Craft Brew Alliance Inc
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended: December 31, 2012ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934Commission File Number: 0-26542CRAFT BREW ALLIANCE, INC.(Exact name of registrant as specified in its charter)Washington 91-1141254(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)929 North Russell StreetPortland, Oregon 97227-1733(Address of principal executive offices) (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 Name of each exchange on which registeredCommon Stock, $0.005 par value The NASDAQ Stock Market LLCSecurities 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 duringthe 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 requirementsfor 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 tobe 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 thatthe 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 bestof 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 Form10-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. Seedefinition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filero Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o NoxThe 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 secondquarter on June 29, 2012 (based upon the closing price of the registrant’s common stock, as reported by the NASDAQ Stock Market, of $8.18 per share)was $85,840,781.The number of shares outstanding of the registrant’s common stock as of February 26, 2013 was 18,887,323 shares.Documents Incorporated by ReferencePortions of the registrant’s definitive Proxy Statement for the 2013 Annual Shareholders’ Meeting are incorporated by reference into Part III.  CRAFT BREW ALLIANCE, INC.2012 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART I Item 1.Business2 Item 1A.Risk Factors13 Item 1B.Unresolved Staff Comments17 Item 2.Properties17 Item 3.Legal Proceedings18 Item 4.Mine Safety Disclosures18 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities18 Item 6.Selected Financial Data20 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations21 Item 7A.Quantitative and Qualitative Disclosures About Market Risk34 Item 8.Financial Statements and Supplementary Data34 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure61 Item 9A.Controls and Procedures61 Item 9B.Other Information63 PART III Item 10.Directors, Executive Officers and Corporate Governance63 Item 11.Executive Compensation63 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters63 Item 13.Certain Relationships and Related Transactions, and Director Independence64 Item 14.Principal Accountant Fees and Services64 PART IV Item 15.Exhibits and Financial Statement Schedules64 Signatures65 1Table of Contents INFORMATION REGARDING FORWARD-LOOKING STATEMENTSThis 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 arenot historical in nature. These statements are based upon assumptions and projections that we believe are reasonable, but are by their natureinherently uncertain. Many possible events or factors could affect our future financial results and performance, and could cause actual results orperformance to differ materially from those expressed, including those risks and uncertainties described in “Item 1A. - Risk Factors” and thosedescribed from time to time in our future reports filed with the Securities and Exchange Commission. Caution should be taken not to place unduereliance on these forward-looking statements, which speak only as of the date of this annual report. THIRD-PARTY INFORMATIONIn this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industrypublications, U.S. government sources or other third parties. Although we believe that the third-party sources of information we use are materiallycomplete, accurate and reliable, there is no assurance of the accuracy, completeness or reliability of third-party information.PART IItem 1.BusinessOverviewCraft Brew Alliance, Inc. is an independent craft brewer formed by the union of four unique and pioneering craft beer brands: ·Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington; ·Widmer Brothers Brewing founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon; ·Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii; and ·Omission Beer internally developed by our brewing team in 2012 in Portland, Oregon.Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beersin the United States. Today, as an independent craft brewer, we possess several distinct advantages unique in the craft beer category. These advantages derivefrom the combination of our innovative quality craft beers; the strength of our distinct, authentic brand portfolio; our seamless national distribution andnational sales and marketing reach; our financial capabilities as a public company; our owned brew pubs; and our bi-coastal breweries.We proudly brew our craft beers in four company-owned breweries including three mainland breweries located in Portsmouth, New Hampshire; Portland,Oregon; and the Seattle suburb of Woodinville, Washington; and one Hawaii brewery located in Kailua-Kona, Hawaii. We also own and operate a small pilotbrewery, primarily used for small batch production and innovative brews, at the Rose Quarter sports arena in Portland, Oregon.We distribute our beers to retailers through independent wholesalers that are aligned with the Anheuser-Busch, LLC (“A-B”) network. These sales are madepursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B. Our agreement with A-B initially allowed us to establish relationshipsnationwide with these wholesalers. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, thesewholesalers own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. Redhook andWidmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 31 states. Omission Beer recently became available nationally and wecontinue to expand into new markets in both the U.S. and internationally. Separate from our wholesalers, we maintain an independent sales and marketingorganization with resources across the key functions of brand management, field marketing, field sales, and national retail sales. 2Table of ContentsWe operate in two segments: Beer Related operations and Pubs. Beer Related operations include the brewing and sale of craft beers from our five breweries, bothdomestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our Beer Related operations, othermerchandise sales, and sales of our beers directly to customers.New Brands and PackagingDuring the second quarter of 2012, we introduced Omission Beer, the first craft beer brand in the United States focused exclusively on brewing great tastingcraft beers with traditional beer ingredients, including malted barley, that are specially crafted to remove gluten. The brand includes two styles: OmissionLager and Omission Pale Ale. Unlike many other beers in the fast-growing gluten-free category, Omission beers have flavor profiles that consumers wouldexpect from traditionally brewed lagers and pale ales. Our innovative brewing process, which allows us to reduce the gluten levels to well below the widelyaccepted international Codex gluten-free standard of 20 parts per million for food and beverages, is unique to Omission Beer.In March and April 2012, we began offering Kona Longboard Island Lager and Redhook Long Hammer IPA, respectively, in 12 oz. cans on a national basis.These new packages allow Kona Brewing and Redhook fans to enjoy our craft beers during more occasions – especially those where glass bottles may not bethe best option, such as on the beach, in the ballpark or at the pool.In March of 2012, coinciding with the start of the Major League Soccer season, Redhook partnered with the Seattle Sounders and their fan support club, theEmerald City Supporters (ECS), to jointly develop and launch a beer for their fans and supporters. This partnership is a manifestation of Redhook’s forayinto the sports lifestyle platform and consumption occasions, in addition to Redhook’s partnership with sportscaster and television & radio personality DanPatrick.In August 2012, Kona Big Wave Golden Ale, which had previously only been available in Hawaii, joined Kona’s portfolio on the mainland that includes itsflagship Longboard Island Lager, Fire Rock Pale Ale and the trio of Aloha Series seasonals. Big Wave Golden Ale is one of Kona’s original beers, first brewedat our Kailua-Kona home brewery in 1995, and is a great session beer with a bright, quenching finish. Like Longboard, Big Wave Golden Ale is a year-round offering and is available in all of Kona’s markets.Industry BackgroundWe 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 largedomestic brewers, international brewers and craft brewers. Shipments of craft beer in the United States are estimated by industry sources to have increased byapproximately 12.0% in 2012 over 2011 and by 14.5% for 2011 over 2010. While the overall domestic market experienced a modest increase of 1.2% in 2012,the craft beer segment continued its strong growth and captured market share from the rest of the domestic market. Craft beer shipments in 2012 and 2011were approximately 6.6% and 5.9%, respectively, of total beer shipped in the U.S. Approximately 13.7 million barrels and 12.3 million barrels, respectively,were shipped in the United States by the craft beer segment during 2012 and 2011, while total beer sold in the U.S., including imported beer, was 208.8million barrels and 206.2 million barrels, respectively. Compared with the other segments of the U.S. brewing industry, craft brewing is a relative newcomer.Approximately twenty years ago, Redhook and Widmer Brothers Brewery were among the approximately 200 craft breweries in operation. By the end of 2012,the number of craft breweries in operation had grown to 2,300. 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. 3Table of ContentsThe recent competitive environment has been characterized by two divergent trends; the number and diversity of craft brewers have significantly increasedwhile, simultaneously, the national domestic brewers have acquired or been acquired by other national domestic and foreign brewers. In 2012, according toindustry sources, A-B and MillerCoors accounted for more than 80% of total beer shipped in the United States, excluding imports. In addition, A-B andMillerCoors have invested in existing smaller craft breweries and created separate craft-focused divisions in an effort to capitalize on the growing craft beersegment.Business StrategyOur consumer mission is to satisfy more consumers, at more times, in more locations through more authentic, distinct craft beer and brands than any othercompetitor.The central elements of our business strategy include: ·An innovative portfolio of distinct, authentic craft beer brands. We have brought together a collection of brands from original innovators in thecraft 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 theopportunity 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 andmarketing capabilities and complementary brand families to create a unique identity in the distribution channel and with the consumer. We believethat the combination of the complementary brand families promoted by one integrated sales and marketing organization delivers both financialbenefits and greater impact at the point of sale. We have invested in technologies that allow us to not only focus our brand families and productofferings on those markets and regions that represent the most significant opportunities, but also measure the results of those efforts. Our sales forcehas been structured to be able to call on all retail channels nationally, including grocery, drug and convenience stores, where most other craft brewersare not able to do so.We distribute our beers to retailers through independent wholesalers that are aligned with the A-B distribution network. These sales are madepursuant to the A-B Distributor Agreement. Our agreement with A-B initially allowed us to establish relationships nationwide with these wholesalers.As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers own the exclusiveright to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. This distribution footprint providesefficiencies in logistics and product delivery, state reporting and licensing, billing and collections. We have realized these efficiencies whilemaintaining full autonomy over the production, sale and marketing of our products as an independent company. ·Bi-coastal brewing capability with significant additional capacity. Our breweries are located on both coasts and in Hawaii, which allows forefficient brewing and distribution of our beers. We prefer to own and operate our breweries to optimize the quality and consistency of our productsand to achieve greater control over our production costs. We believe that maximizing the production under our direct ownership and through selectionof accomplished and expert partners is critical to our success. Further, we believe that our ability to engage in ongoing product innovation and tocontrol product quality provides critical competitive advantages. Each of our breweries is modern, has flexible production capabilities, and isdesigned to produce beer in smaller batches relative to the national domestic brewers, thereby allowing us to brew a wide variety of brand offerings.Our New Hampshire Brewery has room for bolt-on capacity additions, while our Oregon Brewery was expanded with additional fermentation tanksin the summer of 2012. We believe that our investment in brewing and logistic technologies enables us to minimize brewery operating costs andconsistently produce innovative beer styles. 4Table of Contents ·Five brew-pub restaurants supporting consumer awareness and research and development. Our five brew-pub restaurants allow us to interactdirectly with over 1.5 million consumers annually in our home markets, which creates a sense of brand loyalty. Our brewers are continuallyexperimenting with new and different varieties of hops and malts in all styles of beer. Our brew-pubs provide us with the opportunity to bring thosebeers to market in test-size batches in order to understand their strengths prior to releasing them on a national level.BeersOur beer portfolio is comprised of the Widmer Brothers, Redhook, Kona and Omission brand families.We produce a variety of specialty craft beers using traditional brewing methods complemented by American innovation and invention. We brew our beersusing high-quality hops, malted barley, wheat, rye and other natural traditional and nontraditional ingredients. To help maintain full flavor, our products arenot pasteurized and we apply a freshness date to our products for the benefit of wholesalers and consumers. We generally distribute our products in glassbottles 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 ourbrand 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 brewedto match the seasonal change in weather, specific events (e.g. Oktoberfest) or popular activities and are replaced with new offerings when the season orconditions change. These brands allow our brewers to experiment and innovate with ingredients and brewing styles. Additionally, each of the brand familieshas 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 alsodeveloped a group of higher-end specialty beers that are brewed, bottled and packaged in a manner befitting the unique nature of these beers. Our high-endbrands are marketed toward the select segment of consumers that enjoy unique beer experiences, a rapidly growing segment within the craft beer segment.The brands within each of the brand families are categorized below, with details provided for key year round contributors within each of the families. Thesebrands are usually offered both in draft and packaged formats.Widmer Brothers BeersSince 1984, Widmer Brothers has fostered the brotherhood of craft beer by creating uncommon beer experiences to be discovered and shared by fellow beerlovers. Widmer Brothers beers frequently use newly developed hop varieties and unusual ingredients in their recipes. Key segments within the WidmerBrothers brand family are core beers, seasonal beers and high-end beers.The Widmer Brothers core beers are available year-round and are suitable for a variety of beer drinking occasions. Widmer Brothers Hefeweizen is “TheOriginal American Hefeweizen,” first brewed in 1986, and the brewery’s most popular beer. The Rotator IPA Series allows our brewers to experiment withnew India Pale Ale recipes and share those limited-release beers with beer drinkers through this unique, experimental year-round series. The Widmer Brotherscore lineup continues to evolve as our brewers develop new, innovative and market-relevant recipes. 5Table of ContentsWidmer Brothers Brewing was the first craft brewery in the United States to offer an annual full lineup of four seasonal beers. From our use of experimentalhops in recipe development to unique takes on traditional beer styles, the Widmer Brothers seasonal lineup offers beer drinkers an opportunity to enjoyuncommon and seasonally-relevant beer experiences.The Widmer Brothers high-end beers include the W Series and Brothers’ Reserve. Beers in the W Series are made for those who share our passion for the artof brewing and the taste for authentic beers. The W Series includes year-round beers and three limited release beers offered at different times throughout theyear. Beers in this brand are offered in draft and in four-pack 12oz. as well as 22oz. bottles. Our Brothers’ Reserve beers are the specialty high-end offeringsfor the Widmer Brothers brand. The beers chosen for this brand reflect the passion and uniqueness of the Widmer brothers and are extremely limited. Thisseries of beers is focused on the knowledgeable and enthusiastic beer lover who is looking for something exclusive, rare and collectible.Redhook BeersThe Redhook family of beers is comprised of sessionable (lower alcohol by volume) and approachable beers with character that push style boundaries withoutbeing over the top. Key segments within the Redhook brand family are core, seasonal and regional beers.The Redhook core beers are made up of four offerings that are approachable and easy to drink beers with enough malt and hop character to distinguish themas craft.Seasonal offerings under Redhook are also approachable and easy to drink. Redhook seasonal beers are brewed with seasonal beer drinking occasions in mindsuch as barbequing, snow sports and tailgating.Regionally, Redhook also brews the Blueline Series in Washington and the Backyard Series in the Northeast. The beers in these series are more experimental innature than core Redhook beers and designed to appeal to consumers that enjoy higher-end, specialty craft beers.Kona BeersThe Kona Brewing portfolio is comprised of beers that deliver the authentic essence of the Hawaiian Islands that is “Always Aloha.” Our brewers’ approach isto create complex, full tasting beers with a relaxed style and charm that celebrates the one of a kind lifestyle of Hawaii.Kona’s year-round brews deliver what you would expect from a brewery born in Hawaii – approachable, refreshing ales and lagers of uncompromised quality– the perfect reward after a day in the surf.The Aloha Series seasonal lineup features beers brewed with non-traditional ingredients unique to the Islands, such as passion fruit and toasted coconut. Thesebeers not only showcase our brewers’ talents and creativity, but also capture unique flavors of Hawaiian experience. Additionally, visitors to the KonaBrewery will find over a dozen draft only offerings that are served exclusively in Hawaii.Omission BeersThe Omission brand family is comprised of handcrafted beers made from barley, hops, water and yeast, brewed using a proprietary process to remove gluten.Key brands within the Omission brand family are Lager and Pale Ale.Omission Lager is a refreshing, crisp beer brewed in the traditional lager style. Omission Lager’s aromatic hop profile offers a unique, easy-drinking craftbeer for those looking for a lighter and approachable beer style. Bold and hoppy, Omission Pale Ale is a hop-forward American pale ale, brewed to showcasethe Cascade hop profile. Amber in color, Omission Pale Ale’s floral aroma is complimented by a caramel malt body making for a deliciously balanced craftbeer. 6Table of Contents Multi-Brand Beer PackagesIn 2012, we developed a multi-brand seasonal variety pack, including brands from Kona, Widmer Brothers and Redhook, called the Winter Variety Packthat satisfied consumers’ growing thirst for two major trends in craft beer, the popularity of both seasonal beers and variety packs.New Products and BrandsIn an effort to stay current with consumer style and flavor preferences, we routinely analyze consumer trends and behavior, trends in other food and beveragesegments, and our brand families and product offerings to identify beer styles or consumer taste preferences that appear to be under-served or not currentlyaddressed. After identifying a potential new product offering, we will either tap into our brewing recipe library to determine if we have offered the targeted styleeither 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 thisexperimental new brew directly to consumers through on-premise test marketing at our own pubs and at exclusive retail sites. If the initial consumer receptionof 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. Webelieve 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 tomeet these desires with original and novel taste profiles while maintaining consistently high product quality.Contract BrewingIn order to profitably use excess capacity, we have a contract brewing arrangement under which we produce beer in volumes and per specifications asdesignated by the arrangement. Prior to September 1, 2012, we had two contract brewing arrangements.Effective September 1, 2012, in the best interest of both parties, we mutually agreed with Fulton Street Brewery, LLC (“FSB”) to end our contract brewingarrangement with them. Under the termination agreement, we phased out production of FSB branded beers utilizing remaining inventory on-hand. Inconsideration, FSB will pay us $70,000 per month through September 2013. We recorded $838,000 in Sales from September 1, 2012 to December 31, 2012under the terms of the termination agreement and $3.1 million in sales pursuant to the contract brewing arrangement from January 1, 2012 to November 30,2012.During 2012, we shipped 49,600 barrels under these contract brewing arrangements, 24,400 of which were to FSB.Brewing OperationsBrewing FacilitiesWe use highly automated brewing equipment at our four production breweries and also operate a smaller, manual brewpub-style brewing system. As ofDecember 31, 2012, our total production capacity was 1,075,000 barrels. Our breweries consist of the following: ·Oregon Brewery. Our Oregon Brewery is our largest capacity production brewery, consisting of a 230 barrel brewing system with an annualcapacity of 630,000 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. Ituses an anaerobic waste-water treatment facility that completes the process cycle. ·Hawaiian Brewery. Our Hawaiian Brewery utilizes a 25 barrel brewing system and has an annual capacity of 10,000 barrels. During 2010, theHawaiian Brewery installed a 229-kilowatt photovoltaic solar energy generating system to supply approximately 50 percent of its energyrequirements through renewable energy. 7Table of Contents ·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.PackagingWe package our craft beers in cans, bottles and kegs. All of our production breweries, with the exception of the Hawaiian Brewery, have fully automatedbottling and keg lines. The bottle fillers at all of the breweries utilize a carbon dioxide environment during bottling, ensuring that minimal oxygen is dissolvedin the beer, extending the shelf life. In February 2012, we added a canning line at our Oregon Brewery to package our Kona Longboard Island Lager andRedhook Longhammer IPA in various can sizes. We offer an assortment of packages to highlight the unique characteristics of each of our beers and to providegreater opportunities for customers to drink our beers in more locations and at more events and occasions, matching the active lifestyles and preferences of ourconsumers.Quality ControlWe monitor production and quality control at all of our breweries, with central coordination at the Oregon Brewery. All of the breweries have an on-sitelaboratory 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 beerthat we produce goes through a panel of internal testers (our taste panel) who ensure it meets our taste and profile standards.Ingredients and Raw MaterialsWe currently purchase a significant portion of our malted barley from two suppliers and our premium-quality select hops, mostly grown in the PacificNorthwest, 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 supplycontracts 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 certainstrains and maintain a separate, secure supply in-house. We have access to multiple competitive sources for packaging materials, such as labels, six-packcarriers, crowns, cans and shipping cases.DistributionWith limited exceptions, all brewers in the United States are required to sell their beers to independent wholesalers, who then sell the beers to retailers. We arethe only independent craft brewer in the U.S. to have established a wholly aligned distribution network through our partnership with A-B. This partnershipprovides us seamless national distribution, which results in both a highly effective distribution presence in each market and administrative efficiencies. Ourbeers are available for sale directly to consumers in draft, cans and bottles at restaurants, bars and liquor stores, as well as in cans and bottles atsupermarkets, 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. Management believes that our competitors in the craft beersegment generally negotiate distribution relationships separately with wholesalers in each locality and, as a result, typically distribute through a variety ofwholesalers representing differing national beer brands with uncoordinated territorial boundaries.In 2012 and 2011, we sold approximately 660,000 barrels and 611,200 barrels, respectively, to the wholesalers in A-B’s distribution network through the A-BDistributor Agreement, accounting for 91.0% and 90.9%, respectively, of our shipment volume for the corresponding periods. 8Table of Contents Sales and MarketingWe promote our products through a variety of means, including i) creating and executing a range of advertising programs; ii) training and educatingwholesalers and retailers about our products; iii) promoting our name, product offerings and brands, and experimental beers at local festivals, venues andpubs; 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 and promote our products through an assortment of media, including television, radio, billboard, print and social media, including Facebookand Twitter, in key markets and by participating in co-operative programs with our wholesalers whereby our spending is matched by the distributor. Webelieve that the financial commitment by the distributor helps align the distributor’s interests with ours, and the distributor’s knowledge of the local marketresults 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. Thousands of visitorsper year 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 thebreweries have meeting rooms that the public can rent for business meetings, parties and holiday events, and that we use to entertain and educate wholesalers,retailers and the media about our products. At our pubs, we also sell various items of apparel and memorabilia bearing our trademarks, which creates furtherawareness of our beers and reinforces our quality image. To further promote retail canned and bottled product sales and in response to local competitiveconditions, we regularly recommend that wholesalers offer discounts to retailers in most of our markets.Relationship with Anheuser-Busch, LLCExchange AgreementThe Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) is an agreement with A-B under which we granted A-Bcertain contractual rights. The Exchange Agreement was entered into as part of a recapitalization in which we redeemed preferred shares held by A-B inexchange for cash and our common stock currently held by A-B, which total 32.2% of our outstanding shares of common stock at December 31, 2012.The Exchange Agreement 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 committeeof the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a committee formed to review or determinetransactions 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 orbylaws, grant board representation rights, enter into certain transactions with affiliates, distribute our products in the United States other than through A-B oras provided in the A-B Distributor Agreement, or voluntarily terminate our listing on the Nasdaq Stock Market.Distributor AgreementThe A-B Distributor Agreement provides for the distribution of Widmer Brothers, Redhook, Kona and Omission beers in all states, territories and possessionsof the United States, including the District of Columbia and, except with respect to Kona beers, all U.S. military, diplomatic, and governmental installationsin 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 anyinternally developed new products but excluding new products that we acquire. We are responsible for marketing our products to A-B’s wholesalers, as well asto retailers and consumers.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-Bprovides 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 eitherparty, upon the occurrence of standard events of default as defined in the agreement. 9Table of Contents Additionally, the A-B Distributor Agreement may be terminated by A-B, with six months’ prior written notice to us, upon the occurrence of any of thefollowing 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 isdefined 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 toour 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 appointedwithin 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, or by ouraffiliates or shareholders, and we do not reimburse and indemnify A-B and its corporate affiliates on demand for the entire amount of the obligationor expense.As of both December 31, 2012 and 2011, A-B owned approximately 32.2% of our outstanding common stock.FeesWe pay fees to A-B in connection with the sale of our products, including margin fees, invoicing, staging and cooperage handling fees, and inventory managerfees.See Note 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.SeasonalityOur sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting low sales levels compared to the second and thirdquarters. Accordingly, our results for any particular quarter are not likely to be indicative of the results to be achieved for the full year.CompetitionWe compete in the craft brewing market as well as in the much larger alcoholic beverage market, which encompasses domestic and imported beers, flavoredalcohol beverages, spirits, wine and ciders.Competition within the domestic craft beer segment and the specialty beer market is based on product quality, taste, consistency and freshness, ability todifferentiate products, promotional methods and product support, 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 productsoffered 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 andseveral national craft brewers that include MillerCoors’ Tenth and Blake Beer Company division (“Tenth and Blake”), and A-B’s Goose Island and ShockTop divisions. Because of the large number of participants and number of different products offered in this segment, the competition for bottled productplacements and especially for draft beer placements has intensified. Although certain of these competitors distribute their products nationally and may havegreater financial and other resources than we have, we believe that we possess certain competitive advantages, including our broad array of brand offeringswithin our four brand families and the scale of our production breweries. 10Table of Contents We also compete against producers of imported brands, such as Heineken, Corona Extra and Guinness. Most of these foreign brewers have significantlygreater 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 thatcraft brewers possess certain competitive advantages over some importers, including lower transportation costs, no importation costs, proximity to andfamiliarity 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-fundedsignificant product launches in the wheat category. While these product offerings are intended to compete with craft beers, many of them are brewed accordingto methods used by these brewers in their other product offerings. The major national brewers, including Tenth and Blake through MillerCoors, and GooseIsland and Shock Top through A-B, have significantly greater financial resources than us and have access to a greater array of advertising and marketingtools to create product awareness of these offerings. Although increased participation by the major national brewers increases competition for market share andcan heighten price sensitivity within the craft beer segment, we believe that their participation tends to increase advertising, distribution and consumereducation 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 SmirnoffIce, 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 ofthese 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. Growth in this segment 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 limitedbasis, 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 wineand spirits, it also benefits from many of the same advantages enjoyed by wine and spirit producers. These include consumers who allow themselvesaffordable 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 beermarkets in the United States, both in terms of number of participants and consumer awareness. We believe that these areas offer significant competition forour products, not only from other craft brewers but also from the growing wine market and from flavored alcohol beverages. Our recent marketing efforts havebeen focused on creating appealing new brands and better communicating the attributes of our portfolio of existing beers, highlighting and strengthening theidentities 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 tooffer an assortment of flavors and experiences that appeal to more people.Segment and Enterprise-Wide InformationSee 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 andenterprise-wide information. 11Table of Contents RegulationOur business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary for our brewery and pub operations andthe sale of alcoholic beverages are required from a number of agencies, including the U.S. Treasury Department, the Alcohol and Tobacco Tax and TradeBureau (“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 smallerbrewers 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 theestablishment of a commercial brewery and the filing of an amended Brewer’s Notice any time there is a material change in the brewing or warehousinglocations, brewing or packaging equipment, brewery ownership, or officers or directors. Our operations are subject to audit and inspection by the TTB at anytime.Management believes that we currently have all of the licenses, permits and approvals required for our current operations. Existing permits or licenses could berevoked 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 currentoperations 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 produceless 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 normalrate. 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 anystate 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 RegulationOur brewing operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, airemissions, water discharges and the handling and disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violate anysuch regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, we could beadversely affected. Dram Shop LawsThe serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being held liable to third partiesfor injuries caused by the intoxicated customer. Our restaurants and pubs have addressed this issue by maintaining reasonable hours of operation androutinely performing training for personnel.TrademarksWe have obtained U.S. trademark registrations for our numerous products, including our proprietary bottle designs. Trademark registrations generally includespecific product names, marks and label designs. The Widmer Brothers, Redhook, Kona Brewing, and Omission marks and certain other marks are alsoregistered in various foreign countries. We regard our Widmer Brothers, Redhook, Kona Brewing, Omission and other trademarks as having substantialvalue 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 currentbusiness 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 ourtrademarks in our markets whenever possible and to oppose vigorously any infringement of our trademarks. 12Table of Contents EmployeesAt December 31, 2012, we employed approximately 740 people, including 345 employees in the pubs and retail stores, 205 employees in production, 140employees in sales and marketing and 50 employees in corporate and administration. The pubs and restaurants have 220 part-time employees and 35 seasonalor temporary employees, both of which are included in the totals above. None of our employees are represented by a union or employed under a collectivebargaining agreement. We believe our relations with our employees to be good. Available InformationOur 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 suchmaterial with or furnish them to the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section ofour website. 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 FactorsIf 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 wehave not gauged consumer preferences correctly, or are unable to maintain consistently high quality beers as we develop new brands, our overall brand imagemay 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 segmentand fuller-flavored beers offered by major national brewers. We also face increasing competition from producers of wine, spirits and flavored alcohol beveragesoffered by the larger spirit producers and national brewers. Increased competition could cause our future sales and results of operations to be adverselyaffected.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 theoccurrence of failures, interruptions, or breaches of security of these systems. However, there can be no assurances that these policies and procedures willeliminate the occurrence of failures, interruptions or breaches of security or that they will adequately restore our systems or minimize any such events. Theoccurrence of a failure, interruption or breach of security of our computer information systems could result in loss of intellectual property, delays in ourproduction, loss of critical information, or other events, any of which could harm our future sales or operating results.Our business is sensitive to reductions in discretionary consumer spending.Consumer demand for luxury or perceived luxury goods, including craft beer, can be sensitive to downturns in the economy and the corresponding impact ondiscretionary spending. There is no assurance that the craft brewing segment will continue to experience growth in future periods. Changes in discretionaryconsumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, job losses and the resultantrising unemployment rate, perceived or actual disposable consumer income and wealth, and changes in consumer confidence in the economy, couldsignificantly reduce customer demand for craft beer in general, and the products we offer specifically. Furthermore, our consumers may choose to replace ourproducts with the fuller-flavored national brands or other more affordable, although lower quality, alternatives available in the market. Any such decline inconsumption of our products would likely have a significant negative impact on our operating results. 13Table of Contents 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 wouldadversely impact our sales and results of operations. If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could drawconsumers away from the beer industry in general and our products specifically and have an adverse effect on our sales and results of operations. Further, thealcoholic 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 orthat 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 generalwere to fall out of favor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental regulation, it wouldlikely have a significant adverse impact on our financial condition, operating results and cash flows.We have a 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 befaced with a number of operational tasks, including implementing an order management system, establishing and maintaining direct contracts with theexisting wholesaler network or negotiating agreements with replacement wholesalers on an individual basis, and enhancing our credit evaluation, billing andaccounts receivable processes. Such an undertaking would require significant effort and substantial time to complete, during which the distribution of ourproducts could be impaired.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 significantoperational 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 toretailers and could have a material adverse impact on our sales, results of operations and cash flows.Our agreements with A-B may limit our ability to engage in certain activities and investments.The Exchange Agreement requires us to obtain A-B's consent prior to undertaking certain activities and investments. For example, we must obtain A-B'sconsent before acquiring another brewer if the purchase price exceeds $30 million or to purchase a non-brewing entity if the purchase price exceeds $2 million.If A-B opposes strategic or financial investments proposed by our management, A-B may decline to give its consent to activities or investments that ourmanagement believes are in the best interest of our shareholders.A-B has an influential voice in decisions of the board of directors and shareholders.A-B owns 32.2% of our outstanding common stock, which makes A-B our largest shareholder. Under the Exchange Agreement, A-B may designate twonominees to our board of directors, who also participate on our audit, compensation, and nominating and governance committees as non-voting observers.This gives A-B an influential voice in board and shareholder deliberations. 14Table of Contents Operating breweries at production levels substantially below their current designed capacities could negatively impact our financial results.As of December 31, 2012, the annual working capacity of our breweries was approximately 1,075,000 barrels. Due to many factors, including seasonalityand production schedules of various draft products and bottled products and packages, actual production capacity will rarely, if ever, approach full workingcapacity. We believe that capacity utilization of the breweries will fluctuate throughout the year, and even though we expect that capacity of our breweries willbe efficiently utilized during periods when our sales are strongest, there likely will be periods when the capacity utilization will be lower. If we experiencecontraction in our sales volumes, the resulting excess capacity and unabsorbed overhead will have an adverse effect on our gross margins, operating cashflows and overall financial performance. We periodically evaluate whether we expect to recover the costs of our production breweries over the course of theiruseful lives. If facts and circumstances indicate that the carrying value of these long-lived assets may be impaired, an evaluation of recoverability will beperformed by comparing the carrying value of the assets to projected future undiscounted cash flows along with other quantitative and qualitative analyses. Ifwe determine that the carrying value of such assets does not appear to be recoverable, we will recognize an impairment loss by a charge against currentoperations, which could have a material adverse effect on our results of operations.Our sales are concentrated in the Pacific Northwest and California.Approximately 60% of our sales in 2012 were in the Pacific Northwest and California and, consequently, our future sales may be adversely affected bychanges in economic and business conditions within these areas. We also believe these regions are among the most competitive craft beer markets in the UnitedStates, both in terms of number of market participants and consumer awareness. The Pacific Northwest and California offer significant competition to ourproducts, not only from other craft brewers but also from wine producers and flavored alcohol beverages.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 areplacement 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 productsales and within the various bottled product packages; level of fixed and semi-variable operating costs; level of production at our breweries in relation tocurrent 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 torelatively small changes in sales volume.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 produceless 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 normalrate. 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. Anysuch increases in excise taxes, if enacted, would adversely affect our financial condition, results of operations and cash flows.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 varioustaxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Certain actions undertaken byus 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 toconduct business. One or more regulatory authorities could determine that we have not complied with applicable licensing or permitting regulations or have notmaintained the approvals necessary for us to conduct business within our jurisdiction. If licenses, permits or approvals necessary for our brewery or puboperations were unavailable or unduly delayed, or if any permits or licenses that we hold were to be revoked, our ability to conduct business may bedisrupted, which would have a material adverse effect on our financial condition, results of operations and cash flows. 15Table of Contents 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 willlikely 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 weatherconditions 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 state laws regarding distribution arrangements may adversely impact our operations. States in which we have a significant sales presencemay enact legislation that significantly alters the competitive environment for the beer industry. Any change in the competitive environment in those statescould 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 whenwe 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 draftbeer 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, wemay 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 alsodecide to pursue other alternatives for leasing or purchasing kegs, but there is no assurance that we will be successful in securing additional kegs.A loss of involvement by the founders of Widmer Brothers Brewing Company in promoting that brand family could adversely affect sales.The founders of Widmer Brothers Brewing Company, Kurt R. Widmer (“Kurt”) and Robert P. Widmer (“Rob”), are integral to our current Widmer Brothersbrand family messaging and we rely on the positive public perception of their images, as founders. The role of Kurt, as founder and chairman of the board,and Rob, as founder and vice president of corporate quality assurance and industry relations, are emphasized as part of our Widmer Brothers brandcommunication and have appeal to some drinkers. If Kurt or Rob were not willing or able to continue in their active roles, their absence could detrimentallyaffect the strength of our messaging and, accordingly, our growth prospects. If this were to occur, we would need to adapt our strategy for communicating keymessages that currently include their images. Any such change in our messaging strategy might have a detrimental impact on our future growth.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 keyraw materials, packaging materials and utilities. Any disruption in the willingness or ability of these third parties to supply these critical components couldhinder our ability to continue production of our products, which could have a material adverse impact on our financial condition, results of operations andcash flows. 16Table of Contents A small number of shareholders hold a significant ownership percentage of our common stock and uncertainty over their continuing ownershipplans 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 closefamily members own approximately 3.3 million shares, or 17.4%, of our common stock. Collectively, these two groups own 49.6% of our equity. All of theseshares 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 byshareholders 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 commonstock 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 forany 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 adividend without BofA’s prior consent. As a result, only appreciation of the price of our common stock will provide a return to shareholders. Investors seekingcash 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, 2012, we had$29.9 million in an assortment of intangible assets, on a net basis, which represented nearly 18% 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 insales growth, which had a negative impact on our estimated cash flows associated with these assets, our analyses of these assets may conclude that a decreasein 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 CommentsNone.Item 2.Properties We own and operate four highly-automated, small-batch breweries: the Hawaiian Brewery, the New Hampshire Brewery, the Oregon Brewery and theWashington Brewery, as well as a small, pilot brewing system at the Rose Quarter Brewery in Portland, Oregon. We lease the sites upon which the HawaiianBrewery and Pubs, the New Hampshire Brewery and Pub, the Rose Quarter Brewery, and Oregon Pub are located, in addition to our office space andwarehouse locations in Portland, Oregon for our corporate, administrative and sales functions. These operating leases expire at various times between 2013 and2047. Certain of these leases are with related parties. See Notes 18 and 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of thisreport for further discussion regarding these arrangements.Certain information regarding our production breweries is as follows (capacity in thousands of barrels): Production Breweries SquareFootage Current AnnualCapacity MaximumAnnual Capacity Oregon Brewery 185,000 630 650 Washington Brewery 128,000 220 280 New Hampshire Brewery 125,000 215 280 Hawaiian Brewery 11,000 10 10 1,075 1,220 As a result of adding fermentation capacity and modifying our brewing schedules during 2012, the total annual capacity of all our breweries wasapproximately 1,075,000 barrels as of December 31, 2012. Combined, our breweries have the potential to reach 1,220,000 barrels in annual capacity whenfully optimized based on the currently available space and current product mix. 17Table of ContentsSubstantially all of the personal property and the real properties associated with the Oregon Brewery and the Washington Brewery secure our loan agreementwith BofA. See Note 10 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Item 3.Legal ProceedingsWe 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 anypending or threatened litigation involving us or our properties exists, such litigation will not likely have a material adverse effect on our financial condition orresults of operations.Item 4.Mine Safety DisclosuresNot applicable. PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the trading symbol BREW. The table below sets forth, for the fiscal quartersindicated, the reported high and low sale prices of our common stock, as reported on the NASDAQ: 2011 High Low Quarter 1 $9.59 $6.96 Quarter 2 10.17 8.10 Quarter 3 8.95 5.31 Quarter 4 7.22 5.08 2012 High Low Quarter 1 $7.98 $5.84 Quarter 2 8.47 7.03 Quarter 3 8.92 7.50 Quarter 4 8.00 5.62 We had 18,887,323 common shareholders of record as of February 26, 2013. 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 dividendswithout 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 wewill 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, amongother things, future earnings, capital and operating requirements, restrictions in future financing agreements, our general financial condition and generalbusiness conditions.Equity Compensation PlansInformation regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this Form 10-K.Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesWe did not repurchase any of our common stock during the fourth quarter of 2012. 18Table of Contents Stock Performance GraphThe following line-graph presentation compares cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment andreinvestment of dividends, of (a) Craft Brew Alliance, Inc., (b) a broad-based equity market index and (c) an industry-specific index. The broad-based marketindex used is the NASDAQ Composite Index and the industry-specific index used is the S&P 500 Beverages Index. Base Indexed Returns Period Year Ended Company/Index 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Craft Brew Alliance, Inc. $100.00 $18.05 $36.09 $111.13 $90.53 $97.44 NASDAQ Composite 100.00 59.46 85.55 100.02 98.22 113.85 S&P 500 Beverages Index 100.00 79.98 96.16 110.25 115.26 121.19 19Table of Contents Item 6.Selected Financial DataThe selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.In thousands,except per share amounts Year Ended December 31, Statement of Operations Data 2012 2011 2010 2009 2008 Net sales(1) $169,287 $149,197 $131,731 $124,713 $79,761 Cost of sales 119,261 104,011 98,064 97,230 65,646 Gross profit $50,026 $45,186 $33,667 $27,483 $14,115 Selling, general and administrative expenses $44,890 $39,742 $29,938 $24,911 $19,894 Loss on impairment of assets(2) $- $- $- $- $30,589 Operating income (loss) $5,136 $5,444 $3,170 $2,347 $(36,761)Gain on sale of equity interest in Fulton Street Brewery, LLC $- $10,432 $- $- $- Income before provision (benefit) for income taxes $4,477 $15,692 $2,786 $1,073 $(37,655)Provision (benefit) for income taxes 1,951 6,041 1,100 186 (4,377)Net income (loss) $2,526 $9,651 $1,686 $887 $(33,278) Basic and diluted net income (loss) per share $0.13 $0.51 $0.10 $0.05 $(2.63) Shares used in basic per share calculations 18,862 18,834 17,523 17,004 12,660 Shares used in diluted per share calculations 18,934 18,931 17,568 17,041 12,660 December 31, 2012 2011 2010 2009 2008 Balance Sheet Data Cash and cash equivalents $5,013 $795 $164 $11 $11 Working capital (deficit) 5,207 2,327 (4,435) (2,527) (927)Total assets 165,664 158,908 158,266 141,585 147,805 Current portion of long-term debt and capital leases 642 596 2,460 1,481 1,394 Long-term debt and capital leases, net of current portion 12,440 13,188 24,675 24,685 31,834 Other long-term obligations 17,903 16,261 11,388 8,210 8,082 Shareholders’ equity 108,195 104,509 94,196 80,632 79,281 (1)The increase in net sales in 2009 compared to 2008 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-downof trademarks associated with the Widmer brand and a $1.4 million charge for the partial write down of equity-method investments. 20Table of Contents Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverviewCraft Brew Alliance is an independent craft brewer formed by the union of four unique and pioneering craft beer brands: ·Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington; ·Widmer Brothers Brewing founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon; ·Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii; and ·Omission Beer internally developed by our brewing team in 2012 in Portland, Oregon.Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beersin the United States. Today, as an independent craft brewer, we possess several distinct advantages, unique in the craft beer category. These advantages derivefrom the combination of our innovative quality craft beers; the strength of our distinct, authentic brand portfolio; our seamless national distribution andnational sales and marketing reach; our financial capabilities as a public company; our owned brew pubs; and our bi-coastal breweries.We proudly brew our craft beers in four company-owned breweries including three mainland breweries located in Portsmouth, New Hampshire; Portland,Oregon; and the Seattle suburb of Woodinville, Washington; and one Hawaii brewery located in Kailua-Kona, Hawaii. We also own and operate a small pilotbrewery, primarily used for small batch production and innovative brews, at the Rose Quarter sports arena in Portland, Oregon.We distribute our beers to retailers through independent wholesalers that are aligned with the Anheuser-Busch, LLC (“A-B”) network. These sales are madepursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B. Our agreement with A-B initially allowed us to establish relationshipsnationwide with these wholesalers. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, thesewholesalers own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. Redhook andWidmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 31 states. Omission Beer recently became available nationally and wecontinue to expand into new markets in both the U.S. and internationally. Separate from our A-B wholesalers, we maintain an independent sales andmarketing organization complete with resources across the key functions of brand management, field marketing, field sales, and national retail sales.We operate in two segments: Beer Related operations and Pubs. Beer Related operations include the brewing and sale of craft beers from our five breweries, bothdomestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our Beer Related operations, othermerchandise sales, and sales of our beers directly to customers.Following is a summary of our financial results: Net Sales Net Income Number ofBarrels Sold 2012$169.3 million $2.5 million 724,900 2011$149.2 million $9.7 million 672,600 2010$131.7 million $1.7 million 607,800 The comparability of our results is impacted by the merger with Kona Brewing Co., Inc. (“KBC”), which closed October 1, 2010 (the “KBC Merger”), andby 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 ConsolidatedFinancial Statements included in Part II, Item 8 of this Form 10-K for more detailed information. 21Table of ContentsResults of OperationsThe following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Income expressed as a percentage of netsales(1): Year Ended December 31, 2012 2011 2010 Sales 107.5% 107.9% 106.9%Less excise tax 7.5 7.9 6.9 Net sales 100.0 100.0 100.0 Cost of sales 70.4 69.7 74.4 Gross profit 29.6 30.3 25.6 Selling, general and administrative expenses 26.5 26.6 22.7 Merger related expenses - - 0.4 Operating income 3.0 3.6 2.4 Income from equity method investments - 0.5 0.6 Gain on sale of FSB - 7.0 - Interest expense (0.4) (0.6) (1.1)Interest and other income, net - - 0.2 Income before income taxes 2.6 10.5 2.1 Income tax provision 1.2 4.0 0.8 Net income 1.5% 6.5% 1.3%(1) Percentages may not sum due to rounding.Segment InformationNet sales, gross profit and gross margin information by segment was as follows (dollars in thousands): Year Ended December 31, 2012 Beer Related Pubsand Other Total Net sales $145,670 $23,617 $169,287 Gross profit $46,341 $3,685 $50,026 Gross margin 31.8% 15.6% 29.6%2011 Net sales $127,376 $21,821 $149,197 Gross profit $41,626 $3,560 $45,186 Gross margin 32.7% 16.3% 30.3%2010 Net sales $119,389 $12,342 $131,731 Gross profit $31,797 $1,870 $33,667 Gross margin 26.6% 15.2% 25.6% 22Table of ContentsSales by CategoryThe following tables set forth a comparison of sales by category (dollars in thousands): Year Ended December 31, Dollar Sales by Category 2012 2011 Change % Change A-B and A-B related $147,628 $130,137 $17,491 13.4%Contract brewing and beer related(1) 10,773 9,042 1,731 19.1%Excise taxes (12,731) (11,803) (928) 7.9%Net beer related sales 145,670 127,376 18,294 14.4%Pubs(2) 23,617 21,821 1,796 8.2%Net sales $169,287 $149,197 $20,090 13.5% Year Ended December 31, Dollar Sales by Category 2011 2010 Change % Change A-B and A-B related $130,137 $114,231 $15,906 13.9%Contract brewing and beer related(1) 9,042 4,433 4,609 104.0%Excise taxes (11,803) (9,121) (2,682) 29.4%Net beer related sales 127,376 109,543 17,833 16.3%Pubs(2) 21,821 12,342 9,479 76.8%Alternating proprietorship - 9,846 (9,846) (100.0)%Net sales $149,197 $131,731 $17,466 13.3% (1)Beer related includes international beer sales. (2)Pubs sales include sales of promotional merchandise and sales of beer directly to customers.Shipments by CategoryShipments by category were as follows (in barrels):Year EndedDecember 31, 2012 Shipments 2011 Shipments Increase %Change Change inDepletions(1) A-B and A-B related 660,000 611,200 48,800 8.0% 6%Contract brewing and beer related(2) 52,700 51,300 1,400 2.7% Pubs 12,200 10,100 2,100 20.8% Total 724,900 672,600 52,300 7.8% Year EndedDecember 31, 2011 Shipments 2010 Shipments Increase %Change Change inDepletions(1) A-B and A-B related 611,200 574,900 36,300 6.3% 6%Contract brewing and beer related(2) 51,300 23,200 28,100 121.1% Pubs 10,100 9,700 400 4.1% Total 672,600 607,800 64,800 10.7% (1) Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers. (2) Contract brewing and beer related includes international shipments of our beers.The increase in sales to A-B and A-B related in 2012 compared to 2011 was primarily due to increased volume, higher selling prices for our beers, and a shiftin product mix towards bottle and high-end product, both of which carry a higher price per unit than draft. Gross sales in 2012 was also favorably impactedby a decrease in the per barrel fee associated with sales to A-B as a result of an amendment to our A-B Distributor Agreement in May 2011. This lower fee levelfor the period of January 2012 through April 2012 generated approximate savings of $1.2 million as compared to the same period in 2011.The increase in sales 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 ashift in product mix towards bottle and high-end product. Gross sales were also favorably impacted by a decrease in the per barrel fee associated with sales toA-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 tothe A-B Distributor Agreement totaled approximately $3.9 million for 2011. 23Table of Contents 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 reduceddistribution fees would have been approximately $3.3 million. The amount of increase in sales realized for future periods may differ from this estimate due tothe 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 distributionnetwork increased by 4.2% in 2012 compared to 2011 and 4.7% in 2011 compared to 2010, primarily due to pricing increases and a shift in product mixtowards both bottle and high-end product as mentioned above. Price changes implemented by us have generally followed craft beer market pricing trends.During 2012, 2011 and 2010, we sold 91.0%, 90.9% and 94.6%, respectively, of our beer through A-B at wholesale pricing levels.The increase in contract brewing and beer related sales in 2012 compared to 2011 was due to an increase in shipments under the arrangement with FSB.Effective September 1, 2012, in the best interest of both parties, we mutually agreed with FSB to end our contract brewing arrangement. Under the terminationagreement, we phased out production of FSB branded beers by the end of November 2012 utilizing remaining inventory on-hand. In consideration, FSB willpay us $70,000 per month through September 2013. We recorded $838,000 in Sales during the period from September 1, 2012 to December 31, 2012 underthe terms of the termination agreement.The increase in contract brewing and beer related sales in 2011 compared to 2010 was primarily due to an increase in shipments under an existing third-partycontract and the contribution of shipments under a contract brewing arrangement with FSB, which was entered into in the first quarter of 2011.Sales to FSB through the contract brewing arrangement, classified in Sales, were as follows (dollars in thousands):Year Ended December 31, 2012 2011 2010 $3,083 $2,863 $28 The overall increase in volume in 2012 compared to 2011 was primarily driven by our increased sales and marketing efforts, timing of programs and newbrand and package introductions, partially offset by a decline in our event volume, which is included in Pubs.The increase in excise taxes in 2012 compared to 2011 was due to higher shipments in 2012 compared to 2011.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 toshipments 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 thecombined companies are eligible for only a single excise tax exemption. Also contributing to the increase was an increase in the marginal tax rate for beerproduced in Washington state, which became effective in the second half of 2010.Pubs sales increased in 2012 compared to 2011 primarily due to increased guest counts and pricing in certain markets. The increase was also attributable toan increase in the number of barrels sold, primarily as a result of the increase in guest counts.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.Prior to the KBC Merger, we earned revenue in connection with an alternating proprietorship agreement with Kona, including fees for leasing the OregonBrewery and sales of raw materials. Subsequent to the KBC Merger, any such intercompany activities are eliminated, including the revenues associated withthe alternating proprietorship agreement. 24Table of Contents Shipments by Brand The following table sets forth a comparison of shipments by brand (in barrels):Year Ended December 31, 2012Shipments 2011Shipments Increase(Decrease) %Change Change inDepletions Widmer Brothers 264,300 271,200 (6,900) (2.5)% (5)%Kona 220,000 172,800 47,200 27.3% 23%Redhook 191,000 179,300 11,700 6.5% 6%Total(1) 675,300 623,300 52,000 8.3% 6%Year Ended December 31, 2011Shipments 2010Shipments Increase(Decrease) %Change Change inDepletions Widmer Brothers 271,200 277,200 (6,000) (2.2)% (2)%Kona 172,800 133,400 39,400 29.5% 29%Redhook 179,300 174,100 5,200 3.0% 3%Total(1) 623,300 584,700 38,600 6.6% 6% (1)Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.The decrease in our Widmer Brothers brand shipments in 2012 compared to 2011 was primarily due to pressure on our Hefeweizen beer which is experiencingcompetition from large, multi-national wheat beer competitors, particularly in draft in California. Partially offsetting this decrease was the positive effect of ourfocus on the core Widmer Brothers brands including our Rotator IPAs and seasonals, and our high-end offerings, which is fueling broader consumerawareness of the overall Widmer Brothers brand.The decrease in the Widmer Brothers brand shipments in 2011 compared to 2010 was primarily due to the continuing pressure on our Hefeweizen beer in thevery competitive wheat beer category in the craft segment. Partially offsetting this decrease was the success of our focus on the core and high-end WidmerBrothers brands.Kona continues to be one of the fastest growing brands in the craft category, as seen in the increase in shipments in 2012 compared to 2011 and 2011compared to 2010. We believe this sales growth is due to the Always Aloha message and quality of the beer resonating with consumers.The increase in our Kona brand shipments in 2012 compared to 2011 was also due to the success of our Kona variety packs and the increased velocity of ourKona flagship, Longboard Lager, in existing markets. During the third quarter of 2012, we launched our Big Wave Golden Ale, previously available only inHawaii, on the mainland. We continue to successfully introduce our Kona beers to new markets, which has been contributing to the brand’s shipment growth.The introduction of our Kona beer in cans in March 2012 also contributed to the increase.The increase in our Redhook brand shipments in 2012 compared to 2011 and in 2011 compared to 2010 were the result of our investments in new packaging,brand introductions and marketing initiatives. These investments have resulted in the unique Redhook brand position, which we believe is resonating withconsumers. 25Table of ContentsThe following table sets forth a comparison of our shipments by package, excluding private label shipments produced under our contract brewingarrangements (in barrels): Year Ended 2012 2011 2010 December 31, Shipments % of Total Shipments % of Total Shipments % of Total Draft 214,800 31.8% 219,400 35.2% 227,100 38.8%Bottle 460,500 68.2% 403,900 64.8% 357,600 61.2%Total 675,300 100.0% 623,300 100.0% 584,700 100.0%The shift in package mix from draft to bottle in both 2012 compared to 2011 and in 2011 compared to 2010 was primarily the result of the increase involumes on our Kona bottle beer and lower volumes on our Hefeweizen draft beer. There is also increased general competition across the industry for on-premise draft sales as the large, multi-national brewers enter the craft beer segment.Cost of SalesCost of sales includes purchased raw materials, direct labor, overhead and shipping costs.Information regarding Cost of sales was as follows (dollars in thousands): Year Ended December 31, Dollar 2012 2011 Change % Change Beer Related $99,329 $85,750 $13,579 15.8%Pubs 19,932 18,261 1,671 9.2%Total $119,261 $104,011 $15,250 14.7% Year Ended December 31, Dollar 2011 2010 Change % Change Beer Related $85,750 $87,592 $(1,842) (2.1)%Pubs 18,261 10,472 7,789 74.4%Total $104,011 $98,064 $5,947 6.1%The increase in Beer Related Cost of sales in 2012 compared to 2011 was due to the increase in shipments discussed above, as well as the mix shift from draftto bottle as the per barrel equivalent cost of bottle is more than draft. In addition, increased distribution costs, including offsite storage and fuel, increasedlabor, and higher grain prices, contributed to the increase.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 tothe KBC Merger, including elimination of all alternating proprietorship related costs, and improved performance and quality trends in 2011. This waspartially offset by the increase in shipments discussed above, including the mix shift from draft to bottle, as well as increased shipping costs due to fuelsurcharges.The increase in Pubs Cost of sales in 2012 compared to 2011 was primarily due to the increase in guest counts noted above, as well as increased labor, foodand beverage costs in certain markets.The increase in Pubs Cost of sales in 2011 compared to 2010 was primarily associated with the acquired Kona pub operations. These operations had apositive impact on our gross profit as discussed below. 26Table of ContentsGross ProfitInformation regarding gross profit was as follows (dollars in thousands): Year Ended December 31, Dollar 2012 2011 Change % Change Beer Related $46,341 $41,626 $4,715 11.3%Pubs 3,685 3,560 125 3.5%Total $50,026 $45,186 $4,840 10.7% Year Ended December 31, Dollar 2011 2010 Change % Change Beer Related $41,626 $31,797 $9,829 30.9%Pubs 3,560 1,870 1,690 90.4%Total $45,186 $33,667 $11,519 34.2%Gross profit as a percentage of net sales, or gross margin rate, was as follows: Year Ended December 31, 2012 2011 2010 Beer Related 31.8% 32.7% 26.6%Pubs 15.6% 16.3% 15.2%Total 29.6% 30.3% 25.6%The increase in Gross profit in 2012 compared to 2011 was due to increases in shipment volumes discussed above, partially offset by declines in overallgross margin rates. The decline in the beer related gross margin rate was primarily due to the higher brewery variable costs on a per barrel basis. The declinewas partially offset by better fixed cost coverage, a shift in mix to our higher-end beers and the $838,000 recorded in Sales under the terms of the terminationagreement with FSB with no associated costs. The increase in Pubs Gross profit in 2012 compared to 2011 was primarily due to increases in guest counts andpricing, partially offset by increases in labor, food and beverage costs, which contributed to the lower gross margin rate.The increases in gross profit in 2011 compared to 2010 were primarily due to the improvements in gross margin rate and the increases in sales discussedabove, 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 Konaoperations following the KBC Merger, which included elimination of the alternating proprietorship revenue and cost of sales, improved brewery performanceand quality trends, increased capacity utilization and a shift in mix to our higher-end beer products. These improvements were partially offset by the mix shiftfrom 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 fuelsurcharges.Total approximate capacity utilization is calculated by dividing total shipments by the approximate working capacity and was as follows: Year Ended December 31, 2012 2011 2010 Capacity utilization 73% 75% 66%During the second quarter of 2012, we added additional fermentation vessels to our breweries, which increased the combined capacity of our productionbreweries from approximately 900,000 barrels per year to approximately 1,075,000 barrels per year as of December 31, 2012.Our contract brewing agreement with FSB, which was entered into during the first quarter of 2011, contributed to the improvement in capacity utilization in2011 compared to 2010. 27Table of ContentsSelling, General and Administrative ExpensesSelling, general and administrative expenses (“SG&A”) include compensation and related expenses for our sales and marketing activities, management, legaland other professional and administrative support functions.Information regarding SG&A was as follows (dollars in thousands): Year Ended December 31, Dollar 2012 2011 Change % Change $44,890 $39,742 $5,148 13.0%As a % of Net sales 26.5% 26.6% Year Ended December 31, Dollar 2011 2010 Change % Change $39,742 $29,938 $9,804 32.7%As a % of Net sales 26.6% 22.7% The increase in SG&A in 2012 compared to 2011 was primarily due to increases in labor costs as we expand our national footprint into new geographies andincreased costs associated with the launch of our Omission and Big Wave brands. Our investments in sales and marketing are consistent with our strategicfocus on firmly establishing our brands’ national footprint and competitively addressing the varied needs of craft beer consumers. These increases werepartially offset by lower packaging design and development costs.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, pointof sale and related trade merchandise, and brand platform enhancements. Administrative costs associated with the operations acquired with the KBC Mergerin October 2010 also contributed to the increase.Income from Equity Method InvestmentsIncome 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 incomethrough the date of the KBC Merger in October 2010. Since completion of the KBC Merger, Kona’s operating results have been included in our consolidatedoperating results.Income from equity method investments was as follows (in thousands): Year Ended December 31, 2012 2011 2010 FSB $- $691 $696 Kona - - 146 Total $- $691 $842 Gain on Sale of FSBOur pre-tax gain on the sale of FSB in 2011 totaled $10.4 million, which resulted from proceeds of $16.3 million less the investment in FSB of $5.9 million. 28Table of ContentsInterest ExpenseInformation regarding interest expense was as follows (dollars in thousands): Year Ended December 31, Dollar 2012 2011 Change % Change Interest expense $663 $918 $(255) (27.8)% 2011 2010 Interest expense $918 $1,497 $(579) (38.7)% Year Ended December 31, 2012 2011 2010 Average debt outstanding $13,436 $20,163 $24,236 Average interest rate 2.74% 3.43% 3.34% The decrease in Interest expense in 2012 compared to 2011 was due to lower average outstanding borrowings and lower average interest rates. The averageinterest rates shown in the above table represent cash interest, exclusive of our interest rate swap. The decreases in average outstanding borrowings wereprimarily the result of using a portion of the proceeds from the sale of FSB in May 2011 to repay the $8.8 million outstanding on our line of credit and $4.2million outstanding related to capital leases.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 andlower average outstanding borrowings. The increase in the average interest rate on outstanding borrowings was due to the reduction in the outstanding balanceon 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 ourimproved financial condition. The decrease in average outstanding borrowings was primarily the result of using a portion of the proceeds from the sale of FSBto repay the $7.5 million outstanding on our line of credit.Income Tax ProvisionOur effective income tax rate was 43.6%, 38.5% and 39.5% in 2012, 2011 and 2010, respectively. The effective income tax rates reflect the impact of non-deductible expenses, primarily meals and entertainment, and state and local taxes and tax credits. The rate in 2012 reflects the impact of increasing the tax rateapplied against the net deferred tax liability due to the State of California changing income apportionment rules to a single sales factor methodology effectiveJanuary 1, 2013. This one-time adjustment resulted in a 3.4 percentage point increase to our 2012 effective income tax rate, or $153,000 of our Income taxprovision.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 potentialof fully utilizing our outstanding net operating loss carryforwards.Liquidity and Capital ResourcesWe have required capital primarily for the construction and development of our production breweries, to support our expansion and growth plans and to fundour working capital needs. Historically, we have financed our capital requirements through cash flow from operations, bank borrowings and the sale ofcommon and preferred stock. We anticipate meeting our obligations for the twelve months beginning January 1, 2013 primarily from cash flows generatedfrom operations. In addition, we may borrow under our line of credit facility as the need arises. Capital resources available to us at December 31, 2012included $5.0 million of Cash and $22.0 million available under our line of credit facility.We had $5.0 million of Cash and $5.2 million of working capital at December 31, 2012. Our debt as a percentage of total capitalization (total debt andcommon shareholders’ equity) was 10.8% at December 31, 2012. 29Table of Contents A summary of our cash flow information was as follows (dollars in thousands): Year Ended December 31, 2012 2011 2010 Cash flows provided by operating activities $13,105 $6,728 $10,798 Cash flows provided by (used in) investing activities (8,683) 7,131 (10,313)Cash flows used in financing activities (204) (13,228) (332)Increase in cash $4,218 $631 $153 Cash provided by operating activities of $13.1 million in 2012 resulted from our Net income of $2.5 million, net non-cash expense of $8.7 million andchanges in our operating assets and liabilities as discussed in more detail below.Accounts receivable, net, decreased $2.8 million to $10.5 million at December 31, 2012 compared to $13.3 million at December 31, 2011. This decrease wasprimarily due to a $1.9 million decrease in our receivable from A-B, which totaled $6.4 million at December 31, 2012. Historically, we have not had collectionproblems related to our accounts receivable.Inventories increased $2.3 million to $11.7 million at December 31, 2012 compared to $9.4 million at December 31, 2011, primarily to support an increase inshipment volume.Accounts payable increased $1.3 million to $12.3 million at December 31, 2012 compared to $11.0 million at December 31, 2011, primarily due to increasedinventory purchases to support our increased level of sales, partially offset by a $53,000 decrease in the portion of our payable to A-B that is included inAccounts payable, which totaled $1.4 million at December 31, 2012.As of December 31, 2012, we had state net operating loss carryforwards (“NOLs”) available to offset payment of future income taxes of $73,000, tax-effected;and we had no federal NOLs remaining. We also had $609,000 in federal alternative minimum tax (“AMT”) credit carry forwards and federal insurancecontributions act (“FICA”) credit carryforwards of $29,000 tax-effected.We anticipate that we will utilize the remaining state NOLs and federal credit carry forwards in the near future and, accordingly, once utilized, we will berequired to satisfy all of our income tax obligations with cash.Capital expenditures of $9.1 million in 2012 were primarily for capacity, efficiency and cooperage purposes. For 2013, we anticipate capital expenditures ofapproximately $11 million to $13 million primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail.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 ofCredit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $11.8 million term loan (“Term Loan”).We may draw upon the Line of Credit for working capital and general corporate purposes. At December 31, 2012, we had no borrowings outstanding underthe Line of Credit and we were in compliance with the financial covenants associated with the Loan Agreement. 30Table of ContentsContractual Commitments and ObligationsThe following is a summary of our contractual commitments and obligations as of December 31, 2012 (in thousands): Payments Due By Period Contractual Obligation Total 2013 2014 and2015 2016 and2017 2018 andbeyond Term loan $11,822 $456 $1,002 $1,137 $9,227 Interest on term loan(1) 718 143 268 242 65 Promissory notes 600 - 600 - - Interest on promissory notes 348 144 204 - Note with related party 346 181 165 - - Interest on note with related party 16 12 4 - - Operating leases 16,741 1,303 1,989 1,625 11,824 Capital leases 17 6 10 1 - Purchase commitments 20,758 16,331 3,810 617 - Sponsorship obligations 3,989 2,241 1,579 169 - Interest rate swap(2) 190 190 - - - $55,545 $21,007 $9,631 $3,791 $21,116 (1)The variable interest rate on our term loan was 1.21% at December 31, 2012.(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, 2012, was 0.21%.See Notes 10, 11 and 18 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information.InflationWe believe that the impact of inflation was minimal on our business in 2012, 2011 and 2010.Critical Accounting Policies and EstimatesOur financial statements are based upon the selection and application of significant accounting policies that require management to make significant estimatesand assumptions. Judgments and uncertainties affecting the application of these policies may result in materially different amounts being reported underdifferent 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.GoodwillGoodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assetsacquired. All goodwill has been allocated to our Beer Related reporting unit based on the relative fair value of the future benefit of the purchased and existingoperations. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Ourreporting 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 determinewhether 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 whichthis 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 notrequired to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include, but are not limited to, macroeconomicconditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, andentity specific factors such as strategies and financial performance. We are not required to perform a qualitative assessment for our annual impairment test andmay instead bypass the qualitative assessment and perform the two-step goodwill impairment test. 31Table of Contents 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 performthe 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 fairvalue, the second step includes determining the implied fair value of goodwill, which is then compared with the carrying amount to determine if an impairmentloss 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 valuediscount rate, estimated growth of the overall craft beer segment, and other factors. If our estimated future cash flows were to significantly decline, animpairment charge could result. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’ssubjective judgment.Indefinite-Lived Intangible AssetsWe review indefinite-lived intangible assets, primarily comprised of our trademarks, domain name and recipes, for impairment annually and whenever eventsor changes in circumstances indicate that the carrying value may not be recoverable. For indefinite-lived intangible assets that we conclude that it is more likelythan not that the fair value is more than its carrying value, no further testing is required. For those for which we do not conclude that it is more likely than notthat the fair value is more than the carrying value, we test the asset for recoverability. Recoverability of indefinite-lived intangible assets is measured bycomparing 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 assetis impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. We are notrequired to perform a qualitative assessment for our annual impairment test and may instead bypass the qualitative assessment and perform the quantitativetest.The assumptions and estimates used to determine future values and remaining useful lives of our intangibles are complex and subjective. They can be affectedby various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and ourforecasts for specific product lines.Long-Lived Asset ImpairmentWe evaluate potential impairment of our long-lived assets, including our distributor agreements, non-compete agreements and other intangible assets, whenfacts and circumstances indicate that the carrying values of such long-lived assets may be impaired. In such cases, an evaluation of recoverability isperformed by comparing the carrying value of the assets to the projected future undiscounted cash flows and by preparing other quantitative and qualitativeanalyses. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss during the current period. We didnot identify indicators of impairment during 2012, 2011 or 2010. 32Table of ContentsRefundable Deposits on KegsWe 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 reflectedas a component of Property, equipment and leasehold improvements in our Consolidated Balance Sheets at cost and are depreciated over the estimated usefullife 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 acurrent liability in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler. When a wholesaler cannot accountfor 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 lossof 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 similaritiesbetween 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 thatthis is an industry-wide issue and our loss experience is typical of the industry. In order to estimate forfeited deposits attributable to lost kegs, we periodicallyuse 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 actualliability for refundable deposits could differ from estimates.Revenue RecognitionWe 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-Bwholesale 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 oran 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.Deferred TaxesDeferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilizedtax 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 theextent 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. Ifwe 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 berealized 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 ArrangementsWe 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 PronouncementsSee Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. 33Table of Contents Item 7A.Quantitative and Qualitative Disclosures about Market RiskInterest Rate RiskWe have assessed our vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash and long-termdebt. 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 paymentsassociated 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 theone-month LIBOR, which was 0.21% at December 31, 2012. Since the interest rate swap hedges the variability of interest payments on variable rate debt withsimilar terms, it qualifies for cash flow hedge accounting treatment. This interest rate swap reduces our overall interest rate risk. We did not have anyunhedged variable rate debt outstanding at December 31, 2012.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 or the related interestincome.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, 2012 is as follows:2012 (In thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Net sales $38,499 $44,264 $44,588 $41,936 Cost of sales 26,792 30,926 30,964 30,579 Gross profit 11,707 13,338 13,624 11,357 Selling, general and administrative expenses 10,373 12,222 11,907 10,388 Operating income 1,334 1,116 1,717 969 Other expense, net (161) (176) (155) (167)Income before income taxes 1,173 940 1,562 802 Income tax provision 475 381 614 481 Net income $698 $559 $948 $321 Basic and diluted net income per share $0.04 $0.03 $0.05 $0.01 Shares used in basic per share calculation 18,845 18,857 18,872 18,874 Shares used in diluted per share calculation 18,911 18,931 18,954 18,940 2011 (In thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Net sales $32,297 $41,496 $40,477 $34,927 Cost of sales 23,069 28,038 27,762 25,142 Gross profit 9,228 13,458 12,715 9,785 Selling, general and administrative expenses 9,289 10,670 10,530 9,253 Operating income (loss) (61) 2,788 2,185 532 Income from equity-method investments 356 335 - - Gain on sale of equity interest in Fulton Street Brewery, LLC - 10,398 - 34 Other expense, net (269) (253) (183) (170)Income before income taxes 26 13,268 2,002 396 Income tax provision 10 5,108 771 152 Net income $16 $8,160 $1,231 $244 Basic and diluted net income per share $- $0.43 $0.07 $0.01 Shares used in basic per share calculation 18,819 18,829 18,843 18,845 Shares used in diluted per share calculation 18,928 18,945 18,935 18,942 34Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and ShareholdersCraft Brew Alliance, Inc.We have audited the accompanying consolidated balance sheets of Craft Brew Alliance, Inc. (the “Company”) as of December 31, 2012 and 2011, and therelated consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinionon 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 thatwe plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statementpresentation. 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 BrewAlliance, Inc. as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2012, 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.’sinternal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2013 expressed an unqualified opinion thereon./s/ Moss Adams LLP Seattle, WashingtonMarch 12, 2013 35Table of Contents CRAFT BREW ALLIANCE, INC.CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per share amounts) December 31, 2012 2011 Assets Current assets: Cash $5,013 $795 Accounts receivable, net 10,512 13,326 Inventories 11,749 9,446 Deferred income tax asset, net 1,250 894 Other current assets 3,809 2,816 Total current assets 32,333 27,277 Property, equipment and leasehold improvements, net 102,852 100,725 Goodwill 12,917 12,917 Intangible and other assets, net 17,562 17,989 Total assets $165,664 $158,908 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $12,255 $10,994 Accrued salaries, wages and payroll taxes 5,267 4,524 Refundable deposits 7,896 7,400 Other accrued expenses 1,066 1,436 Current portion of long-term debt and capital lease obligations 642 596 Total current liabilities 27,126 24,950 Long-term debt and capital lease obligations, net of current portion 12,440 13,188 Fair value of derivative financial instruments 219 572 Deferred income tax liability, net 17,156 15,210 Other liabilities 528 479 Total liabilities 57,469 54,399 Commitments and contingencies Common shareholders' equity: Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 18,874,256 and18,844,817 94 94 Additional paid-in capital 136,030 135,091 Accumulated other comprehensive loss (135) (356)Accumulated deficit (27,794) (30,320)Total common shareholders' equity 108,195 104,509 Total liabilities and common shareholders' equity $165,664 $158,908 The accompanying notes are an integral part of these financial statements. 36Table of Contents CRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share amounts) Year Ended December 31, 2012 2011 2010 Sales $182,018 $161,000 $140,852 Less excise taxes 12,731 11,803 9,121 Net sales 169,287 149,197 131,731 Cost of sales 119,261 104,011 98,064 Gross profit 50,026 45,186 33,667 Selling, general and administrative expenses 44,890 39,742 29,938 Merger related expenses - - 559 Operating income 5,136 5,444 3,170 Income from equity method investments - 691 842 Gain on sale of equity interest in Fulton Street Brewery, LLC - 10,432 - Interest expense (663) (918) (1,497)Interest and other income, net 4 43 271 Income before income taxes 4,477 15,692 2,786 Income tax provision 1,951 6,041 1,100 Net income $2,526 $9,651 $1,686 Basic and diluted net income per share $0.13 $0.51 $0.10 Shares used in basic per share calculations 18,862 18,834 17,523 Shares used in diluted per share calculations 18,934 18,931 17,568 The accompanying notes are an integral part of these financial statements. 37Table of Contents CRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2012 2011 2010 Net income $2,526 $9,651 $1,686 Unrealized gains (losses) on derivative hedge transactions, net of tax 221 172 (50)Comprehensive income $2,747 $9,823 $1,636 The accompanying notes are an integral part of these financial statements. 38Table of Contents CRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY(In thousands) Accumulated Total Additional Other Common Common Stock Paid-In Comprehensive Retained Shareholders' Shares Par Value Capital Loss Deficit Equity Balance at December 31, 2009 17,074 $85 $122,682 $(478) $(41,657) $80,632 Issuance of shares under stock plans 60 1 126 - - 127 Stock-based compensation 18 - 99 - - 99 Issuance of shares pursuant to merger with KonaBrewing Co., Inc. 1,667 8 11,694 - - 11,702 Unrealized losses on derivative financialinstruments, net of tax benefit of $31 - - - (50) - (50)Net income - - - - 1,686 1,686 Balance at December 31, 2010 18,819 94 134,601 (528) (39,971) 94,196 Issuance of shares under stock plans 10 - 23 - - 23 Stock-based compensation 16 - 467 - - 467 Unrealized gains on derivative financialinstruments, net of tax provision of $105 - - - 172 - 172 Net income - - - - 9,651 9,651 Balance at December 31, 2011 18,845 94 135,091 (356) (30,320) 104,509 Issuance of shares under stock plans 6 - 13 - - 13 Stock-based compensation 23 - 547 - - 547 Tax benefit related to stock options - - 379 - - 379 Unrealized gains on derivative financialinstruments, net of tax provision of $132 - - - 221 - 221 Net income - - - - 2,526 2,526 Balance at December 31, 2012 18,874 $94 $136,030 $(135) $(27,794) $108,195 The accompanying notes are an integral part of these financial statements. 39Table of Contents CRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2012 2011 2010 Cash flows from operating activities: Net income $2,526 $9,651 $1,686 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,369 7,204 7,044 Income from equity method investments, net of distributions received - (691) (647)Gain on sale of equity interest in Fulton Street Brewery, LLC - (10,432) - (Gain) loss on sale or disposal of property, equipment and leasehold improvements 23 (1) 102 Deferred income taxes 1,458 5,025 1,082 Stock-based compensation 547 467 99 Excess tax benefit from employee stock plans (379) - - Other (329) (135) (282)Changes in operating assets and liabilities: Accounts receivable, net 2,396 (1,976) 2,017 Inventories (1,855) (640) 1,445 Other current assets (994) 418 590 Other assets - (495) 36 Accounts payable and other accrued expenses 1,269 (2,773) (1,353)Accrued salaries, wages and payroll taxes 743 471 (1,230)Refundable deposits 331 635 209 Net cash provided by operating activities 13,105 6,728 10,798 Cash flows from investing activities: Expenditures for property, equipment and leasehold improvements (9,138) (8,488) (4,669)Proceeds from sale of property, equipment and leasehold improvements 37 120 160 Cash paid for merger with Kona Brewing Co., Inc. and related entities, net - - (6,206)Proceeds received for federal grant associated with photovoltaic system - - 402 Proceeds from the sale of equity interest in Fulton Street Brewery, LLC 418 15,527 - Other - (28) - Net cash provided by (used in) investing activities (8,683) 7,131 (10,313) Cash flows from financing activities: Principal payments on debt and capital lease obligations (596) (5,751) (1,505)Net borrowings (repayments) under revolving line of credit - (7,500) 1,100 Proceeds from issuances of common stock 13 23 127 Debt issuance costs - - (54)Excess tax benefit from employee stock plans 379 - - Net cash used in financing activities (204) (13,228) (332) Increase in cash 4,218 631 153 Cash: Beginning of period 795 164 11 End of period $5,013 $795 $164 Supplemental disclosure of cash flow information: Cash paid for interest $774 $972 $1,625 Cash paid for income taxes, net 416 675 223 Supplemental disclosure of non-cash information: Fair value of common stock issued in connection with acquisition of Kona Brewing Co., Inc. andrelated entities $- $- $11,702 Receivable from sale of equity interest in Fulton Street Brewery, LLC - 836 - The accompanying notes are an integral part of these financial statements. 40Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Nature of OperationsOverviewCraft 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 draftproducts for the Widmer Brothers, Redhook, Kona and Omission brands at our five company-owned breweries and operate five pubs that promote ourproducts, offer dining and entertainment facilities and sell retail merchandise. Our common stock trades on the Nasdaq Stock Market under the tradingsymbol “BREW.”Our products are distributed domestically in all 50 states. This national footprint was established primarily through a series of distribution agreements withAnheuser-Busch, LLC (“A-B”), a significant shareholder. In 2004, we and A-B entered into three agreements, an exchange and recapitalization agreement (asamended, the “Exchange Agreement”), a master distributor agreement (as amended, the “A-B Distributor Agreement”) and a registration rights agreement thatcollectively constitute the framework of our existing relationship with A-B.Under the present terms of the A-B Distributor Agreement, we distribute our products in substantially all of our markets through A-B’s seamless nationalwholesale distributor network. Our agreement with A-B initially allowed us to establish relationships nationwide with these wholesalers. As a result of thisdistribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers own the exclusive right to distribute our beersin their respective markets if the A-B Distributor Agreement expires or is terminated. A-B’s domestic wholesaler network consists primarily of independentwholesalers, together with owned branches. The A-B Distributor Agreement is subject to early termination by either party upon the occurrence of certain events.The A-B Distributor Agreement expires December 31, 2018, but may be renewed automatically for an additional ten-year period unless A-B provides writtennotice to the contrary on or prior to June 30, 2018.Basis of PresentationThe consolidated financial statements include the accounts of Craft Brew Alliance, Inc. and our wholly owned subsidiaries. All intercompany transactionsand balances are eliminated in consolidation.Note 2. Significant Accounting PoliciesCashWe maintain cash balances with financial institutions that may exceed federally insured limits. We did not have any cash equivalents at December 31, 2012 or2011.Accounts ReceivableAccounts receivable is comprised primarily of trade receivables due from wholesalers and A-B for beer and promotional product sales. Because of state liquorlaws 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 regularlyprovide an allowance for doubtful accounts for beer sales. We have provided an allowance for promotional merchandise receivables that have been invoiced tothe wholesaler, which reflects our best estimate of probable losses inherent in the accounts. We determine the allowance based on historical customer experienceand other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance. The allowance fordoubtful accounts was $25,000 at both December 31, 2012 and 2011.Activity related to our allowance for doubtful accounts was immaterial in 2012, 2011 and 2010.InventoriesInventories, 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 thelower 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 utilitybelow the product’s carrying value, we reduce 41Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)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 Intangibleand other assets on our Consolidated Balance Sheets.Property, Equipment and Leasehold ImprovementsProperty, equipment and leasehold improvements are stated at cost reduced by proceeds received under applicable cash grants, less accumulated depreciationand accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal ofequipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains orlosses 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 usefullives:Buildings30 – 50 yearsBrewery equipment10 – 25 yearsFurniture, fixtures and other equipment2 – 10 yearsVehicles5 yearsLeasehold improvementsThe lesser of useful life or term of the leaseValuation of Long-Lived AssetsWe evaluate potential impairment of long-lived assets, including definite-lived intangible assets, when facts and circumstances indicate that the carrying valuesof such assets may be impaired. An evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscountedcash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, werecognize an impairment loss in the current period in our Consolidated Statements of Income. We did not identify indicators of impairment during 2012, 2011or 2010.Definite-lived intangible assets are amortized using a straight line basis of accounting. Definite-lived intangible assets and their respective estimated lives are asfollows:Distributor agreements15 yearsNon-compete agreements5 yearsGoodwillWe evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may notbe recoverable. All of our goodwill has been allocated to our Beer Related reporting unit based on the relative fair value of the future benefit of the purchased andexisting operations. We test goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. If the carrying amount exceedsfair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. We conduct our annual impairment test asof December 31 of each year and have determined there to be no impairment for any of the periods presented.Indefinite-Lived Intangible AssetsIndefinite-lived intangible assets consist primarily of trademarks, domain name and recipes. We evaluate the recoverability of indefinite-lived intangible assetsannually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the carrying amount of the asset toits estimated fair value measured by using discounted cash flows that the asset is expected to generate. We have determined there to be no impairment for any ofthe periods presented.Refundable Deposits on KegsWe 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 inour 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 ofwhether 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 ourbrewery equipment. 42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 eachwholesaler and retailer, the homogeneous nature of kegs owned by most brewers, and the relatively small deposit collected for each keg when compared with itsmarket value. In order to estimate forfeited deposits attributable to lost kegs, we periodically use internal records, records maintained by A-B, recordsmaintained by other third party vendors and historical information to estimate the physical count of kegs held by wholesalers and A-B. These estimates affectthe amount recorded as equipment and refundable deposits as of the date of the consolidated financial statements. The actual liability for refundable depositsmay differ from estimates. As of December 31, 2012 and 2011, our Consolidated Balance Sheets included $7.6 million and $7.1 million, respectively, inrefundable deposits on kegs and $5.8 million and $5.1 million, respectively, in keg equipment, net of accumulated depreciation.Concentrations of RiskFinancial instruments that potentially subject us to credit risk consist principally of trade accounts receivable. While wholesalers and A-B account forsubstantially all trade accounts receivable, this concentration risk is limited due to the number of wholesalers, their geographic dispersion and state lawsregulating the financial affairs of wholesalers of alcoholic beverages.Comprehensive IncomeComprehensive Income includes changes in the fair value of interest rate derivatives that are designated as cash flow hedges.Revenue RecognitionWe 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-Bwholesale 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 oran 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.Excise TaxesThe federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers producing less than two million barrels of beer percalendar 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 perbarrel for each barrel in excess of 60,000 barrels. Individual states also impose excise taxes on alcoholic beverages in varying amounts. As presented in ourConsolidated Statements of Income, Sales reflects the amounts invoiced to A-B, wholesalers and other customers. Excise taxes due to federal and state agenciesare not collected from our customers, but rather are our responsibility. Net sales, as presented in our Consolidated Statements of Income, are reduced byapplicable federal and state excise taxes.Shipping and Handling CostsCosts incurred to ship our product are included in Cost of sales in our Consolidated Statements of Income.Advertising ExpensesAdvertising costs, consisting of television, radio, print, outdoor advertising, on-line and social media, sponsorships, trade events, promotions and printedproduct information, as well as costs to produce these media, are expensed as incurred. The costs associated with point of sale display items and relatedpromotional merchandise are inventoried and charged to expense when first used. For the years ended December 31, 2012, 2011 and 2010, we recognized costsfor all of these activities totaling $12.4 million, $11.9 million and $9.5 million, respectively, which are reflected as Selling, general and administrativeexpenses in our Consolidated Statements of Income. 43Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Advertising expenses are included in Selling, general and administrative expenses and frequently involve the local wholesaler sharing in the cost of theprogram. Reimbursements from wholesalers for advertising and promotion activities are recorded as a reduction to Selling, general and administrative expensesin our Consolidated Statements of Income. Pricing discounts to wholesalers are recorded as a reduction of Sales in our Consolidated Statements of Income.Stock-Based CompensationThe 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 BSMmodel 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. Weestimate 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 performancegoals will be met. We re-measure the probability of achieving the performance goals during each reporting period. In future reporting periods, if we determinethat performance goals are not probable of occurrence, no compensation expense will be recognized and any previously recognized compensation expense wouldbe reversed.Earnings per ShareBasic earnings per share is computed on the basis of the weighted average number of shares that were outstanding during the period. Diluted earnings per shareinclude the dilutive effect of common share equivalents calculated under the treasury stock method. Performance based restricted stock grants are included inbasic and diluted earnings per share when the underlying performance metrics have been met.Income TaxesDeferred income taxes are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating lossand tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not thatsome 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 taxableincome 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 isrecognized in income in the period that includes the enactment date.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, 2012 and 2011, we did not haveany unrecognized tax benefits or any interest and penalties accrued on unrecognized tax benefits.Segment InformationOur Chief Operating Decision Maker monitors net sales and gross margins of our Beer Related operations and our Pubs operations. Beer Related operationsinclude the brewing operations and related beer sales of our Widmer Brothers, Redhook, Kona and Omission beer brands. Pubs operations primarily includeour 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 asegment level. 44Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and onvarious assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under differentassumptions or conditions.ReclassificationsCertain reclassifications have been made to the prior year’s data to conform to the current year’s presentation. None of the changes impact our previouslyreported consolidated Net sales, Gross profit, Operating income, Net income or Basic or diluted net income per share.Note 3. Recent Accounting PronouncementsIn July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Intangibles – Goodwill andOther: Testing Indefinite-Lived Intangible Assets for Impairment,” which permits an entity to make a qualitative assessment to determine whether it is morelikely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. Entities are required to test indefinite-lived intangible assets forimpairment at least annually and more frequently if indicators of impairment exist. If an entity concludes, based on an evaluation of all relevant qualitativefactors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it is not required to performthe quantitative impairment test for that asset. Because the qualitative assessment is optional, an entity is permitted to bypass it for any indefinite-livedintangible asset in any period and apply the quantitative test. ASU 2012-02 also permits the entity to resume performing the qualitative assessment in anysubsequent period. ASU 2012-02 is effective for impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption ispermitted. The adoption of ASU 2012-02 in the fourth quarter of 2012 did not have any effect on our financial position, results of operations or cash flows.In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” Under ASU2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (“AOCI”) bycomponent. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out ofAOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. Foramounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additionaldetails about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financialstatements. ASU 2013-02 is effective for us on January 1, 2013.Note 4. InventoriesInventories consisted of the following (in thousands): December 31 2012 2011 Raw materials $2,497 $2,778 Work in process 3,552 2,829 Finished goods 3,263 2,128 Packaging materials 544 558 Promotional merchandise 1,552 967 Pub food, beverages and supplies 341 186 $11,749 $9,446 Work in process is beer held in fermentation tanks prior to the filtration and packaging process. 45Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Note 5. Other Current AssetsOther current assets consisted of the following (in thousands): December 31 2012 2011 Deposits paid to keg lessor $1,824 $1,518 Prepaid property taxes 200 315 Prepaid insurance 299 192 Income tax receivable 296 - Other 1,190 791 $3,809 $2,816 Note 6. Property, Equipment and Leasehold ImprovementsProperty, equipment and leasehold improvements consisted of the following (in thousands): December 31 2012 2011 Brewery equipment $87,664 $82,481 Buildings 53,236 52,729 Land and improvements 7,598 7,598 Furniture, fixtures and other equipment 7,121 6,187 Leasehold improvements 6,196 5,644 Vehicles 135 135 Construction in progress 4,546 3,104 166,496 157,878 Less accumulated depreciation and amortization 63,644 57,153 $102,852 $100,725 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 $1.2million placed in escrow. The escrow balance was intended to satisfy valid claims, if any, asserted by A-B during the 18 months following the closing date inconnection with breaches of representations and warranties made by us in the Purchase Agreement. Of the $1.2 million escrow balance, $0.4 million had beencollected as of December 31, 2011 and $0.8 million was included in accounts receivable on our Consolidated Balance Sheets at December 31, 2011, andcollected during 2012. We recorded a gain of $10.4 million in 2011 associated with the sale of our equity interest in FSB.We recognized $691,000 in 2011 for our share of FSB’s earnings through May 2, 2011 and $696,000 in 2010. The book value of our equity investment inFSB was $5.9 million as of May 2, 2011.See Note 19 for information regarding related party transactions with FSB.Note 8. KBC MergerOn October 1, 2010, we completed a merger (the “KBC Merger”) by acquiring all outstanding shares of Kona Brewing Co., Inc.’s (“KBC”) common stock inexchange 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. 46Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)We believe that the combined entity has been able to secure advantages beyond those that had already been achieved in our long-term strategic relationship withKBC in supporting its brand family of products. This acquisition has increased the breadth and variety of our brand offerings, creating favorable sellingopportunities in additional lucrative markets.We incurred merger-related expenses, including legal, consulting, accounting and other professional fees, and severance costs of $559,000, which are reflectedin 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 andliabilities assumed at the acquisition date measured at their fair values. The excess of the consideration transferred and the acquisition date fair value of theprevious equity interest held in Kona over the fair value of net assets acquired is recognized as goodwill. The following table summarizes the considerationpaid (in thousands):Fair value of common stock issued $11,702 Cash consideration paid 6,237 17,939 Fair value of equity interest in Kona held at acquisition date 1,200 Total consideration $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 ourcommon 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 measuringKona at fair value. The gain is included in Other income in the Consolidated Statements of Income for the year ended December 31, 2010.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 $4,858 Property, equipment and leasehold improvements 4,174 Trade name and trademarks 4,600 Non-compete agreements 440 Total assets acquired 14,072 Liabilities Current liabilities 4,091 Interest bearing liabilities and other long-term liabilities 1,476 Deferred income tax liabilities, net and other non-current liabilities 2,283 Total liabilities assumed 7,850 Net assets acquired $6,222 Goodwill recorded $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 andgoodwill 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 thebusiness combination, we consolidated the operations of KBC. Our results of operations included net sales of $3.2 million and net income of $309,000attributable 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 acquisitionaccounting adjustments, primarily amortization of intangible assets. 47Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)As a result of the KBC Merger, KBC became a wholly owned subsidiary and, accordingly, KBC’s results of operations are included in our consolidatedresults of operations from October 1, 2010. For the year ended December 31, 2010, our share of KBC’s net income prior to the KBC Merger was $146,000.Unaudited pro forma results of operations as if the KBC Merger had occurred on January 1, 2010 are as follows (in thousands, except per share amounts): Year EndedDecember 31,2010 Net sales $128,260 Net income $2,181 Basic and diluted earnings per share $0.12 Note 9. Intangible and Other AssetsIntangible and Other AssetsIntangible and other assets and the related accumulated amortization are as follows (in thousands): December 31, 2012 2011 Trademarks and domain name $14,429 $14,429 Recipes 700 700 Distributor agreements 2,200 2,200 Accumulated amortization (660) (513) 1,540 1,687 Non-compete agreements 440 540 Accumulated amortization (198) (210) 242 330 Favorable contracts 31 153 Accumulated amortization (30) (147) 1 6 Other 280 280 Accumulated amortization (236) (223) 44 57 16,956 17,209 Promotional merchandise 606 780 $17,562 $17,989 Amortization expense was as follows (in thousands): Year Ended December 31, 2012 2011 2010 Amortization expense $253 $292 $312 Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands):2013 $249 2014 248 2015 223 2016 149 2017 149 Thereafter 809 $1,827 48Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Note 10. Debt and Capital Lease ObligationsLong-term debt and capital lease obligations consisted of the following (in thousands): December 31, 2012 2011 Term loan, due July 1, 2018 $11,822 $12,240 Line of credit, due September 30, 2015 - - Promissory notes payable to related parties, all due July 1, 2015 600 600 Premium on promissory notes 298 404 Note with affiliated party, due November 15, 2014 346 519 Capital lease obligations for equipment 16 21 13,082 13,784 Less current portion 642 596 $12,440 $13,188 Required principal payments on outstanding debt obligations as of December 31, 2012 for the next five years and thereafter are as follows (in thousands): Term Loan PromissoryNotes Note withRelatedParty CapitalLeaseObligations 2013 $456 $- $181 $6 2014 486 - 165 5 2015 516 600 - 5 2016 549 - - 1 2017 588 - - - Thereafter 9,227 - - - 11,822 600 346 17 Amount representing interest - - - 1 $11,822 $600 $346 $16 Term Loan and Line of CreditWe have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A. (“BofA”), which is presently comprised of a $22.0 millionrevolving 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 TermLoan with a current balance of $11.8 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 repaidthe outstanding borrowings under the Line of Credit and had no borrowings outstanding under the Line of Credit at December 31, 2012 or 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 theBenchmark Rate plus a marginal rate. We may select different Benchmark Rates for different tranches of borrowings under the Line of Credit. The marginalrate varies from 1.00% to 2.25% based on our funded debt ratio. At December 31, 2012, 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 ofCredit is due and payable monthly. 49Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) 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, 2012, the quarterly fee was 0.15% and the fee totaled the following (inthousands): Year Ended December 31, 2012 2011 2010 Loan Agreement fee $34 $29 $29 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 rangingfrom 1.00% to 2.00%. We have had no letters of credit outstanding during 2012, 2011 or 2010.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 theLIBOR one-month Benchmark Rate. The interest rate on the Term Loan was 1.21% as of December 31, 2012. Accrued interest for the Term Loan is due andpayable monthly. Principal payments are due monthly in accordance with an agreed-upon schedule set forth in the Loan Agreement, with any unpaid principalbalance and unpaid accrued interest due and payable on July 1, 2018.We were in compliance with all applicable contractual financial covenants at December 31, 2012. These financial covenants under the Loan Agreement aremeasured on a trailing four-quarter basis. 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.The Loan Agreement is secured by substantially all of our personal property and by certain real property (“Collateral”). In addition, we are restricted in ourability to declare or pay dividends, repurchase outstanding common stock, incur additional debt or enter into any agreement that would result in a change incontrol.Promissory Notes Payable to Individual LendersWe 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 with substantially the same terms and conditions. Each promissory note is secured by a deedof trust on the commercial real estate. The outstanding note balance to each lender as of December 31, 2012 and 2011 was $200,000, with each note bearing afixed 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 adjustmentreflecting 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 statedvalue 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. Interestpayments are due and payable monthly.Note with Affiliated PartyIn connection with the KBC Merger, we assumed an obligation for a promissory note payable (“Related Party Note”) to a counterparty that was a significantKBC shareholder and remains a shareholder of Craft Brew Alliance, Inc. The Related Party Note is secured by the equipment comprising a photovoltaic cellgeneration system (“photovoltaic system”) installed at our brewery located in Kailua-Kona, Hawaii. Accrued interest on the Related Party Note is due andpayable monthly at a fixed interest rate of 4.75%, with monthly loan payments of $16,129. Any unpaid principal balance and unpaid accrued interest underthe 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 andstate tax credits were remitted to the creditor as a reduction of principal. 50Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Note 11. Derivative Financial InstrumentsInterest Rate Swap ContractsOur risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using themost effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks andmanagement 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. Tomitigate this risk, we entered into a five-year interest rate swap contract with BofA with a total notional value of $8.9 million as of December 31, 2012 tohedge the variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. Through this swap agreement, we payinterest at a fixed rate of 4.48% and receive interest at a floating-rate of the one-month LIBOR, which was 0.21% at December 31, 2012. Since the interest rateswap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment. As of December31, 2012, unrealized net losses of $219,000 were recorded in Accumulated other comprehensive loss as a result of this hedge. The effective portion of the gainor loss on the derivative is reclassified into Interest expense in the same period during which we record Interest expense associated with the Term Loan. Therewas no hedge ineffectiveness recognized during 2012, 2011 or 2010.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 2012, 2011 and2010 was as follows (in thousands): Derivatives in CashFlow HedgingRelationships Amount of Gain/(Loss)Recognized in AccumulatedOCI (Effective Portion) Location of Loss Reclassifiedfrom Accumulated OCI intoIncome (Effective Portion) Amount of Loss Reclassified fromAccumulated OCI intoIncome (Effective Portion) Year EndedDecember 31, 2012 $353 Interest expense $387 2011 $277 Interest expense $400 2010 $(81) Interest expense $410 Derivatives Not inCash Flow HedgingRelationships Year EndedDecember 31, Location of Gain/(Loss)Recognized in Income onDerivative Amount of Gain/(Loss)Recognized in Income onDerivative 2012 N/A $- 2011 N/A $- 2010 Interest and other income, net $73 Note 12. Fair Value MeasurementsFactors 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 speedsand credit risk; and ·Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value. 51Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)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, 2012 Level 1 Level 2 Level 3 Total Derivative financial instrument $- $219 $- $219 Fair Value at December 31, 2011 Derivative financial instrument $- $572 $- $572 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 during2012, 2011 or 2010.We believe the carrying amounts of Cash, Accounts receivable, Accounts payable and Other accrued expenses are a reasonable approximation of the fair valueof 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): December 31, 2012 2011 Fixed-rate debt on balance sheet $1,260 $1,544 Fair value of fixed-rate debt $1,275 $1,615 We have fixed-rate debt and calculate the estimated fair value of our fixed-rate debt using a discounted cash flow methodology. Using estimated current interestrates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt.Note 13. Segment Results and ConcentrationsNet sales, gross profit and gross margin by segment were as follows (dollars in thousands): 2012 BeerRelated Pubs Total Net sales $145,670 $23,617 $169,287 Gross profit $46,341 $3,685 $50,026 Gross margin 31.8% 15.6% 29.6% 2011 Net sales $127,376 $21,821 $149,197 Gross profit $41,626 $3,560 $45,186 Gross margin 32.7% 16.3% 30.3% 2010 Net sales $119,389 $12,342 $131,731 Gross profit $31,797 $1,870 $33,667 Gross margin 26.6% 15.2% 25.6%The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segmentinformation 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 onspecific factors such as headcount. These factors can have a significant impact on the amount of gross profit for each segment. While we believe we haveapplied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment gross profit. 52Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Sales to wholesalers through the A-B Distributor Agreement represented the following percentage of our Sales:Year Ended December 31, 2012 2011 2010 81.1% 80.8% 81.1% Receivables from A-B represented the following percentage of our Accounts receivable balance:December 31 2012 2011 60.6% 62.4% 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 CompensationWe maintain several stock incentive plans under which stock-based awards are granted to employees and non-employee directors. We issue new shares ofcommon stock upon conversion of the stock-based awards. Under the terms of our stock option plans, subject to certain limitations, employees and directorsmay 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 theCompensation Committee of our Board of Directors, which determines the grantees, the number of shares of common stock for which options are exercisableand 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”) in May 2010, no further grants of stock-based awards may be made under our 2002Stock Option Plan (the “2002 Plan”) or our 2007 Stock Incentive Plan (the “2007 Plan”); however, the provisions of these plans will remain in effect until alloutstanding options are terminated or exercised.2010 Stock Incentive PlanThe 2010 Plan provides for grants of stock options, restricted stock, restricted stock units, performance awards and stock appreciation rights. Whileincentive 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 generally vest over a five-year period. Vested options are generally exercisable for ten years from the date of grant. Amaximum of 750,000 shares of common stock are authorized for issuance under the 2010 Plan. As of December 31, 2012, there were 325,157 sharesavailable for future awards pursuant to the 2010 Plan, assuming all 172,395 shares subject to performance vesting vest at the end of the respectiveperformance periods.2007 Stock Incentive PlanUnder our 2007 Plan, stock options and restricted stock were granted to our employees and restricted stock grants were awarded to our directors. Optionsgranted to our employees pursuant to the 2007 Plan generally vest over a five-year period. Vested options are generally exercisable for ten years from the date ofgrant.2002 Stock Option PlanOur 2002 Plan provided for the grant of non-qualified stock options and incentive stock options to employees and non-qualified stock options to non-employeedirectors and independent consultants or advisors, subject to certain limitations. Options granted to our employees generally vest over either a four-year or five-year period while options granted to our directors generally became exercisable within three months following the grant date. Vested options are generallyexercisable for ten years from the date of grant. 53Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Stock-Based Compensation ExpenseCertain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):Year Ended December 31, 2012 2011 2010 Weighted average per share fair value of stock options granted $4.84 $5.99 $2.68 Intrinsic value of stock options exercised 40 60 252 Intrinsic value of fully-vested stock awards granted 366 243 61 Stock-based compensation expense was recognized in our Consolidated Statements of Income as follows (in thousands): Year Ended December 31, 2012 2011 2010 Selling, general and administrative expense $547 $467 $99 We amortize stock-based compensation on a straight-line basis over the vesting period of the individual awards, which is the requisite service period, withestimated forfeitures considered.At December 31, 2012, we had total unrecognized stock-based compensation expense of $1.2 million, which will be recognized over the weighted averageremaining 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, 2012 2011 2010 Risk-free interest rate 1.46% 2.84% 2.64% - 3.86%Dividend yield 0.0% 0.0% 0.0%Expected life 8.15 years 7.5 years 10 years Volatility 60.39% 62.10% 62.54%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 onhistorical exercise data. The expected volatility is calculated based on the historical volatility of our common stock.Stock-Based Awards Plan ActivityStock Option ActivityStock option activity for the year ended December 31, 2012 was as follows: OptionsOutstanding WeightedAverageExercise Price Outstanding at December 31, 2011 252,240 $4.30 Granted 123,525 7.62 Exercised (6,500) 2.02 Forfeited (600) 2.02 Outstanding at December 31, 2012 368,665 5.46 Certain information regarding options outstanding as of December 31, 2012 was as follows: OptionsOutstanding Options Exercisable Number 368,665 111,328 Weighted average exercise price $5.46 $3.49 Aggregate intrinsic value $664,000 $366,000 Weighted average remaining contractual term 7.8 years 6.2 years 54Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Performance-Based Stock GrantsDuring the second quarter of each of 2012 and 2011, we granted performance-based stock awards covering 104,865 shares and 67,530 shares, respectively,of our common stock to selected executives with vesting contingent upon meeting various company-wide performance goals. The performance goals are tied totarget amounts of adjusted EBITDA and net sales for the three fiscal years ending December 31, 2014 and 2013. The awards earned on the 2012 grant willrange from zero to one hundred twenty five percent of the targeted number of performance shares for the performance period ending March 31, 2015. Theawards earned on the 2011 grant will range from zero to one hundred percent of the targeted number of performance shares for the performance period endingMarch 31, 2014. Awards, if earned, will be paid in shares of common stock.Stock GrantsBeginning with the 2011 Annual Meeting of Shareholders, each non-employee director receives an annual grant of shares of our common stock with a fairvalue of $25,000 upon election at the Annual Meeting of Shareholders. Accordingly, on May 14, 2012, our Board of Directors approved an annual grant of3,277 shares of fully-vested common stock to each of our seven non-employee directors for a total of 22,939 shares of our common stock.Note 15. Earnings per Share, Basic and DilutedThe following table reconciles shares used for basic and diluted EPS and provides certain other information (in thousands): Year Ended December 31, 2012 2011 2010 Weighted average common shares for basic EPS 18,862 18,834 17,523 Dilutive effect of stock-based awards 72 97 45 Shares used for diluted EPS 18,934 18,931 17,568 Stock-based awards not included in diluted per share calculations as they would beantidilutive 124 7 82 Note 16. Income TaxesThe components of income tax expense were as follows (in thousands): Year Ended December 31, 2012 2011 2010 Current $493 $1,016 $18 Deferred 1,458 5,025 1,082 $1,951 $6,041 $1,100 Income tax expense differs from the amount computed by applying the statutory federal income tax rate to income before income taxes as follows (inthousands): Year Ended December 31, 2012 2011 2010 Provision at U.S. statutory rate $1,522 $5,335 $947 State taxes, net of federal benefit 148 567 119 Permanent differences, primarily meals and entertainment 232 266 213 Merger expenses and true up of merger treatment - - 135 Tax credits (104) (127) (214)Increase to deferred tax liability tax rate 153 - - Release of valuation allowance - - (100) $1,951 $6,041 $1,100 55Table of Contents CRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Significant components of our deferred tax assets and liabilities were as follows (in thousands): December 31, 2012 2011 Deferred tax assets Net operating losses and alternative minimum tax credit carryforwards $711 $2,059 Accrued salaries and severance 988 975 Other 828 766 2,527 3,800 Deferred tax liabilities Property, equipment and leasehold improvements (11,843) (11,369)Intangible assets (6,422) (6,450)Equity investments - (251)Other (168) (46) (18,433) (18,116) $(15,906) $(14,316)As of December 31, 2012, included in our net operating losses and alternative minimum tax credit carryforwards of $0.7 million are the following (inthousands):State NOLs, tax effected $73 Federal and state alternative minimum tax credit carryforwards $609 Federal insurance contributions act (“FICA”) credit carryforwards, tax effected $29 During 2012, the portion of the net operating loss attributable to stock option exercises was utilized. This utilization resulted in a credit to shareholders’ equityof $379,000.Among other factors, in assessing the realizability of our deferred tax assets, we consider future taxable income expected to be generated by the projecteddifferences between financial statement depreciation and tax depreciation, cumulative earnings generated to date and other evidence available to us. Based uponthis 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 allowanceas of December 31, 2012 or 2011. During 2010, we released our remaining valuation allowance of $100,000, which was recorded as an offset to our taxprovision.There were no unrecognized tax benefits as of December 31, 2012 or 2011 and we do not anticipate significant changes to our unrecognized tax benefits withinthe 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 2009through 2012. Tax years remaining open in states where we have a significant presence range from 2008 to 2012. In addition, tax years from 1997 to 2004 and2008 are eligible for examination by the IRS and state tax jurisdictions due to our utilization of the NOLs generated in these tax years in our tax returns.Note 17. Employee Benefit PlansWe sponsor a defined contribution 401(k) plan for all employees 18 years or older. Employee contributions may be made on a before-tax basis, limited by IRSregulations. For the years ended December 31, 2012, 2011 and 2010, we matched 50 percent of the employee’s contributions up to 6% of eligiblecompensation. Eligibility for the matching contribution in all years began after the participant had worked a minimum of three months. Our matchingcontributions to the plan vest ratably over five years of service by the employee. We recognized expense associated with matching contributions as follows (inthousands): Year Ended December 31, 2012 2011 2010 401(k) expense $705 $687 $428 56Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Note 18. CommitmentsOperating LeasesWe lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various datesthrough the year ending December 31, 2047. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflectchanges in price indices. Certain leases require us to pay for insurance, taxes and maintenance applicable to the leased property. Under the terms of the landlease 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, 2012 are as follows (in thousands):2013 $1,303 2014 1,006 2015 983 2016 866 2017 759 Thereafter 11,824 $16,741 Rent expense under all operating leases, including short-term rentals as well as cancelable and noncancelable operating leases was as follows (in thousands): Year Ended December 31, 2012 2011 2010 Rent expense $2,665 $2,759 $2,356 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 toa previous lease agreement in 2010 and 2009. The lessee may renew the lease for two additional five-year periods. We recognized rental income related to thesublease, which was recorded as an offset to rent expense in our Consolidated Statements of Income, as follows (in thousands): Year Ended December 31, 2012 2011 2010 Rental income $254 $242 $193 Future minimum lease rentals pursuant to this agreement as of December 31, 2012 are as follows (in thousands): 2013 $261 2014 269 2015 277 2016 23 2017 - Thereafter - $830 57Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)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 were as follows (in thousands) and areincluded in the Rent expense under all operating leases above:Year Ended December 31, 2012 2011 2010 $125 $122 $124 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 forthe 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 headquartersoffice 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 appraisalmethod. 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 areconsidered 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 whoseowners include a shareholder who owns more than 5% of our common stock and a nonexecutive officer. The sublease contracts expire on various datesthrough 2020, with an extension at our option for two five-year periods. Lease payments to this lessor were as follows (in thousands) and are included in theRent expense under all operating leases above:Year Ended December 31, 2012 2011 2010 $402 $360 $41 All lease terms are considered to be arm’s-length transactions.Purchase and Sponsorship CommitmentsWe periodically enter into commitments to purchase certain raw materials in the normal course of business. Furthermore, we have entered into purchasecommitments and commodity contracts to ensure we have the necessary supply of malt and hops to meet future production requirements. Certain of the maltand hop commitments are for crop years through 2015. We believe that malt and hop commitments in excess of future requirements, if any, will not have amaterial impact on our financial condition or results of operations. We may take delivery of the commodities in excess of our requirements or make paymentsagainst the purchase commitments earlier than contractually obligated, which means our cash outlays in any particular year may exceed or be less than thecommitment 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 31,2013, 2014, 2015 and 2016; however, either the quantity to be delivered or the full price for the commodity has not been established at the present time. To theextent the commitment is not measurable or has not been fixed, that portion of the commitment has been excluded from the table below.We have entered into multi-year sponsorship and promotional commitments with certain professional sports teams and entertainment companies. Generally, inexchange for our sponsorship consideration, we post signage and provide other promotional materials at the site or the event. In certain instances, we aregranted an exclusive right to provide the craft beer products at the site or event. The terms of these sponsorship commitments expire at various dates throughMay 31, 2016. 58Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)Aggregate payments under purchase and sponsorship commitments as of December 31, 2012 are as follows (in thousands): PurchaseObligations SponsorshipObligations Total 2013 $16,331 $2,241 $18,572 2014 2,201 1,260 3,461 2015 1,609 319 1,928 2016 584 169 753 2017 33 - 33 Thereafter - - - $20,758 $3,989 $24,747 Note 19. Related-Party TransactionsAs of both December 31, 2012 and 2011, A-B owned approximately 32.2% of our outstanding common stock.Modifications to A-B AgreementsIn connection with the sale of our interest in FSB, we modified two agreements with A-B originally executed in 2004: the Master Distributor Agreement (asamended 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 theExchange 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 distributionnetwork, except for beer sold in qualifying territories, as defined, from May 1, 2011 (the “Commencement Date”) until December 31, 2018, to $0.25 per caseequivalent from $0.74 per case equivalent. Beer sold through A-B or the associated A-B distribution network in qualifying territories, as defined, will beexempt 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 inthe qualifying territories at or above specified amounts. In the event the A-B Distributor Agreement is renewed beyond December 31, 2018, the A-B DistributorAgreement 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-BDistributor 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-Baffiliated wholesalers. We would not be obligated to pay margin fees on sales of the new brand. 59Table of ContentsCRAFT BREW ALLIANCE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued) Other Transactions with A-BOther transactions with A-B consisted of the following (in thousands): Year Ended December 31, 2012 2011 2010 Gross sales to A-B $149,492 $132,914 $119,885 Margin fee paid to A-B, classified as a reduction of Sales 1,864 2,777 5,589 Sales to FSB through a contract brewing arrangement, classified in Sales(1) 3,083 2,863 28 Sales to FSB pursuant to termination agreement discussed below 838 - - Handling, inventory management, royalty and other fees paid to A-B, classified inCost of sales 449 490 607 Amounts received from A-B for lost keg fees and forfeited deposits, included as areduction of Property, equipment and leasehold improvements, net 122 267 364 (1)We owned 42% of FSB prior to it becoming a wholly owned subsidiary of A-B in May 2011 and, accordingly, transactions with FSB areconsidered to be related party transactions in all periods.Effective September 1, 2012, in the best interest of both parties, we mutually agreed with FSB to end our contract brewing arrangement. Under the terminationagreement, we phased out production of FSB branded beers through November 2012 utilizing remaining inventory on-hand. In consideration, FSB will pay us$70,000 per month through September 2013.Amounts due to or from A-B were as follows (in thousands): December 31 2012 2011 Amounts due from A-B related to beer sales pursuant to the A-B Distributor Agreement $6,369 $8,310 Amounts due from FSB related to beer sales pursuant to a contract brewing arrangement 260 585 Amounts due from FSB related to termination agreement 630 - Refundable deposits due to A-B (2,472) (1,746)Amounts due to A-B for services rendered (1,974) (2,482)Net amount due from A-B $2,813 $4,667 KBCPrior to the KBC Merger in October 2010, KBC was a related party. For the year ended December 31, 2010, we had the following related party transactionswith KBC (in thousands): Year EndedDecember 31, 2010 Alternating proprietorship fees related to leasing the Oregon Brewery to KBC, recorded as a component ofSales $4,814 Fees for selling raw materials and packaging products to KBC, recorded as a component of Sales $5,032 Rent charged to KBC for use of kegs for products distributed in Hawaii, recorded as an offset to Cost ofsales $97 60Table of Contents Item 9.Changes In and Disagreements With Accountants on Accounting and Financial DisclosureNone. Item 9A.Controls and ProceduresDisclosure Controls and ProceduresOur management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design andoperation 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 Officerconcluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to bedisclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified bythe Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. While reasonable assurance is a highlevel 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 controlsmust be proportionate to their costs.Changes in Internal Control Over Financial ReportingDuring the fourth quarter of 2012, no changes in our internal control over financial reporting were identified in connection with the evaluation required byExchange 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 ReportingOur 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 fairpresentation of published financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absoluteassurance 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, managementconcluded that our internal control over financial reporting was effective as of December 31, 2012.Moss Adams LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as ofDecember 31, 2012, as stated in their report, which is included herein. 61Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and ShareholdersCraft Brew Alliance, Inc.We have audited Craft Brew Alliance, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2012, based on criteria establishedin Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to expressan 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 thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures 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 andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith 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, 2012,based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Craft Brew Alliance, Inc. as of December 31, 2012 and 2011, and the consolidated statements of income, comprehensive income, shareholders’ equity, andcash flows for each of the three years in the period ended December 31, 2012, and our report dated March 12, 2013 expressed an unqualified opinion on thoseconsolidated financial statements./s/ Moss Adams LLP Seattle, WashingtonMarch 12, 2013 62Table of Contents Item 9B.Other Information None.PART III Item 10.Directors, Executive Officers and Corporate Governance The information required by this Item is contained in part in our definitive proxy statement for our 2013 Annual Meeting of Shareholders to be held on May22, 2013 (the “2013 Proxy Statement”) under the captions “Board of Directors,” “Board of Directors - Audit Committee,” “Executive Officers,” and “Section16(a) Beneficial Ownership Reporting Compliance,” and the information contained therein is incorporated herein by reference.Code of ConductWe 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 (selectInvestor Relations — Governance — Highlights). Copies of these documents are available to any shareholder who requests them. Such requests should bedirected to Investor Relations, Craft Brew Alliance, Inc., 929 N. Russell Street, Portland, OR 97227. Any waivers of the Code for our directors or executiveofficers 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 daysafter the waiver is approved.Item 11.Executive Compensation Information required by this Item is contained in our 2013 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 MattersSecurities Authorized for Issuance Under Equity Compensation PlansThe following is a summary as of December 31, 2012 of all of our plans that provide for the issuance of equity securities as compensation. See Note 14 ofNotes to Consolidated Financial Statements for additional information. Plan Category Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights (a) Weighted averageexercise price ofoutstanding options,warrants and rights (b) Number of securitiesremaining available for futureissuance under equitycompensation plans(excluding securities reflectedin column (a)) (c) Equity compensation plans approved by shareholders 368,665 $ 5.46 325,157 Equity compensation plans not approved by shareholders(2) - - - Total 368,665 $5.46 325,157 The remaining information required by this Item is contained in our 2013 Proxy Statement under the caption “Security Ownership of Certain BeneficialOwners and Management,” and the information contained therein is incorporated herein by reference. 63Table of ContentsItem 13.Certain Relationships and Related Transactions, and Director Independence The information required by this Item is contained in our 2013 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 ServicesThe information required by this Item is contained in our 2013 Proxy Statement under the caption “Proposal No. 2 — Ratification of Appointment ofIndependent Registered Public Accounting Firm” and the information contained therein is incorporated herein by reference. PART IV Item 15.Exhibits and Financial Statement SchedulesFinancial Statements and Schedules PageReport of Moss Adams LLP, Independent Registered Public Accounting Firm35Consolidated Balance Sheets as of December 31, 2012 and 201136Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 201037Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 201038Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2012, 2011 and 201039Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 201040Notes to Consolidated Financial Statements41ExhibitsExhibits are listed in the Exhibit Index that appears immediately following the signature page of this report and is incorporated herein by reference, and are filedor incorporated by reference as part of this Annual Report on Form 10-K. 64Table of ContentsSIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized, in Portland, Oregon, on March 12, 2013. 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 Registrantand in the capacities indicated on March 12, 2013.Signature Title /s/ Terry E. Michaelson Chief Executive Officer Terry E. Michaelson (Principal Executive Officer) /s/ Mark D. Moreland Chief Financial Officer and Treasurer Mark D. Moreland (Principal Financial Officer) /s/ Joseph K. O’Brien Controller Joseph K. O’Brien (Principal Accounting Officer) * Chairman of the Board and Director Kurt R. Widmer * Director Timothy P. Boyle * Director Marc J. Cramer * Director E. Donald Johnson, Jr. * Director Kevin R. Kelly * Director Thomas D. Larson * Director David R. Lord * Director John D. Rogers, Jr. *By:/s/ Mark D. Moreland Mark D. Moreland, as attorney in fact 65Table of ContentsEXHIBIT INDEX ExhibitNumberDescription2.1Agreement and Plan of Merger between the Registrant and Kona Brewing Co., Inc. and related parties dated July 31, 2010 (incorporated byreference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on August 3, 2010)2.2Equity Purchase Agreement by and among each of the members of Fulton Street Brewery, LLC, as Sellers and A-B, as purchaser, dated as ofFebruary 18, 2011 (incorporated by reference from Exhibit 2.2 to the Registrant’s Form 10-K for the year ended December 31, 2010)2.3Joinder to Equity Purchase Agreement, dated May 2, 2011 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Report onForm 8-K filed on May 4, 2011)3.1Restated Articles of Incorporation of the Registrant, dated January 2, 2012 (incorporated by reference from Exhibit 3.1 to the Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2011)3.2Amended and Restated Bylaws of the Registrant, dated December 1, 2010 (incorporated by reference from Exhibit 3.2 to the Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2010 filed on April 1, 2011)10.1*2002 Stock Option Plan (incorporated by reference from Exhibit A to the Registrant’s Proxy Statement for its 2002 Annual Meeting ofShareholders (File No. 0-26542)10.2*Form of Stock Option Agreement (Directors Grants) for the 2002 Stock Option Plan (incorporated by reference from Exhibit 10.10 to theRegistrant’s Form 10-K for the year ended December 31, 2004)10.3*Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2002 Stock Option Plan (incorporated by reference fromExhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)10.4*2007 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s Proxy Statement for its 2007 Annual Meeting ofShareholders)10.5*Form of Nonstatutory Stock Option Agreement (Executive Officer Grants) for the 2007 Stock Incentive Plan (incorporated by reference fromExhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010)10.6*2010 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s Proxy Statement for its 2010 Annual Meeting ofShareholders)10.7*Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2010 Stock Incentive Plan (incorporated by reference fromExhibit 10.11 to the Registrant’s Form 10-K for the year ended December 31, 2010)10.8*†Form of Performance Award Agreement for the 2010 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form10-Q for the quarter ended June 30, 2011)10.9*Stock Appreciation Right Agreement between the Registrant and Andrew J. Thomas, dated October 12, 2010 (incorporated by reference fromExhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011)10.10*Stock Appreciation Right Agreement between the Registrant and Andrew J. Thomas, dated January 1, 2011 (incorporated by reference fromExhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011)10.11*Letter of Agreement between the Registrant and Terry E. Michaelson dated March 29, 2010 (incorporated by reference from Exhibit 10.14 tothe Registrant’s Form 10-K for the year ended December 31, 2009)10.12*Letter of Agreement between the Registrant and Mark D. Moreland dated March 29, 2010 (incorporated by reference from Exhibit 10.15 to theRegistrant’s Form 10-K for the year ended December 31, 2009)10.13*Letter of Agreement between the Registrant and V. Sebastian Pastore dated March 29, 2010 (incorporated by reference from Exhibit 10.16 tothe Registrant’s Form 10-K for the year ended December 31, 2009)10.14*Letter of Agreement between the Registrant and Martin J. Wall, IV dated March 29, 2010 (incorporated by reference from Exhibit 10.17 to theRegistrant’s Form 10-K for the year ended December 31, 2009)10.15*Separation Agreement between the Registrant and Martin J. Wall, IV dated February 1, 2013 E-1Table of Contents 10.16*Letter of Agreement between the Registrant and Kurt Widmer dated May 26, 2010 (incorporated by reference from Exhibit 10.1 to theRegistrant’s Form 10-Q for the quarter ended June 30, 2010)10.17*Letter of Agreement between the Registrant and Robert Widmer dated May 26, 2010 (incorporated by reference from Exhibit 10.2 to theRegistrant’s Form 10-Q for the quarter ended June 30, 2010)10.18*Letter of Agreement between the Registrant and Andrew J. Thomas, dated June 1, 2011 (incorporated by reference from Exhibit 10.2 to theRegistrant’s Form 10-Q for the quarter ended June 30, 2011)10.19*Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and Kurt Widmer (incorporated by referencefrom Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)10.20*Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and Robert Widmer (incorporated by referencefrom Exhibit 10.11 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)10.21*Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between the Registrant and W. Cameron Healy (incorporated byreference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)10.22*Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between the Registrant and Mattson Davis (incorporated by referencefrom Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)10.23*Summary of Compensation Arrangements for Non-Employee Directors10.24*Summary of Annual Cash Incentive Bonus Plan for Executive Officers10.25Sublease between Pease Development Authority as Sublessor and the Registrant as Sublessee, dated May 30, 1995 (incorporated by referencefrom Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, No. 33-94166)10.26Loan Agreement dated as of July 1, 2008 between Registrant and Bank of America, N.A. (incorporated by reference from Exhibit 10.1 to theRegistrant’s Current Report on Form 8-K filed on July 7, 2008)10.27Loan 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)10.28Second Loan Modification Agreement dated June 8, 2010 to the Loan Agreement dated July 1, 2008 between the Registrant and Bank ofAmerica, N.A. (incorporated by reference from Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010)10.29Third Loan Modification Agreement dated September 30, 2010 to the Loan Agreement dated July 1, 2008 between the Registrant and Bank ofAmerica, N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)10.30Amended and Restated Exchange and Recapitalization Agreement dated as of May 1, 2011 between the Registrant and A-B (incorporated byreference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)10.31Amended and Restated Master Distributor Agreement dated as of May 1, 2011 between the Registrant and A-B (incorporated by reference fromExhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)10.32Amendment to A-B Master Distributor Agreement dated May 11, 2012 (incorporated by reference from Exhibit 10.1 to the Registrant’sQuarterly Report on Form 10-Q filed on August 9, 2012)10.33Registration Rights Agreement dated as of July 1, 2004 between the Registrant and A-B (incorporated by reference from Exhibit 10.3 to theRegistrant’s Current Report on Form 8-K filed on July 2, 2004)10.34Master Lease Agreement dated as of June 6, 2007 between Banc of America Leasing & Capital, LLC and Widmer Brothers BrewingCompany (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”))10.35Amended and Restated License Agreement dated as of February 28, 1997 between Widmer Brothers Brewing Company and Widmer’s WineCellars, 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 10.36Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability Company and Widmer Brothers BrewingCompany (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)10.37Commercial 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)10.38Sublease dated as of September 1, 2010 between Manini Holdings, LLC and Kona Brewing Co., Inc. (incorporated by reference from Exhibit10.41 to the Registrant’s Form 10-K for the year ended December 31, 2010)10.39†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)10.40Sublease dated as of March 31, 2011 between Manini Holdings, LLC and Kona Brewing Co., LLC (incorporated by reference from Exhibit10.43 to the Registrant’s Amendment No. 1 to Form 10-K for the year ended December 31, 2010 filed on April 22, 2011)21.1Subsidiaries 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)23.1Consent of Moss Adams LLP, Independent Registered Public Accounting Firm24.1Power of Attorney – Directors of Craft Brew Alliance, Inc.31.1Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1Certification of Form 10-K for the year ended December 31, 2012 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 200299.1Press Release dated March 12, 201399.2Description of Common Stock101.INS**XBRL Instance Document101.SCH**XBRL Taxonomy Extension Schema Document101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document101.DEF**XBRL Taxonomy Extension Definition Linkbase Document101.LAB**XBRL Taxonomy Extension Label Linkbase Document101.PRE**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 forpurposes 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 10.15 SEPARATION AGREEMENT AND RELEASE The parties to this Separation Agreement and Release ("Agreement") are Martin Wall ("Employee") and Craft Brew Alliance, Inc. (the "Company"). 1.Employee's employment with the Company ends effective February 1, 2013 due to the elimination of Employee's position. The Companywill pay Employee all earned and unpaid wages and all unused Paid Time Off accrued through February 1, 2013. The Company willaccomplish this payment by mailing to Employee a check for such amounts to the home address he has on record with theCompany. Employee recognizes that the payment will be less regular deductions and withholdings. 2.The Company will pay to Employee severance payments under either paragraph 2.a. or 2.b., at Employee's option: a.The Company will pay to Employee severance payments for a period of twelve (12) months following February 1, 2013(the "Severance Period"), Employee's regular weekly salary, less legally required deductions and withholdings, asseverance to which Employee would not otherwise be entitled (the "Severance Payments"). This amount will be paidover the course of the Severance Period on regular paydays. OR b.[Intentionally omitted] 3.In addition to the Severance Payments, the Company will pay Employee an additional amount of $23,459.00, less legally requireddeductions and withholdings. This amount will be paid as a lump sum within 30 days following the date this Agreement becomeseffective. The amount paid to Employee under this Agreement constitutes pay in addition to compensation to which Employee is otherwiseentitled in exchange for a release of all claims. 4.As set forth in Employee's employment agreement, if, during the Severance Period, Employee becomes employed or associated with abrewing or other company that the Company determines, in its reasonable discretion, is a competitor of the Company or Anheuser-Busch,Inc., Employee's Severance Payments under this Agreement will terminate as of the effective date of such employment or association. 5.The Company will not contest any application by Employee for unemployment benefits. 6.The Company will pay Employee any 2012 bonus if the Company declares a bonus and Employee would have been eligible if he wereemployed. Any bonus will be paid pursuant to the terms of the program and at the time paid to other bonus recipients. 7.The Company will pay Employee's COBRA premiums, if any, for medical and dental benefits at the coverage levels in effect on February1, 2013 for twelve (12) months, so long as Employee elects continuation coverage. The Company will cease paying such COBRApremiums in the event Employee finds new employment with comparable health coverage. 8.The Company will pay the cost of outplacement services provided by Lee Hecht Harrison in Portland, OR for the 3-month Quick StartProgram. This includes coaching sessions, access to online resources and office space, resume and interview skill development. Detailswill be provided upon receipt of signed agreement.  9.The Company agrees to give Employee their mobile phone and will transfer the phone number to a personal account by February 2, 2013. 10.If the Company receives a reference request from a prospective employer of Employee, the Company will disclose only Employee's dates ofemployment and the last position held with the Company. 11.In consideration for the above, Employee completely releases and forever discharges the Company and each of its past, present, and futurerelated entities and each of their respective past, present, and future members, managers, partners, shareholders, officers, directors, agents,employees, attorneys, insurers, successors, and assigns from any and all claims, rights, demands, actions, liabilities, and causes ofaction of every kind and character, whether known or unknown, matured or unmatured, which Employee may now have or has ever had,arising from or in any way related to Employee's employment with the Company, including without limitation the conditions ofemployment or the termination thereof, whether based on tort, contract (express or implied), other common law, or any federal, state, orlocal statute, regulation, ordinance, or other law, including, but not limited to, Title VII of the Civil Rights Act of 1964, as amended, theAmericans with Disabilities Act, the Age Discrimination in Employment Act (the "ADEA"), and any similar state or local law, based onany act or omission prior to Employee's execution of this Agreement. 12.In further consideration for the above, Employee will treat this Agreement as confidential and will not disclose this Agreement or any of itsprovisions to any person or entity, except as required by law or, to the extent necessary to receive professional services, to Employee'saccountant, professional tax preparer, or attorney. 13.Employee will make no negative or disparaging oral or written remarks or statements of any nature whatsoever about the Company, itsofficers, directors, or employees, or its products to any person or entity, either publicly or privately, including, without limitation, on anysocial networking, blog, or similar Internet site. 14.The Company specifically denies any liability or wrongdoing whatsoever. Neither this Agreement nor any of its provisions, terms, orconditions constitute an admission of liability or wrongdoing or may be offered or received in evidence in any action or proceeding asevidence of an admission of liability or wrongdoing. 15.Employee acknowledges and reaffirms Employee's continuing obligations under any Confidentiality Agreement that Employee entered intoin connection with Employee's employment with the Company, and Employee will strictly comply with the terms of the ConfidentialityAgreement. 16.Except as otherwise provided in this Agreement, including without limitation Paragraph 13, this Agreement constitutes the entire agreementof the parties concerning the subject matter of this Agreement. 17.The parties acknowledge that the only consideration for this Agreement is the consideration expressly described herein, that each party fullyunderstands the meaning and intent of this Agreement, and that this Agreement has been executed voluntarily. 18.The benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Internal Revenue Code byreason of being separation pay due to involuntary separation from service under Treasury Regulation Section 1.409A-1(b)(9). Allprovisions of this Agreement shall be interpreted in a manner consistent with preserving these exemptions. All payments under thisagreement will be made no later than March 15 of the calendar year following the calendar year in which this Agreement becomes effective.  19.Employee understands that he is releasing and waiving any ADEA claims he may have against the Released Parties, as described in Section9. Employee acknowledges that the Company is hereby advising him in writing to consult with an attorney before signing this Agreementand that he is being given at least 21 days to consider whether to execute this Agreement. Employee understands that he may sign thisAgreement before the expiration of the 21-day period. By executing this Agreement on the date set forth below, Employee has knowingly andvoluntarily waived the balance of that period, if any. Employee may revoke this Agreement by written notice, received by Stacia Bird atCraft Brew Alliance, 929 N. Russell Street, Portland, Oregon 97227, within seven days following the date he signs this Agreement. If notrevoked under the preceding sentence, this Agreement becomes effective and enforceable on the eighth day following the date Employee signsthis Agreement. EMPLOYEE CRAFT BREW ALLIANCE /s/ Martin J. Wall, IV By:/s/ Terry E. Michaelson Title:CEO Date:February 1, 2013 Date:February 1, 2013 EXHIBIT 10.23SUMMARY OFCOMPENSATION ARRANGEMENTS FOR NON-EMPLOYEE DIRECTORS Non-employee directors currently receive stock-based and cash compensation for their service on the Board of Directors as follows:Stock-based Compensation: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 ofShareholders.Cash Compensation:Each non-employee director is entitled to receive an annual cash retainer of $20,000, paid quarterly.The Chair of the Audit Committee is entitled to receive an additional cash retainer of $15,000, while each other member of the Audit Committee is entitled toreceive $4,000. The Chairs of each of the Nominating and Governance, Compensation, and Strategic Planning Committees are entitled to receive an additionalcash retainer of $10,000, while all other committee members are entitled to receive a payment of $2,000 for each committee position. Committee compensationis paid quarterly. EXHIBIT 10.24SUMMARY OF ANNUAL CASH INCENTIVEBONUS PLAN FOR EXECUTIVE OFFICERS Pursuant to their employment letter agreements, executive officers of Craft Brew Alliance, Inc. (the "Company"), are eligible for annual cash incentive bonusopportunities subject to attainment of corporate level goals and individual performance objectives.The annual incentive bonus opportunities for the Company’s executive officers are set by the Compensation Committee (the "Committee") of the Company'sBoard of Directors (the "Board") each year as a percentage of the executive’s annual base salary. For 2013, the percentages range from 50 percent to 80 percentof base salary.Bonus opportunities related to corporate level goals:The corporate level goals relate to 80% of the bonus opportunity. The corporate level goals are generally defined by objectively measureable financial metrics,including, among others, achieving specified target levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”), sales revenues, eitherfor the Company as a whole or for certain key regions or brands, market share, depletion growth, and similar measures. For 2013, the corporate component ofthe target bonuses is tied 50 percent to achievement of a specified EBITDA target and 50 percent to achievement of a specified sales revenue target for theCompany.Achievement above or below the specified target levels for the financial metrics may result in an upward or downward adjustment in the bonus amountpayable. Typically, the adjustment is calculated as the product of a defined factor (2.5% for 2013) and the percentage by which the actual achievement of agiven financial metric is above or below the target level. If the Company fails to achieve a specified financial target at the 80 percent level or above, no part ofthe bonus opportunity associated with that target is earned.Bonus opportunities related to individual performance objectives:The individual performance objectives relate to 20% of the bonus opportunity. The individual performance objectives are generally based on achievingfinancial, strategic, operational and other goals in functional areas for which the executive has responsibility. Individual performance objectives are tied to theofficer's role in achieving the Company's strategic and operating goals. Payout of Bonuses:The Committee determines the extent to which corporate level objectives and individual performance goals have been satisfied following the end of each fiscalyear. Payment of bonuses, if any, is made promptly following the Committee's determination. An executive will not be entitled to receive a bonus if he or shedoes not remain employed by the Company through the date of the Committee's determination, unless the Committee approves otherwise. EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-90524, 333-143158, and 333-171372) of Craft BrewAlliance, Inc. (the “Company”) of our reports dated March 12, 2013, relating to the consolidated financial statements of the Company, and effectiveness ofinternal control over financial reporting of the Company, appearing in this Annual Report (Form 10-K) for the year ended December 31, 2012./s/ Moss Adams LLPSeattle, WashingtonMarch 12, 2013 EXHIBIT 24.1 POWER OF ATTORNEY Each person below designates and appoints TERRY E. MICHAELSON and MARK D. MORELAND his true and lawful attorney-in-fact and agent, with fullpower of substitution, to sign the Annual Report on Form 10-K for the year ended December 31, 2012, of Craft Brew Alliance, Inc., a Washingtoncorporation, and any amendments thereto, and to file said report and amendments, with all exhibits thereto, in such form as they or either of them mayapprove with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Each of such attorneys-in-fact is appointedwith 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 8th day of March, 2013. Signature Title /s/ Kurt R. Widmer Chairman of the Board and Director Kurt R. Widmer /s/ Timothy P. Boyle Director Timothy P. Boyle /s/ Marc J. Cramer Director Marc J. Cramer /s/ E. Donald Johnson, Jr. Director E. Donald Johnson, Jr. /s/ Kevin R. Kelly Director Kevin R. Kelly /s/ Thomas D. Larson Director Thomas D. Larson /s/ David R. Lord Director David R. Lord /s/ John D. Rogers, Jr. Director John D. Rogers, Jr. EXHIBIT 31.1CERTIFICATIONI, Terry E. Michaelson, certify that: 1.I have reviewed this annual report on Form 10−K of Craft Brew Alliance, Inc. (the “Registrant”); 2.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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and15d−15(f)) for the Registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially 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 theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting. Date: March 12, 2013 By:/s/ Terry E. Michaelson Terry E. Michaelson Chief Executive Officer EXHIBIT 31.2CERTIFICATIONI, Mark D. Moreland, certify that: 1.I have reviewed this annual report on Form 10−K of Craft Brew Alliance, Inc. (the “Registrant”); 2.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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a−15(e) and 15d−15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a−15(f) and15d−15(f)) for the Registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially 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 theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting. Date: March 12, 2013 By:/s/ Mark D. Moreland Mark D. Moreland Chief Financial Officer and Treasurer EXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES−OXLEY ACT OF 2002In connection with the Annual Report of Craft Brew Alliance, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2012, as filed with theSecurities and Exchange Commission on March 12, 2013 (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 ofthe 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 12, 2013 BY:/s/ Terry E. Michaelson Terry E. Michaelson Chief Executive Officer (Principal Executive Officer) BY:/s/ Mark D. Moreland Mark D. Moreland Chief Financial Officer and Treasurer (Principal Financial Officer) EXHIBIT 99.1FOR IMMEDIATE RELEASECRAFT BREW ALLIANCEREPORTS 2012 RESULTS AND CONFIRMS 2013 FINANCIAL OUTLOOKPortland, Ore. (March 12, 2013) – Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), an independent craft brewing company, reported final 2012financial results and confirmed 2013 guidance. CBA’s successful strategic focus on building a national portfolio strategy over the last three years haspositioned the Company to expect strong sales and profit growth in 2013 and take advantage of the dynamic craft segment to achieve long-term value for itsshareholders.Highlights of 2012 results include: ·A strong close to 2012 highlighted by 10% growth in depletions for the fourth quarter ·Full year top- and bottom-line results in line with guidance provided during the last quarterly update: oSales growth of 13%, reflecting the continued strength of the Kona, Redhook and Omission brands, as well as continued repositioning ofthe Widmer Brothers brand oDepletion growth of 6% oShipment growth of nearly 8%, reflecting new initiatives such as the launch of the Omission brand and international export oGross margin rate of 29.6%, a reduction of 70 basis points from 2011, reflecting higher brewery variable costs on a per barrel basis,partially offset by improved fixed cost coverage and a shift in mix to our higher-end beers oSelling, general and administrative expense (“SG&A”) of $44.9 million, an increase of $5.1 million from 2011, reflecting continuedinvestments in brand development and sales capabilities oDiluted earnings per share (“EPS”) of $0.13 versus 2011 EPS of $0.51; 2011 EPS included the one-time gain on sale of our equity interestin Fulton Street Brewery of $0.34 per share oCapital expenditures of approximately $9.1 million, reflecting continued investments in capacity, efficiency and quality initiatives “As a follow-up to our release in late January, we want to confirm that we expect meaningful growth in both revenue and earnings resulting from the overallstrength of our portfolio strategy, operating expense leverage and SG&A leverage in 2013,” said Terry Michaelson, CBA’s CEO. “As we enter the next phase inthe development of our portfolio strategy, we are focusing on leveraging our recent investments, brand momentum and breadth, and geographic expansion, todeliver improved sales and profit growth. This is consistent with our phased approach to strengthening our model to ultimately deliver long-term value growth.”  Craft Brew Issues 2012 Results and Confirms 2013 Financial OutlookComponents of anticipated 2013 results and developments“We continue to believe our brand strategy is the most promising it has been in CBA’s history. We expect strong growth tempered by unprecedentedcompetition,” said Terry Michaelson. Expectations for 2013 include (i) confidence in the continued growth in sales of Kona, Redhook and Omission, andclear positioning of Widmer Brothers offerings; (ii) expansion into new geographic markets for Kona and international expansion for all brand families; (iii)updates to packaging across all brand families, as well as introduction of unique can and bottle offerings; (iv) refined messaging on Omission beers,promoting the beer as specially crafted to remove gluten; (v) exploration of introducing additional or new brands to the CBA portfolio; and (vi) continueddevelopment of cross brand packages bringing the power of our portfolio to consumers in real and compelling ways. “While we are providing full-year guidance for 2013, I want to emphasize that we anticipate significant differences in 2013 quarterly performance as comparedto 2012,” said Mark Moreland, CBA’s CFO. “This is due to both normal changes to programs and new product timing, as well as uneven 2012 quarterlyperformance as a result of the implementation of new supply chain processes and systems that will drive improved supply chain control during2013. Specifically, we expect relatively weak shipments in the first quarter of 2013 when compared to the volume generated by the 15% growth in shipmentsin the first quarter of 2012.” We are confirming previously provided anticipated full year 2013 results, as follows: ·Depletion growth estimate of 7% to 11%, reflecting the continued strength of the Kona, Redhook and Omission brands and further stabilization of theWidmer Brothers brand ·Average price increases of approximately 1% to 2% ·Contract brewing revenue for 2013 will be approximately half of the 2012 level as a result of the mutual decision to unwind the Goose Island contractbrewing arrangment ·Gross margin rate of 28.5% to 30.5%, reflecting higher brewery variable costs on a per barrel basis, partially offset by better fixed cost coverage ·SG&A expense ranging from $47 million to $49 million, reflecting leverage from the foundation built by more aggressive spending in prior years ·Capital expenditures of approximately $11 million to $13 million, continuing our investments in capacity and efficiency improvements, qualityinitiatives and restaurant and retail Forward-Looking StatementsStatements made in this press release that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future, includingdepletions and sales growth, the level or effect of SG&A expense, the amount of capital spending, and the benefits or improvements to be realized fromstrategic initiatives and capital projects, are forward-looking statements. It is important to note that the Company's actual results could differ materially fromthose projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those inthe 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, 2012. Copies of these documents may be found on the Company's website, www.craftbrew.com, or obtained by contactingthe Company or the SEC.  Craft Brew Issues 2012 Results and Confirms 2013 Financial Outlook About Craft Brew AllianceCBA is an independent, publicly traded craft brewing company that was formed through the merger of leading Pacific Northwest craft brewers – WidmerBrothers 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 byKona Brewing Company in 2010. Craft Brew Alliance launched Omission beer in 2012.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 ofcraft 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. Theeminently drinkable beers consistently win awards and please crowds across the United States. Kona Brewing was founded in 1994 by the father and sonteam of Cameron Healy and Spoon Khalsa, who dreamed of crafting fresh, local-island brews with spirit, passion and quality. As the largest craft brewery inHawaii, Kona personifies the laid-back, passionate lifestyle and environmental respect of the Hawaiian people and culture. Omission beer is the first craft beerbrand in the United States focused exclusively on brewing great tasting craft beers with traditional beer ingredients, including malted barley, that are speciallycrafted to remove gluten.For more information, visit: www.craftbrew.com.Media Contact:Investor Contact:Ted LaneEdwin SmithLANE PRCraft Brew Alliance, Inc.(212) 302-5948(503) 972-7884Ted@lanepr.comed.smith@craftbrew.com###  Craft Brew Alliance, Inc.Condensed Consolidated Statements of Income(In thousands, except per share amounts and shipments)(Unaudited) Three Months EndedDecember 31, Years EndedDecember 31, 2012 2011 2012 2011 Sales $44,897 $37,558 $182,018 $161,000 Less excise taxes 2,961 2,631 12,731 11,803 Net sales 41,936 34,927 169,287 149,197 Cost of sales 30,579 25,142 119,261 104,011 Gross profit 11,357 9,785 50,026 45,186 as percentage of net sales 27.1% 28.0% 29.6% 30.3%Selling, general and administrative expenses 10,388 9,253 44,890 39,742 Operating income 969 532 5,136 5,444 Interest expense (167) (171) (663) (918)Gain on sale of equity interest in Fulton Street Brewery, LLC — 34 — 10,432 Income from equity investments, interest and other, net — 1 4 734 Income before income taxes 802 396 4,477 15,692 Income tax provision 481 152 1,951 6,041 Net income $321 $244 $2,526 $9,651 Earnings per share: Basic and diluted earnings per share $0.01 $0.01 $0.13 $0.51 Weighted average shares outstanding: Basic 18,874 18,845 18,862 18,834 Diluted 18,940 18,942 18,934 18,931 Total shipments (in barrels): Core Brands 168,000 141,400 675,300 623,300 Contract Brewing 7,200 10,700 49,600 49,300 Total shipments 175,200 152,100 724,900 672,600 Depletion growth rate (over the same period from the prior year) 10% 4% 6% 6%  Craft Brew Alliance, Inc.Condensed Consolidated Balance Sheets(In thousands)(Unaudited) December 31, 2012 2011 Current assets: Cash $5,013 $795 Accounts receivable, net 10,512 13,326 Inventories 11,749 9,446 Deferred income tax asset, net 1,250 894 Other current assets 3,809 2,816 Total current assets 32,333 27,277 Property, equipment and leasehold improvements, net 102,852 100,725 Goodwill 12,917 12,917 Intangible and other non-current assets, net 17,562 17,989 Total assets $165,664 $158,908 Current liabilities: Accounts payable $12,255 $10,994 Accrued salaries, wages and payroll taxes 5,267 4,524 Refundable deposits 7,896 7,400 Other accrued expenses 1,066 1,436 Current portion of long-term debt and capital lease obligations 642 596 Total current liabilities 27,126 24,950 Long-term debt and capital lease obligations, net 12,440 13,188 Other long-term liabilities 17,903 16,261 Total common shareholders' equity 108,195 104,509 Total liabilities and common shareholders' equity $165,664 $158,908  Craft Brew Alliance, Inc.Condensed Consolidated Statements of Cash Flows(In thousands)(Unaudited) Years EndedDecember 31, 2012 2011 Cash Flows From Operating Activities: Net income $2,526 $9,651 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,369 7,204 Income from equity investments — (691)Gain on sale of equity interest in Fulton Street Brewery, LLC — (10,432)Deferred income taxes 1,458 5,025 Other, including stock-based compensation and excess tax benefit from employee stock plans (138) 331 Changes in operating assets and liabilities: Accounts receivable 2,396 (1,976)Inventories (1,855) (640)Other current assets (994) 418 Other assets — (495)Accounts payable and other accrued expenses 1,269 (2,773)Accrued salaries, wages and payroll taxes 743 471 Refundable deposits 331 635 Net cash provided by operating activities 13,105 6,728 Cash Flows from Investing Activities: Expenditures for property, equipment and leasehold improvements (9,138) (8,488)Proceeds from sale of property, equipment and leasehold improvements and other 37 120 Proceeds from the sale of equity interest in Fulton Street Brewery, LLC 418 15,527 Other — (28)Net cash provided by (used in) investing activities (8,683) 7,131 Cash Flows from Financing Activities: Principal payments on debt and capital lease obligations (596) (5,751)Net borrowings under revolving line of credit — (7,500)Issuance of common stock 13 23 Excess tax benefit from employee stock plans 379 — Net cash used in financing activities (204) (13,228)Increase in cash 4,218 631 Cash, beginning of period 795 164 Cash, end of period $5,013 $795  Supplemental Disclosures Regarding Non-GAAP Financial InformationCraft Brew Alliance, Inc.Reconciliation of Adjusted EBITDA to Net Income(In thousands)(Unaudited) Three Months EndedDecember 31, Years EndedDecember 31, 2012 2011 2012 2011 Net income $321 $244 $2,526 $9,651 Interest expense 167 171 663 918 Income tax provision 481 152 1,951 6,041 Depreciation expense 1,788 1,766 7,116 6,912 Amortization expense 63 63 253 292 Gain on sale of equity interest in Fulton Street Brewery, LLC - (34) - (10,432)Stock-based compensation 18 130 547 467 Adjusted EBITDA $2,838 $2,492 $13,056 $13,849 The Company has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) in these tables to provideinvestors with additional information to evaluate our operating performance on an ongoing basis using criteria that are used by the Company’s management. The Company defines Adjusted EBITDA as net earnings before interest, income taxes, depreciation and amortization, stock compensation and other non-cashcharges, including net gain or loss on disposal of property, plant and equipment. The Company uses Adjusted EBITDA, among other measures, to evaluateoperating 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 theUnited States of America (“GAAP”), this measure should not be considered in isolation of, or as a substitute for, net income, as an indicator of operatingperformance, or net cash provided by operating activities as an indicator of liquidity. The use of Adjusted EBITDA instead of net income has limitations asan analytical tool, including the inability to determine profitability; the exclusion of interest expense and associated cash requirements, given the level of theCompany’s indebtedness; and the exclusion of depreciation and amortization which represent significant and unavoidable operating costs, given the capitalexpenditures needed to maintain the Company’s operations. We compensate for these limitations by relying on GAAP results. Our computation of AdjustedEBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information compared with netincome and net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information shouldconsider the types of events and transactions which are excluded. The table above shows a reconciliation of Adjusted EBITDA to net income. EXHIBIT 99.2DESCRIPTION OF COMMON STOCKCraft Brew Alliance, Inc., a Washington corporation (the "Company"), is authorized to issue up to 57,467,271 shares of capital stock, including 50,000,000shares of Common Stock, par value $0.005 per share, and 7,467,271 shares of Preferred Stock, par value $0.005 per share.Common StockEach outstanding share of Common Stock entitles the holder to one vote, either in person or by proxy, on all matters submitted to a vote of shareholders,including the election of directors.Shareholders of the Company have the right to cumulate votes with respect to all elections of directors held while the Company is subject to the reportingrequirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), if, prior to the record date for theshareholder meeting at which such election is to be held, the Company or a shareholder of the Company publicly announces that such shareholder, togetherwith its affiliates, beneficially owns at least 30% of the Company's outstanding Common Stock, or the Company has received any notice or information froma shareholder indicating that it has such beneficial ownership and neither the Company nor the shareholder has publicly announced that it has ceased to havesuch beneficial ownership. As of March 1, 2013, Anheuser-Busch, LLC, was the beneficial owner of approximately 32% of the Company's outstandingCommon Stock. Shareholders of the Company would also have the right to cumulate votes in the election of directors at any time that the Company is notsubject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act.Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors out of funds legally available therefor (subject to therights of holders of any Preferred Stock). In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stockwill be entitled to share ratably in the assets of the Company remaining after provision for payment of amounts owed to creditors and preferences applicable toany outstanding shares of Preferred Stock. All outstanding shares of Common Stock are fully paid and nonassessable. Holders of Common Stock do nothave preemptive rights except to the extent such rights are provided in a written agreement between a shareholder and the Company.The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of any outstanding shares of Preferred Stock.Preferred StockThe Board of Directors of the Company is authorized to issue up to 7,467,271 shares of Preferred Stock, par value $0.005 per share, in one or more series,without shareholder approval. As of March 1, 2013, no shares of Preferred Stock were outstanding.The Board of Directors is authorized to determine, with respect to each series of Preferred Stock: (i) distinctive designations of such series and the number ofshares which shall constitute such series; (ii) the annual dividend rate for such series, and the date or dates from which dividends shall begin to accrue; (iii)the price at which, and the terms and conditions on which, the shares of such series may be 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 Company; (vi) the voting rights, if any, of shares of such series; (vii) the terms and conditions, if any, upon which shares ofsuch series may be converted and the securities into which such shares may be converted; (viii) the relative seniority, parity or junior rank of such series as todividends or assets; and (ix) such other terms, qualifications, privileges, limitations, options, restrictions and special or relative rights and preferences, ifany, of shares of such series as the Board of Directors may, at the time of such resolution, lawfully fix and determine.  Each share of each series of Preferred Stock will be identical in all respects with all other shares of the same series. Preferred Stock does not have preemptiverights except as provided by written agreement between the holder and the Company or as provided by resolution of the Board of Directors establishing a seriesof Preferred Stock.Article and Bylaw Provisions with Possible Anti-Takeover EffectsAs described above, the Board of Directors is authorized to designate and issue shares of Preferred Stock in series and define all rights, preferences andprivileges applicable to such series. This authority may be used to make it more difficult or less economically beneficial to acquire or seek to acquire theCompany.The Board of Directors has the power to amend the Company's Bylaws, which may also be amended by the shareholders.Special meetings of the shareholders may be called by the Board of Directors, by the Chairman of the Board, by the President or, at any time while theCompany is subject to the reporting requirements of Section 13 of the Exchange Act, by one or more shareholders holding not less than 25% of all the sharesentitled to be cast on any issue proposed to be considered at that meeting.The shareholders may, at a special shareholders meeting called for the purpose of removing directors, remove the entire Board of Directors or any lessernumber, with or without cause. If a director has been elected by one or more voting groups, only those voting groups may participate in the vote as to removal.Also, as long as cumulative voting is authorized, a director may not be removed if a number of votes sufficient to elect such director under cumulative voting(computed on the basis of the number of votes actually cast at the meeting on the question of removal) is cast against such director’s removal. 

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