Compensation
The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of our common stock on the date of grant.
The fair value of stock option awards is estimated at the grant date as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model. The BSM
model requires various judgmental assumptions including expected volatility and option life.
The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award, net of estimated forfeitures. We
estimate forfeitures of stock based awards based on historical experience and expected future activity.
The estimated fair value of performance-based stock awards is recognized over the service period based on an assessment of the probability that performance
goals will be met. We re-measure the probability of achieving the performance goals during each reporting period. In future reporting periods, if we determine
that performance goals are not probable of occurrence, no compensation expense will be recognized and any previously recognized compensation expense
would be reversed
Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number of shares that were outstanding during the period. Diluted earnings per
share include the dilutive effect of common share equivalents calculated under the treasury stock method.
Income Taxes
Deferred income taxes are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss
and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that
some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
45
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
We recognize the benefits of tax return positions when it is determined that the positions are “more-likely-than-not” to be sustained by the taxing authority.
Interest and penalties accrued on unrecognized tax benefits are recorded as tax expense in the period incurred. At December 31, 2011, 2010 and 2009, we did
not have any unrecognized tax benefits nor any interest and penalties accrued on unrecognized tax benefits.
Segment Information
Our Chief Operating Decision Maker monitors net sales and gross margins of our Beer Related operations and our Pubs and Other operations. Beer Related
operations include the brewing operations and related beer sales of our Widmer Brothers, Redhook and Kona beer brands. Pubs and Other operations
primarily include our pubs, some of which are located adjacent to our Beer Related operations. We do not track operating results beyond the gross margin
level or our assets on a segment level.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different
assumptions or conditions.
Reclassifications
Certain reclassifications have been made to the prior year’s data to conform to the current year’s presentation.
Note 3. Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive
Income.” This new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires
presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net
income and the components of other comprehensive income are presented. ASU No. 2011-05 was amended by ASU No. 2011-12, which defers the effective
date for amendments to the presentation of reclassification of items out of accumulated other comprehensive income. The remaining updated guidance in
ASU No. 2011-05 is effective on a retrospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011 and
early adoption is permitted. This guidance affects presentation only and will have no effect on our financial condition, results of operations, or cash flows.
In May 2011, the FASB amended ASC 820, “Fair Value Measurements.” This amendment is intended to result in convergence between U.S. GAAP and
International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. This guidance clarifies the
application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures.
The updated guidance is effective on a prospective basis for financial statements issued for interim and annual periods beginning after December 15, 2011.
The adoption of this guidance will not have a material impact on our consolidated financial statements.
46
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 simplifies the goodwill impairment assessment by
permitting a company to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount
before applying the two-step goodwill impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, the company would be required to conduct the current two-step goodwill impairment test. Otherwise, it would not need to apply the two-step
test. The early adoption of ASU 2011-08 for our fiscal year ended December 31, 2011 did not have any impact on our financial position, results of operations,
or cash flows.
Note 4. Inventories
Inventories consisted of the following (in thousands):
Raw materials
Work in process
Finished goods
Packaging materials
Promotional merchandise
Pub food, beverages and supplies
Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. Other Current Assets
Other current assets consisted of the following (in thousands):
Deposits paid to keg lessor
Prepaid property taxes
Prepaid insurance
Income tax receivable
Other
Note 6. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following (in thousands):
Brewery equipment
Buildings
Land and improvements
Furniture, fixtures and other equipment
Leasehold improvements
Vehicles.
Construction in progress
Less accumulated depreciation and amortization
47
December 31
2011
2010
2,778
2,829
2,128
558
967
186
9,446
$
$
2,870
2,244
1,933
343
1,184
155
8,729
December 31
2011
2010
1,518
315
192
-
791
2,816
$
$
1,734
165
202
326
806
3,233
December 31
2011
2010
82,481
52,729
7,598
6,187
5,644
135
3,104
157,878
57,153
100,725
$
$
77,519
52,036
7,594
4,120
5,492
121
2,304
149,186
50,408
98,778
$
$
$
$
$
$
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Note 7. Sale of Equity Interest in Fulton Street Brewery, LLC (“FSB”)
On May 2, 2011, we sold our 42% interest in FSB for $16.3 million, net of transaction fees. Proceeds consisted of $15.1 million received in cash and $1.2
million placed in escrow. The escrow balance is to satisfy valid claims, if any, that may be asserted by A-B in connection with breaches of representations and
warranties made by the Sellers in the Purchase Agreement. Of the $1.2 million escrow balance, $0.4 million had been collected as of December 31, 2011 and
$0.8 million was included in accounts receivable on our Consolidated Balance Sheets at December 31, 2011. The escrow balance is being released to us in
three equal payments, every six months, beginning six months following the Closing Date, subject to indemnification claims, as applicable. We recorded a
gain of $10.4 million associated with the sale of our equity interest in FSB.
We recognized $691,000 in 2011 for our share of FSB’s earnings through the Closing Date and $696,000 and $441,000 in 2010 and 2009, respectively. The
book value of our equity investment in FSB was $5.9 million as of the Closing Date and $5.2 million at December 31, 2010.
At December 31, 2011, we had net outstanding receivables due from FSB of $585,000 primarily related to contract brewing. At December 31, 2010, we had
recorded a payable to FSB of $3.3 million, primarily for amounts owing for purchases of Goose Island-branded product prior to the sale of FSB. As of
December 31, 2011, this amount had been fully paid.
Note 8. KBC Merger
On October 1, 2010, we completed the KBC Merger by acquiring all outstanding shares of Kona Brewing Co., Inc.’s (“KBC”) common stock in exchange for
$6.2 million in cash and the issuance of 1,667,000 shares of our common stock with a value of $11.7 million to former KBC shareholders.
We believe that the combined entity is able to secure advantages beyond those that had already been achieved in our long-term strategic relationship with
KBC in supporting its brand family of products. This acquisition increases the breadth and variety of our brand offerings, creating favorable selling
opportunities in a greater number of lucrative markets.
We incurred merger-related expenses, including legal, consulting, accounting and other professional fees, and severance costs of $559,000, which are
reflected in merger-related expenses in our Consolidated Statements of Income for the year ended December 31, 2010.
The acquisition of KBC was accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and
liabilities assumed at the acquisition date measured at their fair values. The excess of the consideration transferred and the acquisition date fair value of the
previous equity interest held in Kona over the fair value of net assets acquired is recognized as goodwill. The following table summarizes the consideration
paid (in thousands):
Fair value of common stock issued
Cash consideration paid
Fair value of equity interest in Kona held at acquisition date
Total consideration
$
$
11,702
6,237
17,939
1,200
19,139
The fair value of our common stock issued was computed by multiplying the number of shares of common stock issued by $7.02, the closing price of our
common stock as reported by Nasdaq as of the date of the acquisition.
The carrying value of our 20% equity interest in Kona was $1.1 million on the acquisition date and we recognized a gain of $91,000 as a result of measuring
Kona at fair value. The gain is included in Other income in the Consolidated Statements of Income for the year ended December 31, 2010.
48
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):
Assets
Current assets
Property, equipment and leasehold improvements
Trade name and trademarks
Non-compete agreements
Total assets acquired
Liabilities
Current liabilities
Interest bearing liabilities and other long-term liabilities
Deferred income tax liabilities, net and other non-current liabilities
Total liabilities assumed
Net assets acquired
Goodwill recorded
$
$
$
4,858
4,174
4,600
440
14,072
4,091
1,476
2,283
7,850
6,222
12,917
The KBC Merger was structured as a stock purchase and, therefore, the values assigned to the trade name and trademarks, non-compete agreements and
goodwill are not deductible for tax purposes.
Prior to the acquisition date, we accounted for our 20% equity ownership interest in Kona under the equity method of accounting. Upon completion of the
business combination, we consolidate the operations of KBC. Our results of operations included net sales of $3.2 million and net income of $309,000
attributable to KBC for the period from October 1, 2010 to December 31, 2010. Net income attributable to KBC for the period includes the effect of
acquisition accounting adjustments, primarily amortization of intangible assets.
As a result of the KBC Merger, KBC became a wholly owned subsidiary and, accordingly, KBC’s results of operations are included in our consolidated
results of operations from October 1, 2010. For the years ended December 31, 2010 and 2009, our share of KBC’s net income prior to the KBC Merger was
$146,000 and $111,000, respectively.
Unaudited pro forma results of operations as if the KBC Merger had occurred on January 1, 2009 are as follows (in thousands, except per share amounts):
Net sales
Net income
Basic and diluted earnings per share
49
Year Ended December 31,
2009
2010
$
$
$
128,260
2,181
0.12
$
$
$
120,457
391
0.02
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Note 9. Intangible and Other Assets
Intangible and Other Assets
Intangible and other assets and the related accumulated amortization are as follows (in thousands):
Trademarks and domain name
Recipes
Distributor agreements
Accumulated amortization
Non-compete agreements
Accumulated amortization
Favorable contracts
Accumulated amortization
Other
Accumulated amortization
Promotional merchandise
December 31,
2011
2010
$
14,429
$
14,401
700
2,200
(513)
1,687
540
(210)
330
153
(147)
6
280
(223)
57
17,209
780
17,989
700
2,200
(367)
1,833
540
(105)
435
643
(609)
34
280
(209)
71
17,474
285
17,759
$
$
Amortization expense for the years ended December 31, 2011, 2010 and 2009 was $292,000, $312,000 and $460,000, respectively.
Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Note 10. Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following (in thousands):
Term loan, due July 1, 2018
Line of credit, due September 30, 2015
Promissory notes payable to related parties, all due July 1, 2015
Premium on promissory notes
Note with affiliated party, due November 15, 2014
Capital lease obligations for equipment
Less current portion
50
$
$
253
249
248
223
149
958
2,080
December 31,
2011
2010
12,240
-
600
404
519
21
13,784
596
13,188
$
$
12,639
7,500
600
504
1,403
4,489
27,135
2,460
24,675
$
$
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Required principal payments on outstanding debt obligations as of December 31, 2011 for the next five years and thereafter are as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Amount representing interest
Term Loan
Promissory
Notes
Note with
Related
Party
Capital
Lease
Obligations
$
$
418 $
456
486
516
549
9,815
12,240
-
12,240 $
- $
-
-
600
-
-
600
-
600 $
173 $
181
165
-
-
-
519
-
519 $
6
5
6
5
1
-
23
(2)
21
Term Loan and Line of CreditWe have a loan agreement (as amended, the “Loan Agreement”) with BofA, which is presently comprised of a $22.0 million
revolving line of credit (“Line of Credit”), including provisions for cash borrowings, and up to $2.5 million notional amount of letters of credit, and a Term
Loan with a current balance of $12.2 million. We may draw upon the Line of Credit for working capital and general corporate purposes.
With the May 2, 2011 receipt of $15.3 million in cash, including reimbursements, related to the sale of our interest in FSB as discussed in Note 7, we repaid
the outstanding borrowings under the Line of Credit and had no borrowings outstanding under the Line of Credit at December 31, 2011.
Under the Loan Agreement, we may select either the London Inter-Bank Offered Rate (“LIBOR”) or the Inter-Bank Offered Rate (“IBOR”) (each, a
“Benchmark Rate”) as the basis for calculating interest on the outstanding principal balance of the Line of Credit. Interest accrues at an annual rate equal to
the Benchmark Rate plus a marginal rate. We may select different Benchmark Rates for different tranches of borrowings under the Line of Credit. The
marginal rate varies from 1.00% to 2.25% based on our funded debt ratio. At December 31, 2011, our marginal rate was 1.00%. LIBOR rates may be selected
for one, two, three or six-month periods, and IBOR rates may be selected for no shorter than 14 days and no longer than six months. Accrued interest for the
Line of Credit is due and payable monthly.
Under the Loan Agreement a quarterly fee on the unused portion of the Line of Credit, including the undrawn amount of the related standby letter of credit,
varies from 0.15% to 0.30% based upon our funded debt ratio. At December 31, 2011, the quarterly fee was 0.15% and the fee totaled $29,000, $29,000 and
$17,000 for 2011, 2010 and 2009, respectively. An annual fee is payable in advance on the notional amount of each standby letter of credit issued and
outstanding multiplied by an applicable rate ranging from 1.00% to 2.00%. We have had no letters of credit outstanding during 2011, 2010 or 2009.
Interest on the Term Loan accrues on the outstanding principal balance in the same manner as provided for under the Line of Credit, as established under the
LIBOR one-month Benchmark Rate. The interest rate on the Term Loan was 1.27% as of December 31, 2011. Accrued interest for the Term Loan is due and
payable monthly. Principal payments are due monthly in accordance with an agreed-upon schedule set forth in the Loan Agreement, with any unpaid principal
balance and unpaid accrued interest due and payable on July 1, 2018.
We were in compliance with all applicable contractual financial covenants at December 31, 2011. These financial covenants under the Loan Agreement are
measured on a trailing four-quarter basis. For all periods ending June 30, 2011 and thereafter, we are required to maintain a funded debt ratio of up to 3.0 to 1
and a fixed charge coverage ratio above 1.25 to 1.
51
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The Loan Agreement is secured by substantially all of our personal property and by certain real property (“Collateral”). In addition, we are restricted in our
ability to declare or pay dividends, repurchase outstanding common stock, incur additional debt or enter into any agreement that would result in a change in
control.
Promissory Notes Payable to Individual Lenders
We assumed an obligation for promissory notes signed in connection with the acquisition of commercial real estate related to our Portland, Oregon brewery.
These notes were separately executed with three individuals, but under substantially the same terms and conditions. Each promissory note is secured by a deed
of trust on the commercial real estate. The outstanding note balance to each lender as of December 31, 2011 and 2010 was $200,000, with each note bearing a
fixed interest rate of 24% per annum through June 30, 2010, after which time the rate increased to 27.8% per annum as a result of a one-time adjustment
reflecting the change in the consumer price index from the date of issue, July 1, 2005, to July 1, 2010. The promissory notes are carried at the total of stated
value plus a premium reflecting the difference between our incremental borrowing rate and the stated note rate. The effective interest rate for each note is
6.31%. Each note matures on the earlier of the individual lender’s death or July 1, 2015, with prepayment of principal not allowed under the notes’ terms.
Interest payments are due and payable monthly.
Note with Affiliated Party
In connection with the KBC Merger, we assumed an obligation for a promissory note payable (“Related Party Note”) to a counterparty that was a significant
KBC shareholder and remains a shareholder of Craft Brew Alliance, Inc. The Related Party Note is secured by the equipment comprising a photovoltaic cell
generation system (“photovoltaic system”) installed at our brewery located in Kailua-Kona, Hawaii. Accrued interest on the Related Party Note is due and
payable monthly at a fixed interest rate of 4.75%, with monthly loan payments of $16,129. Any unpaid principal balance and unpaid accrued interest under
the Related Party Note will be due and payable on November 15, 2014. The photovoltaic system was eligible for certain federal grants and state tax credits,
which were applied for but not collected prior to the closing of the KBC Merger. The proceeds collected by us associated with the applicable federal grants
and state tax credits were required to be remitted to the creditor as a reduction of principal. As of December 31, 2011, all proceeds from the grants and credits
had been remitted to the creditor.
Capital Lease Obligations
A majority of our capital leases were paid off during 2011 with proceeds from the sale of FSB. As of December 31, 2011 and 2010, brewery equipment
included property acquired under a capital lease as follows (in thousands):
Cost of equipment acquired under capital lease
Less accumulated depreciation
Note 11. Derivative Financial Instruments
December 31
2011
2010
$
$
24
(4)
20
$
$
13,106
(4,290)
8,816
Interest Rate Swap Contracts
Our risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using the
most effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks and
management strives to structure proposed transactions to avoid or reduce risk whenever possible.
We have assessed our vulnerability to certain business and financial risks, including interest rate risk associated with our variable-rate long-term debt. To
mitigate this risk, we entered into a five-year interest rate swap contract with Bank of America, N.A. (“BofA”) with a total notional value of $9.2 million as of
December 31, 2011 to hedge the variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. Through this
swap agreement, we pay interest at a fixed rate of 4.48% and receive interest at a floating-rate of the one-month LIBOR, which was 1.27% at December 31,
2011. Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge
accounting treatment. As of December 31, 2011, unrealized net losses of $572,000 were recorded in Accumulated other comprehensive loss as a result of this
hedge. The effective portion of the gain or loss on the derivative is reclassified into interest expense in the same period during which we record interest
expense associated with the Term Loan. There was no hedge ineffectiveness recognized during 2011, 2010 or 2009.
52
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The interest rate swap contract is secured by substantially all of our personal property and by the real properties located at 924 North Russell Street, Portland,
Oregon and 14300 NE 145th Street, Woodinville, Washington (“collateral”) under the Loan Agreement with BofA.
The effect of our interest rate swap contracts that are accounted for as derivative instruments on our Consolidated Statements of Income for 2011, 2010 and
2009 was as follows (in thousands):
Derivatives in Cash
Flow Hedging
Relationships
Amount of Gain/(Loss)
Recognized in Accumulated
OCI (Effective Portion)
Location of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
Amount of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
Year Ended
December 31,
2011
2010
2009
$
$
$
Derivatives Not in
Cash Flow Hedging
Relationships
Year Ended
December 31,
2011
2010
2009
277
(81)
332
Interest expense
Interest expense
Interest expense
$
$
$
400
410
416
Location of Gain/(Loss)
Recognized in Income on
Derivative
N/A $
Interest and other income, net $
Interest and other income, net $
Amount of Gain/(Loss)
Recognized in Income on
Derivative
-
73
78
Note 12. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•
•
•
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds
and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Following are the disclosures related to our financial liabilities that are recorded at fair value on a recurring basis (in thousands):
Fair Value at December 31, 2011
Derivative financial instruments
Fair Value at December 31, 2010
Derivative financial instruments
Level 1
Level 2
Level 3
Total
-
$
-
$
572
$
-
$
572
849
$
-
$
849
$
$
53
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The fair value of our interest rate swap is based on quarterly statements from the issuing bank. There were no changes to our valuation techniques during
2011, 2010 or 2009.
We believe the carrying amounts of cash, accounts receivable, accounts payable and other accrued expenses are a reasonable approximation of the fair value
of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
Note 13. Segment Results and Concentrations
Net sales, gross profit and gross margin by segment were as follows (dollars in thousands):
2011
Net sales
Gross profit
Gross margin
2010
Net sales
Gross profit
Gross margin
2009
Net sales
Gross profit
Gross margin
Beer
Related
Pubs
and Other
Total
$
$
$
$
$
$
125,531
41,372
33.0%
$
$
117,563
31,607
26.9%
113,439
25,827
22.8%
23,666
3,814
16.1%
14,168
2,060
14.5%
11,274
1,656
14.7%
$
$
$
$
$
$
149,197
45,186%
30.3%
131,731
33,667
25.6%
124,713
27,483
22.0%
The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segment
information is provided to our chief operating decision maker.
In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on
specific factors such as headcount. These factors can have a significant impact on the amount of gross profit for each segment. While we believe we have
applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment gross profit.
Sales to wholesalers through the A-B Distributor Agreement represented 80.8%, 81.1% and 83.1%, respectively, of our sales in 2011, 2010 and 2009.
Receivables from A-B represented 62.4% and 65.8%, respectively, of our accounts receivable balance at December 31, 2011 and 2010.
All of our long-term assets are located in the U.S. and sales outside of the U.S. are insignificant.
Note 14. Stock-Based Plans and Stock-Based Compensation
We maintain several stock incentive plans under which stock-based awards are granted to employees and non-employee directors. We issue new shares of
common stock upon conversion of the stock-based awards. Under the terms of our stock option plans, subject to certain limitations, employees and directors
may be granted options to purchase our common stock at the market price on the date the option is granted. All of our stock plans are administered by the
Compensation Committee of our Board of Directors, which determines the grantees, the number of shares of common stock for which options are exercisable
and the exercise prices of such shares, among other terms and conditions of stock-based awards under our stock-based plans.
With the approval of the 2010 Stock Incentive Plan (the “2010 Plan”), no further grants of stock-based awards may be made under our 2002 Stock Incentive
Plan (the “2002 Plan”) or our 2007 Stock Incentive Plan (the “2007 Plan”); however, the provisions of these plans will remain in effect until all outstanding
options are terminated or exercised.
54
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
2010 Stock Incentive Plan
On May 26, 2010, our shareholders approved the 2010 Plan, as recommended by our Board of Directors. The 2010 Plan provides for grants of stock options,
restricted stock, restricted stock units, performance awards and stock appreciation rights. While incentive stock options may only be granted to employees,
awards other than incentive stock options may be granted to employees and non-employee directors. Options granted to our employees are generally
designated to vest over a five-year period. Vested options are generally exercisable for ten years from the date of grant. A maximum of 750,000 shares of
common stock are authorized for issuance under the 2010 Plan. As of December 31, 2011, there were 576,490 shares available for future awards pursuant to
the 2010 Plan, assuming all 67,530 shares subject to performance vesting vest at the end of the performance period.
2007 Stock Incentive Plan
Our 2007 Plan allows for grants of stock options and restricted stock to our employees and restricted stock grants to our Company’s directors. These grants
have been made since the inception of the 2007 Plan in May 2007 through May 2010. Options granted to the Company’s employees were generally
designated to vest over a five-year period. Vested options are generally exercisable for ten years from the date of grant.
2002 Stock Option Plan
Our 2002 Plan allowed for the grant of non-qualified stock options and incentive stock options to employees and non-qualified stock options to non-employee
directors and independent consultants or advisors, subject to certain limitations. Options granted to our employees were generally designated to vest over
either a four-year or five-year period while options granted to our directors were generally designated to become exercisable from the date of grant up to three
months following the grant date. Vested options are generally exercisable for ten years from the date of grant.
Stock-Based Compensation Expense
Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):
Year Ended December 31,
Weighted average per share fair value of stock options granted
Intrinsic value of stock options exercised
Intrinsic value of fully-vested stock awards granted
2011
2010
2009
$
5.99 $
60
243
2.68 $
252
61
0.89
99
36
Stock-based compensation expense was recognized in our Consolidated Statements of Income as follows (in thousands):
Selling, general and administrative expense
2011
Year Ended December 31,
2010
2009
$
467
$
99
$
42
We amortize stock-based compensation on a straight-line basis over the vesting period of the individual awards, which is the requisite service period, with
estimated forfeitures considered.
55
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
At December 31, 2011, we had total unrecognized stock-based compensation expense of $848,000, which will be recognized over the weighted average
remaining vesting period of 3.2 years.
The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing model:
Year Ended December 31,
Risk-free interest rate
Dividend yield
Expected life
Volatility
2011
2010
2009
2.84%
0.0%
7.5 years
62.10%
2.64% - 3.86%
0.0%
10 years
62.54%
2.87%
0.0%
10 years
60.98%
The risk-free rate used is based on the U.S. Treasury yield curve over the estimated term of the options granted. Expected lives were estimated based on
historical exercise data. The expected volatility is calculated based on the historical volatility of our common stock.
Stock-Based Awards Plan Activity
Stock Option Activity
Stock option activity for the year ended December 31, 2011 was as follows:
Outstanding at December 31, 2010
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Certain information regarding options outstanding as of December 31, 2011 was as follows:
Number
Weighted average exercise price
Aggregate intrinsic value
Weighted average remaining contractual term
Options
Outstanding
Weighted
Average
Exercise Price
$
219,000
46,140
(9,600)
(3,300)
252,240
3.14
9.26
2.41
1.92
4.30
Options
Outstanding
Options
Exercisable
252,240
4.30
621,000
$
$
7.8 years
71,900
2.74
243,000
5.8 years
$
$
Performance-Based Stock Grants
During the second quarter of 2011, we granted performance-based stock awards covering 67,530 shares of our common stock to selected executives with
vesting contingent upon meeting various company-wide performance goals. The performance goals are tied to target amounts of adjusted EBITDA and net
sales for the three fiscal years ending December 31, 2013. The awards earned will range from zero to one hundred percent of the targeted number of
performance shares for the performance period ending March 31, 2014. Awards, if earned, will be paid in shares of common stock.
Stock Grants
Beginning with the 2011 Annual Meeting of Shareholders, each non-employee director receives an annual grant of shares of our common stock with a fair
value of $25,000 upon election at the Annual Meeting of Shareholders. Accordingly, on May 25, 2011, our Board of Directors approved an annual grant of
2,700 shares of fully-vested common stock to each of our six non-employee directors for a total of 16,200 shares of our common stock.
56
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Note 15. Earnings per Share, Basic and Diluted
The following table reconciles shares used for basic and diluted EPS and provides certain other information (in thousands):
Weighted average common shares for basic EPS
Dilutive effect of stock-based awards
Shares used for diluted EPS
18,834
97
18,931
Stock-based awards not included in diluted per share calculations as they would be antidilutive
7
17,523
45
17,568
82
17,004
37
17,041
160
2011
Year Ended December 31,
2010
2009
Note 16. Income Taxes
The components of income tax expense were as follows (in thousands):
Current
Deferred..
Year Ended December 31,
2010
2011
2009
$
$
1,016
5,025
6,041
$
$
18
1,082
1,100
$
$
242
(56)
186
Income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before income taxes as follows (in
thousands):
Provision at U.S. statutory rate
State taxes, net of federal benefit
Permanent differences, primarily meals and entertainment
Merger expenses and true up of merger treatment
Accrual of IRS examination issues
Tax credits
Increase to deferred tax asset tax rate
Release of valuation allowance
2011
Year Ended December 31,
2010
2009
$
$
5,335
567
266
-
-
(127)
-
-
6,041
$
$
947
119
213
135
-
(214)
-
(100)
1,100
$
$
365
119
171
14
104
-
313
(900)
186
Significant components of our deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets
Net operating losses and alternative minimum tax credit carryforwards
Accrued salaries and severance
Other
Valuation allowance
Deferred tax liabilities
Property, equipment and leasehold improvements
Intangible assets
Equity investments
Other
57
December 31,
2011
2010
$
$
2,059
975
766
3,800
-
3,800
(11,369)
(6,450)
(251)
(46)
(18,116)
(14,316)
$
$
8,310
828
822
9,960
-
9,960
(11,462)
(6,539)
(1,093)
(52)
(19,146)
(9,186)
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
As of December 31, 2011, included in our net operating losses and alternative minimum tax credit carryforwards of $2.1 million are: i) federal net operating
loss carryforwards (“NOLs”) totaling $4.5 million, or $1.5 million tax-effected; ii) state NOLs totaling $129,000 tax-effected; and iii) federal and state
alternative minimum tax credit carryforwards totaling $726,000 tax-effected. Included in these net operating losses are: iv) tax deductions related to stock
option exercises of $1.0 million, or $342,000 tax-effected, for which the tax benefit will be credited to equity when realized.
Among other factors, in assessing the realizability of our deferred tax assets, we consider future taxable income expected to be generated by the projected
differences between financial statement depreciation and tax depreciation, cumulative earnings generated to date and other evidence available to us. Based
upon this consideration, we assessed that all of our deferred taxes are more likely than not to be realized, and, as such, we have not recorded a valuation
allowance as of December 31, 2011 or 2010. During 2010, we released our remaining valuation allowance of $100,000 and, during 2009, we released
$900,000 of valuation allowance, all of which was recorded as an offset to our tax provision.
There were no unrecognized tax benefits as of December 31, 2011 or 2010 and we do not anticipate significant changes to our unrecognized tax benefits
within the next twelve months.
Our major tax jurisdictions include U.S. federal and various U.S. states. Tax years that remain open for examination by the IRS include the years from 2007
through 2011. Tax years remaining open in states where we have a significant presence range from 2007 to 2011. In addition, tax years from 1997 to 2003
may be subject to examination by the IRS and state tax jurisdictions to the extent that we utilize these NOLs in our tax returns.
Note 17. Employee Benefit Plans
We sponsor a defined contribution or 401(K) plan for all employees 18 years or older. Employee contributions may be made on a before-tax basis, limited by
IRS regulations. For the years ended December 31, 2011 and 2010, we matched 50 percent of the employee’s contributions up to 6% of eligible
compensation. For the year ended December 31, 2009, we matched the employee’s contribution up to 4% of eligible compensation. Eligibility for the
matching contribution in all years began after the participant had worked a minimum of three months. Our matching contributions to the plan vest ratably over
five years of service by the employee. We recognized expense associated with matching contributions of $687,000, $428,000 and $600,000 for the years
ended December 31, 2011, 2010 and 2009, respectively.
Note 18. Commitments
Operating Leases
We lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various
dates through the year ending December 31, 2047. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to
reflect changes in price indices. Certain leases require us to pay for insurance, taxes and maintenance applicable to the leased property. Under the terms of the
land lease for our New Hampshire Brewery, we hold a first right of refusal to purchase the property should the lessor decide to sell the property.
Minimum aggregate future lease payments under non-cancelable operating leases as of December 31, 2011 are as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
$
$
58
1,341
1,216
925
907
793
12,515
17,697
Table of Contents
CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Rent expense under all operating leases, including short-term rentals as well as cancelable and noncancelable operating leases, totaled $2.8 million, $2.4
million and $2.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.
We sub-lease corporate office space to an unrelated party pursuant to a 5-year lease that began in February 2011. The lessee also leased this space pursuant to
a previous lease agreement in 2010 and 2009. The lessee may renew the lease for two additional five-year periods. We recognized rental income of $242,000,
$193,000 and $177,000 for the years ended December 31, 2011, 2010 and 2009, respectively, which was recorded as an offset to rent expense in our
Consolidated Statements of Income. Future minimum lease rentals pursuant to this agreement as of December 31, 2011 are as follows (in thousands):
2012
2013
2014
2015
2016
$
$
253
261
269
277
23
1,083
We lease our headquarters office space, restaurant and storage facilities located in Portland, land and certain equipment from two limited liability companies,
both of whose members include our current Board Chair and a nonexecutive officer. Lease payments to these lessors totaled $122,000, $124,000 and
$118,000 for the years ended December 31, 2011, 2010 and 2009, respectively. The lease for the headquarters office space and restaurant facility expires in
2034, with an extension at our option for two 10-year periods, while the lease for the other facilities, land and equipment expires in 2017 with an extension at
our option for two five-year periods. We hold a right to purchase the headquarters office space and restaurant facility at the greater of $2.0 million or the fair
market value of the property as determined by a contractually established appraisal method. The right to purchase is not valid in the final year of the lease
term or in each of the final years of the renewal terms, as applicable. All lease terms are considered to be arm’s-length transactions.
We hold lease and sublease obligations for certain office space and the land underlying the brewery and pub location in Kona, Hawaii, with a company whose
owners include a shareholder who owns more than 5% of our common stock and a nonexecutive officer. The sublease contracts expire on various dates
through 2020, with an extension at our option for two five-year periods. Lease payments to this lessor totaled $360,000 and $41,000 for the years ended
December 31, 2011 and 2010. All lease terms are considered to be arm’s-length transactions.
Purchase and Sponsorship Commitments
We periodically enter into commitments to purchase certain raw materials in the normal course of business. Furthermore, we have entered into purchase
commitments and commodity contracts to ensure we have the necessary supply of malt and hops to meet future production requirements. Certain of the malt
and hop commitments are for crop years through 2014. We believe that malt and hop commitments in excess of future requirements, if any, will not have a
material impact on our financial condition or results of operations. We may take delivery of the commodities in excess of our requirements or make payments
against the purchase commitments earlier than contractually obligated, which means our cash outlays in any particular year may exceed or be less than the
commitment amount disclosed.
In certain cases, we have executed agreements with selected vendors to source our requirements for specific malt varieties for the years ending December 31,
2012 and 2013; however, either the quantity to be delivered or the full price for the commodity has not been established at the present time. To the extent the
commitment is not measurable or has not been fixed, that portion of the commitment has been excluded from the table below.
59
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
We have entered into multi-year sponsorship and promotional commitments with certain professional sports teams and entertainment companies. Generally,
in exchange for our sponsorship consideration, we post signage and provide other promotional materials at the site or the event. In certain instances, we are
granted an exclusive right to provide the craft beer products at the site or event. The terms of these sponsorship commitments expire at various dates through
June 30, 2015.
Aggregate payments under purchase and sponsorship commitments as of December 31, 2011 are as follows:
2012
2013
2014
2015
2016
Thereafter
$
$
Note 19. Related-Party Transactions
Purchase
Obligations
Sponsorship
Obligations
Total
13,354
2,119
1,049
612
-
-
17,134
$
$
1,574
847
452
80
-
-
2,953
$
$
14,928
2,966
1,501
692
-
-
20,087
Modifications to A-B Agreements
In connection with the sale of our interest in FSB, we modified two agreements with A-B originally executed in 2004: the Master Distributor Agreement (as
amended and restated, the “A-B Distributor Agreement”), which was amended primarily to lower our margin fees (“Margin Fees”) to be paid to A-B; and the
Exchange and Recapitalization Agreement (as amended and restated, the “Exchange Agreement”).
The modifications to the A-B Distributor Agreement reduced the Margin Fees to be paid to A-B for beer sold through A-B or the associated A-B distribution
network, except for beer sold in qualifying territories, as defined, from May 1, 2011 (the “Commencement Date”) until December 31, 2018, to $0.25 per case
equivalent from $0.74 per case equivalent. Beer sold through A-B or the associated A-B distribution network in qualifying territories, as defined, will be
exempt from Margin Fees until September 30, 2013, and thereafter will be assessed Margin Fees at the $0.25 per case equivalent through December 31, 2018.
The exemption from Margin Fees for beer sold in the qualifying territories is subject to certain conditions, including incurring sales and marketing expenses in
the qualifying territories at or above specified amounts. In the event the A-B Distributor Agreement is renewed beyond December 31, 2018, the A-B
Distributor Agreement sets Margin Fees to be paid to A-B for the period beginning January 1, 2019 and ending December 31, 2028, at $0.75 per case
equivalent. The A-B Distributor Agreement no longer provides for the incremental fees that were previously paid to A-B for shipments above the volume of
shipments during 2003.
If we purchase additional beer brands, we may distribute those brands outside of the A-B Distributor Agreement while still selling existing brands to A-B
affiliated wholesalers. We would not be obligated to pay margin fees on sales of the new brand.
We estimate that, had the modification to the A-B Distributor Agreement been in place throughout 2010, the increase in 2010 sales resulting from the reduced
distribution fees would have been approximately $3.3 million. The amount of increase in sales realized for future periods may differ from this estimate due to
the level, timing and geographic distribution of our shipments to A-B.
60
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CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Other Transactions with A-B
Other transactions with A-B consisted of the following (in thousands):
Gross sales to A-B
Margin fee paid to A-B, classified as a reduction of Sales
Handling, inventory management, royalty and other fees paid to A-B, classified in Cost of sales
Fees paid to A-B for media and advertising services, classified in Selling, general and administrative
$
expenses
Amounts received from A-B for lost keg fees and forfeited deposits, included as a reduction of
Property, equipment and leasehold improvements, net
Amounts due to or from A-B were as follows (in thousands):
Amounts due from A-B related to beer sales pursuant to the A-B Distributor Agreement
Refundable deposits due to A-B
Amounts due to A-B for services rendered
Net amount due from A-B
Year Ended December 31,
2010
2011
132,914
2,777
490
$
$
119,885
5,589
607
-
267
-
364
2009
116,684
5,844
926
63
259
December 31
2011
2010
$
$
8,310
(1,746)
(2,482)
4,082
$
$
6,920
(828)
(2,185)
3,907
In addition, during 2009, we purchased certain materials, primarily bottles and other packaging materials, through A-B totaling $22.6 million.
KBC
Prior to the KBC Merger in October 2010, KBC was a related party. For the years ended December 31, 2010 and 2009, we earned alternating proprietorship
fees of $4.8 million and $5.0 million, respectively, by leasing the Oregon Brewery to KBC and $5.0 million and $5.7 million, respectively, by selling raw
materials and packaging products to KBC. These fees were recorded as Sales in our Consolidated Statements of Income. We also charged rent to KBC for its
use of kegs for products that are distributed to Hawaii, as these sales are outside of our distribution agreement with KBC. Cooperage rental fees of $97,000
and $107,000 were charged to KBC for the years ended December 31, 2010 and 2009, respectively. These fees were credited to Cost of sales for the
corresponding periods.
FSB
Prior to the sale of our equity interest in FSB to A-B, FSB was a related party. Following the sale, A-B owns 100% of FSB and A-B continues to be a related
party. At December 31, 2010, we had net amounts due to FSB of $3.3 million. All such amounts had been paid as of December 31, 2011.
Operating Leases
We entered into lease arrangements with lessors whose members include related parties. See Note 18.
61
Table of Contents
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934
(“Exchange Act”) as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be
disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by
the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. While reasonable assurance is a high
level of assurance, it does not mean absolute assurance. Disclosure controls and internal control over financial reporting cannot prevent or detect all errors,
misstatements or fraud. In addition, the design of a control system must recognize that there are resource constraints, and the benefits associated with controls
must be proportionate to their costs.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2011, no changes in our internal control over financial reporting were identified in connection with the evaluation required by
Exchange Act Rule 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule
13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and
fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide
absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management assessed the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control
— Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of December 31, 2011.
Moss Adams LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of
December 31, 2011, as stated in their report, which is included herein.
62
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Craft Brew Alliance, Inc.
We have audited Craft Brew Alliance, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Craft Brew Alliance, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Craft Brew Alliance, Inc. as of December 31, 2011 and 2010, and the consolidated statements of income, common shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2011, and our report dated March 14, 2012 expressed an unqualified opinion on those consolidated
financial statements.
/s/ Moss Adams LLP
Seattle, Washington
March 14, 2012
63
Table of Contents
Item 9B.
Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is contained in part in our definitive proxy statement for our 2012 Annual Meeting of Stockholders to be held on May
14, 2012 (the “2012 Proxy Statement”) under the captions “Board of Directors,” “Board of Directors - Audit Committee,” “Executive Officers,” and “Section
16(a) Beneficial Ownership Reporting Compliance,” and the information contained therein is incorporated herein by reference.
Code of Conduct
We adopted a Code of Conduct and Ethics (the “Code”) applicable to all employees, including our principal executive officer, principal financial officer,
principal accounting officer and directors. The Code and the charters of each of the Board committees are posted on our website at www.craftbrew.com
(select Investor Relations — Governance — Highlights). Copies of these documents are available to any shareholder who requests them. Such requests should
be directed to Investor Relations, Craft Brew Alliance, Inc., 929 N. Russell Street, Portland, OR 97227. Any waivers of the Code for our directors or
executive officers are required to be approved by our Board of Directors. We will disclose any such waivers on a current report on Form 8-K within four
business days after the waiver is approved.
Item 11.
Executive Compensation
Information required by this Item is contained in our 2012 Proxy Statement under the captions “Executive Compensation,” “Director Compensation” and
“Board of Directors - Compensation Committee” and the information contained therein is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans The following is a summary as of December 31, 2011 of all of our plans that provide
for the issuance of equity securities as compensation. See Note 14 of Notes to Consolidated Financial Statements for additional information.
Equity compensation plans approved by shareholders
Plan Category
Equity compensation plans not approved by shareholders(2)
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
252,240 $
Weighted average
exercise price of
outstanding options,
warrants and rights (b)
4.30
-
252,240
-
4.30
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a)) (c)
576,490
-
576,490
The remaining information required by this Item is contained in our 2012 Proxy Statement under the caption “Security Ownership of Certain Beneficial
Owners and Management,” and the information contained therein is incorporated herein by reference.
64
Table of Contents
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is contained in our 2012 Proxy Statement under the captions “Related Person Transactions” and “Board of Directors –
Director Independence” and the information contained therein is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this Item is contained in our 2012 Proxy Statement under the caption “Proposal No. 2 — Ratification of Appointment of
Independent Registered Public Accounting Firm” and the information contained therein is incorporated herein by reference.
Item 15.
Exhibits and Financial Statement Schedules
Financial Statements and Schedules
PART IV
Report of Moss Adams LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010.
Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
37
38
39
40
41
42
Exhibits
Exhibits are listed in the Exhibit Index that appears immediately following the signature page of this report and is incorporated herein by reference, and are
filed or incorporated by reference as part of this Annual Report on Form 10-K.
65
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Portland, Oregon, on March 14, 2012.
Craft Brew Alliance, Inc.
By: /s/ Joseph K. O’Brien
Joseph K. O’Brien
Controller and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant
and in the capacities indicated on March 14, 2012.
Signature
/s/ TERRY E. MICHAELSON
Terry E. Michaelson
/s/ MARK D. MORELAND
Mark D. Moreland
/s/ JOSEPH K. O’BRIEN
Joseph K. O’Brien
*
Kurt R. Widmer
*
Timothy P. Boyle
*
Marc J. Cramer
*
E. Donald Johnson, Jr.
*
Kevin R. Kelly
*
Thomas D. Larson
*
David R. Lord
John D. Rogers, Jr.
*By:
/s/ MARK D. MORELAND
Mark D. Moreland,
as attorney in fact
Title
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
Director
Director
Director
Director
66
Table of Contents
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*†
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
EXHIBIT INDEX
Description
Agreement and Plan of Merger between the Registrant and Kona Brewing Co., Inc. and related parties dated July 31, 2010 (incorporated by
reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on August 3, 2010)
Equity Purchase Agreement by and among each of the members of Fulton Street Brewery, LLC, as Sellers and A-B, as purchaser, dated as of
February 18, 2011 (incorporated by reference from Exhibit 2.2 to the Registrant’s Form 10-K for the year ended December 31, 2010)
Joinder to Equity Purchase Agreement, dated May 2, 2011 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report on
Form 8-K filed on May 4, 2011)
Restated Articles of Incorporation of the Registrant, dated January 2, 2012
Amended and Restated Bylaws of the Registrant, dated December 1, 2010 (incorporated by reference from Exhibit 3.2 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2010 filed on April 1, 2011)
2002 Stock Option Plan (incorporated by reference from Exhibit A to the Registrant’s Proxy Statement for its 2002 Annual Meeting of
Shareholders (File No. 0-26542)
Form of Stock Option Agreement (Directors Grants) for the 2002 Stock Option Plan (incorporated by reference from Exhibit 10.10 to the
Registrant’s Form 10-K for the year ended December 31, 2004)
Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2002 Stock Option Plan (incorporated by reference from
Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
2007 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s Proxy Statement for its 2007 Annual Meeting of
Shareholders)
Form of Nonstatutory Stock Option Agreement (Executive Officer Grants) for the 2007 Stock Incentive Plan (incorporated by reference from
Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010)
2010 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s Proxy Statement for its 2010 Annual Meeting of
Shareholders)
Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2010 Stock Incentive Plan (incorporated by reference from
Exhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2010)
Form of Performance Award Agreement for the 2010 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s
Form 10-Q for the quarter ended June 30, 2011)
Stock Appreciation Right Agreement between the Registrant and Andrew J. Thomas, dated October 12, 2010 (incorporated by reference from
Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011)
Stock Appreciation Right Agreement between the Registrant and Andrew J. Thomas, dated January 1, 2011 (incorporated by reference from
Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011)
Letter of Agreement between the Registrant and Terry E. Michaelson dated March 29, 2010 (incorporated by reference from Exhibit 10.14 to
the Registrant’s Form 10-K for the year ended December 31, 2009)
Letter of Agreement between the Registrant and Mark D. Moreland dated March 29, 2010 (incorporated by reference from Exhibit 10.15 to
the Registrant’s Form 10-K for the year ended December 31, 2009)
Letter of Agreement between the Registrant and V. Sebastian Pastore dated March 29, 2010 (incorporated by reference from Exhibit 10.16 to
the Registrant’s Form 10-K for the year ended December 31, 2009)
Letter of Agreement between the Registrant and Martin J. Wall, IV dated March 29, 2010 (incorporated by reference from Exhibit 10.17 to
the Registrant’s Form 10-K for the year ended December 31, 2009)
Letter of Agreement between the Registrant and Danielle Katcher dated March 29, 2010 (incorporated by reference from Exhibit 10.18 to the
Registrant’s Form 10-K for the year ended December 31, 2009)
E-1
Table of Contents
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Letter of Agreement between the Registrant and Kurt Widmer dated May 26, 2010 (incorporated by reference from Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2010)
Letter of Agreement between the Registrant and Robert Widmer dated May 26, 2010 (incorporated by reference from Exhibit 10.2 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2010)
Letter of Agreement between the Registrant and Andrew J. Thomas, dated June 1, 2011 (incorporated by reference from Exhibit 10.2 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2011)
Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and Kurt Widmer (incorporated by reference
from Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)
Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and Robert Widmer (incorporated by
reference from Exhibit 10.11 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)
Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between the Registrant and W. Cameron Healy (incorporated by
reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)
Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between the Registrant and Mattson Davis (incorporated by
reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)
Summary of Compensation Arrangements for Non-Employee Directors (incorporated by reference from Exhibit 10.23 to the Registrant’s
Form 10-K for the year ended December 31, 2009)
Summary of Annual Cash Incentive Bonus Plan for Executive Officers (incorporated by reference from Exhibit 10.25 to the Registrant’s
Form 10-K for the year ended December 31, 2010 filed on April 1, 2011)
Sublease between Pease Development Authority as Sublessor and the Registrant as Sublessee, dated May 30, 1995 (incorporated by reference
from Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, No. 33-94166)
Loan Agreement dated as of July 1, 2008 between Registrant and Bank of America, N.A. (incorporated by reference from Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on July 7, 2008)
Loan Modification Agreement dated November 14, 2008 to Loan Agreement dated July 1, 2008 between Registrant and Bank of America,
N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2008)
Second Loan Modification Agreement dated June 8, 2010 to the Loan Agreement dated July 1, 2008 between the Registrant and Bank of
America, N.A. (incorporated by reference from Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010)
Third Loan Modification Agreement dated September 30, 2010 to the Loan Agreement dated July 1, 2008 between the Registrant and Bank
of America, N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)
Amended and Restated Exchange and Recapitalization Agreement dated as of May 1, 2011 between the Registrant and A-B (incorporated by
reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)
Amended and Restated Master Distributor Agreement dated as of May 1, 2011 between the Registrant and A-B (incorporated by reference
from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)
Registration Rights Agreement dated as of July 1, 2004 between the Registrant and A-B (incorporated by reference from Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on July 2, 2004)
Master Lease Agreement dated as of June 6, 2007 between Banc of America Leasing & Capital, LLC and Widmer Brothers Brewing
Company (incorporated by reference from Exhibit 10.2 to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-4, No.
333-149908 filed on May 2, 2008 (“S-4 Amendment No. 1”))
Amended and Restated License Agreement dated as of February 28, 1997 between Widmer Brothers Brewing Company and Widmer’s Wine
Cellars, Inc. and Canandaigua Wine Company, Inc. (incorporated by reference to Exhibit 10.3 from the S-4 Amendment No. 1)
E-2
Table of Contents
10.35
10.36
10.37
10.38†
10.39
21.1
23.1
24.1
31.1
31.2
32.1
99.1
101.INS**
101.SCH**
101.CAL**
101.LAB**
101.PRE**
*
**
†
Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability Company and Widmer Brothers Brewing
Company (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
Commercial Lease (Restated) dated as of December 18, 2007 between Widmer Brothers LLC and Widmer Brothers Brewing Company
(incorporated by reference to Exhibit 10.5 from the S-4 Amendment No. 1)
Sublease dated as of September 1, 2010 between Manini Holdings, LLC and Kona Brewing Co., Inc. (incorporated by reference from Exhibit
10.41 to the Registrant’s Form 10-K for the year ended December 31, 2010)
Amended and Restated Continental Distribution and Licensing Agreement between the Registrant and Kona Brewery LLC dated March 26,
2009 (incorporated by reference from Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
Sublease dated as of March 31, 2011 between Manini Holdings, LLC and Kona Brewing Co., LLC (incorporated by reference from Exhibit
10.43 to the Registrant’s Amendment No. 1 to Form 10-K for the year ended December 31, 2010 filed on April 22, 2011)
Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to the Registrant’s Form 10-K for the year ended December 31,
2010 filed on April 1, 2011)
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
Power of Attorney – Directors of Craft Brew Alliance, Inc.
Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Form 10-K for the year ended December 31, 2011 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Press Release dated March 14, 2012
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Denotes a management contract or a compensatory plan or arrangement.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended,
and otherwise are not subject to liability under those sections.
Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including the redacted
terms, has been separately filed with the Securities and Exchange Commission.
E- 3
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
CRAFT BREW ALLIANCE, INC.
ARTICLE I. NAME AND DURATION
The name of this corporation shall be CRAFT BREW ALLIANCE, INC., and its existence shall be perpetual.
ARTICLE II. PURPOSES AND POWERS
Purposes
The purposes for which this corporation is organized are:
1. To brew and distribute malt beverages.
2. To engage in any lawful business which may be necessary or advantageous to this corporation, in the judgment of the Board of Directors.
Powers
To exercise any and all powers that a corporation formed under the Act, or any amendment thereto or substitute therefor, is entitled at the time to
exercise.
ARTICLE III. CAPITAL STOCK
The total number of shares of all classes of capital stock which the corporation shall have authority to issue is Fifty-seven Million Four Hundred
Sixty-seven Thousand Two Hundred Seventy-one (57,467,271), of which Fifty Million (50,000,000) shares shall be common stock, par value $0.005 per
share, and Seven Million Four Hundred Sixty-seven Thousand Two Hundred Seventy-one (7,467,271) shares shall be preferred stock, par value $0.005 per
share, issuable in one or more series.
The Board of Directors is hereby expressly authorized, at any time and from time to time, to divide any or all of the shares of preferred stock into
one or more series, and in the resolution or resolutions establishing a particular series, before issuance of any of the shares thereof, to fix and determine the
number of shares and the designation of such series, so as to distinguish it from the shares of all other series and classes, and to fix and determine the
preferences, voting rights, qualifications, privileges, limitations, options, conversion rights, restrictions and other special or relative rights of the preferred
stock or of such series to the fullest extent now or hereafter permitted by the laws of the State of Washington, including, but not limited to, the variations
between different series in the following respects:
1
increased or decreased (but not below the number of shares thereof then outstanding) from time to time by the Board of Directors;
(i) The distinctive designations of such series and the number of shares which shall constitute such series, which number may be
(ii) The annual dividend rate for such series, and the date or dates from which dividends shall commence to accrue;
(iii) The price or prices at which, and the terms and conditions on which, the shares of such series may be made redeemable;
(iv) The purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series;
(v) The preferential amount or amounts payable on shares of such series in the event of the liquidation, dissolution or winding up of
the corporation;
(vi) The voting rights, if any, of shares of such series;
the corporation or other securities into which such shares may be converted;
(vii) The terms and conditions, if any, upon which shares of such series may be converted and the class or classes of series of shares of
stock then or thereafter to be issued; and
(viii) The relative seniority, parity or junior rank of such series as to dividends or assets with respect to any other classes or series of
(ix) Such other terms, qualifications, privileges, limitations, options, restrictions and special or relative rights and preferences, if any,
of shares of such series as the Board of Directors may, at the time of such resolution or resolution, lawfully fix and determine under the laws of the State of
Washington.
ARTICLE IV. NO PREEMPTIVE RIGHTS
No Shareholder of this corporation shall have, as a shareholder, any preemptive or preferential right or subscription right to any capital stock of this
corporation or to any securities or obligations convertible into capital stock of this corporation, or to any warrant or option for the purchase thereof, except:
(A) To the extent provided by resolution or resolutions of the Board of Directors establishing a series of preferred stock; or
(B) By written agreement between such holder and the corporation.
ARTICLE V.REGULATION OF INTERNAL AFFAIRS
Provisions for the regulation of the internal affairs of the corporation are as follows:
Bylaws
In furtherance of, and not in limitation of, the powers conferred by the laws of the State of Washington, the Board of Directors is expressly
authorized to make, amend, and repeal the Bylaws of the corporation.
2
Cumulative Voting
(a) Shareholders of this corporation shall have the right to cumulate votes with respect to all elections of directors for the corporation (i) held
at any time that the corporation is not subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or (ii) held while the corporation is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, if prior to
the record date for the shareholder meeting at which such election is to be held (1) the corporation or an Acquiring Person shall have publicly announced that
an Acquiring Person has become an Acquiring Person or the corporation (including without limitation the corporation's directors) shall have received any
notice or information (including without limitation any written consent or notice related thereto) from the Acquiring Person indicating or reflecting that the
Acquiring Person has become an Acquiring Person and neither the corporation nor the Acquiring Person shall have publicly announced that such Acquiring
Person has ceased to be an Acquiring Person and (2) the standstill obligations of Anheuser-Busch, Incorporated ("ABI"), as set forth in Section 5.3 of the
Investment Agreement dated October 18, 1994 between the corporation and ABI shall have expired or otherwise been terminated. Shareholders shall not
have the right to accumulate votes with respect to any elections of directors held while the corporation is subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, except as provided in Section (a)(ii) above.
(b) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial
Owner of 30% or more of the shares of Common Stock of the corporation then outstanding, but shall not include any employee benefit plan of the corporation
or any subsidiary of the corporation or any Person organized, appointed or established by the corporation or such subsidiary for or pursuant to the terms of any
such employee benefit plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of a decrease in the aggregate
number of shares outstanding, or considered outstanding for purposes of this Section, which thereby increases the proportionate number of shares Beneficially
Owned by such Person to 30% or more of the shares of Common Stock of the corporation then outstanding, provided, however, that if a Person shall become
the Beneficial Owner of 30% or more of the shares of Common Stock of the corporation by reason of a decrease in the aggregate number of shares
outstanding, and shall, after such decrease, become the beneficial owner of additional shares of Common Stock, and shall beneficially own, immediately after
such acquisition, 30% or more of the corporation's Common Stock, then such Person shall be deemed to be an Acquiring Person.
(c) "Affiliate" and "Associate," when used with reference to any Person, shall have the respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this
Agreement.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire within 60 days
of such time pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for payment or exchange;
3
(ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant
to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote
such security (A) arising solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and
in accordance with, the Exchange Act and the applicable rules and regulations thereunder, or (B) made in connection with, or to otherwise
participate in, a proxy or consent solicitation made, or to be made, pursuant to, and in accordance with, the applicable provisions of the Exchange
Act and the applicable rules and regulations thereunder, whether or not such agreement, arrangement or understanding described in clause (A) or
(B) above, is also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose
of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (A) to subparagraph (ii) of this paragraph (d)) or
disposing of any voting securities of the corporation; provided, however, that nothing in this paragraph (d) shall cause a person engaged in business
as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such person's participation
in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition.
(e) "Person" shall mean any individual, firm, corporation, partnership, trust or other entity and shall include any successor (by merger or
otherwise) of such entity, but shall not include the corporation or a subsidiary of the corporation or other Person controlled by the corporation.
(f) Common Stock "beneficially owned" by a Person which is not outstanding shall be deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class beneficially owned by such Person but shall not be deemed to be outstanding for the purpose
of computing the percentage beneficially owned by any other person, provided, however, that for purposes of determining the total number of outstanding
shares of Common Stock in calculating beneficial ownership, all shares of Common Stock issuable upon conversion of outstanding securities entitled to vote
with respect to the election of directors of the corporation shall be deemed outstanding, provided further, that if any Person beneficially owns capital stock of
the corporation entitled to vote for the election of directors, and such stock is not convertible into Common Stock, or is entitled to more than one vote for each
share of Common Stock issuable upon conversion of such stock, for purposes of this section such Person shall be deemed to beneficially own that number of
shares of Common Stock equal to the number of votes such Person would be entitled to cast for the election of directors.
4
Duties Of Directors
A director shall perform his duties as a director, including his duties as a member of any committee of the Board on which he may serve, in good
faith, in a manner he reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position
would use under similar circumstances. In performing his duties, a director shall be entitled to rely on information, opinions, reports, or statements, including
financial statements or other financial data, in each case prepared or presented by:
(a) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters
presented;
(b) Counsel, public accountants, or other persons as to matters which the director reasonably believes to be within such persons’ professional
or expert competence; or
(c) A committee of the Board upon which he does not serve, duly designated in accordance with a provision of the Articles of Incorporation
or the Bylaws, as to matters within its designated authority, which committee the director reasonably believes to merit confidence; but he shall not be
considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A person who
so performs his duties shall have no liability by reason of being or having been a director of the corporation.
Conflicts Of Interest
Subject to the limitations set forth below, the corporation may enter into contracts and otherwise transact business as vendor, purchaser, lender,
borrower, or otherwise with its directors and shareholders and with corporations, associations, firms, and entities in which they are or may be or become
interested as directors, officers, shareholders, members, or otherwise; provided, that the requirements of RCW 23B.08.720, 23B.08.730, 23B.17.020, or 23B.
19.040 are met, to the extent any of such sections is applicable. If those requirements are met, then any such contract or transaction shall not be affected or
invalidated or give rise to liability by reason of the director's or shareholder's having an interest in the contract or transaction.
Any contract, transaction, or act of the corporation or of the Board of Directors or of any officers of the corporation which shall be ratified by a
majority vote of the shares of the corporation present at any annual meeting or any special meeting called for such purpose, at which a quorum is present,
shall, insofar as permitted by law, be as valid and as binding as though ratified by every shareholder of the corporation.
Ratification By Shareholders
5
(a) The capitalized terms in this paragraph shall have the meanings set forth in RCW 23B.08.500.
Indemnification; Liability Insurance
(b) The Corporation shall indemnify and hold harmless each individual who is or was a Director or officer of the Corporation or who, while a
Director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against any and all Liability, including
reimbursement and advances of reasonable Expenses, incurred with respect to a Proceeding, to the fullest extent permitted by law, without regard to the
limitations in RCW 23B.08.510 through 23B.08.550; provided that no such indemnity shall indemnify any Director or officer from or on account of (1) acts
or omissions of the Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer
finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such Director or officer
personally received a benefit in money, property, or services to which the Director or officer was not legally entitled. If, after the effective date of this
paragraph, the Act is amended to authorize further indemnification of Directors or officers, then Directors and officers of the Corporation shall be indemnified
to the fullest extent permitted by the Act as so amended. To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses
conferred in this paragraph shall not be exclusive of any other right which any individual may have or hereafter acquire under any statute, provision of the
Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The right to indemnification conferred in this paragraph shall be a contract
right upon which each Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or
repeal of this paragraph shall not adversely affect any right or protection of a Director or officer of the Corporation for or with respect to any acts or omissions
of such Director or officer occurring prior to such amendment or repeal.
(c) The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of
the Corporation or, who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise against Liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee,
or agent, whether or not the Corporation would have power to indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520.
(d) If any provision of this paragraph or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the remainder
of this paragraph, and the application of such provisions to individuals or circumstances other than those as to which it is held invalid, unenforceable, or
contrary to applicable law, shall not be affected thereby.
6
To the fullest extent permitted by the Act, as it exists on the date hereof or may hereafter be amended, a director of this corporation shall not be
personally liable to the corporation or its shareholders for monetary damages for conduct as a director. Any amendment to or repeal of this paragraph shall
not adversely affect a director of this corporation with respect to any conduct of such director occurring prior to such amendment or repeal.
Release Of Directors From Personal Liability
Special Meetings
At any time when the corporation is subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended, special meetings of the shareholders for any purpose or purposes may be called at any time only by a majority of the Board of Directors, the
Chairman of the Board (if one be appointed), the President or one or more shareholders holding not less than twenty-five percent (25%) of all of the shares
entitled to be cast on any issue proposed to be considered at that meeting.
Voting On Corporate Changes
Pursuant to the authority granted under Sections 23B.10.030, 23B.11.030, 23B.12.020 and 23B.14.020 of the Washington Business Corporation
Act, the vote of shareholders of this corporation required to approve an amendment to the Articles of Incorporation, a plan of merger or share exchange, the
sale, lease, exchange or other disposition of all or substantially all of the property of the corporation not in the usual and regular course of business, or
dissolution of the corporation, shall be a majority of all the votes entitled to be cast with respect to such matter.
Dated this 2nd day of January, 2012.
CRAFT BREW ALLIANCE, INC.
By: /s/ Terry Michaelson
Terry Michaelson, Chief Executive Officer
7
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-18945, 333-90524, 333-143158, and 333-171372) of
Craft Brew Alliance, Inc. (the “Company”) of our reports dated March 14, 2012, relating to the consolidated financial statements of the Company, and the
effectiveness of internal control over financial reporting of the Company, appearing in this Annual Report (Form 10-K) for the year ended December 31,
2011.
EXHIBIT 23.1
/s/ Moss Adams LLP
Seattle, Washington
March 14, 2012
POWER OF ATTORNEY
Exhibit 24.1
Each person below designates and appoints TERRY E. MICHAELSON and MARK D. MORELAND his true and lawful attorney-in-fact and agent, with full
power of substitution, to sign the Annual Report on Form 10-K for the year ended December 31, 2011, of Craft Brew Alliance, Inc., a Washington
corporation, and any amendments thereto, and to file said report and amendments, with all exhibits thereto, in such form as they or either of them may
approve with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Each of such attorneys-in-fact is appointed
with full power to act without the other.
IN WITNESS WHEREOF, this power of attorney has been executed by each of the undersigned as of the 6th day of March, 2012.
Signature
/s/ Kurt R. Widmer
Kurt R. Widmer
/s/ Timothy P. Boyle
Timothy P. Boyle
/s/ Marc J. Cramer
Marc J. Cramer
/s/ E. Donald Johnson, Jr.
E. Donald Johnson, Jr.
/s/ Kevin R. Kelly
Kevin R. Kelly
/s/ Thomas D. Larson
Thomas D. Larson
/s/ David R. Lord
David R. Lord
John D. Rogers, Jr.
Title
Chairman of the Board and Director
Director
Director
Director
Director
Director
Director
Director
CERTIFICATION
EXHIBIT 31.1
I, Terry E. Michaelson, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10−K of Craft Brew Alliance, Inc. (the “Registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and 15d
−15(f)) for the Registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 14, 2012
By:
/s/ Terry E. Michaelson
Terry E. Michaelson
Chief Executive Officer
CERTIFICATION
EXHIBIT 31.2
I, Mark D. Moreland, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10−K of Craft Brew Alliance, Inc. (the “Registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and 15d
−15(f)) for the Registrant and we have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most
recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal
control over financial reporting.
Date: March 14, 2012
By:
/s/ Mark D. Moreland
Mark D. Moreland
Chief Financial Officer and Treasurer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES−OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Craft Brew Alliance, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2011, as filed with the
Securities and Exchange Commission on March 14, 2012 (the “Report”), Terry E. Michaelson, the Chief Executive Officer of the Registrant, and Mark D.
Moreland, the Chief Financial Officer and Treasurer of the Registrant, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that, to his knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Registrant.
Date: March 14, 2012
BY:
BY:
/s/ Terry E. Michaelson
Terry E. Michaelson
Chief Executive Officer
(Principal Executive Officer)
/s/ Mark D. Moreland
Mark D. Moreland
Chief Financial Officer and Treasurer
(Principal Financial Officer)
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
CRAFT BREW ALLIANCE
REPORTS FULL YEAR 2011 RESULTS
Craft Brew reports net sales increase of 13 percent for 2011;
Significant gross profit growth of 34 percent for the full year;
Adjusted Net Income increases 94 percent to $3.2 million
Portland, Ore. (March 14, 2012) – Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: HOOK), an independent craft brewing company, reported net sales of
$149.2 million and net income of $9.7 million for the year ended December 31, 2011 as compared with net sales of $131.7 million and net income of $1.7
million a year ago. Adjusted net income for 2011 was $3.2 million, excluding the one-time gain on sale of Fulton Street Brewery, LLC (“FSB”), of $6.5
million, net of tax. We reported $0.51 earnings per share on a fully diluted basis for the year as compared with $0.10 per share last year. Adjusted earnings
per share for 2011 was $0.17, excluding the one-time gain on sale of FSB, of $0.34 per share.
Significant financial highlights for the year ended December 31, 2011 include:
•
•
•
•
•
Net sales increased $17.5 million, or 13 percent, to $149.2 million compared with 2010
Depletion growth and non-contract shipment growth were each 7 percent for the full year
Gross profit percentage increased 470 basis points
Sales and marketing expense increased $7.6 million versus last year reflecting investments towards critical growth initiatives
Capital expenditures were $8.5 million as we continued to make strategic investments in systems and infrastructure
“We are pleased to see our 2011 top and bottom line results reflect improvements in our business driven by our significant investments in our innovative
portfolio of beers and our marketing and sales capabilities. Our primary focus remains to be true to our customers, by delivering the most diverse portfolio of
high quality beers and brands in the industry, that provide unique beer experiences for all occasions,” said Terry Michaelson, CBA’s CEO. “While the full
year results indicate that our strategy has gained traction with consumers, we believe that there are further underlying strengths in our brands and strategy that
have yet to be realized and will drive long-term profitable growth.”
Operating Results
Net sales for the year ended December 31, 2011 were $149.2 million, an increase of $17.5 million, or 13 percent, from net sales of $131.7 million for 2010. A
combination of factors drove the increase, including increased shipments to wholesalers, a decrease in master distributor fees, price increases for our beers
sold to wholesalers and an increase in revenues earned from our restaurants and pubs following the merger with Kona Brewing Co., Inc. (“KBC Merger”).
Craft Brew Alliance Reports Full Year Results for 2011
Total shipments for the year ended December 31, 2011 were 672,600 barrels, an increase of 64,800 barrels, or 11 percent, from 607,800 barrels for 2010,
primarily reflecting the increase in shipments to wholesalers and growth in our contract brewing business. Shipments growth excluding contract shipments
was 7 percent.
Cost of sales as a percentage of net sales improved 470 basis points for the year ended December 31, 2011, reflecting the increased volumes, decreased
distributor fees, elimination of costs related to the Kona Brewing alternating proprietorship, improved quality and capacity utilization and an increased selling
price for our beers. These favorable factors were partially offset by increased shipping costs due to higher fuel prices in 2011 as compared with 2010.
Selling, general and administrative (“SG&A”) expense of $39.7 million for 2011 increased $9.8 million, or 33 percent, from $29.9 million for 2010. This
increase reflects our investment in critical new selling and marketing initiatives that have led to sales and profit growth. The overall SG&A increase was also
driven by costs related to the operations acquired in the KBC Merger. We expect that the rate of increase in SG&A spending for 2012 will not be as
significant as that seen during 2011.
“The full year 2011 results present a solid statement not only about our ability to drive brand development and sales capabilities, but also the CBA team’s
ability to balance aggressive top line growth and investment while controlling overall spending to generate improved profitability,” said Mark Moreland,
CBA’s CFO. “We believe the current overall health of the business and our new marketing and sales initiatives will drive continued top and bottom line
improvement for 2012.”
Cash Flow and Liquidity
Cash provided by operating activities was $6.7 million for the year ended December 31, 2011 compared with $10.8 million for 2010. The $4.1 million
decrease was primarily due to a one-time working capital fluctuation related to our sale of our investment in Fulton Street Brewery in May 2011 and increased
inventory levels resulting from anticipated increases in demand. Capital expenditures for the years ended December 31, 2011 and 2010 were $8.5 million and
$4.7 million, respectively. The capital expenditures for 2011 included projects designed to enhance our ability to provide a variety of package options in
order to target our core brand offerings in our breweries, and improve our quality assurance and information technology systems, including continuing
investments towards a company-wide demand planning and order management system.
Financial Outlook
We remain confident that our targeted investments into our brands, marketing and sales resources, in conjunction with our innovative, high-quality craft
brewing capabilities, will support continued volume and revenue growth while generating improved bottom line results.
We currently anticipate results for the full year 2012 as follows:
•
•
Depletion growth in the high single digit percentage to low double digit range reflecting both continued strength of our brands and continued
growth of the craft category.
Sales growth of approximately 10% to 12%.
Page 2 of 3
Craft Brew Alliance Reports Full Year Results for 2011
•
•
•
•
Gross margin rate approximately 100 basis points lower than 2011, reflecting pressure from grain prices and assuming that fuel prices remain
relatively consistent with recent levels.
SG&A expense ranging from $42 to $44 million, reflecting continued investment into sales and marketing initiatives.
Diluted earnings per share in the range of $0.20 to $0.25.
Capital expenditures of approximately $8.5 to $9.5 million, continuing our investments in capacity and efficiency improvements, and quality
initiatives.
Forward-Looking Statements
Statements made in this press release that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future, including
the level or effect of increased SG&A expense, the amount of capital spending and the benefits or improvements to be realized from those capital projects, are
forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking
statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is
contained from time to time in the Company's SEC filings, including, but not limited to, the Company's report on Form 10-K for the year ended December 31,
2011. Copies of these documents may be found on the Company's website, www.craftbrew.com, or obtained by contacting the Company or the SEC.
About Craft Brew Alliance
CBA is an independent, publicly traded craft brewing company that was formed with the merger of leading Pacific Northwest craft brewers – Widmer
Brothers Brewing and Redhook Ale Brewery – in 2008. With an eye toward preserving and growing one-of-a-kind craft beers and brands, CBA was joined by
Kona Brewing Company in 2010. When Kurt & Rob Widmer founded Widmer Brothers Brewing in 1984, they didn’t confine their brewing exploration to
strict style guidelines. To this day, Widmer Brothers continues to create craft beers with a unique and unconventional twist on traditional styles that are award
winning and please a wide range of craft beer lovers. Redhook began in a Seattle transmission shop in 1981, and those colorful roots are reflected in the
brand’s personality to this day. The eminently drinkable beers consistently win awards and please crowds across the United States. Kona Brewing was
founded in 1994 by the father and son team of Cameron Healy and Spoon Khalsa, who dreamed of crafting fresh, local island brews with spirit, passion and
quality. As the largest craft brewery in Hawaii, Kona personifies the laid-back, passionate lifestyle and environmental respect of the Hawaiian people and
culture.
For more information, visit: www.craftbrew.com.
Media Contact:
Ted Lane
LANE PR
(212) 302-5948
Ted@lanepr.com
Investor Contact:
Edwin Smith
Craft Brew Alliance, Inc.
(503) 972-7884
ed.smith@craftbrew.com
###
Page 3 of 3
Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts and shipments)
(Unaudited)
Three Months Ended
December 31,
Years Ended
December 31,
2011
2010
2011
2010
Sales
Less excise taxes
Net sales
Cost of sales
Gross profit
as percentage of net sales
Selling, general and administrative expenses
Merger-related expenses
Operating income
Interest expense
Gain on sale of equity interest in Fulton Street Brewery, LLC
Income from equity investments, interest and other, net
Income before income taxes
Income tax provision
Net income
Earnings per share:
Basic and diluted earnings per share
Weighted average shares outstanding:
Basic
Diluted
Total shipments (in barrels):
Core Brands
Contract Brewing
Total shipments
$
$
$
$
37,558
2,631
34,927
25,142
9,785
28.0%
9,253
—
532
(171)
34
1
396
152
244
$
$
32,788
2,466
30,322
22,528
7,794
25.7%
8,471
206
(883)
(332)
—
224
(991)
(358)
(633)
$
$
161,000
11,803
149,197
104,011
45,186
140,852
9,121
131,731
98,064
33,667
30.3%
25.6%
39,742
—
5,444
(918)
10,432
734
15,692
6,041
9,651
$
29,938
559
3,170
(1,497)
—
1,113
2,786
1,100
1,686
0.01
$
(0.03)
$
0.51
$
0.10
18,845
18,942
141,300
10,800
152,100
18,801
18,801
18,834
18,931
17,523
17,568
136,700
6,100
142,800
623,300
49,300
672,600
584,700
23,100
607,800
Depletion growth rate (over the same period from the prior year)
4.0%
3.6%
6.5%
1.6%
Craft Brew Alliance, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31,
2011 2010
9,446
894
2,816
164
795 $
$
13,326 10,514
8,729
932
3,233
27,277 23,572
100,725 98,778
12,917 12,917
17,989 22,999
$158,908 $158,266
Current assets:
Cash
Accounts receivable, net
Inventories
Deferred income tax asset, net
Other current assets and income tax receivables
Total current assets
Property, equipment and leasehold improvements, net
Goodwill
Intangible and other non-current assets, net
Total assets
Current liabilities:
Accounts payable
Accrued salaries, wages and payroll taxes
Refundable deposits
Other accrued expenses
Current portion of long-term debt and capital lease obligations
Total current liabilities
Long-term debt and capital lease obligations, net
Other long-term liabilities
Total common shareholders' equity
Total liabilities and common shareholders' equity
4,524
7,400
1,436
596
$ 10,994 $ 13,825
4,053
6,291
1,378
2,460
24,950 28,007
13,188 24,675
16,261 11,388
104,509 94,196
$158,908 $158,266
Craft Brew Alliance, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Years Ended
December 31,
2011 2010
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$ 9,651 $ 1,686
Depreciation and amortization
Income from equity investments
Gain on sale of equity interest in Fulton Street Brewery, LLC
Deferred income taxes
Other, including stock-based compensation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable and other accrued expenses
Accrued salaries, wages and payroll taxes
Refundable deposits
Net cash provided by operating activities
7,204
(691)
(10,432)
5,025
331
7,044
(647)
—
1,082
(81)
(1,976)
(640)
418
(495)
(2,773)
471
635
2,017
1,445
590
36
(1,353)
(1,230)
209
6,728 10,798
Cash Flows from Investing Activities:
Expenditures for property, equipment and leasehold improvements
Proceeds from sale of property, equipment and leasehold improvements and other
Proceeds from the sale of equity interest in Fulton Street Brewery, LLC
Cash paid in merger with Kona Brewing Co., Inc. and related entities, net
Other
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Principal payments on debt and capital lease obligations
Net borrowings (repayments) under revolving line of credit
Issuance of common stock
Debt issuance costs
Net cash used in financing activities
Increase in cash
Cash, beginning of period
Cash, end of period
(8,488)
120
15,527
—
(28)
(4,669)
160
—
(6,206)
402
7,131 (10,313)
(5,751)
(7,500)
23
—
(13,228)
631
164
795 $
$
(1,505)
1,100
127
(54)
(332)
153
11
164
Supplemental Disclosures Regarding Non-GAAP Financial Information
Craft Brew Alliance, Inc.
Reconciliation of Adjusted EBITDA to Net Income
(In thousands)
(Unaudited)
Years Ended
December 31,
2011 2010
$ 9,651 $ 1,686
Net income
918 1,497
Interest expense
6,041 1,100
Income tax provision
6,897 6,494
Depreciation expense
550
Amortization expense
307
-
Gain on sale of equity interest in Fulton Street Brewery, LLC (10,432)
111
458
Stock-based compensation
559
-
Other charges
$ 13,840 $11,997
Adjusted EBITDA
The Company has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) in these tables to provide
investors with additional information to evaluate our operating performance on an ongoing basis using criteria that are used by the Company’s management
and because it is frequently used by the investment community to evaluate companies with substantial financial leverage. The Company defines Adjusted
EBITDA as net earnings before interest, income taxes, depreciation and amortization, stock compensation and other non-cash charges, including net gain or
loss on disposal of property, plant and equipment. The Company uses Adjusted EBITDA, among other measures, to evaluate operating performance, to
plan and forecast future periods’ operating performance, and as an incentive compensation target for certain management personnel.
As Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with generally accepted accounting principles in the
United States of America (“GAAP”), this measure should not be considered in isolation of, or as a substitute for, net income, as an indicator of operating
performance, or net cash provided by operating activities as an indicator of liquidity. The use of Adjusted EBITDA instead of net income has limitations as
an analytical tool, including the inability to determine profitability; the exclusion of interest expense and associated cash requirements, given the level of
the Company’s indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the
capital expenditures needed to maintain the Company’s operations. We compensate for these limitations by relying on GAAP results. Our computation of
Adjusted EBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information
compared with net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial
information should consider the types of events and transactions which are excluded. The table above shows a reconciliation of Adjusted EBITDA to net
income.