Craft Brew Alliance Inc Annual Report 2013

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, 2013ORoo 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) 331-7270Securities 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 filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the common equity held by non-affiliates of the registrant as of the last day of the registrant’s most recently completed secondquarter on June 30, 2013 (based upon the closing price of the registrant’s common stock, as reported by the NASDAQ Stock Market, of $8.24 per share) was$87,217,022. The number of shares outstanding of the registrant’s common stock as of February 18, 2014 was 18,972,247 shares. Documents Incorporated by Reference Portions of the registrant’s definitive Proxy Statement for the 2014 Annual Shareholders’ Meeting are incorporated by reference into Part III. CRAFT BREW ALLIANCE, INC.2013 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART I Item 1.Business2 Item 1A.Risk Factors12 Item 1B.Unresolved Staff Comments16 Item 2.Properties16 Item 3.Legal Proceedings17 Item 4.Mine Safety Disclosures17 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 Risk33 Item 8.Financial Statements and Supplementary Data33 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure59 Item 9A.Controls and Procedures59 Item 9B.Other Information61 PART III Item 10.Directors, Executive Officers and Corporate Governance61 Item 11.Executive Compensation61 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters61 Item 13.Certain Relationships and Related Transactions, and Director Independence62 Item 14.Principal Accountant Fees and Services62 PART IV Item 15.Exhibits and Financial Statement Schedules62 Signatures631Table of ContentsINFORMATION 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 brewing company that was formed through the merger of leading Pacific Northwest craft brewers – WidmerBrothers Brewing and Redhook Ale Brewery – in 2008. Since our formation, we have remained focused on preserving and growing one-of-a-kind craft beersand brands. Today, we are comprised of five unique and pioneering craft beer and cider 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;·Omission Beer, internally developed by our brewing team as the first beer brand specially crafted to remove gluten, and launched in 2012 inPortland, Oregon; and·Square Mile Cider Company, the first non-beer brand family created by Craft Brew Alliance, and launched in 2013.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: i) our innovative portfolio of distinct craft beer and cider brand families; ii) evolving national brewing footprint with national salesand marketing reach; iii) expertise in developing partnerships and new growth strategies; iv) leadership team with significant beer and growth-companyexpertise; v) proven ability to manage brand lifecycles, from development to turnaround; and vi) successful track record managing mergers, divestitures andacquisitions.We proudly brew our craft beers in four company-owned breweries located in Portland, Oregon; the Seattle suburb of Woodinville, Washington; Portsmouth,New Hampshire; and Kailua-Kona, Hawaii. Additionally, we own and operate two small innovation breweries, primarily used for small batch production andinnovative brews, in Portland, Oregon and Portsmouth, New Hampshire.2Table of ContentsWe 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. As a result of this distribution arrangement, we believe that, underalcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-BDistributor Agreement expires or is terminated. Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 36 states.Omission Beer continues to expand into new markets in the U.S. and internationally. Square Mile is currently available in 10 states in the West. Separate fromour A-B wholesalers, we maintain an internal independent sales and marketing organization 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 operations. Beer Related operations include the brewing and sale of craft beers and cider fromour six breweries, both domestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our BeerRelated operations, as well as other merchandise sales, and sales of our beers directly to customers.Industry BackgroundWe are a brewer in the craft brewing segment of the U.S. brewing industry. The domestic beer market includes ales and lagers produced by large domesticbrewers, international brewers and craft brewers. Shipments of craft beer in the U.S. are estimated by industry sources to have increased by approximately15.5% in 2013 over 2012 and by 15.4% in 2012 over 2011. While the overall domestic market experienced a modest decrease of 2.0% in 2013, the craft beersegment continued its strong growth and captured market share from the rest of the domestic market. Craft beer shipments in 2013 and 2012 wereapproximately 7.5% and 6.4%, respectively, of total beer shipped in the U.S. Approximately 15.3 million barrels and 13.2 million barrels, respectively, wereshipped in the U.S. by the craft beer segment during 2013 and 2012, while total beer sold in the U.S., including imported beer, was 205.2 million barrels and207.9 million barrels, respectively. Compared with the other segments of the U.S. brewing industry, craft brewing is a relative newcomer. Twenty years ago,Redhook and Widmer Brothers Brewery were two of the approximately 200 craft breweries in operation. By the end of 2013, the number of craft breweries inoperation had grown to 3,699. Industry sources estimate that craft beer produced by regional and national craft brewers, similar to us, accounts forapproximately two-thirds of total craft beer sales, with one-third of the production brewed by smaller craft breweries.The recent competitive environment has been characterized by three trends: the number and diversity of craft brewers have significantly increased, Crown hasemerged as a significant player in imports with its brewing capacity in Mexico, and the large national domestic brewers have been acquired by or merged withother national domestic and foreign brewers. In 2013, according to industry sources, A‑B and MillerCoors accounted for more than 74% of total beer shippedin the U.S., excluding imports. In addition, A-B and MillerCoors have invested in existing smaller craft breweries and created separate craft-focused divisionsin an effort to capitalize on the growing craft beer segment.Business StrategyAt Craft Brew Alliance, we believe that we have an advantaged strategy that differentiates us in the advantaged craft beer segment.The central elements of our business strategy include: ·An innovative complementary portfolio of beers and ciders that reflects changing consumer trends in craft beer and is designed to satisfy a widerange of variety-seeking consumers’ experiences and preferences. The breadth of our product offerings also provides consumers with the opportunityto match specific consumer occasions with a product in our brand families.3Table of Contents·Distinct, authentic craft beer brands that represent unique new market leaders, like Kona Brewing Company, legacy pioneers, including WidmerBrothers and Redhook Brewery, and bold trailblazers, like Omission and Square Mile Cider Company.·A national brewing footprint that allows us to get our beers to market faster, fresher and more efficiently. We have significant flexibility to fullyleverage the specific strengths of our distinct breweries and operations. Additionally, we guarantee the quality and consistency of all of our productsthrough fine-tuned processes that ensure everything from brewing to quality-assurance to warehousing and distribution meets our high standards. Webelieve that maximizing the production under our direct supervision and through accomplished and expert partners is critical to our success. Further,we believe that our ability to engage in ongoing product innovation and to control product quality provides critical competitive advantages. Each ofour breweries is modern, has flexible production capabilities, and is designed to produce beer in smaller batches relative to the national domesticbrewers, thereby allowing us to brew a wide variety of brand offerings. We believe that our investment in brewing and logistics technologies enablesus to minimize brewery operating costs and consistently produce innovative beer styles.·Nationwide sales activation through robust partnerships with leading retailers such as Buffalo Wild Wings, Safeway, and Costco. We leverage ournational sales and marketing capabilities and complementary brand families to create a unique identity in the distribution channel and with theconsumer. Our sales force calls on all retail channels nationally, including grocery, drug and convenience stores, something most other craft brewersare not able to do.·National distribution through the Anheuser-Busch wholesaler network alliance. This distribution footprint provides efficiencies in logistics andproduct delivery, state reporting and licensing, billing and collections. We have realized these efficiencies while maintaining full autonomy over theproduction, sale and marketing of our products as an independent craft beer company.·A diverse leadership team with extensive experience in the beer and beverage industries. The team has a proven ability to manage brand lifecycles,from development to turnaround, in both large and growth-company settings. Our leadership team also has a successful track record in managingmergers, divestitures and acquisitions.·Five brew-pub restaurants supporting consumer awareness of our brands and research and development.Brand OverviewOur brand portfolio comprises the Kona Brewing Company, Widmer Brothers Brewing, Redhook Brewery, Omission Beer and Square Mile Cider Companybrand families.We produce a variety of specialty craft beers and ciders using traditional brewing methods complemented by American innovation and invention. We brew ourbeers using high-quality hops, malted barley, wheat, rye and other natural traditional and nontraditional ingredients. To craft our ciders, we partner with anestablished Oregon cidery to grow, pick and hand press three apple varieties and then use a lager beer yeast to make a unique, and easy-to-drink hard cider.Below is an overview of our five brands:About Kona Brewing CompanyKona Brewing Company was started in the spring of 1994 by father and son team Cameron Healy and Spoon Khalsa, who had a dream to create fresh, localisland brews made with spirit, passion and quality. It is a Hawaii-born and Hawaii-based craft brewery that prides itself on brewing the freshest beer ofexceptional quality, closest to market. This helps to minimize its carbon footprint by reducing shipping of raw materials, finished beer and wastefulpackaging materials. The brewery is headquartered where it began, in Kailua-Kona on Hawaii’s Big Island.4Table of ContentsAbout Widmer Brothers BrewingFounded in 1984, Widmer Brothers Brewing is celebrating 30 years of beer in 2014. Founders Kurt and Rob Widmer helped lead the Pacific Northwest craftbeer movement in 1984 when, in their 20s, they began brewing unique interpretations of traditional German beer styles. In 1986, Widmer Brothers Brewingintroduced the original American-style Hefeweizen, which elevated the brewery to national acclaim. Since then, the brewery has continued to push theboundaries of craft beer, developing a variety of beers with an unapologetic, uncompromising commitment to innovation.Based in Portland, Oregon, the brewery brews a variety of beers including Alchemy Pale Ale, Upheaval IPA, Hefeweizen, Drop Top Amber Ale, Pitch BlackIPA, Nelson Imperial IPA, a full seasonal lineup, and a series of limited edition beers.About Redhook BreweryRedhook was born out of the energy and spirit of the early 80’s in the heart of Seattle. While the term didn’t exist at the time, Redhook became one of America’sfirst “craft” breweries. From a modest start in a former transmission shop in the Seattle neighborhood of Ballard, to the current breweries in Woodinville, WAand Portsmouth, NH, Redhook has become one of America’s most recognized craft breweries.While Redhook has “grown up” over the past 30 years, one thing has never changed – Redhook is still brewing great beers like ESB, Long Hammer IPA, andAudible Ale. Most importantly, Redhook has fun doing it. Redhook beers are available both on draught and in bottles. About Omission BeerOmission Beer is a brand of craft beers introduced in 2012 by Craft Brew Alliance in Portland, Oregon. Omission is the first craft beer brand in the U.S.focused exclusively on brewing great-tasting beers with traditional beer ingredients, including malted barley, that are specially crafted to remove gluten. Eachbatch of Omission Beer is tested independently using the R5 competitive ELISA test to ensure that it contains gluten levels below the U.S. Food and DrugAdministration gluten-free standard of 20ppm or less. Omission produces three craft beers specially crafted to remove gluten: Omission Lager, Omission PaleAle and Omission IPA. Drinking is believing.About Square Mile Cider CompanySquare Mile Cider Company is a new brand from Craft Brew Alliance, launched in 2013. The name is inspired by the fortitude and perseverance of the earlyAmerican settlers who traveled the Oregon Trail in search of a better future. When they arrived in Oregon in the 1850s, they were granted square mile parcelsof land to stake their claims. It was on these square mile claims that some of the original Northwest orchards were planted, and where Square Mile CiderCompany chose to stake its claim.New Brands and PackagingOur recent brand and packaging announcements include:Kona BrewingWe continued to expand Big Wave Golden Ale into new markets throughout the U.S. in 2013, and launched a new custom bottle and packaging across theentire portfolio of beers. The new bottle is embossed with the Hawaiian island chain and “Liquid Aloha” lettering.Widmer Brothers BrewingWidmer Brothers unveiled new packaging designs across its entire portfolio, with a focus on celebrating the brand’s roots and legacy as a pioneer of the craftbeer movement.5Table of ContentsAmong its new brands released in 2013, Widmer Brothers Brewing introduced Alchemy Pale Ale, showcasing the brewery’s proprietary Alchemy hop blend,as the newest addition to the year-round core line-up. The brewery continued its Rotator IPA Series with two releases: O’Ryely IPA and the longest-running beerin the Rotator Series to date, Hopside Down IPL. Widmer Brothers also introduced Green & Gold Kölsch, a beer brewed with the Timbers Army for thePortland Timbers Major League Soccer team. Throughout the year, Widmer Brothers released eight limited-release Brothers’ Reserve beers, a collaboration beerwith Cigar City Brewing called Gentlemen’s Club, and a variety of experimental small batch beers brewed at the Widmer Brothers pilot brewery in Portland.Redhook BreweryRedhook continued to build on its partnerships with the launch of Game Changer Ale in July 2013 at all Buffalo Wild Wings locations across the U.S.Redhook also partnered with theCHIVE, a popular online media platform, to launch KCCO Black Lager in October 2013.Omission BeerOmission Beer launched a new IPA, the first authentic IPA brewed with malted barley and specially crafted to remove gluten, in April 2013. At the end of2013, the largest non-profit celiac support group in the United States, the Celiac Support Association, approved the use of its Recognition Seal on OmissionLager and Pale Ale packaging.Square Mile Cider CompanySquare Mile was launched in a handful of select Western states in May of 2013. The brand finds its inspiration from the pioneering spirit of the originalOregon pioneers and debuted with two varieties: The Original, a classic American hard cider; and Spur & Vine, a hopped version of the classic Americanhard cider, with the addition of Galaxy hops. In November 2013, a special holiday cider was launched in time for the holidays with the addition of NWcranberries.Multi-Brand Beer PackagesDuring 2013, we added a Summer Variety Pack to complement our Winter Variety Pack released in 2012. Both Variety Packs include beers from Kona,Widmer Brothers and Redhook to satisfy consumers’ thirst for two popular trends in craft beer: seasonal beers and variety packs.Brewing OperationsBrewing FacilitiesWe use highly automated brewing equipment at our four production breweries and also operate two smaller, manual brewpub-style brewing systems. As ofDecember 31, 2013, 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.6Table of Contents·Innovation Breweries. Our Portland, Oregon innovation brewery maintains a 10-barrel pilot brewing system and is located in the Rose Quartersports and entertainment district; our New Hampshire innovation brewery maintains a 3-barrel pilot brewing system and is located on the samesite as our New Hampshire production 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 and extending the beer’s shelf life. In February 2012, we added a canning line at our Oregon Brewery to package our Kona Longboard Island Lagerand Redhook Longhammer IPA in various can sizes. We offer an assortment of packages to highlight the unique characteristics of each of our beers and toprovide greater opportunities for customers to drink our beers in more locations and at more events and occasions, matching the active lifestyles andpreferences of our consumers.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 an internal taste panel to ensure that 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.Contract BrewingIn order to profitably use excess capacity, we enter into contract brewing arrangements under which we produce beer in volumes and per specifications asdesignated by the 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 paid us $70,000 per month through September 2013.During 2013, we shipped 30,300 barrels under contract brewing arrangements compared to 49,600 barrels in 2012, 24,400 of which were to FSB.Pubs OperationsWe own and operate five brew-pub restaurants and retail stores that support consumer awareness and research and development. Our five brew-pubrestaurants allow us to interact directly with over 1.5 million consumers annually in our home markets, which creates a sense of brand loyalty. Our brewersare continually experimenting with new and different varieties of hops and malts in all styles of beer, and our brew pubs allow us to bring those beers tomarket in test-size batches in order to evaluate their strengths prior to releasing them on a national level.7Table of ContentsDistributionWith 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 national distribution, which results in both a highly effective distribution presence in each market and administrative efficiencies. Our beers areavailable for sale directly to consumers in draft, cans and bottles at restaurants, bars and liquor stores, as well as in cans and bottles at supermarkets,warehouse clubs, convenience stores and drug stores. We sell beer directly to consumers at our brew pubs and breweries.Our products are distributed in all 50 states, pursuant to a master distributor agreement with A-B that allows us access to A-B’s national distribution network.For additional information regarding our relationship with A-B, see “Relationship with Anheuser-Busch, LLC” below. Management believes that ourcompetitors in the craft beer segment generally negotiate distribution relationships separately with wholesalers in each locality and, as a result, typicallydistribute through a variety of wholesalers representing differing national beer brands with uncoordinated territorial boundaries.In 2013 and 2012, we sold approximately 708,100 barrels and 660,000 barrels, respectively, to the wholesalers in A-B’s distribution network through the A-BDistributor Agreement, accounting for 93.6% and 91.0%, respectively, of our shipment volume for the corresponding periods.Sales and MarketingIn addition to leveraging our owned brew pubs and retail locations, we promote our products through a national sales and marketing network that includes butis not limited to i) creating and executing a range of advertising programs; ii) training and educating wholesalers and retailers about our products; and iii)promoting our name, product offerings and brands, and experimental beers at local festivals, venues and pubs.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 sell various items of apparel and other merchandise bearing our trademarks, which creates furtherawareness of our beers and reinforces our brand 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 AgreementUnder the Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) with A-B, we granted A-B certain contractual rights.The Exchange Agreement was entered into as part of a recapitalization in which we redeemed preferred shares held by A-B in exchange for cash and ourcommon stock currently held by A-B, which represents 32.0% of our outstanding shares of common stock at December 31, 2013.8Table of ContentsThe 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 evaluate transactions orproposed transactions between A-B and us. The Exchange Agreement contains limitations on our ability to take certain actions without A-B’s prior consent,including, but not limited to, our ability to issue equity securities or acquire or sell assets or stock, amend our Articles of Incorporation or Bylaws, grantboard representation rights, enter into certain transactions with affiliates, distribute our products in the United States other than through A-B or as provided inthe 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 Kona, Widmer Brothers, Redhook, Omission and Square Mile in all states, territories andpossessions of the United States, including the District of Columbia and, except with respect to Kona beers, all U.S. military, diplomatic, and governmentalinstallations in a U.S. territory or possession. Under the A-B Distributor Agreement, we granted A-B the right of first refusal to distribute our products,including any internally developed new products but excluding new products that we acquire. We are responsible for marketing our products to A-B’swholesalers, as well as to 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.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 incompatible conduct that 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.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 18 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.9Table of ContentsCompetitionWe 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.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 packaged 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 five brand families and the scale of our production breweries.We also compete against imported brands, such as Heineken, Corona Extra and Guinness. Most of these foreign brewers have significantly greater financialresources than we have. Although imported beers currently account for a greater share of the U.S. beer market than craft beers, we believe that craft brewerspossess certain competitive advantages over some importers, including lower transportation costs, no importation costs, proximity to and familiarity with localconsumers, 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 and Mike’s Hard Lemonade have captured sizable market share in the higher-priced end of the malt beverage industry. We believe sales of these products,along with strong growth in the imported and craft beer segments of the malt beverage industry, contributed to an increase in the overall U.S. alcohol market.These products are particularly popular in certain regions and markets in which we sell our products.Competition for consumers of craft beers has also come from wine and spirits. 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.10Table of ContentsSegment and Enterprise-Wide InformationSee Note 12 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.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. 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.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, such as us,that produce less than two million barrels annually are taxed at $7 per barrel on the first 60,000 barrels shipped, with shipments above this amount taxed atthe normal rate. Certain states also levy excise taxes on alcoholic beverages. Excise taxes may be increased in the future by the federal government or any stategovernment 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.11Table of ContentsTrademarksWe 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 Kona Brewing, Widmer Brothers, Redhook, and Omission marks and certain other marks are alsoregistered in various foreign countries. We regard our Kona Brewing, Widmer Brothers, Redhook, Omission, Square Mile and other trademarks as havingsubstantial value and as being an important factor in the marketing of our products. We are not aware of any infringing uses that could materially affect ourcurrent business or any prior claim to the trademarks that would prevent us from using such trademarks in our business. Our policy is to pursue registrationof our trademarks in our markets whenever possible and to oppose vigorously any infringement of our trademarks.EmployeesAt December 31, 2013, we employed approximately 745 people, including 355 employees in the pubs and retail stores, 210 employees in production, 115employees in sales and marketing and 65 employees in corporate and administration. Included in the totals above are 236 part-time employees and 2 seasonalor temporary employees. None of our employees are represented by a union or employed under a collective bargaining agreement. We believe our relations withour 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 the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations section of our website. Theinformation found on our website 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. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual generaleconomic conditions, job losses and the resultant rising unemployment rate, perceived or actual disposable consumer income and wealth, and changes inconsumer confidence in the economy, could significantly reduce customer demand for craft beer in general, and the products we offer specifically.Furthermore, our consumers may choose to replace our products with the fuller-flavored national brands or other more affordable, although lower quality,alternatives available in the market. Any such decline in consumption of our products would likely have a significant negative impact on our operating results.12Table of ContentsChanges 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. There is no assurance that the craft brewing segment will continue to experience growth in future periods.If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could draw consumers away from the beer industry in general and ourproducts specifically and have an adverse effect on our sales and results of operations. Further, the alcoholic beverage industry has become the subject ofconsiderable 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 beerproducers could be restricted, that additional cautionary labeling or packaging requirements might be imposed or that there may be renewed efforts to impose,at either the federal or state level, increased excise or other taxes on beer sold in the United States. If beer in general were to fall out of favor among domesticconsumers, or if the domestic beer industry were subjected to significant additional governmental regulation, it would likely have a significant adverse impacton our financial condition, operating results and cash flows.We have a continuing relationship with Anheuser-Busch, LLC and the current distribution network that would be difficult to replace.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 establishing and maintaining direct contracts with the existing wholesaler network or negotiatingagreements with replacement wholesalers on an individual basis, and enhancing our credit evaluation, billing and accounts receivable processes. Such anundertaking would require significant effort and substantial time to complete, during which the distribution of our products 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. A-B has been purchasing distributors in states where it isallowed, which could impact our distribution if the A-B relationship were to end. 28% of our shipments during 2013 were through A-B owned distributors.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 32.0% 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. Additionally, A-B has acquired craft breweries in the past and may in the future,and has also launched similar style beers which increases the direct competition between the companies.13Table of ContentsOperating breweries at production levels substantially below their current designed capacities could negatively impact our financial results.As of December 31, 2013, 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 55% of our sales in 2013 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 Andrew Thomas 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 packagedproduct sales and within the various bottled product packages; level of fixed and semi-variable operating costs; level of production at our breweries in relationto current production capacity; availability and prices of raw materials, production inputs such as energy, and packaging materials; rates charged for freight;and federal and state excise taxes. The high percentage of fixed and semi-variable operating costs causes our gross margin to be particularly sensitive torelatively small changes in sales volume.A failure in any of our supply chain processes could harm our ability to effectively operate our business.Our results are highly dependent on our ability to accurately forecast and execute throughout the entire supply chain, including sales forecasting, raw materialordering, brewing and distribution. The combination of our recent growth and increased brand complexity has increased the operating complexity of ourbusiness. We cannot guarantee that we will effectively manage such complexity without experiencing planning failures, operating inefficiencies or other issuesthat could have an adverse effect on our business.14Table of ContentsWe engage in electronic communications between third parties, including A-B and our wholesalers, as part of our supply chain processes. Any interruptions orerrors in our electronic interfaces may negatively affect our operating activities.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.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 distribution industry. Any change in the competitive environment inthose states could have an adverse effect on our future sales and results of operations and may impact the financial stability of wholesalers on which we rely.We may experience a shortage of kegs necessary to distribute draft beer.We distribute our draft beer in kegs that are owned by us as well as leased from a third-party vendor. During periods when we experience stronger sales, wemay need to rely on kegs leased from A-B and the third-party vendor to address the additional demand. If shipments of draft beer increase, we may experiencea shortage of available kegs to fill sales orders. If we cannot meet our keg requirements through either lease or purchase, we may be required to delay somedraft shipments. Such delays could have an adverse impact on sales and relationships with wholesalers and A-B.15Table of ContentsA 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.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.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 2.9 million shares, or 15.1%, of our common stock. Collectively, these two groups own 47.1% 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 unless we meet certain financial covenants. As a result, only appreciation of the price of our common stock will provide a return to shareholders.Investors seeking cash dividends should not invest in our common stock.The fair value of our intangible assets, including goodwill, may become impaired.As a result of the KBC Merger, we have recognized a significant increase in our total intangible assets, including goodwill. As of December 31, 2013, we had$29.6 million in an assortment of intangible assets, on a net basis, which represented nearly 17.4% 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.PropertiesWe own and operate four highly-automated, small-batch production breweries: the Oregon Brewery, the Washington Brewery, the New Hampshire Brewery,and the Hawaiian Brewery, as well as two small, innovation brewing systems in Portland, Oregon and Portsmouth, New Hampshire. We lease the sites uponwhich the Hawaiian Brewery and Pubs, the New Hampshire Breweries and Pub, the Portland Innovation Brewery, and Oregon Pub are located, in addition toour office space and warehouse locations in Portland, Oregon for our corporate, administrative and sales functions. These operating leases expire at varioustimes between 2014 and 2047. Certain of these leases are with related parties. See Notes 17 and 18 of Notes to Consolidated Financial Statements included inPart II, Item 8 of this report for further discussion regarding these arrangements.16Table of ContentsCertain information regarding our production breweries is as follows (capacity in thousands of barrels):Production Breweries SquareFootage CurrentAnnual Capacity 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, 2013 and 2012. Combined, our breweries have the potential to reach 1,220,000 barrels in annualcapacity when fully optimized based on the currently available space and current product mix.Substantially all of the personal property and the real properties associated with the Oregon Brewery secure our loan agreement with BofA. See Note 9 of Notesto 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 is not likely to have a material adverse effect on our financial condition orresults of operations.Item 4.Mine Safety DisclosuresNot applicable.17Table of ContentsPART 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 closing sale prices of our common stock, as reported on the NASDAQ: 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 2013 High Low Quarter 1 $7.50 $6.39 Quarter 2 8.24 7.19 Quarter 3 13.80 8.40 Quarter 4 17.78 13.00 We had 683 common shareholders of record as of February 28, 2014. 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 2013.18Table of ContentsStock 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 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 Craft Brew Alliance, Inc. $100.00 $200.00 $615.83 $501.67 $540.00 $1,368.33 NASDAQ Composite 100.00 143.89 168.22 165.19 191.47 264.84 S&P 500 Beverages Index 100.00 120.23 137.85 144.11 151.53 180.99 19Table of ContentsItem 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 2013 2012 2011 2010 2009 Net sales $179,180 $169,287 $149,197 $131,731 $124,713 Cost of sales 128,919 119,261 104,011 98,064 97,230 Gross profit $50,261 $50,026 $45,186 $33,667 $27,483 Selling, general and administrative expenses $46,461 $44,890 $39,742 $29,938 $24,911 Operating income $3,800 $5,136 $5,444 $3,170 $2,347 Gain on sale of equity interest in Fulton Street Brewery, LLC $- $- $10,432 $- $- Income before provision for income taxes $3,263 $4,477 $15,692 $2,786 $1,073 Provision for income taxes 1,304 1,951 6,041 1,100 186 Net income $1,959 $2,526 $9,651 $1,686 $887 Basic and diluted net income per share $0.10 $0.13 $0.51 $0.10 $0.05 Shares used in basic per share calculations 18,923 18,862 18,834 17,523 17,004 Shares used in diluted per share calculations 19,042 18,934 18,931 17,568 17,041 December 31, 2013 2012 2011 2010 2009 Balance Sheet Data Cash and cash equivalents $2,726 $5,013 $795 $164 $11 Working capital (deficit) 5,782 5,207 2,327 (4,435) (2,527)Total assets 170,286 165,664 158,908 158,266 141,585 Current portion of long-term debt and capital leases 710 642 596 2,460 1,481 Long-term debt and capital leases, net of current portion 11,050 12,440 13,188 24,675 24,685 Other long-term obligations 18,303 17,903 16,261 11,388 8,210 Shareholders’ equity 111,232 108,195 104,509 94,196 80,632 20Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverviewCraft Brew Alliance, Inc. is an independent craft brewing company that was formed through the merger of leading Pacific Northwest craft brewers – WidmerBrothers Brewing and Redhook Ale Brewery – in 2008. Since our formation, we have remained focused on preserving and growing one-of-a-kind craft beersand brands. Today, we are comprised of five unique and pioneering craft beer and cider 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;·Omission Beer, internally developed by our brewing team as the first beer brand specially crafted to remove gluten, and launched in 2012 inPortland, Oregon; and·Square Mile Cider Company, the first non-beer brand family created by Craft Brew Alliance, and launched in 2013.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: i) our innovative portfolio of distinct craft beer and cider brand families; ii) evolving national brewing footprint with national salesand marketing reach; iii) expertise in developing partnerships and new growth strategies; iv) leadership team with significant beer and growth-companyexpertise; v) proven ability to manage brand lifecycles, from development to turnaround; and vi) successful track record managing mergers, divestitures andacquisitions.We proudly brew our craft beers in four company-owned breweries located in Portland, Oregon; the Seattle suburb of Woodinville, Washington; Portsmouth,New Hampshire; and Kailua-Kona, Hawaii. Additionally, we own and operate two small innovation breweries, primarily used for small batch production andinnovative brews, in Portland, Oregon and Portsmouth, New Hampshire.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. As a result of this distribution arrangement, we believe that, underalcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-BDistributor Agreement expires or is terminated. Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 36 states.Omission Beer continues to expand into new markets in the U.S. and internationally. Square Mile is currently available in 10 states in the West. Separate fromour A-B wholesalers, we maintain an internal independent sales and marketing organization 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 operations. Beer Related operations include the brewing and sale of craft beers and cider fromour six breweries, both domestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our BeerRelated operations, as well as other merchandise sales, and sales of our beers directly to customers.21Table of ContentsFollowing is a summary of our financial results: Net Sales Net Income Number ofBarrels Sold 2013 $179.2 million $2.0 million 756,600 2012 $169.3 million $2.5 million 724,900 2011 $149.2 million $9.7 million 672,600 Results 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, 2013 2012 2011 Sales 107.4% 107.5% 107.9%Less excise tax 7.4 7.5 7.9 Net sales 100.0 100.0 100.0 Cost of sales 71.9 70.4 69.7 Gross profit 28.1 29.6 30.3 Selling, general and administrative expenses 25.9 26.5 26.6 Operating income 2.1 3.0 3.6 Income from equity method investments - - 0.5 Gain on sale of FSB - - 7.0 Interest expense (0.3) (0.4) (0.6)Interest and other income, net - - - Income before income taxes 1.8 2.6 10.5 Income tax provision 0.7 1.2 4.0 Net income 1.1% 1.5% 6.5%(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, 2013 BeerRelated Pubsand Other Total Net sales $154,830 $24,350 $179,180 Gross profit $47,055 $3,206 $50,261 Gross margin 30.4% 13.2% 28.1%2012 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%22Table 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 2013 2012 Change % Change A-B and A-B related $159,001 $147,628 $11,373 7.7%Contract brewing and beer related(1) 9,082 10,773 (1,691) (15.7)%Excise taxes (13,253) (12,731) (522) 4.1%Net beer related sales 154,830 145,670 9,160 6.3%Pubs(2) 24,350 23,617 733 3.1%Net sales $179,180 $169,287 $9,893 5.8% 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%(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, 2013Shipments 2012Shipments Increase(Decrease) %Change Change inDepletions(1) A-B and A-B related 708,100 660,000 48,100 7.3% 11%Contract brewing and beer related(2) 37,100 52,700 (15,600) (29.6)% Pubs 11,400 12,200 (800) (6.6)% Total 756,600 724,900 31,700 4.4% Year EndedDecember 31, 2012Shipments 2011Shipments 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% (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 2013 compared to 2012 was primarily due to an increase in shipments and a shift in mix towards packaged,which has a higher selling price per barrel than draft.The increase in sales to A-B and A-B related in 2012 compared to 2011 was primarily due to increased shipments, higher selling prices for our beers, and ashift in product mix towards packaged and high-end product, both of which carry a higher price per unit than draft. Gross sales in 2012 was also favorablyimpacted by 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. Thislower fee level for the period of January 2012 through April 2012 generated approximate savings of $1.2 million as compared to the same period in 2011.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 0.4% in 2013 compared to 2012 and 4.2% in 2012 compared to 2011, primarily due to pricing increases and shifts in brand, packageand geographic mix. Price changes implemented by us have generally followed craft beer market pricing trends. During 2013, 2012 and 2011, we sold 93.6%,91.0% and 90.9%, respectively, of our beer through A‑B at wholesale pricing levels.23Year Ended December 31, 2013 2012 2011 $- $3,083 $2,863 Table of ContentsThe decrease in contract brewing and beer related sales in 2013 compared to 2012 was primarily due to a $3.1 million decrease related to the mutually-agreedupon termination of our contract brewing agreement with FSB effective September 1, 2012. This decrease was partially offset by a $1.2 million increase ininternational shipments of our beers, which sell at a higher rate per barrel than contract brewing sales. Pursuant to our agreement with FSB, we phased outproduction of FSB branded beers by the end of November 2012 utilizing remaining inventory on-hand. In consideration, FSB paid us $70,000 per monththrough September 2013. We recorded $0.8 million in Sales during the period from September 1, 2012 to December 31, 2012 under the terms of thetermination agreement.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. Werecorded $0.8 million in Sales during the period from September 1, 2012 to December 31, 2012 under the terms of the termination agreement.Sales to FSB through the contract brewing arrangement, classified in Sales, were as follows (dollars in thousands):The increases in excise taxes in 2013 compared to 2012 and in 2012 compared to 2011 were due to higher shipments.Pubs sales increased in 2013 compared to 2012, primarily as a result of our Kona Pubs in Hawaii experiencing increased sales as a result of higher guestcounts, partially offset by lower sales at our Redhook Pub in Woodinville as a result of a twelve-week closure for a full remodel of that location. The RedhookPub in Woodinville, Washington re-opened at the end of May 2013.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 overall increase in volume in 2013 compared to 2012 reflected the continued strength of the Kona Brewing, Redhook Brewery and Omission brands,partially offset by a decrease in Widmer Brothers brands as we continued its repositioning in the marketplace.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.24Table of ContentsShipments by BrandThe following table sets forth a comparison of shipments by brand (in barrels):Year Ended December 31, 2013Shipments 2012Shipments Increase(Decrease) %Change Change inDepletions Kona 256,800 220,000 36,800 16.7% 23%Widmer Brothers(1) 252,600 264,300 (11,700) (4.4)% (3)%Redhook 216,900 191,000 25,900 13.6% 15%Total(2) 726,300 675,300 51,000 7.6% 11%Year Ended December 31, 2012Shipments 2011Shipments Increase(Decrease) %Change Change inDepletions Kona 220,000 172,800 47,200 27.3% 23%Widmer Brothers(1) 264,300 271,200 (6,900) (2.5)% (5)%Redhook 191,000 179,300 11,700 6.5% 6%Total(2) 675,300 623,300 52,000 8.3% 6%(1)Widmer Brothers includes the shipments and depletions from our Omission and Square Mile brand families.(2)Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.The increase in our Kona brand shipments in 2013 compared to 2012 was primarily due to the introduction on the mainland of our Big Wave Golden Aleduring the third quarter of 2012, as well as expansion of sales of our Kona brands into certain Midwest states at the beginning of 2013, which also contributedto the continued sales growth of our Longboard Lager.Kona continued to be one of the fastest growing brands in the craft category in shipments in 2012 compared to 2011. The increase in our Kona brandshipments in 2012 compared to 2011 was also due to the success of our Kona variety packs and the increased velocity of our Kona flagship, LongboardLager, in existing markets. During the third quarter of 2012, we launched our Big Wave Golden Ale, previously available only in Hawaii, on the mainland.The introduction of our Kona beer in cans in March 2012 also contributed to the increase.We believe the Kona sales growth was due to the Always Aloha message and quality of the beer resonating with consumers. We continue to successfullyintroduce our Kona beers to new markets, which has been contributing to the brand’s shipment growth.The decrease in our Widmer Brothers brand shipments in 2013 compared to 2012 was primarily due to a decline in shipments of Hefeweizen, partially offsetby an increase in shipments of Omission.The decrease in our Widmer Brothers brand shipments in 2012 compared to 2011 was primarily due to pressure on our Hefeweizen beer which experiencedcompetition 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 increase in our Redhook brand shipments in 2013 compared to 2012 was primarily the result of launching our new Audible Ale, a craft beer developed inpartnership with Dan Patrick, at the Super Bowl in February 2013, as well as our new Game Changer Ale, co-developed with Buffalo Wild Wings as a craftbeer that pairs well with wings. Redhook is also experiencing further penetration into existing markets, particularly by our Long Hammer IPA.The increase in our Redhook brand shipments in 2012 compared to 2011 was the result of our investments in new packaging, brand introductions andmarketing initiatives. These investments have resulted in the unique Redhook brand position, which we believe is resonating with consumers.25Table of ContentsFor each of the brand families discussed above, shipments lagged depletions for 2013 as a result of optimizing our supply chain processes, includingbrewing, during the 2013 first quarter to more closely align with the seasonality of our beer sales.Shipments by PackageThe following table sets forth a comparison of our shipments by package, excluding contract brewing shipments produced under our contract brewingarrangements (in barrels): 2013 2012 2011 Year Ended December 31, Shipments % of Total Shipments % of Total Shipments % of Total Draft 205,500 28.3% 214,800 31.8% 219,400 35.2%Packaged 520,800 71.7% 460,500 68.2% 403,900 64.8%Total 726,300 100.0% 675,300 100.0% 623,300 100.0%The shift in mix from draft to packaged in 2013 compared to 2012 was primarily the result of the increases in volumes of our Kona and Redhook packagedbeers and lower volumes on our Widmer Brothers draft beer. Increased competition across the industry, as a result of both the entry of large, multi-nationalbrewers into the craft beer segment and the significant increase in small, local breweries nationally, is putting pressure on on-premise draft sales.The shift in mix from draft to packaged in 2012 compared to 2011 was primarily the result of the increase in volumes on our Kona packaged beer and lowervolumes on our Hefeweizen draft beer.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 2013 2012 Change % Change Beer Related $107,775 $99,329 $8,446 8.5%Pubs 21,144 19,932 1,212 6.1%Total $128,919 $119,261 $9,658 8.1% 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%The increase in Beer Related Cost of sales in 2013 compared to 2012 was primarily due to the increase in shipments discussed above, as well as the mix shiftfrom draft to packaged as the per barrel equivalent cost of packaged is higher than draft and increased distribution costs per barrel.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 packaged. In addition, increased distribution costs, including offsite storage and fuel, increased labor, and higher grain prices, contributed to the increase.Pubs Cost of sales increased in 2013 compared to 2012 primarily due to cost increases across various categories, including labor, food, merchandise and rent.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.26Table of ContentsCapacity UtilizationCapacity utilization is calculated by dividing total shipments by approximate working capacity and was as follows: Year Ended December 31, 2013 2012 2011 Capacity utilization 70% 73% 75%During 2012, we increased the combined capacity of our production breweries from approximately 900,000 barrels per year to approximately 1,075,000barrels per year. Utilization in 2012 and 2011 would have been 67% and 63%, respectively, if this increased capacity of our breweries had been availablesince January 1, 2011.At mid-year 2014, we will be expanding our brewing capability into the Southeastern U.S. through a new partnership. This new partnership will help toimprove gross margin by bringing brewing capability closer to growing markets, while alleviating emerging capacity constraints within our Portsmouth, NewHampshire brewery driven by growth in the east region and internationally.Gross ProfitInformation regarding gross profit was as follows (dollars in thousands): Year Ended December 31, Dollar 2013 2012 Change % Change Beer Related $47,055 $46,341 $714 1.5%Pubs 3,206 3,685 (479) (13.0)%Total $50,261 $50,026 $235 0.5% 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%Gross profit as a percentage of net sales, or gross margin rate, was as follows: Year Ended December 31, 2013 2012 2011 Beer Related 30.4% 31.8% 32.7%Pubs 13.2% 15.6% 16.3%Total 28.1% 29.6% 30.3%The increase in Gross profit in 2013 compared to 2012 was due to the increase in shipment volumes discussed above. The increase was partially offset by theincrease in supply-chain costs, including distribution, a decline in our Pubs gross profit as a result of a twelve-week closure of our Redhook Pub inWoodinville, Washington for a full remodel of that location, and increased Pubs costs.The decrease in the Beer Related gross margin rate in 2013 compared to 2012 was primarily due to the change in product mix and higher distribution costs perbarrel; the decrease was also due to the $0.8 million recorded in Sales in 2012 under the terms of the termination agreement with FSB with no associated costs.The decline in the Pubs gross margin rate in 2013 compared to 2012 was primarily due to the closure and post‑renovation ramp‑up of our Woodinville Pub, asdiscussed above, and increases in food and labor costs.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 $0.8 million recorded in Sales under the terms of thetermination agreement with FSB with no associated costs. The increase in Pubs Gross profit in 2012 compared to 2011 was primarily due to increases in guestcounts and pricing, partially offset by increases in labor, food and beverage costs, which contributed to the lower gross margin rate.27Table 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 2013 2012 Change % Change $46,461 $44,890 $1,571 3.5%As a % of Net sales 25.9% 26.5% 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% The increase in SG&A in 2013 compared to 2012 was primarily due to increases in employee related costs, and new packaging design and development costs.SG&A decreased as a percentage of Net sales in 2013 compared to 2012 primarily due to our leveraging of spending in prior periods.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 were 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.Income from Equity Method InvestmentsIncome from equity method investments in 2011 related to our share of FSB’s net income through the date of sale in May 2011.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.Interest ExpenseInformation regarding interest expense was as follows (dollars in thousands): Year Ended December 31, Dollar 2013 2012 Change % Change Interest expense $464 $663 $(199) (30.0)% 2012 2011 Interest expense $663 $918 $(255) (27.8)% Year Ended December 31, 2013 2012 2011 Average debt outstanding $12,615 $13,436 $20,163 Average interest rate 2.92% 2.74% 3.43%28Table of ContentsThe decrease in Interest expense in 2013 compared to 2012 was due to the expiration of an interest rate swap contract, lower average outstanding borrowingsand lower average interest rates.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 decrease in average outstanding borrowings wasprimarily 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.Income Tax ProvisionOur effective income tax rate was 40.0%, 43.6% and 38.5% in 2013, 2012 and 2011, respectively. The effective income tax rates reflect the impact of non-deductible expenses, primarily state and local taxes, meals and entertainment expenses and tax credits.The rate in 2012 reflects the impact of increasing the tax rate applied against the net deferred tax liability due to the State of California changing incomeapportionment rules to a single sales factor methodology effective January 1, 2013. This one-time adjustment resulted in a 3.4 percentage point increase to our2012 effective income tax rate, or $153,000 of our Income tax provision.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 flows from operations, bank borrowings and the sale ofcommon and preferred stock. We anticipate meeting our obligations for the twelve months beginning January 1, 2014 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, 2013included $2.7 million of Cash and cash equivalents and $22 million available under our line of credit facility.We had $5.8 million of working capital and our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 9.6% atDecember 31, 2013.A summary of our cash flow information was as follows (dollars in thousands): Year Ended December 31, 2013 2012 2011 Cash flows provided by operating activities $8,457 $13,105 $6,728 Cash flows provided by (used in) investing activities (9,894) (8,683) 7,131 Cash flows used in financing activities (850) (204) (13,228)Increase (decrease) in cash and cash equivalents $(2,287) $4,218 $631 Cash provided by operating activities of $8.5 million in 2013 resulted from our Net income of $2.0 million, net non-cash expenses of $9.4 million andchanges in our operating assets and liabilities as discussed in more detail below.Accounts receivable, net, increased $0.9 million to $11.4 million at December 31, 2013 compared to $10.5 million at December 31, 2012. This increase wasprimarily due to a $2.1 million increase in our receivable from A-B, which totaled $8.5 million at December 31, 2013, partially offset by decreases in ourother accounts receivable. Historically, we have not had collection problems related to our accounts receivable.Inventories increased $4.9 million to $16.6 million at December 31, 2013 compared to $11.7 million at December 31, 2012, primarily to support an expectedincrease in shipment volume.29Table of ContentsAccounts payable increased $2.4 million to $14.7 million at December 31, 2013 compared to $12.3 million at December 31, 2012, primarily due to increasedinventory purchases to support our expected increased level of sales, partially offset by a $0.3 million decrease in the portion of our payable to A-B that isincluded in our Accounts payable, which totaled $1.1 million at December 31, 2013.As of December 31, 2013, we had the following net operating loss carryforwards (“NOLs”) and federal credit carry forwards available to offset payment offuture income taxes:·state NOLs of $42,000, tax-effected; and·federal alternative minimum tax (“AMT”) credit carry forwards of $428,000.We anticipate that we will utilize the remaining NOLs and federal credit carry forwards in the near future and, accordingly, once utilized, we will be requiredto satisfy all of our income tax obligations with cash.Capital expenditures of $10.2 million in 2013 were primarily directed to Pubs remodeling and beer production capacity and efficiency improvements. As ofDecember 31, 2013, we had $0.3 million of the $10.2 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets. We anticipatecapital expenditures of approximately $15 million to $20 million in 2014 primarily for capacity and efficiency improvements, quality initiatives andrestaurant and retail.Loan AgreementWe have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A., which consists of a $22.0 million revolving line of credit (“Lineof Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and an $10.8 million term loan (“TermLoan”). We may draw upon the Line of Credit for working capital and general corporate purposes until expiration on October 31, 2018. The maturity date ofthe Term Loan is September 30, 2023. At December 31, 2013, we had no borrowings outstanding under the Line of Credit.Under the Loan Agreement, interest accrues at an annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) Daily Floating Rate plus a marginalrate. The marginal rate varies from 1.00% to 2.25% based on our funded debt ratio. At December 31, 2013, our marginal rate was 1.00%, resulting in anannual interest rate of 1.17%. Accrued interest for the Line of Credit and the Term Loan is due and payable monthly.In connection with an amendment to the Loan Agreement on November 15, 2013, we paid down the Term Loan by $0.6 million in order to bring theoutstanding principal balance to $10.8 million to achieve an 80% loan to value ratio on certain property securing the Loan Agreement. Monthly principalpayments of $45,000 will be made on the Term Loan from January 1, 2014 through September 30, 2023, with any unpaid principal and accrued interestbeing paid on September 30, 2023. The outstanding principal balance was $10.8 million at December 31, 2013.The November 15, 2013 amendment also provided for the approval of acquisitions within the same line of business as long as we remain in compliance withthe financial covenants of the Loan Agreement and at least $5.0 million remains available on the Line of Credit following the acquisition. In addition, theamendment released our Woodinville, Washington property as collateral and, accordingly, only our Oregon brewery is collateral on the Term Loan.30Table of ContentsContractual Commitments and ObligationsThe following is a summary of our contractual commitments and obligations as of December 31, 2013 (in thousands): Payments Due By Period Contractual Obligations Total 2014 2015 and2016 2017 and2018 2019 andbeyond Term loan $10,800 $540 $1,080 $1,080 $8,100 Interest on term loan(1) 935 114 231 205 385 Promissory notes 600 - 600 - - Interest on promissory notes 204 144 60 - - Note with related party 165 165 - - - Interest on note with related party 4 4 - - - Operating leases 17,790 1,263 2,346 1,765 12,416 Capital leases 12 6 6 - - Purchase commitments 25,975 19,536 5,544 895 - Sponsorship obligations 4,260 2,308 1,632 320 - $60,745 $24,080 $11,499 $4,265 $20,901 (1)The variable interest rate on our term loan was 1.17% at December 31, 2013.See Notes 9 and 17 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 2013, 2012 and 2011.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.Goodwill and Other Indefinite-lived Intangible AssetsWe test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or as indicators of impairment are present. We have an optionto first assess certain qualitative factors for indications of impairment in order to determine whether it is necessary to perform the quantitative, two-stepimpairment test. If we choose not to first perform the qualitative test, or we determine that it is more likely than not that the fair value of the reporting unit isless than the carrying amount, we perform the quantitative two-step impairment test.Our goodwill and other indefinite-lived intangible assets impairment loss calculations contain uncertainties because they require management to makeassumptions in the qualitative assessment of relevant events and circumstances and to estimate the fair value of our reporting units and indefinite-livedintangible assets, including estimating future cash flows. These calculations contain uncertainties because they require management to make assumptions andapply judgment to estimate economic factors and the profitability of future business operations and, if necessary, the fair value of a reporting unit’s assets andliabilities. Further, our ability to realize the future cash flows used in our fair value calculations is affected by changes in such factors as economic conditions,our operating performance, our industry and our business strategies.31Table of ContentsWe do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losseson goodwill. Based on the results of our annual impairment test for goodwill and other indefinite-lived intangible assets, no impairment was recorded. Webelieve, based on our assessment discussed above, that our goodwill and other indefinite-lived intangible assets are not at risk of impairment. However, ifactual results are not consistent with our estimates or assumptions or there are significant changes in any of these estimates, projections or assumptions, thefair value of these assets in future measurement periods could be materially affected resulting in an impairment that could materially affect our results ofoperations.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 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.32Table of ContentsRecent Accounting PronouncementsSee Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.Item 7A.Quantitative and Qualitative Disclosures about Market 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 expired July 1, 2013, to hedge the variability of interest paymentsassociated with our variable-rate borrowings. Since the interest rate swap hedged the variability of interest payments on variable rate debt with similar terms, itqualified for cash flow hedge accounting treatment. This interest rate swap reduced our overall interest rate risk. As of December 31, 2013, we had $10.8million of unhedged variable-rate debt outstanding. A 10% increase or decrease in the interest rate on our variable-rate debt would not have a material effect onour financial position, results of operations or cash flows.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, 2013 is as follows:2013 (In thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Net sales $36,609 $49,007 $49,354 $44,210 Cost of sales 27,666 34,043 34,512 32,698 Gross profit 8,943 14,964 14,842 11,512 Selling, general and administrative expenses 11,760 12,950 11,602 10,149 Operating income (loss) (2,817) 2,014 3,240 1,363 Other expense, net (179) (150) (120) (88)Income (loss) before income taxes (2,996) 1,864 3,120 1,275 Income tax provision (benefit) (1,222) 769 1,228 529 Net income (loss) $(1,774) $1,095 $1,892 $746 Basic and diluted net income (loss) per share(1) $(0.09) $0.06 $0.10 $0.04 Shares used in basic per share calculation 18,884 18,926 18,937 18,946 Shares used in diluted per share calculation 18,884 18,992 19,067 19,113 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(1) $0.04 $0.03 $0.05 $0.02 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 (1) Basic and diluted net income (loss) per share may not sum to the full year as presented on the Consolidated statements of income due to rounding.33Table of ContentsREPORT 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, 2013 and 2012, and therelated consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2013, 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, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issuedby the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2014 expressed an unqualified opinion thereon./s/ Moss Adams LLP Seattle, WashingtonMarch 6, 201434Table of ContentsCRAFT BREW ALLIANCE, INC.CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per share amounts) December 31, 2013 2012 Assets Current assets: Cash and cash equivalents $2,726 $5,013 Accounts receivable, net 11,370 10,512 Inventories 16,639 11,749 Deferred income tax asset, net 1,345 1,250 Other current assets 3,403 3,809 Total current assets 35,483 32,333 Property, equipment and leasehold improvements, net 104,193 102,852 Goodwill 12,917 12,917 Intangible and other assets, net 17,693 17,562 Total assets $170,286 $165,664 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $14,742 $12,255 Accrued salaries, wages and payroll taxes 4,616 5,267 Refundable deposits 8,252 7,896 Other accrued expenses 1,381 1,066 Current portion of long-term debt and capital lease obligations 710 642 Total current liabilities 29,701 27,126 Long-term debt and capital lease obligations, net of current portion 11,050 12,440 Fair value of derivative financial instruments - 219 Deferred income tax liability, net 17,719 17,156 Other liabilities 584 528 Total liabilities 59,054 57,469 Commitments and contingencies (Note 17) Common shareholders' equity: Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 18,972,247 and18,874,256 95 94 Additional paid-in capital 136,972 136,030 Accumulated other comprehensive loss - (135)Accumulated deficit (25,835) (27,794)Total common shareholders' equity 111,232 108,195 Total liabilities and common shareholders' equity $170,286 $165,664 The accompanying notes are an integral part of these financial statements.35Table of ContentsCRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share amounts) Year Ended December 31, 2013 2012 2011 Sales $192,433 $182,018 $161,000 Less excise taxes 13,253 12,731 11,803 Net sales 179,180 169,287 149,197 Cost of sales 128,919 119,261 104,011 Gross profit 50,261 50,026 45,186 Selling, general and administrative expenses 46,461 44,890 39,742 Operating income 3,800 5,136 5,444 Income from equity method investments - - 691 Gain on sale of equity interest in Fulton Street Brewery, LLC - - 10,432 Interest expense (464) (663) (918)Other income (expense), net (73) 4 43 Income before income taxes 3,263 4,477 15,692 Income tax provision 1,304 1,951 6,041 Net income $1,959 $2,526 $9,651 Basic and diluted net income per share $0.10 $0.13 $0.51 Shares used in basic per share calculations 18,923 18,862 18,834 Shares used in diluted per share calculations 19,042 18,934 18,931 The accompanying notes are an integral part of these financial statements.36Table of ContentsCRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year Ended December 31, 2013 2012 2011 Net income $1,959 $2,526 $9,651 Unrealized gains on derivative hedge transactions, net of tax 135 221 172 Comprehensive income $2,094 $2,747 $9,823 The accompanying notes are an integral part of these financial statements.37Table of ContentsCRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY(In thousands) Common Stock AdditionalPaid-In AccumulatedOtherComprehensive Retained TotalCommonShareholders' Shares Par Value Capital Loss Deficit Equity 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 Issuance of shares under stock plans 75 1 243 - - 244 Stock-based compensation 23 - 549 - - 549 Tax benefit related to stock options - - 150 - - 150 Unrealized gains on derivative financialinstruments, net of tax provision of $84 - - - 135 - 135 Net income - - - - 1,959 1,959 Balance at December 31, 2013 18,972 $95 $136,972 $- $(25,835) $111,232 The accompanying notes are an integral part of these financial statements.38Table of ContentsCRAFT BREW ALLIANCE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2013 2012 2011 Cash flows from operating activities: Net income $1,959 $2,526 $9,651 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,164 7,369 7,204 Income from equity method investments, net of distributions received - - (691)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 195 23 (1)Deferred income taxes 374 1,458 5,025 Stock-based compensation 549 547 467 Excess tax benefit from employee stock plans (150) (379) - Other 286 (329) (135)Changes in operating assets and liabilities: Accounts receivable, net (858) 2,396 (1,976)Inventories (5,577) (1,855) (640)Other current assets 407 (994) 418 Other assets - - (495)Accounts payable and other accrued expenses 2,630 1,269 (2,773)Accrued salaries, wages and payroll taxes (651) 743 471 Refundable deposits 1,129 331 635 Net cash provided by operating activities 8,457 13,105 6,728 Cash flows from investing activities: Expenditures for property, equipment and leasehold improvements (9,894) (9,138) (8,488)Proceeds from sale of property, equipment and leasehold improvements - 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 (9,894) (8,683) 7,131 Cash flows from financing activities: Principal payments on debt and capital lease obligations (1,208) (596) (5,751)Net borrowings (repayments) under revolving line of credit - - (7,500)Proceeds from issuances of common stock 244 13 23 Debt issuance costs (46) - - Excess tax benefit from employee stock plans 160 379 - Net cash used in financing activities (850) (204) (13,228) Increase in cash and cash equivalents (2,287) 4,218 631 Cash and cash equivalents: Beginning of period 5,013 795 164 End of period $2,726 $5,013 $795 Supplemental disclosure of cash flow information: Cash paid for interest $601 $774 $972 Cash paid for income taxes, net 543 416 675 Supplemental disclosure of non-cash information: Receivable from sale of equity interest in Fulton Street Brewery, LLC - - 836 Purchases of Property, equipment and leasehold improvements included in Accounts payable 331 - - The accompanying notes are an integral part of these financial statements.39Table of ContentsNote 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 packaged and draftproducts for the Kona, Widmer Brothers, Redhook, Omission and Square Mile brands at our six company-owned breweries and operate five pubs thatpromote our products, offer dining and entertainment facilities and sell retail merchandise. Our common stock trades on the Nasdaq Stock Market under thetrading symbol “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. 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. A-B’s domesticwholesaler network consists primarily of independent wholesalers, together with branches owned by A-B. The A-B Distributor Agreement is subject to earlytermination by either party upon the occurrence of certain events. The A‑B Distributor Agreement expires December 31, 2018, but may be renewedautomatically for an additional ten-year period unless A‑B provides written notice to the contrary on or before 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 PoliciesCash and Cash EquivalentsWe maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an originalmaturity of three months or less to be cash equivalents.Under our cash management system, we utilize a controlled disbursement account to fund cash distribution checks presented for payment by the holder.Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes. As of December 31, 2013, and December 31, 2012,bank overdrafts of $0.7 million and $1.1 million, respectively, were included in Accounts payable on our Consolidated Balance Sheets. Changes in bookoverdrafts from period to period are reported in the Consolidated Statement of Cash Flows as a component of operating activities within Accounts payable andOther accrued expenses.Accounts ReceivableAccounts receivable primarily consists of trade receivables due from wholesalers and A-B for beer and promotional product sales. Because of state liquor lawsand each wholesaler’s agreement with A-B, we do not have collectability issues related to the sale of our beer products. Accordingly, we do not regularly providean allowance for doubtful accounts for beer sales. We have provided an allowance for promotional merchandise receivables that have been invoiced to thewholesaler, 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, 2013 and 2012.Activity related to our allowance for doubtful accounts was immaterial in 2013, 2012 and 2011.40Table of ContentsInventoriesInventories, 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 the product to a new cost basis. We record the cost of inventory for which we estimate we have more than atwelve-month supply as a component of Intangible and other assets on our Consolidated Balance Sheets.Property, Equipment and Leasehold ImprovementsProperty, equipment and leasehold improvements are stated at cost, less accumulated depreciation and accumulated amortization. Expenditures for repairs andmaintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts arerelieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in our Consolidated Statements of Income.Depreciation and amortization of property, equipment and leasehold improvements is provided on the straight-line method over the following estimated usefullives:Buildings 30 – 50 yearsBrewery equipment 10 – 25 yearsFurniture, fixtures and other equipment 2 – 10 yearsVehicles 5 yearsLeasehold improvements The lesser of useful life or term of the leaseValuation of Long-Lived AssetsWe evaluate potential impairment of long-lived assets when facts and circumstances indicate that the carrying values of such assets may be impaired. Anevaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash flows. Upon indication that thecarrying value of such assets may not be recoverable, we recognize an impairment loss in the current period in our Consolidated Statements of Income. We didnot identify indicators of impairment during 2013, 2012 or 2011.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 agreements 15 yearsNon-compete agreements 5 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. We test goodwill for impairment by comparing the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fairvalue, then the second step of the impairment test is performed to measure the amount of any impairment loss. We conduct our annual impairment test as ofDecember 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.41Table 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 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 18, “Related-Party Transactions” for impact of lost kegs on ourbrewery equipment.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, 2013 and 2012, our Consolidated Balance Sheets included $8.0 million and $7.6 million, respectively, inrefundable deposits on kegs and $6.5 million and $5.8 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.Taxes Collected from Customers and Remitted to Governmental AuthoritiesWe account for tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction (i.e., sales, use, value added) on a net(excluded from revenue) basis.42Table of ContentsShipping 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, 2013, 2012 and 2011, we recognized costsfor all of these activities totaling $12.4 million, $12.4 million and $11.9 million, respectively, which are reflected as Selling, general and administrativeexpenses in our Consolidated Statements of Income.Advertising expenses are included in Selling, general and administrative expenses and frequently involve the local wholesaler sharing in the cost of 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.Legal CostsWe are a party to legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees, and potential settlementclaims related to various legal proceedings that are estimable and probable. If not estimable and probable, legal costs are expensed as incurred as a componentof Selling, general and administrative expenses.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, 2013 and 2012, we did not haveany unrecognized tax benefits or any interest and penalties accrued on unrecognized tax benefits.43Table of ContentsSegment 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 and cider sales of our Kona, Widmer Brothers, Redhook and Omission beer brands and Square Mile ciderbrand. Pubs operations primarily include our pubs, some of which are located adjacent to our Beer Related operations. We do not track operating resultsbeyond the gross margin level or our assets on a segment level.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.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 affect 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 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of anUnrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amends theguidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss (“NOL”)carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position isdisallowed. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and early adoption is permitted. Wedo not expect our adoption of ASU 2013-11 in January 2014 to have a material effect on our financial position, results of operations or cash flows.In February 2013, the FASB issued ASU 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. The adoption of ASU 2013-02 effective January 1, 2013 did not have an effect on our financial position, results of operations or cash flows.44Table of ContentsIn July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment,” which permitsan entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, isimpaired. Entities are required to test indefinite-lived intangible assets for impairment at least annually and more frequently if indicators of impairment exist. Ifan entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-livedintangible asset is less than its carrying amount, it is not required to perform the quantitative impairment test for that asset. Because the qualitative assessmentis optional, an entity is permitted to bypass it for any indefinite-lived intangible asset in any period and apply the quantitative test. ASU 2012-02 also permitsthe entity to resume performing the qualitative assessment in any subsequent period. ASU 2012-02 was effective for impairment tests performed for fiscalyears beginning after September 15, 2012 and early adoption was permitted. The adoption of ASU 2012-02 in January 2013 did not have an effect on ourfinancial position, results of operations or cash flows.Note 4. InventoriesInventories consisted of the following (in thousands): December 31, 2013 2012 Raw materials $4,934 $2,497 Work in process 3,313 3,552 Finished goods 5,927 3,263 Packaging materials 442 544 Promotional merchandise 1,539 1,552 Pub food, beverages and supplies 484 341 $16,639 $11,749 Work in process is beer held in fermentation tanks prior to the filtration and packaging process.Note 5. Other Current AssetsOther current assets consisted of the following (in thousands): December 31, 2013 2012 Deposits paid to keg lessor $2,228 $1,824 Prepaid property taxes 215 200 Prepaid insurance 332 299 Income tax receivable 68 296 Other 560 1,190 $3,403 $3,809 Note 6. Property, Equipment and Leasehold ImprovementsProperty, equipment and leasehold improvements consisted of the following (in thousands): December 31, 2013 2012 Brewery equipment $93,711 $87,664 Buildings 55,051 53,236 Land and improvements 7,617 7,598 Furniture, fixtures and other equipment 9,895 7,121 Leasehold improvements 6,592 6,196 Vehicles 135 135 Construction in progress 2,052 4,546 175,053 166,496 Less accumulated depreciation and amortization (70,860) (63,644) $104,193 $102,852 45Table of ContentsNote 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 wascollected in 2011 and the remaining $0.8 million was collected in 2012. We recorded a gain of $10.4 million in 2011 associated with the sale of our equityinterest in FSB.We recognized $691,000 in 2011 for our share of FSB’s earnings through May 2, 2011. The book value of our equity investment in FSB was $5.9 millionas of May 2, 2011.See Note 18 for information regarding related-party transactions with FSB.Note 8. Intangible and Other AssetsIntangible and Other AssetsIntangible and other assets and the related accumulated amortization are as follows (in thousands): December 31, 2013 2012 Trademarks and domain name $14,429 $14,429 Recipes 700 700 Distributor agreements 2,200 2,200 Accumulated amortization (807) (660) 1,393 1,540 Non-compete agreements 440 440 Accumulated amortization (286) (198) 154 242 Favorable contracts 31 31 Accumulated amortization (31) (30) - 1 Other 250 280 Accumulated amortization (201) (236) 49 44 16,725 16,956 Promotional merchandise 968 606 $17,693 $17,562 Amortization expense was as follows (in thousands): Year Ended December 31, 2013 2012 2011 Amortization expense $247 $253 $292 46Table of ContentsEstimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows (in thousands): 2014 $246 2015 220 2016 154 2017 154 2018 153 Thereafter 669 $1,596 Note 9. Debt and Capital Lease ObligationsLong-term debt and capital lease obligations consisted of the following (in thousands): December 31, 2013 2012 Term loan, due September 30, 2023 $10,800 $11,822 Promissory notes payable to related parties, all due July 1, 2015 600 600 Premium on promissory notes 184 298 Note with affiliated party, due November 15, 2014 165 346 Capital lease obligations for equipment 11 16 11,760 13,082 Less current portion (710) (642) $11,050 $12,440 Required principal payments on outstanding debt obligations as of December 31, 2013 for the next five years and thereafter are as follows (in thousands): Term Loan PromissoryNotes Note withRelatedParty CapitalLeaseObligations 2014 $540 $- $165 $6 2015 540 600 - 5 2016 540 - - 1 2017 540 - - - 2018 540 - - - Thereafter 8,100 - - - 10,800 600 165 12 Amount representing interest - - - 1 $10,800 $600 $165 $11 Term Loan and Line of CreditWe have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A., which presently comprises $22.0 million revolving line of credit(“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $10.8 million term loan (“TermLoan”). We may draw upon the Line of Credit for working capital and general corporate purposes until expiration on October 31, 2018. The maturity date ofthe Term Loan is September 30, 2023. At December 31, 2013, we had no borrowings outstanding under the Line of Credit.Under the Loan Agreement, interest accrues at an annual rate based on the London Inter-Bank Offered Rate (“LIBOR”) Daily Floating Rate plus a marginalrate. The marginal rate varies from 1.00% to 2.25% based on our funded debt ratio. At December 31, 2013, our marginal rate was 1.00%, resulting in anannual interest rate of 1.17%. Accrued interest for the Line of Credit and the Term Loan is due and payable monthly.In connection with an amendment to the Loan Agreement on November 15, 2013, we paid down the Term Loan by $0.6 million in order to bring theoutstanding principal balance to $10.8 million to achieve an 80% loan to value ratio on certain property securing the Loan Agreement. Monthly principalpayments of $45,000 will be made on the Term Loan from January 1, 2014 through September 30, 2023, with any unpaid principal and accrued interestbeing paid on September 30, 2023.47Table of ContentsThe November 15, 2013 amendment also provided for the approval of acquisitions within the same line of business as long as we remain in compliance withthe financial covenants of the Loan Agreement and there is at least $5.0 million of availability remaining on the Line of Credit following the acquisition. Inaddition, the amendment released our Woodinville, Washington property as collateral and, accordingly, only our Oregon brewery is collateral on the TermLoan.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, 2013, the quarterly fee was 0.15% and the fee totaled the following (inthousands): Year Ended December 31, 2013 2012 2011 Loan Agreement fee $33 $34 $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 2013, 2012 or 2011.We were in compliance with all applicable contractual financial covenants of the Loan Agreement at December 31, 2013. These financial covenants under theLoan Agreement are measured 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 ratioabove 1.25 to 1.The Loan Agreement is secured by substantially all of our personal property and by our Oregon brewery (“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, 2013 and 2012 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 26.9% 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.48Table of ContentsNote 10. Derivative Financial InstrumentsInterest Rate Swap ContractOur 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, in 2008 we entered into a five-year interest rate swap contract with Bank of America, N.A. (“BofA”), which expired July 1, 2013, to hedgethe variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. The interest rate swap qualified for cashflow hedge accounting treatment and there was no hedge ineffectiveness recognized during 2013, 2012 and 2011.The fair value of our derivative instrument is as follows (in thousands):Fair Value of Liability Derivative December 31, 2013 2012 Fair value of interest rate swap $- $219 The effect of our interest rate swap contract that was accounted for as a derivative instrument on our Consolidated Statements of Income was as follows (inthousands):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 Reclassifiedfrom Accumulated OCI into Income (Effective Portion) Year EndedDecember 31, 2013 $219 Interest expense $188 2012 $353 Interest expense $387 2011 $277 Interest expense $400 Note 11. 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.The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.49Table of ContentsThe following tables summarize assets and (liabilities) measured at fair value on a recurring basis (in thousands):Fair Value at December 31, 2013 Level 1 Level 2 Level 3 Total Money market funds $2,650 $- $- $2,650 Fair Value at December 31, 2012 Level 1 Level 2 Level 3 Total Interest rate swap $- $(219) $- $(219)We did not have any financial liabilities recorded at fair value on a recurring basis at December 31, 2013, nor any financial assets recorded at fair value on arecurring basis at December 31, 2012.The fair value of our money market funds was based on statements from our institutional investor. The fair value of our interest rate swap was based onquarterly statements from the issuing bank. There were no changes to our valuation techniques during 2013, 2012 or 2011.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, 2013 2012 Fixed-rate debt on balance sheet $960 $1,260 Fair value of fixed-rate debt $985 $1,275 We calculate the estimated fair value of our fixed-rate debt using a discounted cash flow methodology. Using estimated current interest rates based on a similarrisk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt.Note 12. Segment Results and ConcentrationsNet sales, gross profit and gross margin by segment were as follows (dollars in thousands):2013 BeerRelated Pubs Total Net sales $154,830 $24,350 $179,180 Gross profit $47,055 $3,206 $50,261 Gross margin 30.4% 13.2% 28.1% 2012 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%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.50Table of ContentsSales to wholesalers through the A-B Distributor Agreement represented the following percentage of our Sales: Year Ended December 31, 2013 2012 2011 82.6% 81.1% 80.8% Receivables from A-B represented the following percentage of our Accounts receivable balance: December 31 2013 2012 74.4% 60.6%All of our long-term assets are located in the U.S. and sales outside of the U.S. are insignificant.Note 13. Stock-Based Plans and Stock-Based CompensationWe maintain several stock incentive plans under which stock-based awards are or have been granted to employees and non-employee directors. We issue newshares of common stock upon exercise or vesting of the stock-based awards. Under the terms of our stock option plans, subject to certain limitations,employees and directors may be granted options to purchase our common stock at the market price on the date the option is granted. All of our stock plans areadministered by the Compensation Committee of our Board of Directors, which determines the grantees, the number of shares of common stock for whichoptions are exercisable and the exercise prices of such shares, among other terms and conditions of stock-based awards under our stock-based plans.With the approval of the 2010 Stock Incentive Plan (the “2010 Plan”) 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, 2013, there were 314,488 shares availablefor future awards pursuant to the 2010 Plan, assuming 121,370 shares subject to performance awards vest, based on the achievement of financial targets, atthe end of the respective performance 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.51Table of ContentsStock-Based Compensation ExpenseCertain information regarding our stock-based compensation was as follows (in thousands, except per share amounts): Year Ended December 31, 2013 2012 2011 Weighted average per share fair value of stock options granted $4.90 $4.84 $5.99 Intrinsic value of stock options exercised 554 40 60 Intrinsic value of fully-vested stock awards granted 1,039 366 243 Stock-based compensation expense was recognized in our Consolidated Statements of Income as follows (in thousands): Year Ended December 31, 2013 2012 2011 Selling, general and administrative expense $464 $547 $467 Cost of sales 85 - - Total Stock-based compensation expense $549 $547 $467 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, 2013, we had total unrecognized stock-based compensation expense of $0.9 million, which will be recognized over the weighted averageremaining vesting period of 3.3 years.The following weighted average assumptions were utilized in determining fair value pursuant to the Black-Scholes option pricing model: Year Ended December 31, 2013 2012 2011 Risk-free interest rate 1.61% 1.46% 2.84%Dividend yield 0.0% 0.0% 0.0%Expected life 7.85 years 8.15 years 7.5 years Volatility 58.91% 60.39% 62.10%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, 2013 was as follows: OptionsOutstanding WeightedAverageExercise Price Outstanding at December 31, 2012 368,665 $5.46 Granted 141,219 7.94 Exercised (74,779) 3.26 Cancelled (134,502) 6.41 Forfeited (1,649) 9.28 Outstanding at December 31, 2013 298,954 6.73 52Table of ContentsCertain information regarding options outstanding as of December 31, 2013 was as follows: OptionsOutstanding OptionsExercisable Number 298,954 91,303 Weighted average exercise price $6.73 $5.04 Aggregate intrinsic value $2,896,000 $1,039,000 Weighted average remaining contractual term8.1 years6.9 yearsPerformance-Based Stock GrantsDuring the second quarter of each of 2013, 2012 and 2011, we granted performance-based common stock awards to selected executives with vesting contingentupon meeting various company-wide performance goals. The performance goals are tied to target amounts of adjusted EBITDA and net sales for the three-yearperiods ending December 31, 2015, 2014 and 2013, respectively. The awards earned on the 2013 and 2012 grants will range from zero to 125% of the targetednumber of performance shares for the performance periods ending March 31, 2016 and 2015, respectively. The awards earned on the 2011 grant will rangefrom zero to 100% of the targeted number of performance shares for the performance period ending March 31, 2014. Awards, if earned, will be paid in sharesof common stock.Activity related to performance-based awards was as follows: 2013Awards 2012Awards 2011 Awards Total Granted (target amount 95,360 102,820 69,575 267,755 Canceled due to termination of employee (45,013) (60,370) (12,430) (117,813)Not expected to vest due to failure to meet performance goals - - (28,572) (28,572)Expected to vest as of December 31, 2013 50,347 42,450 28,573 121,370 Stock GrantsBeginning with the 2011 Annual Meeting of Shareholders, each non-employee director has received 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 22, 2013, our Board of Directors approved an annual grant of3,316 shares of fully-vested common stock to each of our seven non-employee directors for a total of 23,212 shares of our common stock.Note 14. Earnings Per ShareThe following table reconciles shares used for basic and diluted EPS and provides certain other information (in thousands): Year Ended December 31, 2013 2012 2011 Weighted average common shares for basic EPS 18,923 18,862 18,834 Dilutive effect of stock-based awards 119 72 97 Shares used for diluted EPS 19,042 18,934 18,931 Stock-based awards not included in diluted per share calculations as they would beantidilutive 1 124 7 53Table of ContentsNote 15. Income TaxesAll of our income is generated in the U.S. The components of income tax expense were as follows (in thousands): Year Ended December 31, 2013 2012 2011 Current federal $746 $292 $92 Current state 184 201 924 930 493 1,016 Deferred federal 305 1,116 5,085 Deferred state 69 342 (60) 374 1,458 5,025 $1,304 $1,951 $6,041 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, 2013 2012 2011 Provision at U.S. statutory rate $1,109 $1,522 $5,335 State taxes, net of federal benefit 182 148 567 Permanent differences, primarily meals and entertainment 198 232 266 Domestic production activities deduction (98) - - Tax credits (87) (104) (127)Increase to deferred tax liability tax rate - 153 - $1,304 $1,951 $6,041 Significant components of our deferred tax assets and liabilities were as follows (in thousands): December 31, 2013 2012 Deferred tax assets Net operating losses and alternative minimum tax credit carryforwards $470 $711 Accrued salaries and severance 922 988 Other 918 828 2,310 2,527 Deferred tax liabilities Property, equipment and leasehold improvements (12,158) (11,843)Intangible assets (6,323) (6,422)Other (203) (168) (18,684) (18,433) $(16,374) $(15,906)As of December 31, 2013, included in our net operating losses and alternative minimum tax credit carryforwards of $0.5 million were the following (inthousands):State NOLs, tax effected $42 Federal alternative minimum tax credit carryforwards $428 During 2013 and 2012, the portion of the net operating loss attributable to stock option exercises was utilized. This utilization resulted in a credit toshareholders’ equity of $150,000 and $379,000, respectively.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, 2013 or 2012.54Table of ContentsThere were no unrecognized tax benefits as of December 31, 2013 or 2012 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 2010through 2013. Tax years remaining open in states where we have a significant presence range from 2009 to 2013. In addition, tax years from 1997 to 2003 areeligible 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 16. 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, 2013, 2012 and 2011, 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, 2013 2012 2011 401(k) expense $744 $705 $687 Note 17. 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, 2013 are as follows (in thousands):2014 $1,263 2015 1,232 2016 1,114 2017 1,004 2018 761 Thereafter 12,416 $17,790 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, 2013 2012 2011 Rent expense $2,554 $2,665 $2,759 55Table of ContentsWe 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, 2013 2012 2011 Rental income $266 $254 $242 Future minimum lease rentals pursuant to this agreement as of December 31, 2013 are as follows (in thousands):2014 $269 2015 277 2016 23 2017 - 2018 - Thereafter - $569 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, 2013 2012 2011 $127 $125 $122 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, 2013 2012 2011 $428 $402 $360 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 2016. 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.56Table of ContentsIn certain cases, we have executed agreements with selected vendors to source our requirements for specific malt and hop varieties for the years endingDecember 31, 2014, 2015, 2016, 2017 and 2018; however, either the quantity to be delivered or the full price for the commodity has not been established atthe present time. To the extent the commitment is not measurable or has not been fixed, that portion of the commitment has been excluded from the table below.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. The terms of these sponsorshipcommitments expire at various dates through May 31, 2018.Aggregate future payments under purchase and sponsorship commitments as of December 31, 2013 are as follows (in thousands): PurchaseObligations SponsorshipObligations Total 2014 $19,536 $2,308 $21,844 2015 3,320 1,045 4,365 2016 2,224 587 2,811 2017 895 220 1,115 2018 - 100 100 Thereafter - - - $25,975 $4,260 $30,235 Note 18. Related-Party TransactionsAs of December 31, 2013 and 2012, A-B owned approximately 32.0% and 32.2%, respectively, 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, was exemptfrom Margin Fees until September 30, 2013, and thereafter are assessed Margin Fees at the $0.25 per case equivalent through December 31, 2018. Theexemption from Margin Fees for beer sold in the qualifying territories was 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.57Table of ContentsOther Transactions with A-BOther transactions with A-B consisted of the following (in thousands): Year Ended December 31, 2013 2012 2011 Gross sales to A-B $161,010 $149,492 $132,914 Margin fee paid to A-B, classified as a reduction of Sales 2,009 1,864 2,777 Sales to FSB through a contract brewing arrangement, classified in Sales(1) - 3,083 2,863 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 402 449 490 Amounts received from A-B for lost keg fees and forfeited deposits, included as areduction of Property, equipment and leasehold improvements, net - 122 267 (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 paid us$70,000 per month through September 2013.Amounts due to or from A-B were as follows (in thousands): December 31, 2013 2012 Amounts due from A-B related to beer sales pursuant to the A-B Distributor Agreement $8,457 $6,369 Amounts due from FSB related to beer sales pursuant to a contract brewing arrangement - 260 Amounts due from FSB related to termination agreement - 630 Refundable deposits due to A-B (2,728) (2,472)Amounts due to A-B for services rendered (1,852) (1,974)Net amount due from A-B $3,877 $2,813 Note 19. Subsequent EventsEffective January 23, 2014, we entered into an interest rate swap in order to swap the floating rate of LIBOR plus a marginal rate for a fixed interest rate. Thecurrent fixed interest rate is 2.86%. The interest rate swap terminates on September 29, 2023.58Table of ContentsItem 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 2013, 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 in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,management concluded that our internal control over financial reporting was effective as of December 31, 2013.Moss Adams LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as ofDecember 31, 2013, as stated in their report, which is included herein.59Table 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, 2013, based on criteria establishedin Internal Control - Integrated Framework (1992) 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, 2013, basedon criteria established in Internal Control - Integrated Framework (1992) 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, 2013 and 2012, and the consolidated statements of income, comprehensive income, shareholders’ equity, andcash flows for each of the three years in the period ended December 31, 2013, and our report dated March 6, 2014 expressed an unqualified opinion on thoseconsolidated financial statements./s/ Moss Adams LLPSeattle, WashingtonMarch 6, 201460Table of ContentsItem 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 2014 Annual Meeting of Shareholders to be held on May20, 2014 (the “2014 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 2014 Proxy Statement under the captions “Compensation Committee Report,” “Compensation Discussionand Analysis,” “Executive Compensation,” “Employment Agreements and Potential Payments Upon Termination or Change-in-Control,” “DirectorCompensation” and “Board of Directors - Compensation Committee” and the information contained therein is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Securities Authorized for Issuance Under Equity Compensation PlansThe following is a summary as of December 31, 2013 of all of our plans thatprovide for the issuance of equity securities as compensation. See Note 13 of Notes to Consolidated Financial Statements in Item 8 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 420,324(1) $6.73 314,488 Equity compensation plans not approved by shareholders - - - Total 420,324 $6.73 314,488 (1)Includes a total of 121,370 performance shares that may vest between March 31, 2014 and March 31, 2016, based on the achievement of financial targetsover three separate three-year performance periods. The shares are not included in the calculation of weighted average price in column (b).61Table of ContentsThe remaining information required by this Item is contained in our 2014 Proxy Statement under the caption “Security Ownership of Certain BeneficialOwners and Management,” and the information contained therein is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is contained in our 2014 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 2014 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 Page Report of Moss Adams LLP, Independent Registered Public Accounting Firm34 Consolidated Balance Sheets as of December 31, 2013 and 201235 Consolidated Statements of Income for the Years Ended December 31, 2013, 2012 and 201136 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 201137 Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2013, 2012 and 201138 Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 201139 Notes to Consolidated Financial Statements40There are no schedules required to be filed herewith.ExhibitsExhibits 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.62Table 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 6, 2014. Craft Brew Alliance, Inc. By:/s/ Joseph K. O’Brien Joseph K. O’Brien Controller and Chief Accounting OfficerPursuant 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 6, 2014.SignatureTitle /s/ ANDREW J. THOMASChief Executive OfficerAndrew J. Thomas(Principal Executive Officer)/s/ MARK D. MORELANDChief Financial Officer and TreasurerMark D. Moreland(Principal Financial Officer)/s/ JOSEPH K. O’BRIENControllerJoseph K. O’Brien(Principal Accounting Officer)*Chairman of the Board and DirectorKurt R. Widmer*DirectorTimothy P. Boyle*DirectorMarc J. Cramer*DirectorE. Donald Johnson, Jr.*DirectorKevin R. Kelly*DirectorThomas D. Larson*DirectorDavid R. Lord*DirectorJohn D. Rogers, Jr.*By:/s/ ANDREW J. THOMASAndrew J. Thomas,as attorney in fact63Table of ContentsEXHIBIT INDEX ExhibitNumber Description2.1 Agreement 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)2.2 Equity Purchase Agreement by and among each of the members of Fulton Street Brewery, LLC, as Sellers and A‑B, as purchaser, datedas of February 18, 2011 (incorporated by reference from Exhibit 2.2 to the Registrant’s Form 10-K for the year ended December 31, 2010)2.3 Joinder to Equity Purchase Agreement, dated May 2, 2011 (incorporated by reference from Exhibit 2.1 to the Registrant’s Current Reporton Form 8-K filed on May 4, 2011)3.1 Restated 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)3.2 Amended 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 referencefrom Exhibit 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 referencefrom Exhibit 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’sForm 10-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 referencefrom Exhibit 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 10.14to the 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 tothe Registrant’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 10.16to the 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 tothe Registrant’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 (incorporated by reference from Exhibit 10.15to the Registrant’s Form 10-K for the year ended December 31, 2012)E-1Table of ContentsExhibitNumber Description10.16* 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* Employment Letter Agreement between the Registrant and Andrew J. Thomas, dated November 20, 2013 (incorporated by reference fromExhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 21, 2013)10.19* Employee Noncompetition and Nonsolicitation Agreement between the Registrant and Andrew J. Thomas, dated November 20, 2013(incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 21, 2013)10.20* 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)10.21* Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between the Registrant and Mattson Davis (incorporated byreference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)10.22* Transition and Separation Agreement dated December 16, 2013 between the Registrant and Terry Michaelson (incorporated by referencefrom Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 19, 2013)10.23* Transition and Separation Agreement dated December 16, 2013 between the Registrant and Sebastian Pastore (incorporated by referencefrom Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 19, 2013)10.24* Summary of Compensation Arrangements for Non-Employee Directors as of January 1, 201410.25* Summary of Annual Cash Incentive Bonus Plan for Executive Officers (incorporated by reference from Exhibit 10.24 to the Registrant’sForm 10-K for the year ended December 31, 2012)10.26 Sublease between Pease Development Authority as Sublessor and the Registrant as Sublessee, dated May 30, 1995 (incorporated byreference from Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, No. 33-94166)10.27 Loan Agreement dated as of July 1, 2008 between Registrant and Bank of America, N.A. (incorporated by reference from Exhibit 10.1 tothe Registrant’s Current Report on Form 8-K filed on July 7, 2008)10.28 Loan Modification Agreement dated November 14, 2008 to Loan Agreement dated July 1, 2008 between Registrant and Bank of America,N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2008)10.29 Second 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)10.30 Third Loan Modification Agreement dated September 30, 2010 to the Loan Agreement dated July 1, 2008 between the Registrant and Bankof America, N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)10.31 Fourth Loan Modification Agreement dated November 15, 2013 to the Loan Agreement dated July 1, 2008 between the Registrant andBank of America, N.A. (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November19, 2013)10.32 Amended 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)10.33 Amended and Restated Master Distributor Agreement dated as of May 1, 2011 between the Registrant and A-B (incorporated by referencefrom Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011)E-2Table of ContentsExhibitNumber Description10.34 Amendment 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)10.35 Amendment to A-B Master Distributor Agreement dated November 20, 201310.36 Registration 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)10.37 Master 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”))10.38 Amended and Restated License Agreement dated as of February 28, 1997 between Widmer Brothers Brewing Company and Widmer’sWine Cellars, Inc. and Canandaigua Wine Company, Inc. (incorporated by reference to Exhibit 10.3 from the S-4 Amendment No. 1)10.39 Restated 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)10.40 Commercial Lease (Restated) dated as of December 18, 2007 between Widmer Brothers LLC and Widmer Brothers Brewing Company(incorporated by reference to Exhibit 10.5 from the S-4 Amendment No. 1)10.41 Sublease dated as of September 1, 2010 between Manini Holdings, LLC and Kona Brewing Co., Inc. (incorporated by reference fromExhibit 10.41 to the Registrant’s Form 10-K for the year ended December 31, 2010)10.42† 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)10.43 Sublease dated as of March 31, 2011 between Manini Holdings, LLC and Kona Brewing Co., LLC (incorporated by reference fromExhibit 10.43 to the Registrant’s Amendment No. 1 to Form 10-K for the year ended December 31, 2010 filed on April 22, 2011)21.1 Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to the Registrant’s Form 10-K for the year ended December 31,2010 filed on April 1, 2011)23.1 Consent of Moss Adams LLP, Independent Registered Public Accounting Firm24.1 Power of Attorney – Directors of Craft Brew Alliance, Inc.31.1 Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Form 10-K for the year ended December 31, 2013 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 200299.1 Press Release dated March 6, 201499.2 Description of Common Stock (incorporated by reference from Exhibit 99.2 to the Registrant’s Form 10-K for the year ended December 31,2012 filed on March 12, 2013)101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL101.DEF XBRL Taxonomy Extension Calculation Linkbase DocumentXBRL 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.†Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including the redactedterms, has been separately filed with the Securities and Exchange Commission. E-3EXHIBIT 10.24 SUMMARY OFCOMPENSATION ARRANGEMENTS FOR NON-EMPLOYEE DIRECTORSAs of January 1, 2014, non-employee directors are entitled to 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 $30,000 upon election at the Annual Meeting ofShareholders.Cash Compensation:Each non-employee director is entitled to receive an annual cash retainer of $25,000, 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 10.35 [Anheuser-Busch Letterhead] November 20, 2013Mark MorelandEVP & Chief Financial OfficerCraft Brew Alliance, Inc.929 N. Russell StreetPortland, Oregon 97227 Re: Amended and Restated Master Distributor Agreement (“Distributor Agreement”) dated as of May 1, 2011 between Anheuser-Busch,LLC, as successor in interest to Anheuser-Busch, Incorporated (“AB”) and Craft Brew Alliance, Inc., f/k/a Craft Brewers Alliance, Inc.(“CBA”) Dear Mark:Pursuant to Section 7.03(iii) of the Distributor Agreement, AB has the right to terminate the Distributor Agreement if Terry Michaelson ceases tofunction as the chief executive officer of CBA and a successor to Mr. Michaelson satisfactory to AB is not appointed as his successor.We understand that Terry Michaelson may resign as chief executive officer of CBA and be replaced by Andrew Thomas.ABI regards Andrew Thomas as a satisfactory successor to Terry Michaelson and confirms that its rights under Section 7.03(iii) of the DistributorAgreement will not arise upon the resignation of Terry Michaelson and the concurrent appointment of Andrew Thomas as chief executive officer of CBA.The parties further agree that, on and after the effective date of the resignation of Terry Michaelson and the appointment of Andrew Thomas as chiefexecutive officer of CBA, Section 7.03(iii) shall be amended to read as follows:7.03 ABI shall have the right and option to terminate this Agreement at any time upon six months’ prior written notice to CBA, in the event:(iii) The chief executive officer of CBA (Andrew Thomas) ceases to function as chief executive officer and within six months of suchcessation an individual serving as chief executive officer satisfactory in the sole, good faith discretion of ABI is not serving as chief executive officer of CBA.All other provisions of the Distributor Agreement shall remain in full force and effect (including the remaining provisions of Section 7.03). The provisions of this letter agreement shall be of no continuing effect if the effective date of the resignation of Terry Michaelson and appointment ofAndrew Thomas does not occur on or prior to March 31, 2014.Please indicate your agreement to the foregoing by executing and returning this letter agreement. Very truly yours, /s/ E. Donald Johnson /s/ Thomas Larson E. Donald Johnson Thomas Larson Vice President, Business Assistant Secretary and Wholesaler Development Agreed to by:Craft Brew Alliance, Inc. By:/s/ Mark Moreland Mark Moreland EVP & Chief Financial Officer 2EXHIBIT 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 6, 2014, 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, 2013./s/ Moss Adams LLPSeattle, WashingtonMarch 6, 2014 EXHIBIT 24.1POWER OF ATTORNEY Each person below designates and appoints ANDREW J. THOMAS 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, 2013, of Craft Brew Alliance, Inc., a Washington corporation,and any amendments thereto, and to file said report and amendments, with all exhibits thereto, in such form as they or either of them may approve with theSecurities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Each of such attorneys-in-fact is appointed with full power toact without the other. IN WITNESS WHEREOF, this power of attorney has been executed by each of the undersigned as of the 28th day of February, 2014. 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 31.1 CERTIFICATIONI, Andrew J. Thomas, 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; andd.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; and5.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; andb.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 6, 2014 By:/s/ Andrew J. Thomas Andrew J. Thomas Chief Executive Officer EXHIBIT 31.2 CERTIFICATION I, 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; andd.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; and5.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; andb.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 6, 2014 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 2002 In connection with the Annual Report of Craft Brew Alliance, Inc. (the “Registrant”) on Form 10-K for the year ended December 31, 2013, as filed with theSecurities and Exchange Commission on March 6, 2014 (the “Report”), Andrew J. Thomas, 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 6, 2014 BY:/s/ Andrew J. Thomas Andrew J. Thomas Chief Executive Officer (Principal Executive Officer) BY:/s/ Mark D. Moreland Mark D. Moreland Chief Financial Officer and Treasurer (Principal Financial Officer) EXHIBIT 99.1 FOR IMMEDIATE RELEASECRAFT BREW ALLIANCE REPORTS FOURTH QUARTER AND FULL-YEAR RESULTS FOR 2013; CONFIRMS POSITIVE OUTLOOKFOR 201410% Depletion Growth for the Fourth Quarter Contributes to 11% Growth for the Full YearPortland, Ore. (March 6, 2014) – Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), an independent craft brewing company, today announced final2013 financial results for the fourth quarter and full year ended December 31st. The Company also confirmed previously reported guidance for 2014 based oncontinued sales momentum and focus on growing its bottom line.As previously reported in its preliminary financial release:Highlights for the fourth quarter 2013 include·A strong close to 2013 highlighted by 10% growth in depletions over the fourth quarter of 2012, the third consecutive quarter of double-digit depletiongrowth, reflecting continued momentum across the Kona Brewing, Redhook Ale Brewery, Omission and Square Mile Cider Company brandfamilies and stabilization of the Widmer Brothers brand.·An increase in net sales and branded beer shipments of 5% and 6%, respectively, in the fourth quarter attributable to strong sales execution, as wellas support from our national partners, wholesalers and retailers.·A decrease in gross margin rate by 100 basis points to 26.0% in the fourth quarter compared to the fourth quarter last year primarily resulting fromshifts in product and geographic mix and increased distribution-related costs.·Diluted earnings per share (“EPS”) of $0.04 for the quarter, an increase over fourth quarter 2012 EPS of $0.02, primarily due to improved grossprofit and a decrease in selling, general and administrative (“SG&A”) expense.Highlights for the full year 2013 include·Net sales growth of 6%, reflecting the continued strength of the Kona Brewing, Redhook Brewery and Omission brands, as well as continuedrepositioning of the Widmer Brothers brand.·Record depletion growth of 11% and owned brands shipment growth of nearly 8%, reflecting the continuing strength of our complementary portfolioof craft beers.·Contract brewing revenue reduction of 40% as a result of the termination of certain contract brewing contracts in late 2012.·Gross margin rate of 28.1%, a reduction of 150 basis points from 2012, primarily due to product mix and distribution costs in our beer businessand lower restaurant business margin related to our Woodinville pub remodel.Craft Brew Reports Fourth Quarter and Full Year 2013 Results ·SG&A expense of $46.5 million, an increase of $1.6 million from 2012, reflecting continued investments in brand development and salescapabilities, partially offset by the leverage of one-time spending in prior years.·EPS of $0.10 versus 2012 EPS of $0.13.·Capital expenditures of approximately $9.9 million, reflecting continued investments in capacity, our pubs, efficiency and quality initiatives. “We continued to make progress in 2013. It further validates that our distinctive portfolio strategy is well-positioned to drive long-term growth for our businessand shareholders in today’s rapidly evolving craft beer market. I’m proud that we achieved our third consecutive quarter of double-digit depletion growth andincreased momentum across all of our brands. Our bottom-line performance, however, underscores key opportunities to drive operational improvements andbetter leverage our national brewing and distribution capabilities,” said CBA Chief Executive Officer Andy Thomas. “As I mentioned in our preliminaryannouncement, we are wholly committed to applying the same level of resolve and discipline towards improving our bottom line that led to our strong toplinegrowth last year. With our expanded brewing footprint in the Southeast, continued support for our brands, and targeted programs to optimize our supplychain, we are confident in our ability to continue delivering strong topline results while accelerating our bottom-line growth in 2014 and beyond.” Components of anticipated 2014 results and developments are:Portfolio Highlights·We believe our national portfolio strategy will continue to drive strong topline growth and differentiate us from others in our high-growth market.·Widmer Brothers celebrates a significant milestone in 2014, which marks the brewery’s 30th anniversary. Special anniversary initiatives include sixnew limited release collaborations with Oregon craft brewers and 30th anniversary events and beers, as well as the launch of a new signature year-round IPA, Upheaval.·Our fastest-growing brand, Kona Brewing, celebrates its 20th anniversary this year, and we are excited to be expanding into four new states as wellas launching Castaway IPA on the mainland.·Redhook will continue to build on its strong national partnerships, including Dan Patrick, Buffalo Wild Wings, and theCHIVE. Earlier this year,we announced the national expansion of KCCO Black Lager, Redhook’s first collaboration with theCHIVE.·We look forward to putting an increased focus and investment behind Omission, our innovative, fast-growing craft beer that is specially brewed toremove gluten.·We will continue our commitment to innovation in adjacent categories such as cider and in cross-brand packaging to bring the power of CBA’sportfolio to consumers and retailers in exciting ways.·We look forward to continued international expansion across all brand families.Craft Brew Reports Fourth Quarter and Full Year 2013 Results Operational Highlights·We are expanding our brewing footprint in the Southeast through a partnership with Blues City Brewery, based in Memphis, Tenn. This newpartnership, which builds on our successful track record developing strong partnerships that drive business growth, will generate gross marginimprovements by bringing brewing capability closer to growing markets while alleviating emerging capacity constraints driven by growth in the Eastregion and internationally.·We will continue to transform our supply chain to drive further efficiencies in how we partner with our wholesalers.·As a result of SKU rationalization, we look forward to continued growth in our topline as well as significant improvements in gross marginperformance for the year. “Our full-year 2014 guidance reflects our commitment to driving top-line growth with great beers and brands supported with effective in-market sales andmarketing initiatives, as well as our commitment to expanding gross margin in 2014 with a focus on key initiatives such as SKU rationalization and our newbrewing partnership,” said Chief Financial Officer Mark Moreland. “Over the five-year horizon, we expect to drive gross margin rate expansion with gainsfrom portfolio optimization and brewing infrastructure and supply chain improvements. Lastly, with regards to the annual guidance, we will continue tofocus on full-year estimates with the understanding that quarter-to-quarter performance will exhibit volatility.”Anticipated financial highlights for 2014 include:·Depletion growth estimate of 7% to 11%.·Average price increase of 1%-2%.·Growth in contract brewing revenue of 25% to 50% as a result of new partnerships.·Gross margin rate of 28.5% to 30.5%. As we continue to optimize our brewing locations and improve our capacity utilization and efficiency, weexpect our gross margin rate to expand 500-700 basis points over the next five years.·SG&A expense ranging from $52 million to $54 million primarily reflecting reinvestment into our sales and marketing infrastructure.·Capital expenditures of approximately $15 million to $20 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, improvements in gross margin, the amount of capital spending, and the benefits orimprovements to be realized from strategic initiatives and capital projects, are forward-looking statements. It is important to note that the Company’s actualresults could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actualresults to differ materially from those in the forward-looking statements is contained from time to time in the Company’s SEC filings, including, but notlimited to, the Company’s report on Form 10-K for the year ended December 31, 2013. Copies of these documents may be found on the Company’s website,www.craftbrew.com, or obtained by contacting the Company or the SEC.Craft Brew Reports Fourth Quarter and Full Year 2013 Results 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 welcomedKona Brewing Company in 2010, and then launched Omission beer in 2012 and Square Mile Cider Company in 2013.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. Square Mile Cider was inspired by the fortitude and perseverance of the original pioneers and reinvigorates an enduringly classicAmerican beverage with its blend of apples hand-selected for the perfect balance of sweet and tart.For more information, visit: www.craftbrew.com.Media Contact:Investor Contact:Jenny McLeanEdwin SmithCraft Brew Alliance, Inc.Craft Brew Alliance, Inc.(503) 331-7248(503) 972-7884jenny.mclean@craftbrew.comed.smith@craftbrew.com ###Craft Brew Alliance, Inc.Condensed Consolidated Statements of Operations(In thousands, except per share amounts and shipments)(Unaudited) Three Months EndedDecember 31, Years EndedDecember 31, 2013 2012 2013 2012 Sales $47,320 $44,897 $192,433 $182,018 Less excise taxes 3,110 2,961 13,253 12,731 Net sales 44,210 41,936 179,180 169,287 Cost of sales 32,698 30,579 128,919 119,261 Gross profit 11,512 11,357 50,261 50,026 As percentage of net sales 26.0% 27.1% 28.1% 29.6%Selling, general and administrative expenses 10,149 10,388 46,461 44,890 Operating income 1,363 969 3,800 5,136 Interest expense (90) (167) (464) (663)Other income (expense), net 2 — (73) 4 Income before income taxes 1,275 802 3,263 4,477 Income tax provision 529 481 1,304 1,951 Net income $746 $321 $1,959 $2,526 Earnings per share: Basic and diluted earnings per share $0.04 $0.02 $0.10 $0.13 Weighted average shares outstanding: Basic 18,946 18,874 18,923 18,862 Diluted 19,113 18,940 19,042 18,934 Total shipments (in barrels): Core Brands 178,300 168,100 726,300 675,300 Contract Brewing 8,400 7,100 30,300 49,600 Total shipments 186,700 175,200 756,600 724,900 Change in depletions (1) 10% 10% 11% 6%(1) Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.Craft Brew Alliance, Inc.Condensed Consolidated Balance Sheets(In thousands)(Unaudited) December 31, 2013 2012 Current assets: Cash and cash equivalents $2,726 $5,013 Accounts receivable, net 11,370 10,512 Inventories 16,639 11,749 Deferred income tax asset, net 1,345 1,250 Other current assets 3,403 3,809 Total current assets 35,483 32,333 Property, equipment and leasehold improvements, net 104,193 102,852 Goodwill 12,917 12,917 Intangible and other non-current assets, net 17,693 17,562 Total assets $170,286 $165,664 Current liabilities: Accounts payable $14,742 $12,255 Accrued salaries, wages and payroll taxes 4,616 5,267 Refundable deposits 8,252 7,896 Other accrued expenses 1,381 1,066 Current portion of long-term debt and capital lease obligations 710 642 Total current liabilities 29,701 27,126 Long-term debt and capital lease obligations, net 11,050 12,440 Other long-term liabilities 18,303 17,903 Total common shareholders' equity 111,232 108,195 Total liabilities and common shareholders' equity $170,286 $165,664 Craft Brew Alliance, Inc.Condensed Consolidated Statements of Cash Flows(In thousands)(Unaudited) Years EndedDecember 31, 2013 2012 Cash Flows From Operating Activities: Net income $1,959 $2,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,164 7,369 Deferred income taxes 374 1,458 Other, including stock-based compensation and excess tax benefit from employee stock plans 880 (138)Changes in operating assets and liabilities: Accounts receivable (858) 2,396 Inventories (5,577) (1,855)Other current assets 407 (994)Accounts payable and other accrued expenses 2,630 1,269 Accrued salaries, wages and payroll taxes (651) 743 Refundable deposits 1,129 331 Net cash provided by operating activities 8,457 13,105 Cash Flows from Investing Activities: Expenditures for property, equipment and leasehold improvements (9,894) (9,138)Proceeds from sale of property, equipment and leasehold improvements and other - 37 Proceeds from the sale of equity interest in Fulton Street Brewery, LLC - 418 Net cash used in investing activities (9,894) (8,683)Cash Flows from Financing Activities: Principal payments on debt and capital lease obligations (1,208) (596)Issuance of common stock 244 13 Debt issuance costs (46) - Excess tax benefit from employee stock plans 160 379 Net cash used in financing activities (850) (204)Increase (decrease) in cash and cash equivalents (2,287) 4,218 Cash and cash equivalents, beginning of period 5,013 795 Cash and cash equivalents, end of period $2,726 $5,013 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, 2013 2012 2013 2012 Net income $746 $321 $1,959 $2,526 Interest expense 90 167 464 663 Income tax provision 529 481 1,304 1,951 Depreciation expense 2,024 1,788 7,916 7,116 Amortization expense 61 63 248 253 Stock-based compensation (38) 18 594 547 Loss on disposal of assets 8 7 195 23 Adjusted EBITDA $3,420 $2,845 $12,680 $13,079 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’smanagement. The Company defines Adjusted EBITDA as net earnings before interest, income taxes, depreciation and amortization, stock compensation andother non-cash charges, including net gain or loss on disposal of property, plant and equipment. The Company uses Adjusted EBITDA, among othermeasures, to evaluate operating performance, to plan and forecast future periods’ operating performance, and as an incentive compensation target for certainmanagement 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.

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