CRAFT BREW ALLIANCE, INC.2015 ANNUAL REPORT Dear Fellow Shareholders,
2014 was a milestone year for Craft Brew Alliance and one that reflects the powerful results we can achieve with the right focus, right strategy and
right team in place. Despite an increasingly complex and crowded market and an ambitious internal workload, we delivered against every one of our
performance objectives for the year. Highlights include:
• Record sales growth, which propelled revenue past $200 million in net sales for the first time in our company history.
• Double-digit growth in shipments, reflecting increasing consumer demand for CBA’s distinctive portfolio of award-winning brands.
• Robust gross margin expansion of 130 basis points, underscoring continued achievements in driving operational efficiencies and balancing
production capabilities across our expanded brewing footprint in the U.S.
• Earnings per share growth of $0.06 resulting in full year EPS of $0.16.
CONTINUED BRAND MOMENTUM
We continue to believe that our portfolio of well-loved brands, each with distinctive and authentic stories rooted in real people and real places, will
drive sustained topline growth and differentiate us in today’s competitive market. In 2014, our brand highlights included:
• Kona Brewing launched the biggest integrated media campaign in our company’s history, including broadcast, social and out of home assets. Our
“Dear Mainland” TV ads playfully encouraged audiences in target mainland Kona markets to bring more of Kona’s Liquid Aloha into their lives.
• Widmer Brothers kicked off an ambitious 30-year anniversary celebration, which included revisiting 30 beer recipes from the brewery’s history,
with bottle artwork designed by 30 local Portland artists, a collaboration series with six different innovative Oregon breweries, and a proud
renewed focus on Hefe, America’s Original Hefeweizen.
• Redhook continued its winning partnership strategy to attract the cross-over craft beer drinker, which includes brewing more Game Changer
for consumers in key accounts like Buffalo Wild Wings and bringing beers to sports fans in Redhook’s home market of Washington.
• Omission rose to become the #1 beer in the gluten-free beer category within just three years of launch and continued to build awareness
among the healthy lifestyle, gluten-avoider audience.
• Square Mile continued to grow in the Northwest, becoming the #2 cider in the region at the end of 2014.
• KCCO, our beer brand in partnership with social media powerhouse theCHIVE, was the spotlight at numerous offline CHIVEfests held across the U.S.
INNOVATION & LEADERSHIP IN OUR OPERATIONS
• One of our most noteworthy accomplishments in 2014 was getting our Memphis brewing operations up and running in time for the busy
summer selling season. The expanded capability brings significant opportunities to drive efficiencies in how we leverage our national brewing
footprint and continue growing our gross margin to achieve our long-term gross margin targets.
• Continuing our commitment to sustainability, we issued our first-ever Annual Sustainability Report in 2014, highlighting our focus on water
reduction, energy savings and recycling.
• We continued to implement initiatives around optimizing our supply chain, including leveraging freight efficiencies, warehouse enhancements
and planning.
A NEW LEADERSHIP TEAM
2014 brought a new leadership to the helm of Craft Brew Alliance. Former President of Commercial Operations Andy Thomas stepped into the role
of CEO and appointed a new Executive Leadership Team (ELT) to help direct the company through its next stage of growth. The new ELT is comprised
of eight senior leaders who, combined, bring more than 200 years of beer leadership to CBA.
OUR VISION
We are excited about the future ahead and the opportunities to continue realizing the potential of our differentiated strategy. In 2014, CBA’s
leadership announced its vision for 2020 to the entire company:
CBA aspires to be the leader in brewing, branding, and
bringing to market world-class American craft beers.
THE HAWAIIAN BREWERY
THE NEW HAMPSHIRE
We recognize the level of effort required to achieve this leadership and believe that our focus and
strategy, along with the vast talent and commitment of our 800 employees, will continue to drive
us forward.
In 2015 and beyond, we commit to continued focus on our financial and gross margin goals and to
building CBA’s long-term health. We also commit to fostering a culture of innovation and respect
so that we may continue to attract great talent, strategic partners and proud shareholders. On
behalf of everyone at CBA, I would like to raise a virtual pint and thank you for your continued
support of our company.
Sincerely,
Andy Thomas
CEO • Craft Brew Alliance
CRAFT BREW ALLIANCE, INC.
DIRECTORS
KURT R. WIDMER
CHAIRMAN OF THE BOARD
Craft Brew Alliance, Inc.
KEVIN R. KELLY
DIRECTOR
Sisters of Providence
Pension Trustees
TIMOTHY P. BOYLE
PRESIDENT & CHIEF
EXECUTIVE OFFICER
Columbia Sportswear Company
MARC J. CRAMER
RANDALL S. JOZWIAKOWSKI
FINANCE DIRECTOR
The Bill Healy Foundation
VICE PRESIDENT OF
WHOLESALER DEVELOPMENT
Anheuser-Busch, LLC
THOMAS D. LARSON
DAVID R. LORD
SENIOR ASSOCIATE GENERAL COUNSEL
DIRECTOR
Anheuser-Busch, LLC
Pioneer Newspapers, Inc.
JOHN D. ROGERS, JR.
DIRECTOR OF CONSUMER SALES
Lile International Corporation
ANDREW J. THOMAS
CHIEF EXECUTIVE OFFICER
KENNETH C. KUNZE
CHIEF MARKETING OFFICER
J. SCOTT MENNEN
VICE PRESIDENT OF
BREWERY OPERATIONS
JOHN W. GLICK
VICE PRESIDENT OF SUPPLY
CHAIN & EMERGING BUSINESS
EXECUTIVE OFFICERS
CORPORATE INFORMATION
PRINCIPAL CORPORATE OFFICE
STOCK EXCHANGE LISTING
2015 ANNUAL
Craft Brew Alliance, Inc.
929 N. Russell Street, Portland, Oregon 97227
NASDAQ – Global Market
Under the symbol – “BREW”
(503) 331-7270
www.craftbrew.com
CORPORATE COUNSEL
Miller Nash LLP
Attorneys at Law
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Moss Adams LLP
STOCK TRANSFER AGENT
Computershare Shareowner Services
PO Box 30170, College Station, TX 77842
SHAREHOLDER MEETING
May 20, 2015 1:00 PM PDT
Widmer Brothers Banquet Room
947 N. Russell Street
Portland, Oregon 97227
Toll Free - (877) 255-1004
Outside the U.S. - (201) 680-6578
Hearing Impaired - (800) 231-5469
TDD International - (201) 680-6610
www.computershare.com/investor
THE WASHINGTON
BREWERY
14300 N.E. 145th Street
Woodinville, Washington 98072
(425) 483-3232
Forecasters Public House
Redhook Branded
LOCATIONS
BREWERY
35 Pease Drive
Pease International Tradesport
Portsmouth, New Hampshire 03801
(603) 430-8600
Cataqua Public House
Redhook Branded
74-5612 Pawai Place
Kailua-Kona, Hawaii 96740
(808) 334-2739
Kona Pub & Brewery
Koko Marina Pub
Hawaii Kai, Oahu
Both Kona Brewing Branded
THE OREGON BREWERY
924 N. Russell Street
Portland, Oregon 97227
(503) 331-7270
Widmer Brothers Pub
Widmer Brothers Branded
THE MEMPHIS
THE LOS ANGELES
PARTNERSHIP BREWERY
NATIONAL SALES OFFICE
5151 Raines Road
Memphis, Tennessee 38118
315 Culver Boulevard
Playa del Rey, California 90293
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
____________________
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2014
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26542
CRAFT BREW ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
91-1141254
(I.R.S. Employer Identification No.)
929 North Russell Street
Portland, Oregon
(Address of principal executive offices)
97227-1733
(Zip Code)
Registrant’s telephone number, including area code: (503) 331-7270
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.005 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
____________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] 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 [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K, or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if a smaller reporting
company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of the registrant as of the last day of the registrant’s most
recently completed second quarter on June 30, 2014 (based upon the closing price of the registrant’s common stock, as reported by
the NASDAQ Stock Market, of $11.06 per share) was $122,055,981.
The number of shares outstanding of the registrant’s common stock as of February 16, 2015 was 19,115,396 shares.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2015 Annual Shareholders’ Meeting are incorporated by reference into
Part III.
CRAFT BREW ALLIANCE, INC.
2014 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
2
12
18
18
19
19
20
22
23
34
35
62
62
64
64
64
64
65
65
65
66
1
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements. Generally, the words “believe,”
“expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” ”may,” “plan” and similar expressions or their
negatives identify forward-looking statements, which generally are not historical in nature. These
statements are based upon assumptions and projections that we believe are reasonable, but are by their
nature inherently uncertain. Many possible events or factors could affect our future financial results and
performance, and could cause actual results or performance to differ materially from those expressed,
including those risks and uncertainties described in “Item 1A. - Risk Factors” and those described from
time to time in our future reports filed with the Securities and Exchange Commission. Caution should be
taken not to place undue reliance on these forward-looking statements, which speak only as of the date of
this annual report.
THIRD-PARTY INFORMATION
In this report, we rely on and refer to information regarding industry data obtained from market research,
publicly available information, industry publications, U.S. government sources or other third parties.
Although we believe that the third-party sources of information we use are materially complete, accurate
and reliable, there is no assurance of the accuracy, completeness or reliability of third-party information.
PART I
Item 1. Business
Overview
Craft Brew Alliance is a leading craft brewing company that brews, brands and markets some of the
world’s most respected and best-loved American craft beers.
The company is home to three of the earliest pioneers in craft beer: Redhook Ale Brewery, Washington’s
largest craft brewery founded in 1981; Widmer Brothers Brewing, Oregon’s largest craft brewery founded
in 1984; and Kona Brewing Company, Hawaii’s oldest and largest craft brewery founded in 1994. As part
of Craft Brew Alliance, these craft brewing legends have expanded their reach across the U.S. and more
than 15 international markets.
In addition to growing and nurturing distinctive brands rooted in local heritage, Craft Brew Alliance is
committed to developing innovative new category leaders, such as Omission Beer, which is the #1 beer in
the gluten free beer segment, and Square Mile Cider, a tribute to the early American settlers who
purchased the first plots of land in the Pacific Northwest.
Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in
Portland, Oregon and operates five breweries and five pub restaurants across the U.S. For more
information about CBA and its brands, see “Available Information” on page 12.
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; and
one brewery in Memphis, Tennessee owned by our brewing partner. Additionally, we own and operate
two small innovation breweries, primarily used for small batch production and innovative 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 made pursuant to a Master Distributor Agreement (the “A-B
Distributor Agreement”) with A-B. As a result of this distribution arrangement, we believe that, under
alcohol 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-B Distributor Agreement expires or is terminated.
Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 40
2
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 from our 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 from our breweries, both domestically and
internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our
Beer Related operations, as well as other merchandise sales, and sales of our beers directly to
customers.
Industry Background
We are one of the top five brewers in the craft brewing segment of the U.S. brewing industry. The
domestic beer market includes ales and lagers produced by large domestic brewers, international
brewers and craft brewers. Shipments of craft beer in the U.S. are estimated by industry sources to have
increased by approximately 17.6% in 2014 over 2013 and by 15.4% in 2013 over 2012. While the overall
domestic market experienced a modest decrease in shipments of 0.6% in 2014, the craft beer segment
continued its strong growth and captured market share from the rest of the domestic market. Craft beer
shipments in 2014 and 2013 were approximately 9.2% and 7.9%, respectively, of total beer shipped in the
U.S. Approximately 19.0 million barrels and 16.5 million barrels, respectively, were shipped in the U.S. by
the craft beer segment during 2014 and 2013, while total beer sold in the U.S., including imported beer,
was 206.2 million barrels and 206.2 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 2014, the
number of craft breweries in operation had grown to 3,040. Industry sources estimate that craft beer
produced by regional and national craft brewers, similar to us, accounts for approximately two-thirds of
total craft beer sales, with one-third of the production brewed by smaller craft breweries.
The recent competitive environment has been characterized by three trends: the number and diversity of
craft brewers have significantly increased, Crown has emerged as a significant player in imports with its
brewing capacity in Mexico, and the large national domestic brewers have been acquired by or merged
with other national domestic and foreign brewers. In 2014, according to industry sources, A-B and
MillerCoors accounted for more than 70% of total beer shipped in the U.S., excluding imports. In addition,
A-B and MillerCoors have invested in existing smaller craft breweries and created separate craft-focused
divisions in an effort to capitalize on the growing craft beer segment.
Business Strategy
At Craft Brew Alliance, we believe that we have an advantaged strategy that differentiates us in the
rapidly evolving 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 wide range of variety-seeking consumers’
experiences and preferences. The breadth of our product offerings also provides consumers with
the opportunity to match specific consumer occasions with a product in our brand families.
• Distinct, authentic craft beer brands that represent legacy pioneers such as Widmer Brothers,
Redhook Brewery, and Kona Brewing Company, as well as bold new trailblazers, including
Omission Beer 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 fully leverage the specific strengths of our distinct
breweries and operations. Additionally, we guarantee the quality and consistency of all of our
products through fine-tuned processes that ensure everything from brewing to quality-assurance
3
to warehousing and distribution meets our high standards. We believe 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 of our breweries is modern,
has flexible production capabilities, and is designed to produce beer in smaller batches relative to
the national domestic brewers, thereby allowing us to brew a wide variety of brand offerings. We
believe that our investment in brewing and logistics technologies enables us 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 our national sales and marketing capabilities and
complementary brand families to create a unique identity in the distribution channel and with the
consumer. Our sales force calls on all retail channels nationally, including grocery, drug and
convenience stores, something most other craft brewers are not able to do.
• National seamless distribution through the Anheuser-Busch wholesaler network alliance. This
distribution footprint provides efficiencies in logistics and product delivery, state reporting and
licensing, billing and collections. We have realized these efficiencies while maintaining full
autonomy over the production, sale and marketing of our products as an independent 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.
Brand Overview
Our brand portfolio comprises the Kona Brewing Company, Widmer Brothers Brewing, Redhook Brewery,
Omission Beer and Square Mile Cider Company brand families.
We produce a variety of specialty craft beers and ciders using traditional brewing methods complemented
by American innovation and invention. We brew our beers using high-quality hops, malted barley, wheat,
rye and other natural traditional and nontraditional ingredients. To craft our ciders, we use three apple
varieties from the Pacific Northwest 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:
Kona Brewing Company
Kona Brewing Company was started in the spring of 1994 in Kailua-Kona, Hawaii by father and son team
Cameron Healy and Spoon Khalsa, who had a dream to create fresh, local island 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 of exceptional quality, closest to market. This helps to minimize its carbon footprint by
reducing shipping of raw materials, finished beer and wasteful packaging materials. The brewery is
headquartered where it began, in Kailua-Kona on Hawaii’s Big Island.
Widmer Brothers Brewing
Founded in 1984, Widmer Brothers Brewing is celebrating 30 years of beer from April 2014 – April 2015.
Founders Kurt and Rob Widmer helped create the Pacific Northwest craft beer movement in 1984 when,
in their 20s, they began brewing unique interpretations of traditional German beer styles. In 1986, Widmer
Brothers Brewing introduced the original American-style Hefeweizen, which elevated the brewery to
national acclaim and has long been Oregon’s favorite craft beer. Since then, the brewery has continued to
push the boundaries of craft beer, developing a variety of beers with an unapologetic, uncompromised
4
commitment to innovation. Based in Portland, Oregon, the brewery currently brews a variety of beers
including Hefeweizen, Upheaval IPA, Alchemy Pale Ale, Drop Top Amber Ale, a full seasonal lineup, and
a series of limited edition beers.
Redhook Brewery
Redhook 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’s first “craft” breweries. From a modest start in a
former transmission shop in the Seattle neighborhood of Ballard, to the current breweries in Woodinville,
Washington and Portsmouth, New Hampshire, Redhook has become one of America’s most recognized
craft breweries.
While Redhook has “grown up” over the past 30-plus years, one thing has never changed – Redhook is
still brewing great beers like ESB, Long Hammer IPA, and Audible Ale. Most importantly, Redhook has
fun doing it. Redhook beers are available both on draught and in bottles.
Omission Beer
Omission 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. Each
batch 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 Drug Administration gluten-free standard of 20ppm or
less. Omission produces three craft beers specially crafted to remove gluten: Omission Lager, Omission
Pale Ale and Omission IPA.
Square Mile Cider Company
Square Mile Cider Company was launched in 2013. The brand’s name pays homage to the fortitude and
perseverance of the early American 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 parcels of 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 Cider Company chose to stake its claim.
New Brands and Packaging
Our recent brand and packaging announcements include:
Kona Brewing
As Kona’s 20th year in business, 2014 represented the fifth consecutive year of double-digit growth for the
Hawaiian brewery on the mainland. We continued to expand Longboard Lager and Big Wave Golden Ale
into new markets, entering three new states and increasing our U.S. distribution to 40 states. We also
added several new countries to our ever-growing line-up, with the long-anticipated move into Canada
bringing us to 17 countries at year’s end. During the summer, we launched our first-ever integrated
marketing campaign that included TV, radio, digital and out of home to drive brand awareness and trial.
Additionally, we launched Castaway IPA, previously available only in Hawaii, on the mainland during the
summer season.
Widmer Brothers Brewing
In March 2014, Widmer Brothers introduced a new year-round IPA, Upheaval, to its core lineup. This
Northwest Style India Pale Ale unleashes a huge hop flavor and aroma with serious bitterness and a
balanced finish. Hazy and bold, Upheaval is left unfiltered for the full IPA experience. As part of the
brewery’s 30th anniversary celebration, Widmer Brothers brewed a series of collaboration beers with six of
Oregon’s best craft breweries including: Boneyard, Breakside, 10 Barrel, Gigantic, Ninkasi and
Deschutes. The limited edition collaboration beers were distributed to select markets on draught and in
22oz bottles. The brewery also introduced the most ambitious beer series ever from an American craft
5
brewery with its 30 Beers for 30 Years Series. Beginning in April, Widmer Brothers brewed one beer to
commemorate each year since the brewery was founded in 1984. These are the most memorable,
beloved and innovative beers in the brewery’s history. Each recipe was faithfully recreated and each
bottle features special artwork designed by Portland artists.
Redhook Brewery
Redhook continued to build on its partnerships with the ongoing promotion of Game Changer Ale in all
1,000-plus Buffalo Wild Wings locations across the U.S. Redhook also continued its partnership with
theCHIVE, a popular online media platform, to promote KCCO Black Lager. Redhook’s partnership beer
with sports commentator Dan Patrick, Audible Ale, won Gold at the World Beer Cup. Redhook also
launched False Start Session IPA at the Richard Sherman Celebrity Softball Game to celebrate Super
Bowl XLVIII Champions, the Seattle Seahawks.
Omission Beer
In 2014, Omission Beer became the official market leader in the gluten free beer category and continued
to gain dollar share over the competition. Omission IPA continued to expand into new markets across the
country, following in the footsteps of Omission Lager and Pale Ale. With a major focus on the casual
dining sector, Omission Beer is on the menu of such large, national chains as Olive Garden, Red Robin,
and T.G.I. Friday’s.
Square Mile Cider Company
In 2014, Square Mile Cider Company expanded distribution in select Western states, becoming the
number two cider in the Northwest. The brand, which finds its inspiration from the pioneering spirit of the
original Oregon pioneers, offers two varieties: The Original, a classic American hard cider; and Spur &
Vine, a hopped version of the classic American hard cider, with the addition of Galaxy hops.
Multi-Brand Beer Packages
During 2014, 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 Operations
Brewing Facilities
We use highly automated brewing equipment at our four owned production breweries and also operate
two smaller, manual brewpub-style brewing systems. As of December 31, 2014, our total owned
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 annual capacity 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. It uses 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. The Hawaiian Brewery utilizes a 229-kilowatt photovoltaic
solar energy generating system to supply approximately 50 percent of its energy requirements
through renewable energy.
•
Innovation Breweries. Our Portland, Oregon innovation brewery maintains a 10-barrel pilot
brewing system and is located in the Rose Quarter sports and entertainment district. Our New
6
Hampshire innovation brewery maintains a 3-barrel pilot brewing system and is located on the
same site as our New Hampshire production brewery.
In June 2014, we initiated full-scale brewing with our brewing partner in Memphis, Tennessee. This
partnership provides us scalable capacity, and we anticipate producing up to 100,000 barrels at this
location annually.
Packaging
We package our craft beers in cans, bottles and kegs. All of our production breweries, with the exception
of the Hawaiian Brewery, have fully automated bottling and keg lines. The bottle fillers at all of the
breweries utilize a carbon dioxide environment during bottling, ensuring that minimal oxygen is dissolved
in 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 Lager and Redhook Longhammer IPA in various can
sizes. We offer an assortment of packages to highlight the unique characteristics of each of our beers and
to provide greater opportunities for customers to drink our beers in more locations and at more events
and occasions, matching the active lifestyles and preferences of our consumers.
Quality Control
We monitor production and quality control at all of our breweries, with central coordination at the Oregon
Brewery. All of the breweries have an on-site laboratory where microbiologists and lab technicians
supervise on-site yeast propagation, monitor product quality, test products, measure color and bitterness,
and test for oxidation and unwanted bacteria. We also regularly utilize outside laboratories for
independent product analysis. In addition, every batch of beer that we produce goes through an internal
taste panel to ensure that it meets our taste and profile standards.
Ingredients and Raw Materials
We currently purchase a significant portion of our malted barley from two suppliers and our premium-
quality select hops, mostly grown in the Pacific Northwest, from competitive sources. We also periodically
purchase small lots of hops from international sources, such as New Zealand and Western Europe, which
we use to achieve a special hop character in certain beers. In order to ensure the supply of the hop
varieties used in our products, we enter into supply contracts for our hop requirements. We believe that
comparable quality malted barley and hops are available from alternate sources at competitive prices,
although there can be no assurance that pricing would be consistent with our current arrangements. We
currently cultivate our own yeast supply for certain strains and maintain a separate, secure supply
in-house. We have access to multiple competitive sources for packaging materials, such as labels,
six-pack carriers, crowns, cans and shipping cases.
Contract Brewing
In order to profitably use excess capacity, we enter into contract brewing arrangements under which we
produce beer in volumes and per specifications as designated 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 brewing arrangement with them. Under the termination
agreement, we phased out production of FSB branded beers utilizing remaining inventory on-hand. In
consideration, FSB paid us $70,000 per month through September 2013.
During 2014, we shipped 39,700 barrels under contract brewing arrangements compared to 30,300
barrels in 2013 and 49,600 in 2012.
Pubs Operations
We own and operate five brew-pub restaurants and retail stores that support consumer awareness and
research and development. Our five brew-pub restaurants allow us to interact directly with over 1.5 million
consumers annually in our home markets, which creates a sense of brand loyalty. Our brewers are
continually experimenting with new and different varieties of hops and malts in all styles of beer, and our
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brew pubs allow us to bring those beers to market in test-size batches in order to evaluate their strengths
prior to releasing them on a wider basis.
Distribution
With 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 are the only independent craft brewer in the U.S. to
have established a wholly aligned distribution network through our partnership with A-B. This partnership
provides us national distribution, which results in both an effective distribution presence in each market
and administrative efficiencies. Our beers are available for sale directly to consumers in draft, cans and
bottles at restaurants, bars and liquor stores, as well as in cans and bottles 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 our
competitors in the craft beer segment generally negotiate distribution relationships separately with
wholesalers in each locality and, as a result, typically distribute through a variety of wholesalers
representing differing national beer brands with uncoordinated territorial boundaries.
In 2014 and 2013, we sold approximately 766,600 barrels and 708,100 barrels, respectively, to the
wholesalers in A-B’s distribution network through the A-B Distributor Agreement, accounting for 92.3%
and 93.6%, respectively, of our shipment volume for the corresponding periods.
Sales and Marketing
In addition to leveraging our owned brew pubs and retail locations, we promote our products through a
national sales and marketing network that includes but is 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 Facebook, Twitter and Instagram, in key markets and by
participating in cooperative programs with our wholesalers whereby our spending is matched by the
distributor. We believe that the financial commitment by the distributor helps align the distributor’s
interests with ours, and the distributor’s knowledge of the local market results in an advertising and
promotion program that is targeted in a manner that will best promote our products.
Our breweries also play a significant role in increasing consumer awareness of our products and
enhancing our image as a craft brewer. Thousands of visitors per 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 the breweries have meeting rooms that the public can rent for business meetings, parties and
holiday events, and that we use to entertain and educate 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 further awareness of our beers and reinforces our brand image. To further promote retail
canned and bottled product sales and in response to local competitive conditions, we regularly
recommend that wholesalers offer discounts to retailers in most of our markets.
Relationship with Anheuser-Busch, LLC
Exchange Agreement
Under 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
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and our common stock currently held by A-B, which represents 31.7% of our outstanding shares of
common stock at December 31, 2014.
The Exchange Agreement entitles A-B to designate two members of our board of directors. A-B also
generally has the right to have a designee on each committee of the board of directors, except where
prohibited by law or stock exchange requirements, or with respect to a committee formed to evaluate
transactions or proposed 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, grant board representation rights, enter into certain transactions with affiliates, distribute our
products in the United States other than through A-B or as provided in the A-B Distributor Agreement, or
voluntarily terminate our listing on the Nasdaq Stock Market.
Distributor Agreement
The A-B Distributor Agreement provides for the distribution of Kona, Widmer Brothers, Redhook,
Omission and Square Mile in all states, territories and possessions of the United States, including the
District of Columbia and, except with respect to Kona beers, all U.S. military, diplomatic, and
governmental installations in a U.S. territory or possession. Under the A-B Distributor Agreement, we
granted A-B the right of first refusal to distribute our products, including any internally developed new
products but excluding new products that we acquire. We are responsible for marketing our products to
A-B’s wholesalers, 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-B provides written notice of non-renewal to us on or
prior to June 30, 2018. The A-B Distributor Agreement is also subject to immediate termination, by either
party, upon the occurrence of 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 the following 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 to our board of directors;
• our current chief executive officer ceases to function in that role or is terminated, and a
satisfactory successor, in A-B’s opinion, is not appointed within six months;
• we are merged or consolidated into or with any other entity or any other entity merges or
consolidates into or with us without A-B’s prior approval; or
• A-B, its subsidiaries, affiliates, or parent, incur any obligation or expense as a result of a claim
asserted against them by or in our name, or by our affiliates or shareholders, and we do not
reimburse and indemnify A-B and its corporate affiliates on demand for the entire amount of the
obligation or expense.
Fees
We pay fees to A-B in connection with the sale of our products, including margin fees, invoicing, staging
and cooperage handling fees, and inventory manager fees.
See Note 17 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K for additional information.
Seasonality
Our sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting
low sales levels compared to the second and third quarters. Accordingly, our results for any particular
quarter are not likely to be indicative of the results to be achieved for the full year.
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Competition
We compete in the craft brewing market as well as in the much larger alcoholic beverage market, which
encompasses domestic and imported beers, flavored alcohol 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 products offered by such brewers. Craft brewers have also
encountered more competition as their peers expand distribution. Competition also varies by regional
market. Depending on the local market preferences and distribution, we have encountered strong
competition from microbreweries, regional specialty brewers and several national craft brewers that
include MillerCoors’ Tenth and Blake Beer Company division (“Tenth and Blake”), and A-B’s Craft
division. A-B’s Craft division includes Goose Island, Blue Point Brewing, 10 Barrel Brewing Company and
Shock Top. Because of the large number of participants and number of different products offered in this
segment, the competition for packaged product placements and especially for draft beer placements has
intensified. Although certain of these competitors distribute their products nationally and may have greater
financial and other resources than we have, we believe that we possess certain competitive advantages,
including our broad array of brand offerings within our 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 financial resources than we have. Although imported beers
currently account for a greater share of the U.S. beer market than craft beers, we believe that craft
brewers possess certain competitive advantages over some importers, including lower transportation
costs, no importation costs, proximity to and familiarity with local consumers, a higher degree of product
freshness, eligibility for lower federal excise taxes and absence of exposure to currency fluctuations.
In response to the growth of the craft beer segment, most of the major domestic national brewers have
introduced fuller-flavored beers, including well-funded significant product launches in the wheat category.
While these product offerings are intended to compete with craft beers, many of them are brewed
according to methods used by these brewers in their other product offerings. The major national brewers,
including Tenth and Blake through MillerCoors, and A-B Craft brands through A-B, have significantly
greater financial resources than us and have access to a greater array of advertising and marketing tools
to create product awareness of these offerings. Although increased participation by the major national
brewers increases competition for market share and can heighten price sensitivity within the craft beer
segment, we believe that their participation tends to increase advertising, distribution and consumer
education and awareness of craft beers, and thus may ultimately contribute to further growth of this
industry segment.
In the past several years, several major distilled spirits producers and national brewers have introduced
flavored alcohol beverages. Products such as the Bud Light Rita family, Smirnoff Ice 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 limited
basis, by its ability to sell outside of the three-tier system, allowing sales to be made directly to the
consumer. While the craft beer segment competes with wine and spirits, it also benefits from many of the
same advantages enjoyed by wine and spirit producers. These include consumers who allow themselves
affordable luxuries in the form of high quality alcoholic beverages.
A significant portion of our sales continues to be in the Pacific Northwest and in California, which we
believe are among the most competitive craft beer markets in the United States, both in terms of number
of participants and consumer awareness. We believe that these areas offer significant competition for our
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products, not only from other craft brewers but also from the growing wine market and from flavored
alcohol beverages. Our recent marketing efforts have been focused on creating appealing new brands
and better communicating the attributes of our portfolio of existing beers, highlighting and strengthening
the identities to better match the preferences and lifestyles of a greater number of consumers. We believe
that our broad array of beers and brands enables us to offer an assortment of flavors and experiences
that appeal to more people.
Segment and Enterprise-Wide Information
See Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K for the required segment and enterprise-wide information.
Regulation
Our business is highly regulated at federal, state and local levels. Various permits, licenses and approvals
necessary for our brewery and pub operations and the sale of alcoholic beverages are required from a
number of agencies, including the U.S. Treasury Department, the Alcohol and Tobacco Tax and Trade
Bureau (“TTB”), the U.S. Department of Agriculture, the U.S. Food and Drug Administration, state alcohol
regulatory agencies, and state and local health, sanitation, safety, fire and environmental agencies. In
addition, the beer industry is subject to substantial federal and state excise taxes.
We operate our breweries under federal licensing requirements imposed by the TTB. The TTB requires
the filing of a “Brewer’s Notice” upon the establishment of a commercial brewery and the filing of an
amended Brewer’s Notice any time there is a material change in the brewing or warehousing locations,
brewing or packaging equipment, brewery ownership, or officers or directors. Our operations are subject
to audit and inspection by the TTB at any time.
Management believes that we currently have all of the licenses, permits and approvals required for our
current operations. Existing permits or licenses could be revoked if we fail to comply with the terms of
such permits or licenses and additional permits or licenses may be required in the future for our current
operations or as a result of expanding our operations.
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 at
the 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 state government or both. In the past, increases
in excise taxes on alcoholic beverages have been considered in connection with various governmental
budget-balancing or funding proposals.
Federal and State Environmental Regulation
Our brewing operations are subject to environmental regulations and local permitting requirements and
agreements regarding, among other things, air emissions, water discharges and the handling and
disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violate
any such regulation or requirement, if such a violation were to occur, or if environmental regulations were
to become more stringent in the future, we could be adversely affected.
Dram Shop Laws
The serving of alcoholic beverages to a person known to be intoxicated may, under certain
circumstances, result in the server being held liable to third parties for injuries caused by the intoxicated
customer. Our restaurants and pubs have addressed this issue by maintaining reasonable hours of
operation and routinely performing training for personnel.
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Trademarks
We have obtained U.S. trademark registrations for our numerous products, including our proprietary
bottle designs. Trademark registrations generally include specific product names, marks and label
designs. The Kona Brewing, Widmer Brothers, Redhook, and Omission marks and certain other marks
are also registered in various foreign countries. We regard our Kona Brewing, Widmer Brothers,
Redhook, Omission, Square Mile and other trademarks as having substantial value and as being an
important factor in the marketing of our products. We are not aware of any infringing uses that could
materially affect our current business or any prior claim to the trademarks that would prevent us from
using such trademarks in our business. Our policy is to pursue registration of our trademarks in our
markets whenever possible and to oppose vigorously any infringement of our trademarks.
Employees
At December 31, 2014, we employed approximately 785 people, including 385 employees in the pubs
and retail stores, 210 employees in production, 130 employees in sales and marketing and 60 employees
in corporate and administration. Included in the totals above are 244 part-time employees and 6 seasonal
or temporary employees. None of our employees are represented by a union or employed under a
collective bargaining agreement. We believe our relations with our employees to be good.
Available Information
Our Internet address is www.craftbrew.com. There we make available, free of charge, our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any
amendments to those reports, as soon as reasonably practicable after we electronically file such material
with the Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the
investor relations section of our website. The information found on our website is not part of this or any
other report we file with or furnish to the SEC.
Item 1A. Risk Factors
If we are unable to gauge trends and react to changing consumer preferences in a timely and
cost-effective manner, our sales and market share may decrease and our gross margin may be
adversely affected.
The costs and management attention involved in maintaining an innovative brand portfolio have been,
and are expected to continue to be, significant. If we have not gauged consumer preferences correctly, or
are unable to maintain consistently high quality beers as we develop new brands, our overall brand image
may be damaged. If this were to occur, our future sales, results of operations and cash flows would be
adversely affected. Also, increased costs associated with developing new products may have a negative
effect on our gross margin.
Increased competition could adversely affect sales and results of operations.
We compete in the highly competitive craft beer market, as well as in the much larger specialty beer
category, which includes the imported beer segment and fuller-flavored beers offered by major national
brewers. We also face increasing competition from producers of wine, spirits and flavored alcohol
beverages offered by the larger spirit producers and national brewers. Increased competition could cause
our future sales and results of operations to be adversely affected.
Our information systems may experience an interruption or breach in security.
We rely on computer information systems in the conduct of our business. We have policies and
procedures in place to protect against and reduce the occurrence of failures, interruptions, or breaches of
security of these systems. However, there can be no assurances that these policies and procedures will
eliminate the occurrence of failures, interruptions or breaches of security or that they will adequately
restore our systems or minimize any such events. The occurrence of a failure, interruption or breach of
security of our computer information systems could result in loss of intellectual property, delays in our
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production, loss of critical information, or other events, any of which could harm our future sales or
operating results.
We manage and store various proprietary information and sensitive or confidential data relating to our
business, including sensitive and personally identifiable information. Breaches of our security measures
or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or
sensitive or confidential data about us, our employees, or our customers, including the potential loss or
disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception,
could expose us, our customers or the individuals affected to a risk of loss or misuse of this information.
This could result in litigation and potential liability for us, damage our brand image and reputation or
otherwise harm our business. In addition, our current data protection measures might not protect us
against increasingly sophisticated and aggressive threats and the cost and operational consequences of
implementing further data protection measures could be significant.
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 on discretionary spending. Changes in
discretionary consumer spending or consumer preferences brought about by factors such as perceived or
actual general economic conditions, job losses and the resultant rising unemployment rate, perceived or
actual disposable consumer income and wealth, and changes in consumer confidence in the economy,
could significantly reduce customer demand for craft beer in general, and the products we offer
specifically. Furthermore, our consumers may choose to replace our products with the fuller-flavored
national brands or other more affordable, although lower quality, alternatives available in the market. Any
such decline in consumption of our products would likely have a significant negative impact on our
operating results.
Changes in consumer preferences or public attitudes about alcohol could decrease demand for
our products.
If consumers were unwilling to accept our products or if general consumer trends caused a decrease in
the demand for beer, including craft beer, it would adversely impact our sales and results of operations.
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 our products specifically and have an adverse effect on our
sales and results of operations. Further, the alcoholic beverage industry has become the subject of
considerable societal and political attention in recent years due to increasing public concern over alcohol-
related social problems, including drunk driving, underage drinking and health consequences from the
misuse of alcohol. As an outgrowth of these concerns, the possibility exists that advertising by beer
producers could be restricted, that additional cautionary labeling or packaging requirements may be
imposed or that there may be renewed efforts to impose, at either the federal or state level, increased
excise or other taxes on beer sold in the United States. If beer in general were to fall out of favor among
domestic consumers, or if the domestic beer industry were subjected to significant additional
governmental regulation, it would likely have a significant adverse impact on our financial condition,
operating results and cash flows.
Product safety and quality concerns may have a material adverse effect on our business.
Our success depends in large part on our ability to maintain consumer confidence in the safety and
quality of our products. We have rigorous product safety and quality standards which we expect our
breweries and our brewing partner to meet. However, we cannot assure you that, despite our strong
commitment to product safety and quality, we will always meet these standards. If we, or our brewing
partner, fail to comply with applicable product safety and quality standards and our products on the
market are, or become, contaminated or adulterated, we may be required to conduct costly product
recalls and may become subject to product liability claims and negative publicity, which could cause our
reputation and business to suffer.
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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 be faced with a number of operational tasks, including
establishing and maintaining direct contracts with the existing wholesaler network or negotiating
agreements with replacement wholesalers on an individual basis, and enhancing our credit evaluation,
billing and accounts receivable processes. Such an undertaking 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. Independent
wholesalers make their own business decisions that may not align with our interests and there is no
assurance that the sales efforts of distributors will be effective in generating sales of our products. Any
disruption in the ability of the wholesalers, A-B, or us to distribute products efficiently due to any
significant operational problems, such as wide-spread labor union strikes or the loss of a major
wholesaler as a customer, could hinder our ability to get our products to retailers and could have a
material adverse impact on our sales, results of operations and cash flows. A-B has been purchasing
distributors in states where it is legally permissible, which could impact our distribution if the A-B
relationship were to end. 32% of our shipments during 2014 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's consent 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 our management 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 has acquired craft breweries and is seeking to increase sales in the high-end category while it owns
31.7% of our outstanding common stock, which makes A-B our largest shareholder. Under the Exchange
Agreement, A-B may designate two nominees 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.
Operating breweries at production levels substantially below their current designed capacities
could negatively impact our financial results.
As of December 31, 2014, the annual working capacity of our breweries was approximately 1,075,000
barrels. Due to many factors, including seasonality and production schedules of various draft products
and bottled products and packages, actual production capacity will rarely, if ever, approach full working
capacity. We believe that capacity utilization of the breweries will fluctuate throughout the year, and even
though we expect that capacity of our breweries will be efficiently utilized during periods when our sales
are strongest, there likely will be periods when the capacity utilization will be lower. If we experience
contraction in our sales volumes, the resulting excess capacity and unabsorbed overhead will have an
adverse effect on our gross margins, operating cash flows and overall financial performance. We
periodically evaluate whether we expect to recover the costs of our production breweries over the course
of their useful lives. If facts and circumstances indicate that the carrying value of these long-lived assets
may be impaired, an evaluation of recoverability will be performed by comparing the carrying value of the
assets to projected future undiscounted cash flows along with other quantitative and qualitative analyses.
If we determine that the carrying value of such assets does not appear to be recoverable, we will
recognize an impairment loss by a charge against current operations, which could have a material
adverse effect on our results of operations.
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Our sales are concentrated in the Pacific Northwest and California.
Approximately 53% of our sales in 2014 were in the Pacific Northwest and California and, consequently,
our future sales may be adversely affected by changes in economic and business conditions within these
areas. We also believe these regions are among the most competitive craft beer markets in the United
States, both in terms of number of market participants and consumer awareness. The Pacific Northwest
and California offer significant competition to our products, not only from other craft brewers, but also
from the major domestic brewers, wine producers and flavored alcohol beverages.
We are dependent upon the services of our key personnel.
We may be unable to retain or recruit qualified personnel in key positions, 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 a replacement satisfactory to A-B, would be a termination event 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 packaged product sales and within the various bottled product
packages; level of fixed and semi-variable operating costs; level of production at our breweries in relation
to current production capacity; availability and prices of raw materials, production inputs such as energy,
and packaging materials; rates charged for freight; and federal and state excise taxes. The high
percentage of fixed and semi-variable operating costs causes our gross margin to be particularly sensitive
to relatively small changes in sales volume.
Higher health care costs may have an adverse effect on our operating results.
We are self-insured with respect to health care expenses for our employees. During 2014, we
experienced higher than average medical expense claims, which increased our Selling, general and
administrative expenses. If this trend continues, our operating results may be negatively affected.
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 material ordering, brewing and distribution. The
combination of our recent growth and increased brand complexity has increased the operating complexity
of our business. We cannot guarantee that we will effectively manage such complexity without
experiencing planning failures, operating inefficiencies or other issues that could have an adverse effect
on our business.
We engage in electronic communications between third parties, including A-B and our wholesalers, as
part of our supply chain processes. Any interruptions or errors in our electronic interfaces may negatively
affect our operating activities.
Unavailability of production at our brewing partner may adversely affect our capacity and disrupt
our ability to satisfy demand for our products.
During 2014, we entered into a contract brewing relationship with our brewing partner in Memphis,
Tennessee, and anticipate producing up to 100,000 barrels of our beer at that facility annually. If
production at that facility should be disrupted due to unforeseen circumstances, our ability to produce and
ship sufficient quantities of our beer to meet demand in certain key geographic markets, particularly
Texas and the southeastern United States, could be significantly impaired, resulting in decreased sales
revenue and a negative impact on our wholesaler relationships.
An increase in excise taxes could adversely affect our financial condition and results of
operations.
The U.S. federal government currently levies an excise tax of $18 per barrel on beer sold for consumption
in the United States; however, brewers that produce less than two million barrels annually are taxed at $7
per barrel on the first 60,000 barrels shipped, with the remainder of the shipments taxed at the normal
rate. Individual states that we operate in also impose excise taxes on beer and other alcohol beverages in
15
varying amounts, which have been subject to change. Federal and state legislators routinely consider
various proposals to impose additional excise taxes on the production of alcoholic beverages, including
beer. Any such increases in excise taxes, if enacted, would adversely affect our financial condition,
results of operations and cash flows.
We are subject to governmental regulations affecting our breweries and pubs.
Federal, state and local laws and regulations govern the production and distribution of beer, including
permitting, licensing, trade practices, labeling, advertising and marketing, distributor relationships and
various other matters. A variety of federal, state and local governmental authorities also levy various
taxes, license fees and other similar charges and may require bonds to ensure compliance with
applicable laws and regulations. Noncompliance with such laws and regulations may cause the Alcohol
and Tobacco Tax and Trade Bureau or any particular state or jurisdiction to revoke its license or permit,
restricting our ability to conduct business, or result in the imposition of significant fines or penalties. One
or more regulatory authorities could determine that we have not complied with applicable licensing or
permitting regulations or have not maintained the approvals necessary for us to conduct business within
our jurisdiction. If licenses, permits or approvals necessary for our brewery or pub operations were
unavailable or unduly delayed, or if any permits or licenses that we hold were to be revoked, or additional
permits or licenses were required in the future, including as a result of expanding our operations, our
ability to conduct business may be disrupted, which would have a material adverse effect on our financial
condition, results of operations and cash flows.
The craft beer business is seasonal in nature, and we are likely to experience fluctuations in
results of operations and financial condition.
Sales of craft beer products are somewhat seasonal, with the first and fourth quarters historically being
lower and the rest of the year generating stronger sales. Our sales volume may also be affected by
weather conditions and selling days within a particular period. Therefore, the results for any given quarter
will likely not be indicative of the results that may be achieved for the full fiscal year. If an adverse event
such as a regional economic downturn or poor weather conditions should occur during the second and
third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonal
business.
We may be unable to access public or private debt markets to fund our operations and contractual
commitments at competitive rates, on commercially reasonable terms, or in sufficient amounts, if
at all.
We depend, in part, on our revolving line of credit with Bank of America, N.A. ("BofA"), to fund our
operations and commitments for capital expenditures. Our capital expenditures in 2015 are expected to
range from $17 million to $21 million. A number of factors could cause us to incur increased borrowing
costs and to have greater difficulty accessing public and private markets for debt. These factors include
general economic conditions, disruptions or declines in the global capital markets, and our financial
performance or outlook, or credit. An adverse change in any or all of these factors may materially
adversely affect our ability to fund our operations and contractual or financing commitments.
If our business does not perform as expected, including if we generate less revenue than anticipated from
our operations or encounter significant unexpected costs, we may fail to comply with the financial
covenants under our credit facilities. If we do not comply with our financial covenants and we do not
obtain a waiver or amendment, BofA may elect to cause all amounts owed to become immediately due
and payable. Any default may require us to seek additional capital or modifications to our credit facilities,
which may not be available or which may be costly. Any of these risks and uncertainties could have a
material adverse effect on our business, financial position, results of operations, and cash flows.
Failure to realize expected benefits from capital investments in our breweries and information
technology may impact our operating results and cash flows.
Over the past several years, we have made, and expect to continue to make, significant investments in
improvements aimed at increasing the efficiency, capabilities and capacity of our breweries, improving
our ordering and logistics systems, and enhancing the customer experience at our restaurant facilities.
16
Failure to realize the anticipated benefits and generate adequate returns on such capital improvement
projects may have a material adverse effect on our results of operations and cash flows.
Acquisitions subject us to various risks, including risks relating to selection and pricing of
acquisition targets, integration of acquired companies into our business and assumption of
unanticipated liabilities.
We have completed two acquisitions since 2008 and may pursue additional acquisitions or joint venture
or investment opportunities. We cannot assure, however, that we will be able to identify or take
advantage of such opportunities. If we do pursue such transactions, we may not realize the anticipated
benefits. Acquisitions involve many risks, including risks relating to the assumption of unforeseen
liabilities of an acquired business, adverse accounting charges resulting from the acquisition, and
difficulties in integrating acquired companies into our business, both from a cultural perspective, as well
as with respect to technological integration. Our inability to successfully integrate acquired businesses or
manage joint ventures may lead to increased costs, failure to generate expected returns, or even a total
loss of amounts invested, any of which could have a material adverse effect on our financial condition and
results of operations.
Changes in state laws regarding distribution arrangements may adversely impact our operations.
States in which we have a significant sales presence may enact legislation that significantly alters the
competitive environment for the beer distribution industry. Any change in the competitive environment in
those states could have an adverse effect on our future sales and results of operations and may impact
the financial stability of wholesalers on which we rely.
We may experience a shortage of kegs necessary to distribute draft beer.
We distribute our draft beer in kegs that are owned by us. During periods when we experience stronger
sales, we may need to rely on kegs leased from A-B to address the additional demand. If shipments of
draft beer increase, we may experience a shortage of available kegs to fill sales orders. If we cannot meet
our keg requirements through either lease or purchase, we may be required to delay some draft
shipments. Such delays could have an adverse impact on sales and relationships with wholesalers and
A-B.
A loss of involvement by the founders of Widmer Brothers Brewing Company in promoting that
brand family could adversely affect sales.
The founders of Widmer Brothers Brewing Company, Kurt R. Widmer (“Kurt”) and Robert P. Widmer
(“Rob”), are integral to our current Widmer Brothers brand 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 brand communication and have appeal to some drinkers. If
Kurt or Rob were not willing or able to continue in their active roles, their absence could detrimentally
affect 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 key raw materials, packaging materials and utilities. Any
disruption in the willingness or ability of these third parties to supply these critical components could
hinder our ability to continue production of our products, which could have a material adverse impact on
our financial condition, results of operations and cash flows.
Violation of federal and state environmental regulations could adversely affect our operations.
Our brewing operations are subject to environmental regulations and local permitting requirements and
agreements regarding, among other things, air emissions, water discharges and the handling and
disposal of hazardous wastes. While we have no reason to believe the operation of our breweries violates
any such regulation or requirement, if such a violation were to occur, or if environmental regulations were
to become more stringent in the future, we could be adversely affected.
17
A small number of shareholders hold a significant ownership percentage of our common stock
and uncertainty over their continuing ownership plans could cause the market price of our
common stock to decline.
As noted above, A-B has a significant ownership stake in us. In addition, Kurt Widmer and Rob Widmer
together beneficially own approximately 2.2 million shares, or 11.6%, of our common stock. Collectively,
these two groups own 43.3% of our equity. All of these shares are available for sale in the public market,
subject to volume, manner of sale and other requirements under the Securities Act of 1933. Such sales in
the public market, or the perception that such sales may occur, could cause the market price of our
common stock to decline.
We do not intend to pay and are limited in our ability to declare or pay dividends; accordingly,
shareholders must rely on stock appreciation for any return on their investment in us.
We do not anticipate paying cash dividends. Further, under our loan agreement with BofA, we are not
permitted to declare or pay a dividend 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 acquisition of Kona Brewing Company, we have recognized a significant increase in our
total intangible assets, including goodwill. As of December 31, 2014, we had $29.4 million in an
assortment of intangible assets, on a net basis, which represented nearly 16.5% of our total assets. If any
circumstances were to occur, such as economic recession or other factors causing a reduction in
consumer demand, or for any other reason we were to experience a significant decrease in sales growth,
which had a negative impact on our estimated cash flows associated with these assets, our analyses of
these assets may conclude that a decrease in the fair value of these assets occurred. If this were to
occur, we would be required to recognize a potentially significant loss on impairment of these assets. Any
such impairment loss would be charged against current operations in the period of change.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own and operate four highly-automated, small-batch 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
upon which the Hawaiian Brewery and Pubs, the New Hampshire Breweries and Pub, the Portland
Innovation Brewery, and Oregon Pub are located, in addition to our office space and warehouse locations
in Portland, Oregon for our corporate, administrative and sales functions. In 2014, we entered into a lease
for space in Southern California for our national sales office. These operating leases expire at various
times between 2016 and 2047. Certain of these leases are with related parties. See Notes 16 and 17 of
Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for further discussion
regarding these arrangements.
Certain information regarding our production breweries is as follows (capacity in thousands of barrels):
Production Breweries
Oregon Brewery
Washington Brewery
New Hampshire Brewery
Hawaiian Brewery
Square
Footage
185,000
128,000
125,000
11,000
Maximum
Annual Capacity
650
280
280
10
1,220
Current
Annual Capacity
630
220
215
10
1,075
18
As a result of adding fermentation capacity and modifying our brewing schedules during 2012, the total
annual capacity of all our breweries was approximately 1,075,000 barrels as of December 31, 2014 and
2013. Combined, our breweries have the potential to reach 1,220,000 barrels in annual capacity when
fully optimized based on the currently available space and current product mix.
In June 2014, we initiated full-scale brewing with our brewing partner in Memphis, Tennessee. This
partnership provides us scalable capacity and we anticipate producing up to 100,000 barrels at this
location in 2015.
Substantially all of the personal property and the real properties associated with the Oregon Brewery
secure our loan agreement with BofA. See Note 8 of Notes to Consolidated Financial Statements
included in Part II, Item 8 of this report.
Item 3. Legal Proceedings
We are involved, from time to time, in claims, proceedings and litigation arising in the normal course of
business. We believe that, to the extent that any pending or threatened litigation involving us or our
properties exists, such litigation is not likely to have a material adverse effect on our financial condition or
results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the trading symbol BREW.
The table below sets forth, for the fiscal quarters indicated, the reported high and low closing sale prices
of our common stock, as reported on NASDAQ:
2013
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2014
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
7.50
8.24
13.80
17.78
High
17.77
15.60
14.40
17.47
$
$
Low
6.39
7.19
8.40
13.00
Low
13.99
10.14
8.40
13.00
We had 696 common shareholders of record as of February 16, 2015.
We have not declared or paid any dividends during our existence. Under the terms of our loan agreement
with BofA, we may not declare or pay dividends without BofA’s consent. We anticipate that, for the
foreseeable future, all earnings will be retained for the operation and expansion of our business and that
we will not pay cash dividends. The payment of dividends, if any, in the future, will be at the discretion of
our Board of Directors and will depend upon, among other things, future earnings, capital and operating
requirements, restrictions in future financing agreements, our general financial condition, and general
business conditions.
Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is included in
Item 12 of this Form 10-K.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not repurchase any of our common stock during the fourth quarter of 2014.
20
Stock Performance Graph
The following line-graph presentation compares cumulative five-year shareholder returns on an indexed
basis, assuming a $100 initial investment and reinvestment of dividends, of (a) Craft Brew Alliance, Inc.,
(b) a broad-based equity market index and (c) an industry-specific index. The broad-based market index
used is the NASDAQ Composite Index and the industry-specific index used is the S&P 500 Beverages
Index.
Company/Index
Craft Brew Alliance, Inc.
NASDAQ Composite
S&P 500 Beverages Index
Base
Period
12/31/09
$100.00
100.00
100.00
12/31/10
$307.92
116.91
114.65
12/31/11
$250.83
114.81
119.86
Indexed Returns
Year Ended
12/31/12
$270.00
133.07
126.03
12/31/13
$684.17
184.06
150.53
12/31/14
$555.83
208.71
169.39
21
Item 6. Selected Financial Data
The selected consolidated financial data below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and notes thereto included elsewhere in this Form 10-K.
In thousands,
except per share amounts
Statement of Operations Data
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Gain on sale of equity interest in Fulton
Street Brewery, LLC
Income before provision for income taxes
Provision for income taxes
Net income
Basic and diluted net income per share
$
$
$
$
$
$
$
$
Year Ended December 31,
2014
200,022 $
141,312
58,710 $
53,000 $
5,710 $
2013
179,180 $
128,919
50,261 $
46,461 $
3,800 $
2012
169,287 $
119,261
50,026 $
44,890 $
5,136 $
2011
149,197 $
104,011
45,186 $
39,742 $
5,444(cid:2) $
2010
131,731
98,064
33,667
29,938
3,170(cid:2)
$
-
5,099 $
2,022
3,077 $
$
-
3,263 $
1,304
1,959 $
-
$
4,477 $
1,951
2,526 $
10,432
$
15,692(cid:2) $
6,041(cid:2)
9,651(cid:2) $
-
2,786(cid:2)
1,100(cid:2)
1,686(cid:2)
0.16 $
0.10 $
0.13 $
0.51(cid:2) $
0.10(cid:2)
Shares used in basic per share calculations
Shares used in diluted per share calculations
19,038
19,126
18,923
19,042
18,862
18,934
18,834
18,931
17,523
17,568
Balance Sheet Data
Cash and cash equivalents
Working capital (deficit)
Total assets
Current portion of long-term debt and capital
leases
Long-term debt and capital leases, net of
current portion
Other long-term obligations
Shareholders’ equity
2014
2013
2012
2011
2010
December 31,
$
981 $
8,050
178,601
2,726 $
5,782
170,286
5,013 $
5,207(cid:2)
165,664
795 $
2,327(cid:2)
158,908
164
(4,435)
158,266
1,157
710
642
596
2,460
13,720
19,738
115,417
11,050
18,303
111,232
12,440
17,903
108,195
13,188
16,261
104,509
24,675
11,388
94,196
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Craft Brew Alliance is a leading craft brewing company that brews, brands and markets some of the
world’s most respected and best-loved American craft beers.
The company is home to three of the earliest pioneers in craft beer: Redhook Ale Brewery, Washington’s
largest craft brewery founded in 1981; Widmer Brothers Brewing, Oregon’s largest craft brewery founded
in 1984; and Kona Brewing Company, Hawaii’s oldest and largest craft brewery founded in 1994. As part
of Craft Brew Alliance, these craft brewing legends have expanded their reach across the U.S. and more
than 15 international markets.
In addition to growing and nurturing distinctive brands rooted in local heritage, Craft Brew Alliance is
committed to developing innovative new category leaders, such as Omission Beer, which is the #1 beer in
the gluten free beer segment, and Square Mile Cider, a tribute to the early American settlers who
purchased the first plots of land in the Pacific Northwest.
Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in
Portland, Oregon and operates five breweries and five pub restaurants across the U.S. For more
information about CBA and its brands, see “Available Information” on page 12.
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; and
one brewery in Memphis, Tennessee owned by our brewing partner. Additionally, we own and operate
two small innovation breweries, primarily used for small batch production and innovative 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 made pursuant to a Master Distributor Agreement (the “A-B
Distributor Agreement”) with A-B. As a result of this distribution arrangement, we believe that, under
alcohol 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-B Distributor Agreement expires or is terminated.
Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 40
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 from our 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 from our breweries, both domestically and
internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our
Beer Related operations, as well as other merchandise sales, and sales of our beers directly to
customers.
Following is a summary of our financial results:
2014
2013
2012
Net Sales
$200.0 million
$179.2 million
$169.3 million
Net Income
$3.1 million
$2.0 million
$2.5 million
Number of
Barrels Sold
830,200
756,600
724,900
23
Results of Operations
The following table sets forth, for the periods indicated, certain information from our Consolidated
Statements of Income expressed as a percentage of Net sales(1):
Sales
Less excise tax
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Income tax provision
Net income
(1) Percentages may not sum due to rounding.
Year Ended December 31,
2013
107.4%
7.4
100.0
71.9
28.1
25.9
2.1
(0.3)
-
1.8
0.7
1.1%
2014
107.3%
7.3
100.0
70.6
29.4
26.5
2.9
(0.2)
(0.1)
2.5
1.0
1.5%
2012
107.5%
7.5
100.0
70.4
29.6
26.5
3.0
(0.4)
-
2.6
1.2
1.5%
Segment Information
Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
2014
Net sales
Gross profit
Gross margin
2013
Net sales
Gross profit
Gross margin
2012
Net sales
Gross profit
Gross margin
Beer
Related
$ 173,687 $
55,174 $
$
31.8%
Year Ended December 31,
Pubs
and Other
26,335
3,536
13.4%
$
$
Total
200,022
58,710
29.4%
$ 154,830 $
47,055 $
$
30.4%
24,350
3,206
13.2%
$ 145,670 $
46,341 $
$
31.8%
23,617
3,685
15.6%
$
$
$
$
179,180
50,261
28.1%
169,287
50,026
29.6%
24
Net Sales by Category
The following tables set forth a comparison of Net sales by category (dollars in thousands):
Sales by Category
A-B and A-B related
Contract brewing and beer related(1)
Excise taxes
Net beer related sales
Pubs(2)
Net sales
Sales by Category
A-B and A-B related
Contract brewing and beer related(1)
Excise taxes
Net beer related sales
Pubs(2)
Net sales
Year Ended December 31,
2014
176,161
12,113
(14,587)
173,687
26,335
200,022
2013
159,001
9,082
(13,253)
154,830
24,350
179,180
$
$
Year Ended December 31,
2013
159,001
9,082
(13,253)
154,830
24,350
179,180
2012
147,628
10,773
(12,731)
145,670
23,617
169,287
$
$
$
$
$
$
Dollar
Change
17,160
3,031
(1,334)
18,857
1,985
20,842
Dollar
Change
11,373
(1,691)(cid:2)
(522)(cid:2)
9,160
733
9,893
$
$
$
$
% Change
10.8%
33.4%
10.1%
12.2%
8.2%
11.6%
% Change
7.7%
(15.7)%
4.1%
6.3%
3.1%
5.8%
(1) Beer related includes international beer sales.
(2) Pubs sales include sales of promotional merchandise and sales of beer directly to customers.
Shipments by Category
Shipments by category were as follows (in barrels):
Year Ended
December 31,
A-B and A-B related
Contract brewing and
beer related(2)
Pubs
Total
Year Ended
December 31,
A-B and A-B related
Contract brewing and
beer related(2)
Pubs
Total
2014
Shipments
766,600
2013
Shipments
708,100
Increase
(Decrease)
58,500
%
Change
8.3%
Change in
Depletions(1)
7%
52,700
10,900
830,200
37,100
11,400
756,600
15,600
(500)
73,600
42.0%
(4.4)%
9.7%
2013
Shipments
708,100
2012
Shipments
660,000
Increase
(Decrease)
48,100(cid:2)
%
Change
7.3%
Change in
Depletions(1)
11%
37,100
11,400
756,600
52,700
12,200
724,900
(15,600)
(800)(cid:2)
31,700(cid:2)
(29.6)%
(6.6)%
4.4%
(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 2014 compared to 2013 was primarily due to the increase
in shipments, a shift in package mix from draft to packaged, which has a higher selling price per barrel
than draft, and price increases.
The increase in sales to A-B and A-B related in 2013 compared to 2012 was primarily due to the increase
in shipments and a shift in package mix from draft to packaged.
The average revenue per barrel on shipments of beer through the A-B distribution network increased by
1.8% in 2014 compared to 2013, and 0.4% in 2013 compared to 2012, primarily due to pricing increases
and shifts in brand, package and geographic mix. Price changes implemented by us have generally
followed craft beer market pricing trends. During 2014, 2013 and 2012, we sold 92.3%, 93.6% and
91.0%, respectively, of our beer through A-B at wholesale pricing levels.
25
The increase in contract brewing and beer related sales in 2014 compared to 2013 was primarily due to
an increase in international shipments of our beers, which sell at a higher rate per barrel than contract
brewing sales, as we expanded into additional countries. Contract brewing also saw an increase in
shipments as we began brewing for a new contract brewing customer in 2014.
The decrease in contract brewing and beer related sales in 2013 compared to 2012 was due to a $3.1
million decrease related to the mutually-agreed upon termination of our contract brewing agreement with
Fulton Street Brewery (“FSB”) effective September 1, 2012. This decrease was partially offset by a $1.2
million increase in international shipments of our beers, which sell at a higher rate per barrel than contract
brewing sales. Pursuant to our agreement with FSB, we phased out production of FSB branded beers by
the end of November 2012 utilizing remaining inventory on-hand. In consideration, FSB agreed to a
termination fee of $0.8 million that we recorded in Sales during the period from September 1, 2012 to
December 31, 2012 and, under the terms of the termination agreement, we collected $70,000 per month
from FSB through September 2013.
The increases in excise taxes in 2014 compared to 2013 and in 2013 compared to 2012 were due to
higher shipments.
Pubs sales increased in 2014 compared to 2013, primarily as a result of our Kona Pubs in Hawaii
experiencing increased sales, and our Redhook Pub in Woodinville being open the full year in 2014
compared to the twelve-week closure for a full remodel of that location during 2013, as well an increase in
average pricing. The increase in Pubs sales was partially offset by the decrease in beer shipment volume
through our Pubs.
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 guest counts, as well as increased average pricing.
The increase in Pubs sales was partially offset by lower sales at our Redhook Pub in Woodinville as a
result of its closure for remodeling, in addition to a decrease in beer shipment volume through our pubs.
The Redhook Pub in Woodinville, Washington re-opened at the end of May 2013.
The overall increase in volume in 2014 compared to 2013 reflected the continued strength of the Kona
Brewing, Omission Beer and Redhook Brewery brands, partially offset by a decrease in the Widmer
Brothers brand as we continued repositioning it in the marketplace.
The overall increase in volume in 2013 compared to 2012 reflected the continued strength of the Kona
Brewing, Redhook Brewery and Omission Beer brands, partially offset by a decrease in the Widmer
Brothers brand as we continued its repositioning in the marketplace.
Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
Year Ended
December 31,
Kona
Widmer Brothers(1)
Redhook
Total(2)
Year Ended
December 31,
Kona
Widmer Brothers(1)
Redhook
Total(2)
2014
Shipments
300,600
266,800
223,100
790,500
2013
Shipments
256,800
252,600
216,900
726,300
2013
Shipments
256,800
252,600
216,900
726,300
2012
Shipments
220,000
264,300
191,000
675,300
Increase
43,800
14,200
6,200
64,200
Increase
(Decrease)
36,800(cid:2)
(11,700)(cid:2)
25,900(cid:2)
51,000(cid:2)
%
Change
17.1%
5.6%
2.9%
8.8%
%
Change
16.7%
(4.4)%
13.6%
7.6%
Change in
Depletions
13%
2%
3%
7%
Change in
Depletions
23%
(3)%
15%
11%
(1) Widmer Brothers includes the shipments and depletions from our Omission Beer and Square Mile brand families.
(2) Total shipments by brand include international shipments and exclude shipments produced under our contract brewing
arrangements.
26
The increase in our Kona brand shipments in 2014 compared to 2013 was primarily due to the release of
Castaway IPA on the mainland and continued sales growth of our Big Wave Golden Ale and Longboard
Lager.
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 Ale during 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
contributed to the continued sales growth of our Longboard Lager.
The increase in our Widmer Brothers brand shipments in 2014 compared to 2013 was primarily due to
increases in shipments of the Omission Beer brand and Upheaval IPA, partially offset by the
discontinuation of our Rotator IPA series.
The decrease in our Widmer Brothers brand shipments in 2013 compared to 2012 was primarily due to a
decline in shipments of Hefeweizen, partially offset by an increase in shipments of Omission.
The increase in our Redhook brand shipments in 2014 compared to 2013 was primarily the result of
increased sales of KCCO Black Lager, as well as further penetration into existing markets, particularly by
our Long Hammer IPA, partially offset by declines in sales of ESB and Audible Ale.
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 in partnership 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
craft beer that pairs well with wings. Redhook is also experiencing further penetration into existing
markets, particularly by our Long Hammer IPA.
For each of the brand families discussed above, shipments lagged depletions for 2013 as a result of
optimizing our supply chain processes, including brewing, during the 2013 first quarter to more closely
align with the seasonality of our beer sales.
Shipments by Package
The following table sets forth a comparison of our shipments by package, excluding contract brewing
shipments produced under our contract brewing arrangements (in barrels):
Year Ended
December 31,
Draft
Packaged
Total
2014
2013
2012
Shipments(cid:2)
198,500
592,000
790,500
% of Total(cid:2)
25.1%
74.9%
100.0%
Shipments
205,500(cid:2)
520,800(cid:2)
726,300(cid:2)
% of Total
28.3%(cid:2)
71.7%(cid:2)
100.0%(cid:2)
Shipments
214,800(cid:2)
460,500(cid:2)
675,300(cid:2)
% of Total
31.8%(cid:2)
68.2%(cid:2)
100.0%(cid:2)
The shift in mix from draft to packaged in 2014 compared to 2013 was primarily the result of the increases
in volumes on our Kona, Omission and Redhook packaged beers and lower volumes on our Widmer
Brothers draft beer. Increased competition across the industry, as a result of both the entry of large, multi-
national brewers into the craft beer segment and the significant increase in small, local breweries
nationally, is making on-premise draft sales more challenging.
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 packaged beers and lower volumes on our Widmer Brothers draft
beer.
27
Capacity Utilization
Capacity utilization is calculated by dividing total shipments by approximate working capacity and was as
follows:
Capacity utilization
Year Ended December 31,
2013
70%
2014
75%
2012
73%
During 2012, we increased the combined capacity of our production breweries from approximately
900,000 barrels per year to approximately 1,075,000 barrels per year. Utilization in 2012 would have
been 67% if this increased capacity of our breweries had been available since January 1, 2012.
In June 2014, we initiated full-scale brewing with our brewing partner in Memphis, Tennessee. This
partnership provides us scalable capacity and we anticipate producing up to 100,000 barrels at this
location in 2015.
Cost of Sales
Cost of sales includes purchased raw materials, direct labor, overhead and shipping costs.
Information regarding Cost of sales was as follows (dollars in thousands):
Beer Related
Pubs
Total
Beer Related
Pubs
Total
Year Ended December 31,
2014
118,513
22,799
141,312
2013
107,775
21,144
128,919
$
$
Year Ended December 31,
2013
107,775
21,144
128,919
2012
99,329
19,932
119,261
$
$
$
$
$
$
Dollar
Change
10,738
1,655
12,393
Dollar
Change
8,446
1,212
9,658
$
$
$
$
% Change
10.0%
7.8%
9.6%
% Change
8.5%
6.1%
8.1%
The increase in Beer Related Cost of sales in 2014 compared to 2013 was primarily due to the increases
in shipments discussed above, as well as the mix shift from draft to packaged product as the per barrel
equivalent cost of packaged product is higher than draft. These increases were partially offset by
increased efficiencies, primarily through better capacity utilization of our breweries.
Also contributing to the increase in Beer Related Cost of sales in 2014 compared to 2013 were various
one-time costs incurred as a result of initiating brewing operations in Memphis, Tennessee. We
experienced incremental startup costs for initial shipments out of the Memphis brewery as a result of
launching during the peak selling season. The impact of decreased production and higher shipment costs
represented approximately $0.7 million, or $420,000 after tax, reflected in Beer Related Cost of sales.
The increase in Beer Related Cost of sales in 2013 compared to 2012 was primarily due to the increase
in shipment volume discussed above, as well as the mix shift from draft to packaged as the per barrel
equivalent cost of packaged is higher than draft, and increased distribution costs per barrel as a result of
expanding distribution.
Pubs Cost of sales increased in 2014 compared to 2013 primarily due to increases in Sales and cost
increases across various categories, including labor, merchandise and administrative costs.
The increase in Pubs Cost of sales in 2013 compared to 2012 was primarily due to cost increases across
various categories, including labor, food, merchandise and rent.
28
Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
Beer Related
Pubs
Total
Beer Related
Pubs
Total
Year Ended December 31,
2014
55,174
3,536
58,710
$
$
2013
47,055
3,206
50,261
Year Ended December 31,
2013
47,055
3,206
50,261
$
$
2012
46,341
3,685
50,026
$
$
$
$
Dollar
Change
8,119
330
8,449
Dollar
Change
714(cid:2)
(479)(cid:2)
235(cid:2)
$
$
$
$
% Change
17.3%
10.3%
16.8%
% Change
1.5%
(13.0)%
0.5%
Gross profit as a percentage of Net sales, or gross margin rate, was as follows:
Beer Related
Pubs
Total
Year Ended December 31,
2013
30.4%
13.2%
28.1%
2012
31.8%
15.6%
29.6%
2014
31.8%
13.4%
29.4%
The increase in the Beer Related Gross profit in 2014 compared to 2013 was due to the increase in
shipment volume, as well as increased pricing, improved operating efficiencies of our breweries and
optimization of our supply chain, partially offset by the additional costs incurred related to initiating
brewing in Memphis, Tennessee, as discussed above.
The increase in the Beer Related gross margin rate in 2014 compared to 2013 was primarily due to the
improved operating efficiencies of our breweries, as discussed above, optimization of our supply chain,
and increases in pricing, partially offset by the effect of changes in product mix and additional costs
incurred related to initiating brewing in Memphis, Tennessee. The increase in the Pubs gross margin rate
in 2014 over 2013 was primarily due to the 2013 temporary closure of our Woodinville, Washington Pub
for remodeling as discussed above.
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 per barrel; 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, as discussed above, and increases in
food and labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include compensation and related expenses for
our sales and marketing activities, management, legal and other professional and administrative support
functions.
29
Information regarding SG&A was as follows (dollars in thousands):
As a % of Net sales
As a % of Net sales
Year Ended December 31,
2014
53,000
26.5%
$
2013
46,461
25.9%
Year Ended December 31,
2013
46,461
25.9%
$
2012
44,890
26.5%
$
$
Dollar
Change
6,539
Dollar
Change
1,571
$
$
% Change
14.1%
% Change
3.5%
The increase in SG&A in 2014 compared to 2013, both in dollars and as a percentage of Net sales, was
primarily due to the planned increases in SG&A spending, primarily for Kona television advertising in
select markets, as well as an increase in employee related benefit costs in 2014 when compared to 2013.
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.
Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):
Interest expense
Interest expense
Year Ended December 31,
2014
431
2013
464
$
$
2013
464
2012
663
$
$
$
$
Dollar
Change
(33)
% Change
(7.1)%
(199)
(30.0)%
Average debt outstanding
Average interest rate
$
Year Ended December 31,
2013
12,615
2.92%
$
$
2012
13,436
2.74%
2014
12,311
1.83%
The decrease in Interest expense in 2014 compared to 2013 was due to lower average outstanding
borrowings, as well as lower average interest rates.
The decrease in Interest expense in 2013 compared to 2012 was due to the expiration of an interest rate
swap contract, lower average outstanding borrowings and lower average interest rates.
Income Tax Provision
Our effective income tax rate was 39.7%, 40.0% and 43.6% in 2014, 2013 and 2012, respectively. The
effective income tax rates reflect the impact of non-deductible expenses (primarily meals and
entertainment expenses), state and local taxes, tax credits, and income excluded from taxation under the
domestic production activities exclusion.
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 income apportionment rules to a single sales factor methodology
effective January 1, 2013. This one-time adjustment resulted in a 3.4 percentage point increase to our
2012 effective income tax rate, or $153,000 of our Income tax provision.
Liquidity and Capital Resources
We have required capital primarily for the construction and development of our production breweries, to
support our expansion and growth plans, and to fund our working capital needs. Historically, we have
financed our capital requirements through cash flows from operations, bank borrowings and the sale of
30
common and preferred stock. We anticipate meeting our obligations for the twelve months beginning
January 1, 2015 primarily from cash flows generated from operations and borrowing under our line of
credit facility as the need arises. Capital resources available to us at December 31, 2014 included $1.0
million of Cash and cash equivalents and $19 million available under our line of credit facility.
We had $8.0 million of working capital and our debt as a percentage of total capitalization (total debt and
common shareholders’ equity) was 11.4% at December 31, 2014.
A summary of our cash flow information was as follows (dollars in thousands):
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents $
$
Year Ended December 31,
2013
8,457
(9,894)
(850)
(2,287)
2014
9,911(cid:2)
(15,529)(cid:2)
3,873(cid:2)
(1,745)
$
$
$
$
2012
13,105
(8,683)
(204)
4,218
Cash provided by operating activities of $9.9 million in 2014 resulted from our Net income of $3.1 million,
net non-cash expenses of $9.8 million, and changes in our operating assets and liabilities as discussed in
more detail below.
Accounts receivable, net, increased $0.3 million to $11.7 million at December 31, 2014 compared to
$11.4 million at December 31, 2013. This increase was primarily due to an increase in our Contract
Brewing and Beer Related revenue, partially offset by a $0.6 million decrease in our receivable from A-B
to a total of $7.8 million at December 31, 2014, due to the timing of shipments. Historically, we have not
had collection problems related to our accounts receivable.
Inventories increased $2.4 million to $19.0 million at December 31, 2014 compared to $16.6 million at
December 31, 2013, primarily to support expansion into new geographic markets and sales growth.
Other current assets increased $1.0 million to $4.4 million at December 31, 2014 compared to $3.4
million at December 31, 2013, primarily due to increases in prepaid property and excise taxes, and
income taxes receivable.
Accounts payable decreased $1.7 million to $13.0 million at December 31, 2014 compared to $14.7
million at December 31, 2013, primarily due to the timing of payments for brewing and production
activities. The portion of our payable to A-B that is included in our Accounts payable totaled $1.8 million at
December 31, 2014, which is consistent with the balance at December 31, 2013.
Other accrued expenses increased $0.9 million to $2.3 million at December 31, 2014 compared to $1.4
million at December 31, 2013, primarily due to an increase in incentives owed to our wholesalers as a
result of increased sales.
As of December 31, 2014, we had the following net operating loss carryforwards (“NOLs”) and federal
credit carry forwards available to offset payment of future income taxes:
•
•
state NOLs of $32,000, tax-effected; and
federal alternative minimum tax (“AMT”) credit carry forwards of $332,000.
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 required to satisfy all of our income tax obligations with cash.
Capital expenditures of $15.8 million in 2014 were primarily directed to beer production capacity and
efficiency improvements and Pubs remodeling. As of December 31, 2014, we had an additional $0.6
million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to
$0.3 million at December 31, 2013. In June 2014, we entered into a capital lease financing arrangement
31
related to equipment already purchased and included in the $15.8 million above, and received cash
proceeds of $0.8 million. The lease term is 84 months with an effective interest rate of 2.98% per annum
and payments due monthly. We anticipate capital expenditures of approximately $17 million to $21 million
in 2015 primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail.
Loan Agreement
We 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 (“Line of Credit”), including provisions for cash
borrowings and up to $2.5 million notional amount of letters of credit, and a $10.4 million term loan (“Term
Loan”). We may draw upon the Line of Credit for working capital and general corporate purposes until
expiration on October 31, 2018. The maturity date of the Term Loan is September 30, 2023. At December
31, 2014, we had $3.0 million of borrowings outstanding under the Line of Credit and $10.4 million
outstanding under the Term Loan.
Under the Loan Agreement, interest accrues at an annual rate based on the London Inter-Bank Offered
Rate (“LIBOR”) Daily Floating Rate plus a marginal rate. The marginal rate varies from 1.00% to 2.25%
based on our funded debt ratio. At December 31, 2014, our marginal rate was 1.00%, resulting in an
annual interest rate of 1.16%. 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 the outstanding principal balance to $10.8 million to achieve
an 80% loan to value ratio on certain property securing the Loan Agreement. Principal payments are due
monthly in accordance with an agreed-upon schedule set forth in the Loan Agreement, with any unpaid
principal and accrued interest being paid on September 30, 2023.
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 with the financial covenants of the Loan Agreement and at
least $5.0 million remains available on the Line of Credit following the acquisition. In addition, the
amendment released our Woodinville, Washington property as collateral and, accordingly, only our
Oregon brewery is collateral on the Term Loan.
Contractual Commitments and Obligations
The following is a summary of our contractual commitments and obligations as of December 31, 2014 (in
thousands):
Contractual Obligations
Term loan
Interest on term loan(1)
Line of credit
Interest on line of credit(1)
Promissory notes
Interest on promissory notes
Operating leases
Capital leases
Purchase commitments
Sponsorship obligations
Interest rate swap(2)
Payments Due By Period
Total
10,421
879
3,000
135
600
60
18,879
872
34,710
3,345
1,544
74,445
2015
377 $
120
-
35
600
60
1,839
139
20,822
1,407
211
25,610 $
$
$
$
$
2016 and
2017
799
225
-
70
-
-
3,114
267
8,327
1,488
395
14,685
2018 and
2019
864
206
3,000
30
-
-
2,522
266
3,989
450
362
11,689
$
$
$
$
2020 and
beyond
8,381
328
-
-
-
-
11,404
200
1,572
-
576
22,461
(1) The variable interest rate on our term loan and line of credit was 1.16% at December 31, 2014.
(2) The fixed rate on our interest rate swap is 2.86%. We pay that fixed rate less the Benchmark Rate, which was 0.16% at
December 31, 2014.
See Notes 8 and 16 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form
10-K for additional information.
32
Inflation
We believe that the impact of inflation was minimal on our business in 2014, 2013 and 2012.
Critical Accounting Policies and Estimates
Our financial statements are based upon the selection and application of significant accounting policies
that require management to make significant estimates and assumptions. Judgments and uncertainties
affecting the application of these policies may result in materially different amounts being reported under
different conditions or using different assumptions. Our estimates are based upon historical experience,
market trends and financial forecasts and projections, and upon various other assumptions that
management believes to be reasonable under the circumstances at various points in time. Actual results
may differ, potentially significantly, from these estimates.
Goodwill and Other Indefinite-Lived Intangible Assets
We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or as
indicators of impairment are present. We have an option to first assess certain qualitative factors for
indications of impairment in order to determine whether it is necessary to perform the quantitative, two-
step impairment 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 is less 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 make assumptions in the qualitative assessment of relevant events
and circumstances and to estimate the fair value of our reporting units and indefinite-lived intangible
assets, including estimating future cash flows. These calculations contain uncertainties because they
require management to make assumptions and apply judgment to estimate economic factors and the
profitability of future business operations and, if necessary, the fair value of a reporting unit’s assets and
liabilities. 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.
We 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 losses on goodwill. Based on the results of our
annual impairment test for goodwill and other indefinite-lived intangible assets, no impairment was
recorded. We believe, based on our assessment discussed above, that our goodwill and other indefinite-
lived intangible assets are not at risk of impairment. However, if actual results are not consistent with our
estimates or assumptions or there are significant changes in any of these estimates, projections or
assumptions, the fair value of these assets in future measurement periods could be materially affected
resulting in an impairment that could materially affect our results of operations.
Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us and are reflected as a component of Property,
equipment and leasehold improvements in our Consolidated Balance Sheets at cost and are depreciated
over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, we collect a
refundable deposit, reflected as a current liability in our Consolidated Balance Sheets. Upon return of the
keg to us, the deposit is refunded to the wholesaler. When a wholesaler cannot account for some of our
kegs for which it is responsible, it pays us a fixed fee and forfeits its deposit for each keg determined to
be lost. We have experienced some loss of kegs and anticipate that some loss will occur in future periods
due to the significant volume of kegs handled by each wholesaler and retailer, the similarities between
kegs owned by most brewers, and the relatively low deposit collected on each keg when compared with
the market value of the keg. We believe that this is an industry-wide issue and our loss experience is
typical of the industry. In order to estimate forfeited deposits attributable to lost kegs, we periodically use
internal records, A-B records, other third-party records, and historical information to estimate the physical
count of kegs held by wholesalers and A-B.
33
These estimates affect the amount recorded as brewery equipment and refundable deposits as of the
date of the consolidated financial statements. The actual liability for refundable deposits could differ from
estimates.
Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in
connection with sales to a member of the A-B wholesale distributor network, when the products are
delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B or
an independent wholesale distributor.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing
customer.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the
time of the event.
Deferred Taxes
Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but
not yet deducted for tax purposes and from unutilized tax credits and net operating loss carry forwards.
We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required.
To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we
will record a valuation allowance against deferred tax assets. If we are unable to generate adequate
taxable income in future periods or our assessment that it is more likely than not that certain deferred tax
assets will be realized is otherwise not accurate, we may incur charges in future periods to record a
valuation allowance on our gross deferred tax assets.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material
current or future effect on our financial condition, changes in financial condition, revenue or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We have assessed our vulnerability to certain market risks, including interest rate risk associated with
financial instruments included in Cash and cash equivalents and Long-term debt. To mitigate this risk, on
January 23, 2014, we entered into an $8.0 million notional amount interest rate swap agreement, which
expires September 29, 2023, to hedge the variability of interest payments associated with our variable-
rate borrowings. Since the interest rate swap hedges the variability of interest payments on variable rate
debt with similar terms, it qualifies for cash flow hedge accounting treatment. This interest rate swap
hedges 75% of our total term loan outstanding and reduces our overall interest rate risk. As of December
31, 2014, we had unhedged variable-rate debt outstanding of $2.6 million on our term loan and $3.0
million on our line of credit. A 10% increase or decrease in the interest rate on our variable-rate debt
would not have a material effect on our financial position, results of operations or cash flows.
Due to the nature of our highly liquid Cash and cash equivalents, an increase or decrease in interest rates
would not materially affect the fair value of our cash or the related interest income.
34
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, 2014 is as follows:
1st Quarter
2nd Quarter
3rd Quarter
2014 (In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income (loss)
Interest expense and Other expense, net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Basic and diluted net income (loss) per share(1)
Shares used in basic per share calculation
Shares used in diluted per share calculation
2013 (In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income (loss)
Interest expense and Other expense, net
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Basic and diluted net income (loss) per share(1)
Shares used in basic per share calculation
Shares used in diluted per share calculation
$
$
$
$
$
$
43,826 $
31,986
11,840
12,062
(222)
(107)
(329)
(128)
(201) $
(0.01) $
18,976
18,976
36,609 $
27,666
8,943
11,760
(2,817)(cid:2)
(179)
(2,996)(cid:2)
(1,222)(cid:2)
(1,774)(cid:2) $
(0.09)(cid:2) $
18,884
18,884
56,686 $
38,112
18,574
15,208
3,366
(96)
3,270
1,275
1,995 $
0.10 $
52,073 $
37,428
14,645
13,554
1,091
(165)
926
361
565 $
0.03 $
4th Quarter
47,437
33,786
13,651
12,176
1,475
(243)
1,232
514
718
0.04
19,029
19,087
19,052
19,103
19,093
19,167
49,007 $
34,043
14,964
12,950
2,014
(150)
1,864
769
1,095 $
0.06 $
49,354 $
34,512
14,842
11,602
3,240
(120)
3,120
1,228
1,892 $
0.10 $
4th Quarter
44,210
32,698
11,512
10,149
1,363
(88)
1,275
529
746
0.04
18,926
18,992
18,937
19,067
18,946
19,113
1st Quarter
2nd Quarter
3rd Quarter
(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.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Craft Brew Alliance, Inc.
We have audited the accompanying consolidated balance sheets of Craft Brew Alliance, Inc. (the
“Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income,
comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2014. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Craft Brew Alliance, Inc. as of December 31, 2014 and
2013, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2014, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Craft Brew Alliance Inc.’s internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4,
2015 expressed an unqualified opinion thereon.
/s/ Moss Adams LLP
Portland, Oregon
March 4, 2015
36
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Deferred income tax asset, net
Other current assets
Total current assets
Property, equipment and leasehold improvements, net
Goodwill
Intangible and other assets, net
Total assets
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
Accrued salaries, wages and payroll taxes
Refundable deposits
Other accrued expenses
Current portion of long-term debt and capital lease obligations
Total current liabilities
Long-term debt and capital lease obligations, net of current portion
Fair value of derivative financial instruments
Deferred income tax liability, net
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Common shareholders' equity:
Common stock, $0.005 par value. Authorized 50,000,000 shares;
issued and outstanding 19,115,396 and 18,972,247
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total common shareholders' equity
Total liabilities and common shareholders' equity
December 31,
2014
2013
$
$
$
981
11,741
18,971
1,670
4,413
37,776
110,350
12,917
17,558
178,601
12,987
5,114
8,152
2,316
1,157
29,726
13,720
503
18,570
665
63,184
2,726
11,370
16,639
1,345
3,403
35,483
104,193
12,917
17,693
170,286
14,742
4,616
8,252
1,381
710
29,701
11,050
-
17,719
584
59,054
96
138,391
(312)
(22,758)
115,417
178,601
$
95
136,972
-
(25,835)
111,232
170,286
$
$
$
$
The accompanying notes are an integral part of these financial statements.
37
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Sales
Less excise taxes
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income (expense), net
Income before income taxes
Income tax provision
Net income
Basic and diluted net income per share
Shares used in basic per share calculations
Shares used in diluted per share calculations
2014
Year Ended December 31,
2013
2012
$
$
$
$
$
$
214,609
14,587
200,022
141,312
58,710
53,000
5,710
(431)
(180)
5,099
2,022
3,077
0.16
19,038
19,126
$
$
$
192,433
13,253
179,180
128,919
50,261
46,461
3,800
(464)
(73)
3,263
1,304
1,959
0.10
18,923
19,042
182,018
12,731
169,287
119,261
50,026
44,890
5,136
(663)
4
4,477
1,951
2,526
0.13
18,862
18,934
The accompanying notes are an integral part of these financial statements.
38
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Unrealized gain (loss) on derivative hedge transactions, net of tax
Comprehensive income
$
$
3,077
(312)
2,765
$
$
1,959
135
2,094
$
$
2,526
221
2,747
2014
Year Ended December 31,
2013
2012
The accompanying notes are an integral part of these financial statements.
39
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(In thousands)
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Common Stock
Balance at December 31, 2011
Issuance of shares under stock plans
Stock-based compensation
Tax benefit related to stock options
Unrealized gains on derivative financial instruments,
net of tax provision of $132
Net income
Balance at December 31, 2012
Issuance of shares under stock plans
Stock-based compensation
Tax benefit related to stock options
Unrealized gains on derivative financial instruments,
net of tax provision of $84
Net income
Balance at December 31, 2013
Issuance of shares under stock plans
Stock-based compensation
Tax benefit related to stock options
Unrealized losses on derivative financial instruments,
net of tax benefit of $191
Tax payments related to performance shares issued
Net income
Balance at December 31, 2014
Shares
18,845
6
23
-
-
-
18,874
75
23
-
-
-
18,972
105
38
-
-
-
-
19,115
Par Value
94
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
94
1
95
1
$
135,091
13
547
379
-
-
136,030
243
549
150
-
-
136,972
487
784
298
-
(150)
-
$
96
$
138,391
$
$
Retained
Deficit
(30,320)
-
-
-
$
-
2,526
(27,794)
-
-
-
-
1,959
(25,835)
-
-
-
-
-
3,077
(22,758)
$
(356)
-
-
-
221
-
(135)
-
-
-
135
-
-
-
-
-
(312)
-
-
(312)
$
Total
Common
Shareholders'
Equity
104,509
13
547
379
221
2,526
108,195
244
549
150
135
1,959
111,232
488
784
298
(312)
(150)
3,077
115,417
The accompanying notes are an integral part of these financial statements.
40
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2014
Year Ended December 31,
2013
2012
$
3,077
$
1,959
$
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on sale or disposal of property, equipment and leasehold improvements
Deferred income taxes
Stock-based compensation
Excess tax benefit from employee stock plans
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Other current assets
Accounts payable and other accrued expenses
Accrued salaries, wages and payroll taxes
Refundable deposits
Net cash provided by operating activities
Cash flows from investing activities:
Expenditures for property, equipment and leasehold improvements
Proceeds from sale of property, equipment and leasehold improvements
Proceeds from the sale of equity interest in Fulton Street Brewery, LLC
Net cash used in investing activities
Cash flows from financing activities:
Principal payments on debt and capital lease obligations
Net borrowings under revolving line of credit
Proceeds from capital lease financing
Proceeds from issuances of common stock
Debt issuance costs
Tax payments related to performance shares issued
Excess tax benefit from employee stock plans
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes, net
Supplemental disclosure of non-cash information:
Purchases of Property, equipment and leasehold improvements
included in Accounts payable
8,648
213
709
784
(298)
(286)
(371)
(2,185)
(1,011)
(825)
498
958
9,911
(15,783)
254
-
(15,529)
(604)
3,000
841
488
-
(150)
298
3,873
(1,745)
2,726
981
540
1,187
$
$
8,164
195
374
549
(150)
286
(858)
(5,577)
407
2,630
(651)
1,129
8,457
(9,894)
-
-
(9,894)
(1,208)
-
-
244
(46)
-
160
(850)
(2,287)
5,013
2,726
601
543
$
$
2,526
7,369
23
1,458
547
(379)
(329)
2,396
(1,855)
(994)
1,269
743
331
13,105
(9,138)
37
418
(8,683)
(596)
-
-
13
-
-
379
(204)
4,218
795
5,013
774
416
636
$
331
$
-
$
$
$
The accompanying notes are an integral part of these financial statements.
41
Note 1. Nature of Operations
Overview
Craft Brew Alliance, Inc. was formed in 1981 to brew and sell craft beer. We produce, sell and market
on a national basis innovative packaged and draft products for the Kona, Widmer Brothers, Redhook,
Omission and Square Mile brands at our six company-owned breweries and operate five pubs that
promote our products, offer dining and entertainment facilities and sell retail merchandise. Our
common stock trades on the Nasdaq Stock Market under the trading symbol “BREW.”
Our products are distributed domestically in all 50 states. This national footprint was established
primarily through a series of distribution agreements with Anheuser-Busch, LLC (“A-B”), a significant
shareholder. In 2004, we and A-B entered into three agreements, an exchange and recapitalization
agreement (as amended, the “Exchange Agreement”), a master distributor agreement (as amended,
the “A-B Distributor Agreement”) and a registration rights agreement that collectively constitute the
framework of our existing relationship with A-B.
Under the present terms of the A-B Distributor Agreement, we distribute our products in substantially
all of our markets through A-B’s seamless national wholesale distributor network. As a result of this
distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these
wholesalers 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 domestic wholesaler network consists primarily
of independent wholesalers, together with branches owned by A-B. The A-B Distributor Agreement is
subject to early termination by either party upon the occurrence of certain events. The A-B Distributor
Agreement expires December 31, 2018, but may be renewed automatically for an additional ten-year
period unless A-B provides written notice to the contrary on or before June 30, 2018.
Basis of Presentation
The consolidated financial statements include the accounts of Craft Brew Alliance, Inc. and our wholly
owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Note 2. Significant Accounting Policies
Cash and Cash Equivalents
We maintain cash balances with financial institutions that may exceed federally insured limits. We
consider all highly liquid investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2014, there were no cash equivalents. Cash equivalents totaled
$2.7 million at December 31, 2013.
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, 2014, there
were no bank overdrafts. As of December 31, 2013, bank overdrafts totaling $0.7 million were
included in Accounts payable on our Consolidated Balance Sheets. Changes in book overdrafts from
period to period are reported in the Consolidated Statement of Cash Flows as a component of
operating activities within Accounts payable and Other accrued expenses.
Accounts Receivable
Accounts receivable primarily consists of trade receivables due from wholesalers and A-B for beer
and promotional product sales. Because of state liquor laws and each wholesaler’s agreement with A-
B, we do not have collectability issues related to the sale of our beer products. Accordingly, we do not
regularly provide an allowance for doubtful accounts for beer sales. We have provided an allowance
for promotional merchandise receivables that have been invoiced to the wholesaler, which reflects
our best estimate of probable losses inherent in the accounts. We determine the allowance based on
historical customer experience and other currently available evidence. When a specific account is
deemed uncollectible, the account is written off against the allowance. The allowance for doubtful
accounts was $25,000 at both December 31, 2014 and 2013.
42
Activity related to our allowance for doubtful accounts was immaterial in 2014, 2013 and 2012.
Inventories
Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost or
market. Pub food, beverages and supplies are stated at the lower of cost or market.
We regularly review our inventories for the presence of obsolete product attributed to age, seasonality
and quality. If our review indicates a reduction in utility below the product’s carrying value, we reduce
the product to a new cost basis. We record the cost of inventory for which we estimate we have more
than a twelve-month supply as a component of Intangible and other assets on our Consolidated
Balance Sheets.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation
and accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred;
renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements,
the accounts are relieved of the costs and related accumulated depreciation or amortization, and
resulting gains or losses are reflected in our Consolidated Statements of Income.
Depreciation and amortization of property, equipment and leasehold improvements is provided on the
straight-line method over the following estimated useful lives:
Buildings(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2)
Brewery equipment(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)
Furniture, fixtures and other equipment(cid:2)
Vehicles(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2).
Leasehold improvements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) The lesser of useful life or term of the lease
30 – 50 years
10 – 25 years
2 – 10 years
5 years
Valuation of Long-Lived Assets
We evaluate potential impairment of long-lived assets when facts and circumstances indicate that the
carrying values of such assets may be impaired. An evaluation of recoverability is performed by
comparing the carrying value of the assets to projected future undiscounted cash flows. Upon
indication that the carrying value of such assets may not be recoverable, we recognize an impairment
loss in the current period in our Consolidated Statements of Income. We did not identify indicators of
impairment during 2014, 2013 or 2012.
Definite-lived intangible assets are amortized using a straight line basis of accounting. Definite-lived
intangible assets and their respective estimated lives are as follows:
Distributor agreements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2) 15 years
Non-compete agreements.(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).. 5 years
Goodwill
Goodwill is not amortized but rather is reviewed for impairment at least annually, or more frequently if
an event occurs or circumstances change that indicate that the carrying value may not be
recoverable. We first make a qualitative assessment of whether it is more likely than not that a
reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill
impairment test. If the conclusion is that it is more likely than not that the fair value of a reporting unit
is less than its carrying amount, we then perform a two-step goodwill impairment test. Under the first
step, the fair value of the reporting unit is compared to its carrying value, and, if an indication of
goodwill impairment exists in the reporting unit, the second step of the impairment test is performed to
measure the amount of any impairment loss. Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill as determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be performed. We conduct our
annual impairment test as of December 31 of each year and have determined there to be no
impairment for any of the periods presented.
43
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist primarily of trademarks, domain name and recipes. We
evaluate the recoverability of indefinite-lived intangible assets annually, or more frequently if events or
changes in circumstances indicate that the asset might be impaired, by comparing the carrying
amount of the asset to its 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 of the periods
presented.
Refundable Deposits on Kegs
We distribute our draft beer in kegs that are owned by us and are reflected in our Consolidated
Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer
is shipped to the wholesaler, 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.
We have experienced some loss of kegs and anticipate that some loss will occur in future periods due
to the significant volume of kegs handled by each wholesaler and retailer, the homogeneous nature of
kegs owned by most brewers, and the relatively small deposit collected for each keg when compared
with its market value. In order to estimate forfeited deposits attributable to lost kegs, we periodically
use internal records, records maintained by A-B, records maintained by other third party vendors and
historical information to estimate the physical count of kegs held by wholesalers and A-B. These
estimates affect the amount recorded as equipment and refundable deposits as of the date of the
consolidated financial statements. The actual liability for refundable deposits may differ from
estimates. Our Consolidated Balance Sheets included $8.0 million at December 31, 2014 and 2013 in
refundable deposits on kegs and $10.1 million and $6.5 million, respectively, in keg equipment, net of
accumulated depreciation.
Concentrations of Risk
Financial instruments that potentially subject us to credit risk consist principally of Accounts
receivable. While wholesalers and A-B account for substantially all Accounts receivable, this
concentration risk is limited due to the number of wholesalers, their geographic dispersion and state
laws regulating the financial affairs of wholesalers of alcoholic beverages.
Comprehensive Income
Comprehensive income includes changes in the fair value of interest rate derivatives that are
designated as cash flow hedges.
Revenue Recognition
We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must
pay in connection with sales to a member of the A-B wholesale distributor network, when the products
are delivered to the member. A member of the A-B wholesale distributor network may be a branch of
A-B or an independent wholesale distributor.
We recognize revenue on contract brewing sales when the product is shipped to our contract brewing
customer.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the
time of the event.
Excise Taxes
The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For
brewers producing less than two million barrels of beer per calendar year, the federal excise tax is $7
per barrel on the first 60,000 barrels of beer removed for consumption or sale during the calendar
year, and $18 per barrel for each barrel in excess of 60,000 barrels. Individual states also impose
excise taxes on alcoholic beverages in varying amounts. As presented in our Consolidated
Statements of Income, Sales reflects the amounts invoiced to A-B, wholesalers and other customers.
44
Excise taxes due to federal and state agencies are not collected from our customers, but rather are
our responsibility. Net sales, as presented in our Consolidated Statements of Income, are reduced by
applicable federal and state excise taxes.
Taxes Collected from Customers and Remitted to Governmental Authorities
We 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.
Shipping and Handling Costs
Costs incurred to ship our product are included in Cost of sales in our Consolidated Statements of
Income.
Advertising Expenses
Advertising costs, consisting of television, radio, print, outdoor advertising, on-line and social media,
sponsorships, trade events, promotions and printed product information, as well as costs to produce
these media, are expensed as incurred. The costs associated with point of sale display items and
related promotional merchandise are inventoried and charged to expense when first used. For the
years ended December 31, 2014, 2013 and 2012, we recognized costs for all of these activities
totaling $15.0 million, $12.4 million and $12.4 million, respectively, which are reflected as Selling,
general and administrative expenses in our Consolidated Statements of Income.
Advertising expenses frequently involve the local wholesaler sharing in the cost of the program.
Reimbursements from wholesalers for advertising and promotion activities are recorded as a
reduction to Selling, general and administrative expenses in our Consolidated Statements of Income.
Pricing discounts to wholesalers are recorded as a reduction of Sales in our Consolidated Statements
of Income.
Stock-Based Compensation
The fair value of restricted stock awards is determined based on the number of shares granted and
the quoted price of our common stock on the date of grant. The fair value of stock option awards is
estimated at the grant date as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model.
The BSM model requires various judgmental assumptions including expected volatility and option life.
The estimated fair value of stock-based awards is recognized as compensation expense over the
vesting period of the award, net of estimated forfeitures. We estimate forfeitures of stock-based
awards based on historical experience and expected future activity.
The estimated fair value of performance-based stock awards is recognized over the service period
based on an assessment of the probability that performance goals will be met. We re-measure the
probability of achieving the performance goals during each reporting period. In future reporting
periods, if we determine that performance goals are not probable of occurrence, no compensation
expense will be recognized and any previously recognized compensation expense would be
reversed.
Legal Costs
We are a party to legal proceedings arising in the normal course of business. We accrue for certain
legal costs, including attorney fees, and potential settlement claims related to various legal
proceedings that are estimable and probable. If not estimable and probable, legal costs are expensed
as incurred as a component of Selling, general and administrative expenses.
Income Taxes
Deferred income taxes are established for the difference between the financial reporting and income
tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
45
which those temporary differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
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, 2014
and 2013, we did not have any unrecognized tax benefits or any interest and penalties accrued on
unrecognized tax benefits.
Segment Information
Our chief operating decision maker monitors Net sales and gross margins of our Beer Related
operations and our Pubs operations. Beer Related operations include the brewing operations and
related domestic and international beer and cider sales of our Kona, Widmer Brothers, Redhook and
Omission beer brands and Square Mile cider brand. Pubs operations primarily include our pubs,
some of which are located adjacent to our Beer Related operations. We do not track operating results
beyond the gross margin level or our assets on a segment level.
Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number of shares that
were outstanding during the period. Diluted earnings per share include the dilutive effect of common
share equivalents calculated under the treasury stock method. Performance-based restricted stock
grants are included in basic and diluted earnings per share when the underlying performance metrics
have been met.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. We base our estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances at the time. Actual results could differ from those
estimates under different assumptions or conditions.
Note 3. Recent Accounting Pronouncements
ASU 2015-1
In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update (“ASU”) No. 2015-1, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-
20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.”
This ASU eliminates from U.S. GAAP the concept of extraordinary items. ASU 2015-1 is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A
reporting entity may apply the amendments prospectively. We do not expect the adoption of ASU
2015-1 to have a material effect on our financial position, results of operations or cash flows.
ASU 2014-17
In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations (Topic 805):
Pushdown Accounting.” This ASU provides an acquired entity with an option to apply pushdown
accounting in its separate financial statements upon occurrence of an event in which an acquirer
obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown
accounting in the reporting period in which the change-in-control event occurs. If pushdown
accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-
17 was effective on November 18, 2014. We do not expect the adoption of ASU 2014-17 to have a
material effect on our financial position, results of operations or cash flows.
46
ASU 2014-16
In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” ASU
2014-16 addresses whether the host contract in a hybrid financial instrument issued in the form of a
share should be accounted for as debt or equity. ASU 2014-16 is effective for annual periods and
interim periods beginning after December 15, 2015. We do not currently have issued, nor are we
investors in, hybrid financial instruments. Accordingly, we do not expect the adoption of ASU 2014-16
to have any effect on our financial position, results of operations or cash flows.
ASU 2014-15
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going
Concern (Subtopic 205-40)". ASU 2014-15 provides guidance related to management's responsibility
to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern
and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after
December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. We
do not expect the adoption of ASU 2014-15 to have a material effect on our financial position, results
of operations or cash flows.
ASU 2014-12
In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic
718): Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a
performance target that affects vesting and that could be achieved after the requisite service period
be treated as a performance condition. ASU 2014-12 is effective for annual periods beginning after
December 15, 2015, and interim periods within annual periods beginning after December 15, 2015.
We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position,
results of operations or cash flows.
ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606).” ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets
unless those contracts are within the scope of other standards (e.g., insurance contracts or lease
contracts). ASU 2014-09 is effective for annual periods beginning after December 15, 2016, and
interim periods within annual periods beginning after December 15, 2016. We are still evaluating the
effect of the adoption of ASU 2014-09.
ASU 2014-08
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205)
and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity." ASU 2014-08 amends the definition for what
types of asset disposals are to be considered discontinued operations, as well as amending the
required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective
for annual periods beginning on or after December 15, 2014, and interim periods within annual
periods beginning on or after December 15, 2014. We do not expect the adoption of ASU 2014-08 to
have a material effect on our financial position, results of operations or cash flows.
ASU 2013-11
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”
ASU 2013-11 amends the guidance 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 is disallowed. ASU 2013-11 is effective for annual and interim
periods for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 in January
2014 did not have any effect on our financial position, results of operations or cash flows.
47
Note 4. Inventories
Inventories consisted of the following (in thousands):
Raw materials(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2). $
Work in process(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)..
Finished goods(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)
Packaging materials(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)........
Promotional merchandise(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Pub food, beverages and supplies(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
$
December 31,
2014
4,414
2,781
8,986
627
1,531
632
18,971
2013
4,934
3,313
5,927
442
1,539
484
16,639
$
$
Work in process is beer held in fermentation tanks prior to the filtration and packaging process.
Note 5. Other Current Assets
Other current assets consisted of the following (in thousands):
Deposits paid to keg lessor(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)..(cid:2). $
Prepaid property taxes...(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)....
Prepaid insurance(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Income tax receivable(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).....
Other(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
$
December 31,
2014
2,336
367
369
250
1,091
4,413
$
$
2013
2,228
215
332
68
560
3,403
Note 6. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following (in thousands):
Brewery equipment(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2). $
Buildings(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Land and improvements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Furniture, fixtures and other equipment(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Leasehold improvements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Vehicles(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)...
Construction in progress(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Less accumulated depreciation and amortization(cid:2)(cid:2)..
$
Note 7. Goodwill and Intangible and Other Assets
December 31,
2014
101,258
55,254
7,621
12,501
7,058
72
4,528
188,292
(77,942)
110,350
2013
93,711
55,051
7,617
9,895
6,592
135
2,052
175,053
(70,860)
104,193
$
$
Goodwill
Goodwill totaled $12.9 million at both December 31, 2014 and 2013 and there were no changes to
the goodwill balance during 2014, 2013 or 2012. There are no impairment losses netted against the
goodwill balance.
48
Intangible and Other Assets
Intangible and other assets and the related accumulated amortization are as follows (in thousands):
2014
Trademarks and domain name(cid:2).. $ 14,429
2013
$ 14,429
December 31,
Recipes(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
700
700
Distributor agreements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Accumulated amortization(cid:2)(cid:2)(cid:2)...
Non-compete agreements(cid:2)(cid:2)(cid:2).
Accumulated amortization(cid:2)(cid:2)(cid:2)..
Favorable contracts(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Accumulated amortization(cid:2)(cid:2)(cid:2)..
Other(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Accumulated amortization(cid:2)(cid:2)(cid:2)..
2,200
(953)
1,247
440
(374)
66
31
(31)
-
250
(208)
42
16,484
2,200
(807)
1,393
440
(286)
154
31
(31)
-
250
(201)(cid:2)
49
16,725
Promotional merchandise(cid:2)(cid:2)(cid:2)(cid:2)
1,074
$ 17,558
968
$ 17,693
Amortization expense was as follows (in thousands):
Amortization expense(cid:2).. $
Year Ended December 31,
2013
247
$
$
2012
253
2014
241
Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as
follows (in thousands):
2015(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2016(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2017(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2018(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2019(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Thereafter(cid:2)(cid:2)..(cid:2)..
$
$
223
154
154
153
149
522
1,355
Note 8. Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following (in thousands):
December 31,
2014
Term loan, due September 30, 2023..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2).. $ 10,421
3,000
Line of credit, due October 31, 2018..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)..
600
Promissory notes payable to related parties, all due July 1, 2015(cid:2)..(cid:2)..
63
Premium on promissory notes(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
-
Note with affiliated party, due November 15, 2014...................................
793
Capital lease obligations for equipment(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
14,877
(1,157)
$ 13,720
Less current portion(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2013
$ 10,800
-
600
184
165
11
11,760
(710)
$ 11,050
49
Required principal payments on outstanding debt obligations as of December 31, 2014 for the next
five years and thereafter are as follows (in thousands):
2015(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2).(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2). $
2016(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2).
2017(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)..(cid:2)
2018(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
2019(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Thereafter(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Amount representing interest(cid:2)(cid:2)(cid:2)...
$
Term
Loan
377
391
408
422
442
8,381
10,421
-
10,421
Line of
Credit
-
-
-
3,000
-
-
3,000
-
3,000
$
$
Promissory
Notes
600
-
-
-
-
-
600
-
600
$
$
Capital
Lease
Obligations
139
134
133
133
133
200
872
79(cid:2)
793
$
$
Term Loan and Line of Credit
We have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A., which
presently comprises a $22.0 million revolving line of credit (“Line of Credit”), including provisions for
cash borrowings and up to $2.5 million notional amount of letters of credit, and a $10.4 million term
loan (“Term Loan”). We may draw upon the Line of Credit for working capital and general corporate
purposes until expiration on October 31, 2018. The maturity date of the Term Loan is September 30,
2023. At December 31, 2014, we had $3.0 million 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 marginal rate. The marginal rate varies from 1.00%
to 2.25% based on our funded debt ratio. At December 31, 2014, our marginal rate was 1.00%,
resulting in an annual interest rate of 1.16%. 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 the outstanding principal balance to $10.8 million to
achieve an 80% loan to value ratio on certain property securing the Loan Agreement. Accrued
interest for the Term Loan is due and payable monthly. Principal payments are due monthly in
accordance with an agreed-upon schedule set forth in the Loan Agreement, with any unpaid principal
balance and unpaid accrued interest due and payable on September 30, 2023.
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 with the 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. In addition, the amendment released our Woodinville, Washington property as
collateral and, accordingly, only our Oregon brewery is collateral on the Term Loan.
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, 2014, the quarterly fee was 0.15% and the fee totaled the
following (in thousands):
Loan Agreement fee(cid:2). $
Year Ended December 31,
2013
33
$
$
2014
33
2012
34
An annual fee is payable in advance on the notional amount of each standby letter of credit issued
and outstanding multiplied by an applicable rate ranging from 1.00% to 2.00%. We had no letters of
credit outstanding during 2014, 2013 or 2012.
We were in compliance with all applicable contractual financial covenants of the Loan Agreement at
December 31, 2014. These financial covenants under the Loan Agreement are measured on a trailing
50
four-quarter basis. We are required to maintain a funded debt ratio of up to 3.0 to 1 and a fixed
charge coverage ratio above 1.25 to 1.
The Loan Agreement is secured by substantially all of our personal property and by our Oregon
brewery (“Collateral”). In addition, we are restricted in our ability to declare or pay dividends,
repurchase outstanding common stock, incur additional debt or enter into any agreement that would
result in a change in control.
Promissory Notes Payable to Individual Lenders
We assumed an obligation for promissory notes signed in connection with the acquisition of
commercial real estate related to our Portland, Oregon brewery. These notes were separately
executed with three individuals, but with substantially the same terms and conditions. Each
promissory note is secured by a deed of trust on the commercial real estate. The outstanding note
balance to each lender as of December 31, 2014 and 2013 was $200,000, with each note bearing a
fixed interest rate of 24% per annum through June 30, 2010, after which time the rate increased to
26.9% per annum as a result of a one-time adjustment reflecting the change in the consumer price
index from the date of issue, July 1, 2005, to July 1, 2010. The promissory notes are carried at the
total of stated value plus a premium reflecting the difference between our incremental borrowing rate
and the stated note rate. The effective interest rate for each note is 6.31%. Each note matures on the
earlier of the individual lender’s death or July 1, 2015, with prepayment of principal not allowed under
the notes’ terms. Interest payments are due and payable monthly.
Note with Affiliated Party
In connection with the acquisition of Kona Brewing Company (“KBC”), we assumed an obligation for a
promissory note payable (“Related Party Note”) to a counterparty that was a significant KBC
shareholder and remains a shareholder of Craft Brew Alliance, Inc. The Related Party Note was
secured by the equipment comprising a photovoltaic cell generation system (“photovoltaic system”)
installed at our brewery located in Kailua-Kona, Hawaii. Accrued interest on the Related Party Note
was due and payable monthly at a fixed interest rate of 4.75%, with monthly loan payments of
$16,129. Any unpaid principal balance and unpaid accrued interest under the Related Party Note was
due and payable on November 15, 2014. As of December 31, 2014, no amounts remained due
pursuant to the Related Party Note.
Note 9. Derivative Financial Instruments
Interest Rate Swap Contract
Our risk management objectives are to ensure that business and financial exposures to risk that have
been identified and measured are minimized using the most effective and efficient methods to reduce,
transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated
risks and management strives to structure proposed transactions to avoid or reduce risk whenever
possible.
We have assessed our vulnerability to certain business and financial risks, including interest rate risk
associated with our variable-rate long-term debt. To mitigate this risk, effective January 23, 2014, we
entered into an interest rate swap contract with Bank of America, N.A. (“BofA”) for 75% of the Term
Loan balance, to hedge the variability of interest payments associated with our variable-rate
borrowings under our Term Loan with BofA. On July 1, 2013 our previous swap contract terminated.
The current swap contract terminates on September 29, 2023, and had a total notional value of $7.8
million as of December 31, 2014. Through this swap agreement, we pay interest at a fixed rate of
2.86% and receive interest at a floating-rate of the one-month LIBOR, which was 0.16% at December
31, 2014. Since the interest rate swap hedges the variability of interest payments on variable rate
debt with similar terms, it qualifies for cash flow hedge accounting treatment. As of December 31,
2014, unrealized net losses of $503,000 were recorded in Accumulated other comprehensive loss as
a result of this hedge. The effective portion of the gain or loss on the derivative is reclassified into
Interest expense in the same period during which we record Interest expense associated with the
Term Loan. There was no hedge ineffectiveness during 2014, 2013 or 2012.
51
The fair value of our derivative instrument is as follows (in thousands):
Fair Value of Derivative Instrument
Fair value of interest rate swap $
December 31,
2014
(503)
$
2013
-
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 (in thousands):
Derivatives in Cash
Flow Hedging
Relationships
Amount of Gain/(Loss)
Recognized in Accumulated
OCI (Effective Portion)
Location of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
Amount of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
Year Ended
December 31,
2014
2013
2012
$
$
$
(503)
219
353
Interest expense
Interest expense
Interest expense
$
$
$
205
188
387
Note 10. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into
three broad categories:
•
•
•
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for
similar securities, interest rates, prepayment speeds and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources,
including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk
associated with investing in those securities.
The following tables summarize assets and (liabilities) measured at fair value on a recurring basis (in
thousands):
Fair Value at December 31, 2014
Interest rate swap(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) $
Level 1
-
Fair Value at December 31, 2013
Money market funds(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) $
Level 1
2,650
Level 2
(503)
Level 3
-
$
Level 2
-
$
Level 3
-
$
$
Total
(503)
Total
2,650
$
$
We did not have any financial liabilities recorded at fair value on a recurring basis at December 31,
2013.
The fair value of our money market funds was based on quoted prices from our financial institution.
The fair value of our interest rate swap was based on quarterly statements from the issuing bank.
There were no changes to our valuation techniques during 2014, 2013 or 2012.
We believe the carrying amounts of Cash, Accounts receivable, Other current assets, Accounts
payable, Accrued salaries, wages and payroll taxes and Other accrued expenses are a reasonable
approximation of the fair value of those financial instruments because of the nature of the underlying
transactions and the short-term maturities involved.
52
We had fixed-rate debt outstanding as follows (in thousands):
Fixed-rate debt on balance sheet..... $
Fair value of fixed-rate debt(cid:2)(cid:2)(cid:2)(cid:2) $
December 31,
2014
1,456
1,513
$
$
2013
960
985
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 similar risk profile and duration (Level
2), the fixed cash flows are discounted and summed to compute the fair value of the debt.
Note 11. Segment Results and Concentrations
Net sales, Gross profit and gross margin information by segment was as follows (dollars in
thousands):
2014
Net sales
Gross profit
Gross margin
2013
Net sales
Gross profit
Gross margin
2012
Net sales
Gross profit
Gross margin
Beer
Related
173,687
55,174
31.8%
$
$
154,830 $
47,055 $
30.4%
145,670 $
46,341 $
31.8%
$
$
$
$
$
$
Pubs
26,335
3,536
13.4%
24,350
3,206
13.2%
23,617
3,685
15.6%
$
$
$
$
$
$
Total
200,022
58,710
29.4%
179,180
50,261
28.1%
169,287
50,026
29.6%
The segments use many of the same assets. For internal reporting purposes, we do not allocate
assets by segment and, therefore, no asset by segment information is provided to our chief operating
decision maker.
In preparing this financial information, certain expenses were allocated between the segments based
on management estimates, while others were based on specific factors such as headcount. These
factors can have a significant impact on the amount of gross profit for each segment. While we
believe we have applied a reasonable methodology, assignment of other reasonable cost allocations
to each segment could result in materially different segment gross profit.
Sales to wholesalers through the A-B Distributor Agreement represented the following percentage of
our Sales:
Year Ended December 31,
2013
82.6%
2014
82.1%
2012
81.1%
Receivables from A-B represented the following percentage of our Accounts receivable balance:
December 31
2014
66.8%
2013
74.4%
All of our long-term assets are located in the U.S. and Sales outside of the U.S. are insignificant.
53
Note 12. Stock-Based Plans and Stock-Based Compensation
We maintain several stock incentive plans under which stock-based awards are, or have been,
granted to employees and non-employee directors. We issue new shares of common stock upon
exercise or settlement of the stock-based awards. All of our stock plans are administered by the
Compensation Committee of our Board of Directors, which determines the grantees, the number of
shares of common stock for which awards may be exercised or settled and the exercise or grant
prices of such shares, among other terms and conditions of stock-based awards under our stock-
based plans.
With the approval of the 2014 Stock Incentive Plan (the “2014 Plan”) in May 2014, no further grants of
stock-based awards may be made under our 2002 Stock Option Plan (the “2002 Plan”), our 2007
Stock Incentive Plan (the “2007 Plan”) or our 2010 Stock Incentive Plan (the “2010 Plan”). However,
the provisions of these plans will remain in effect until all outstanding awards are exercised, settled or
terminated. Shares subject to terminated awards under the 2002 Plan, the 2007 Plan and the 2010
Plan are not added to the pool of shares available for grant pursuant to the 2014 Plan.
2014 Stock Incentive Plan
The 2014 Plan provides for grants of stock options, restricted stock, restricted stock units,
performance awards and stock appreciation rights, as well as other stock-based awards. While
incentive stock options may only be granted to employees, awards other than incentive stock options
may be granted to employees, non-employee directors and outside consultants. Options granted to
our employees have generally been subject to a five-year vesting period. Vested options generally
remain exercisable until ten years following the date of grant. The exercise price of stock options
must be at least equal to the fair market value per share of our common stock on the date of grant. A
maximum of 1,000,000 shares of common stock are authorized for issuance under the 2014 Plan. As
of December 31, 2014, there were 988,347 shares available for future awards pursuant to the 2014
Plan.
Terms of awards granted pursuant to the 2002 Plan, the 2007 Plan and the 2010 Plan were similar to
the terms of awards granted pursuant to the 2014 Plan.
Stock-Based Compensation
Certain information regarding our stock-based compensation was as follows (in thousands, except
per share amounts):
Year Ended December 31,
2012
2014
$ 4.84
Weighted average per share fair value of stock options granted(cid:2)(cid:2). $ 6.89
40
932
Intrinsic value of stock options exercised(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Intrinsic value of fully-vested stock awards granted...(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
366
288
2013
$ 4.90
554
1,039
Stock-based compensation expense was recognized in our Consolidated Statements of Income as
follows (in thousands):
Selling, general and administrative expense..... $
Cost of sales(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Total stock-based compensation expense(cid:2)(cid:2). $
Year Ended December 31,
2012
2014
547
666
118
-
547
784
2013
$ 464
85
$ 549
$
$
We amortize stock-based compensation on a straight-line basis over the vesting period of the
individual awards, which is the requisite service period, with estimated forfeitures considered.
At December 31, 2014, we had total unrecognized stock-based compensation expense of $1.7
million, which will be recognized over the weighted average remaining vesting period of 3.2 years.
54
The following weighted average assumptions were utilized in determining fair value pursuant to the
Black-Scholes option pricing model:
2014
Year Ended December 31,
2013
Risk-free interest rate(cid:2).
Dividend yield(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Expected life..(cid:2)(cid:2)(cid:2)(cid:2)..
Volatility(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
2.11%
0.0%
7.34 years
60.20%
1.61%
0.0%
7.85 years
58.91%
2012
1.46%
0.0%
8.15 years
60.39%
The risk-free rate used is based on the U.S. Treasury yield curve over the estimated term of the
options granted. Expected lives were estimated based on historical exercise data. The expected
volatility is calculated based on the historical volatility of our common stock.
Stock-Based Awards Plan Activity
Stock Option Activity
Stock option activity for the year ended December 31, 2014 was as follows:
Outstanding at December 31, 2013(cid:2)(cid:2).
Granted(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Exercised(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)
Cancelled(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Forfeited(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Outstanding at December 31, 2014(cid:2)(cid:2).
Options
Outstanding
298,954
141,955
(104,804)
(31,074)
-
305,031
$
Weighted
Average
Exercise Price
6.73
11.17
4.65
8.33
-
9.35
Certain information regarding options outstanding as of December 31, 2014 was as follows:
Options
Outstanding
305,031
Number(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Weighted average exercise price(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..... $
9.35
Aggregate intrinsic value(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) $ 1,248,000
Weighted average remaining contractual term(cid:2)(cid:2)
8.5 years
$
$
Options
Exercisable
53,390
8.00
288,000
7.5 years
Performance-Based Stock Grants
During the second quarter of each of 2014, 2013, 2012 and 2011, we granted performance-based
common stock awards to selected executives under the 2010 Plan, with vesting contingent upon
meeting various company-wide performance goals. The performance goals were tied to target
amounts of adjusted EBITDA and Net sales for each of the three-year periods ending December 31,
2015, 2014 and 2013, respectively; for the awards in 2014, the measurement period is the 11
quarters ending December 31, 2016. The awards earned on the 2014, 2013 and 2012 grants will
range from zero to 125% of the targeted number of performance shares for the performance periods
ending March 31, 2017, 2016 and 2015, respectively. For the 2011 grant, 50% of the targeted
number of performance shares were earned for the performance period ended March 31, 2014.
Awards, if earned, are paid in shares of common stock.
55
Activity related to performance-based awards was as follows (in shares):
Granted (target amount)..(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2).(cid:2)(cid:2)..
Vested(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)
Canceled due to termination of employee......
Canceled due to failure to meet performance
goals(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)....(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)...
Not expected to vest due to failure to meet
performance goals.(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).(cid:2)(cid:2)(cid:2)..
Expected to vest as of December 31, 2014(cid:2)
2014
Awards
2013
Awards
2012
Awards
2011
Awards
77,443
-
(12,561)
50,347
-
(16,999)
42,450
-
-
57,145
(28,571)
-
Total
227,385
(28,571)
(29,560)
-
-
-
(28,574)
(28,574)
-
64,882
-
33,348
(22,938)
19,512
-
-
(22,938)
117,742
Stock Grants
On the date of our Annual Meeting of Shareholders, each non-employee director received an annual
grant of fully-vested shares of our common stock with a fair value of $30,000 in 2014 and $25,000 in
each of 2013 and 2012. The 2014 amount included 2,804 fully-vested shares of common stock
granted to each of our seven non-employee directors for a total of 19,628 shares.
Note 13. Earnings Per Share
The following table reconciles shares used for basic and diluted earnings per share (“EPS”) and
provides certain other information (in thousands):
Weighted average common shares for basic EPS(cid:2)(cid:2)
Dilutive effect of stock-based awards(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Shares used for diluted EPS(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Year Ended December 31,
2013
18,923
119
19,042
2014
19,038
88
19,126
2012
18,862
72
18,934
Stock-based awards not included in diluted per share
calculations as they would be antidilutive(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)
85
1
124
Note 14. Income Taxes
All of our income is generated in the U.S. The components of income tax expense were as follows (in
thousands):
Current federal(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)... $
Current state(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Year Ended December 31,
2013
2012
2014
1,079 $
234
1,313
746(cid:2) $
184(cid:2)
930(cid:2)
292(cid:2)
201(cid:2)
493(cid:2)
Deferred federal(cid:2)(cid:2)(cid:2)...(cid:2)(cid:2)..
Deferred state(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
$
595
114
709
2,022 $
305(cid:2)
69(cid:2)
374(cid:2)
1,304(cid:2) $
1,116(cid:2)
342(cid:2)
1,458(cid:2)
1,951(cid:2)
56
Income tax expense differs from the amount computed by applying the statutory federal income tax
rate to income before income taxes as follows (in thousands):
Provision at U.S. statutory rate(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) $
State taxes, net of federal benefit(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Permanent differences, primarily meals and
entertainment(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Domestic production activities deduction(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Tax credits(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Increase to deferred tax liability tax rate.(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
$
Year Ended December 31,
2013
1,109
182
2014
1,734 $
217
$
2012
1,522
148
304
(113)
(120)
-
2,022 $
198
(98)
(87)
-
1,304
$
232
-
(104)
153
1,951
Significant components of our deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets
Net operating losses and alternative minimum tax credit carryforwards(cid:2) $
Accrued salaries and severance(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)...
Other(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
December 31,
2014
2013
$
364
1,150
1,153
2,667
470
922
918
2,310
Deferred tax liabilities
Property, equipment and leasehold improvements(cid:2)(cid:2)(cid:2)(cid:2)..(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Intangible assets(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Other(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
(13,139)
(6,240)
(188)
(19,567)
(16,900) $
(12,158)
(6,323)
(203)
(18,684)
(16,374)
$
As of December 31, 2014, included in our net operating losses and alternative minimum tax credit
carryforwards were the following (in thousands):
State NOLs, tax effected
Federal alternative minimum tax credit carryforwards
$
32
$ 332
In assessing the realizability of our deferred tax assets, we consider future taxable income expected
to be generated by the projected differences between financial statement depreciation and tax
depreciation, cumulative earnings generated to date and other evidence available to us. Based upon
this consideration, we assessed that all of our deferred taxes are more likely than not to be realized,
and, as such, we have not recorded a valuation allowance as of December 31, 2014 or 2013.
There were no unrecognized tax benefits as of December 31, 2014 or 2013 and we do not anticipate
significant changes to our unrecognized tax benefits within the next twelve months.
Our major tax jurisdictions include U.S. federal and various U.S. states. Tax years that remain open
for examination by the IRS include the years from 2011 through 2014. Tax years remaining open in
states where we have a significant presence range from 2010 to 2014. In addition, tax years from
1998 to 2004 and 2008 are eligible for examination by the IRS and state tax jurisdictions due to our
utilization of the NOLs generated in these tax years in our tax returns.
Note 15. Employee Benefit Plans
We 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 IRS regulations. For the years ended
December 31, 2014, 2013 and 2012, we matched 50% of the employee’s contributions up to 6% of
eligible compensation. Eligibility for the matching contribution in all years began after the participant
had worked a minimum of three months. Our matching contributions to the plan vest ratably over five
57
years of service by the employee. During 2014, we used approximately $165,000 of previously
forfeited matching contributions to fund current matching contributions, which decreased our 2014
expense. We recognized expense associated with matching contributions as follows (in thousands):
Year Ended December 31,
2012
2013
2014
705
744 $
632
$
401(k) expense..... $
Note 16. Commitments
Operating Leases
We lease office space, restaurant and production facilities, warehouse and storage space, land and
equipment under operating leases that expire at various dates through the year ending December 31,
2047. Certain leases contain renewal options for varying periods and escalation clauses for adjusting
rent to reflect changes in price indices. Certain leases require us to pay for insurance, taxes and
maintenance applicable to the leased property. Under the terms of the land lease for our New
Hampshire Brewery, we hold a first right of refusal to purchase the property should the lessor decide
to sell the property.
Minimum aggregate future lease payments under non-cancelable operating leases as of December
31, 2014 are as follows (in thousands):
2015(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2). $
2016(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
2017(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2018(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2019(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Thereafter(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
1,839
1,630
1,484
1,285
1,237
11,404
$ 18,879
Rent expense under all operating leases, including short-term rentals as well as cancelable and
noncancelable operating leases, gross, was as follows (in thousands):
2014
Rent expense(cid:2)..... $ 2,323
2013
2,554
$
$
2012
2,665
Year Ended December 31,
We sub-lease corporate office space to an unrelated party pursuant to a 5-year lease that began in
February 2011. The lessee also leased this space pursuant to a previous lease agreement in 2010
and 2009. In December 2014, the lease agreement was amended to extend the lease through 2025,
with an option to cancel in 2020 with 180 days’ written notice and a fee of $150,000. We recognized
rental income related to the sublease, which was recorded as an offset to rent expense in our
Consolidated Statements of Income, as follows (in thousands):
Rental income(cid:2)..... $
Year Ended December 31,
2013
266
2012
254
2014
269
$
$
Future minimum lease rentals pursuant to this agreement as of December 31, 2014 are as follows (in
thousands):
2015(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2). $
2016(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
2017(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2018(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2019(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Thereafter(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
369
369
369
369
369
2,219
$ 4,064
58
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 are included in the Rent expense under all operating leases above:
Year Ended December 31,
2013
127
$
$
2014
125
2012
125
$
The lease for the headquarters office space and restaurant facility expires in 2034, with an extension
at our option for two 10-year periods, while the lease for the other facilities, land and equipment
expires in 2017 with an extension at our option for two five-year periods. We hold a right to purchase
the headquarters office space and restaurant facility at the greater of $2.0 million or the fair market
value of the property as determined by a contractually established appraisal method. The right to
purchase is not valid in the final year of the lease term or in each of the final years of the renewal
terms, as applicable. All lease terms are considered to be arm’s-length transactions.
We hold lease and sublease obligations for certain office space and the land underlying the brewery
and pub location in Kona, Hawaii, with a company whose owners include a shareholder who owns
more than 5% of our common stock and a nonexecutive officer. The sublease contracts expire on
various dates through 2020, with an extension at our option for two five-year periods. Lease
payments to this lessor were as follows (in thousands) and are included in the Rent expense under all
operating leases above:
Year Ended December 31,
2013
428
2012
402
2014
499
$
$
$
All lease terms are considered to be arm’s-length transactions.
Purchase and Sponsorship Commitments
We periodically enter into commitments to purchase certain raw materials in the normal course of
business. Furthermore, we have entered into purchase commitments and commodity contracts to
ensure we have the necessary supply of malt and hops to meet future production requirements.
Certain of the malt and hop commitments are for crop years through 2019. We believe that malt and
hop commitments in excess of future requirements, if any, will not have a material impact on our
financial condition or results of operations. We may take delivery of the commodities in excess of our
requirements or make payments against the purchase commitments earlier than contractually
obligated, which means our cash outlays in any particular year may exceed or be less than the
commitment amount disclosed.
In certain cases, we have executed agreements with selected vendors to source our requirements for
specific malt and hop varieties for the years ending December 31, 2015, 2016, 2017, 2018 and 2019;
however, either the quantity to be delivered or the full price for the commodity has not been
established at the present time. To the extent the commitment is not measurable or has not been
fixed, that portion of the commitment has been excluded from the table below.
We have entered into multi-year sponsorship and promotional commitments with certain professional
for our sponsorship
sports
consideration, we post signage and provide other promotional materials at the site or the event. The
terms of these sponsorship commitments expire at various dates through May 31, 2018.
teams and entertainment companies. Generally,
in exchange
59
Aggregate future payments under purchase and sponsorship commitments as of December 31, 2014
are as follows (in thousands):
2015(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2016(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2017(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2018(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
2019(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Thereafter(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Purchase
Obligations
20,822
4,794
3,533
2,468
1,521
1,572
34,710
$
$
$
Sponsorship
Obligations
1,407
918
570
450
-
-
3,345
$
Total
22,229
5,712
4,103
2,918
1,521
1,572
38,055
$
$
Note 17. Related-Party Transactions
For additional related party transactions, see Notes 8 and 16.
As of December 31, 2014 and 2013, A-B owned approximately 31.7% and 32.0%, respectively, of our
outstanding common stock.
Modifications to A-B Agreements
In connection with the sale of our interest in FSB, we modified two agreements with A-B originally
executed in 2004: the Master Distributor Agreement (as amended and restated, the “A-B Distributor
Agreement”), which was amended primarily to lower our margin fees (“Margin Fees”) to be paid to
A-B; and the Exchange and Recapitalization Agreement (as amended and restated, the “Exchange
Agreement”).
The modifications to the A-B Distributor Agreement reduced the Margin Fees to be paid to A-B for
beer sold through A-B or the associated A-B distribution network, except for beer sold in qualifying
territories, as defined, from May 1, 2011 (the “Commencement Date”) until December 31, 2018, to
$0.25 per case equivalent from $0.74 per case equivalent. Beer sold through A-B or the associated
A-B distribution network in qualifying territories, as defined, was exempt from Margin Fees until
September 30, 2013, and thereafter are assessed Margin Fees at the $0.25 per case equivalent
through December 31, 2018. The exemption from Margin Fees for beer sold in the qualifying
territories was subject to certain conditions, including incurring sales and marketing expenses in the
qualifying territories at or above specified amounts. In the event the A-B Distributor Agreement is
renewed beyond December 31, 2018, the A-B Distributor Agreement sets Margin Fees to be paid to
A-B for the period beginning January 1, 2019 and ending December 31, 2028, at $0.75 per case
equivalent. The A-B Distributor Agreement no longer provides for the incremental fees that were
previously paid to A-B for shipments above the volume of shipments during 2003.
If we purchase additional beer brands, we may distribute those brands outside of the A-B Distributor
Agreement while still selling existing brands to A-B affiliated wholesalers. We would not be obligated
to pay margin fees on sales of the new brand.
60
Transactions with A-B
Transactions with A-B consisted of the following (in thousands):
2014
Year Ended December 31,
2013
161,010 $
2,009
2012
149,492
1,864
Gross sales to A-B(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2). $ 178,805 $
Margin fee paid to A-B, classified as a reduction of Sales(cid:2)(cid:2)(cid:2)..
Sales to FSB through a contract brewing arrangement, classified
in Sales(1)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Sales to FSB pursuant to termination agreement discussed
below(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Handling, inventory management, royalty and other fees paid to
A-B, classified in Cost of sales(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)
Amounts received from A-B for lost keg fees and forfeited
deposits, included as a reduction of Property, equipment and
leasehold improvements, net(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
2,644
393
-
-
-
-
-
402
-
3,083
838
449
122
(1) We owned 42% of FSB prior to its becoming a wholly owned subsidiary of A-B in May 2011 and,
accordingly, transactions with FSB are considered 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 termination agreement, 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, all of which was recognized as Sales on
September 1, 2012, the effective date of agreement.
Amounts due to or from A-B were as follows (in thousands):
Amounts due from A-B related to beer sales pursuant to the
A-B Distributor Agreement(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Refundable deposits due to A-B(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)..
Amounts due to A-B for services rendered(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Net amount due from A-B
$
$
December 31,
2014
2013
$
7,846
(2,629)
(1,821)
3,396 $
8,457
(2,728)
(1,852)
3,877
61
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Principal Financial Officer, carried
out an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) under the Securities Exchange
Act of 1934 (“Exchange Act”) as of the end of the period covered by this Report. Based upon that
evaluation, our Chief Executive Officer and Principal Financial Officer concluded that, as of the end of
the period covered by this report, disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports filed or submitted by us under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified by the Securities
and Exchange Commission’s rules and forms and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Principal Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. While reasonable assurance
is a high level of assurance, it does not mean absolute assurance. Disclosure controls and internal
control over financial reporting cannot prevent or detect all errors, misstatements or fraud. In addition,
the design of a control system must recognize that there are resource constraints, and the benefits
associated with controls must be proportionate to their costs.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2014, no changes in our internal control over financial reporting were
identified in connection with the evaluation required by Exchange Act Rule 13a-15 or 15d-15 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting in accordance with Exchange Act Rule 13a-15(f). Our internal control system was
designed to provide reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected.
Our management assessed the effectiveness of our internal control over financial reporting based on
the framework and criteria established in Internal Control — Integrated Framework, issued in 2013 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, 2014.
Moss Adams LLP, an independent registered public accounting firm, has audited the effectiveness of
our internal control over financial reporting as of December 31, 2014, as stated in their report, which
is included herein.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Craft Brew Alliance, Inc.
We have audited Craft Brew Alliance, Inc.’s (the “Company”) internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Craft Brew Alliance, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2014, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Craft Brew Alliance, Inc. as of December
31, 2014 and 2013, and
income, comprehensive income,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2014, and our report dated March 4, 2015 expressed an unqualified opinion on those consolidated
financial statements.
the consolidated statements of
/s/ Moss Adams LLP
Portland, Oregon
March 4, 2015
63
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is contained in part in our definitive proxy statement for our
2015 Annual Meeting of Shareholders to be held on May 20, 2015 (the “2015 Proxy Statement”)
under the captions “Board of Directors – Nominees for Director,” “Board of Directors – Committees of
the Board – Audit Committee,” “Executive Officers,” and “Section 16(a) Beneficial Ownership
Reporting Compliance,” and the information contained therein is incorporated herein by reference.
Code of Conduct
We adopted a Code of Conduct and Ethics (the “Code”) applicable to all employees, including our
principal executive officer, principal financial officer, principal accounting officer and directors. The
Code and the charters of each of the Board committees are posted on our website at
www.craftbrew.com (select Investor Relations — Governance — Highlights). Copies of these
documents are available to any shareholder who requests them. Such requests should be directed to
Investor Relations, Craft Brew Alliance, Inc., 929 N. Russell Street, Portland, OR 97227. Any waivers
of the Code for our directors or executive officers are required to be approved by our Board of
Directors. We will disclose any such waivers on a current report on Form 8-K within four business
days after the waiver is approved.
Item 11. Executive Compensation
Information required by this Item is contained in our 2015 Proxy Statement under the captions
“Compensation Committee Report,”
“Executive
Compensation,” “Employment Agreements and Potential Payments Upon Termination or Change-in-
Control,” “Director Compensation” and “Board of Directors – Committees of the Board –
Compensation Committee” and the information contained therein is incorporated herein by reference.
“Compensation Discussion and Analysis,”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following is a summary as of December 31, 2014 of all of our plans that provide for the issuance
of equity securities as compensation. See Note 12 of Notes to Consolidated Financial Statements in
Item 8 for additional information.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
Weighted average
exercise price of
outstanding options,
warrants and rights (b)
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a)) (c)
422,773(1)(cid:2)
-
422,773
$ 9.35
-
$ 9.35
988,347
-
988,347
Plan Category
Equity compensation
plans approved by
shareholders
Equity compensation
plans not approved by
shareholders
Total
(1) Includes a total of 117,742 performance shares that may vest between March 31, 2015 and March 31, 2017,
based on the achievement of financial targets over three separate performance periods. The shares are not
included in the calculation of weighted average price in column (b).
64
The remaining information required by this Item is contained in our 2015 Proxy Statement under the
caption “Security Ownership of Certain Beneficial Owners and Management,” and the information
contained therein is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is contained in our 2015 Proxy Statement under the captions
“Transactions with Related Persons” and “Board of Directors – Director Independence” and the
information contained therein is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in our 2015 Proxy Statement under the caption
“Proposal No. 2 — Ratification of Appointment of Independent Registered Public Accounting Firm”
and the information contained therein is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements and Schedules
Report of Moss Adams LLP, Independent Registered Public Accounting Firm(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 36
Consolidated Balance Sheets as of December 31, 2014 and 2013(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 37
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012(cid:2)(cid:2)(cid:2) 38
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014,
2013 and 2012(cid:2)(cid:2)(cid:2).......(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2).
Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31,
2014, 2013 and 2012(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012(cid:2) 41
Notes to Consolidated Financial Statements(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2)(cid:2) 42
39
Page
There are no schedules required to be filed herewith.
Exhibits
Exhibits are listed in the Exhibit Index that appears immediately following the signature page of this
report and is incorporated herein by reference, and are filed or incorporated by reference as part of
this Annual Report on Form 10-K.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Portland, Oregon, on March 4, 2015.
Craft Brew Alliance, Inc.
By:
/s/ Joseph K. O’Brien
Joseph K. O’Brien
Corporate Controller and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated, on
March 4, 2015.
Signature
Title
/s/ ANDREW J. THOMAS
Andrew J. Thomas
/s/ JOSEPH K. O’BRIEN
Joseph K. O’Brien
*
Kurt R. Widmer
*
Timothy P. Boyle
*
Marc J. Cramer
*
Randall S. Jozwiakowski
*
Kevin R. Kelly
*
Thomas D. Larson
*
David R. Lord
*
John D. Rogers, Jr.
*By: /s/ ANDREW J. THOMAS
Andrew J. Thomas,
as attorney in fact
Chief Executive Officer
(Principal Executive Officer)
Corporate Controller and Principal Accounting Officer
(Principal Financial and Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
Director
Director
Director
Director
66
Exhibit
Number
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
EXHIBIT INDEX
Description
Restated Articles of Incorporation of the Registrant, dated January 2, 2012 (incorporated by
reference from Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2011)
Amended and Restated Bylaws of the Registrant, dated December 1, 2010 (incorporated by
reference from Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2010 filed on April 1, 2011)
2002 Stock Option Plan (incorporated by reference from Exhibit A to the Registrant’s Proxy
Statement for its 2002 Annual Meeting of Shareholders (File No. 0-26542)
Form of Stock Option Agreement (Directors Grants) for the 2002 Stock Option Plan
(incorporated by reference from Exhibit 10.10 to the Registrant’s Form 10-K for the year ended
December 31, 2004)
Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2002 Stock
Option Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2010)
2010 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s
Proxy Statement for its 2010 Annual Meeting of Shareholders)
Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2010 Stock
Incentive Plan (incorporated by reference from Exhibit 10.11 to the Registrant’s Form 10-K for
the year ended December 31, 2010)
Form of Performance Share Award Agreement for Executive Officers ((incorporated by
reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31,
2014)
2014 Stock Incentive Plan (incorporated by reference from Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on May 27, 2014)
Letter of Agreement between the Registrant and Mark D. Moreland dated March 29, 2010
(incorporated by reference from Exhibit 10.15 to the Registrant’s Form 10-K for the year ended
December 31, 2009)
Transition and Separation Agreement between the Registrant and Mark D. Moreland, dated
October 31, 2014 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on November 5, 2014)
Letter of Agreement between the Registrant and Kurt Widmer dated May 26, 2010
(incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2010)
Letter of Agreement between the Registrant and Robert Widmer dated May 26, 2010
(incorporated by reference from Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2010)
Employment Letter Agreement between the Registrant and Andrew J. Thomas, dated
November 20, 2013 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on November 21, 2013)
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)
Non-Competition and Non-Solicitation Agreement dated October 1, 2010 between
the
Registrant and Mattson Davis (incorporated by reference from Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on October 6, 2010)
Letter of Agreement between the Registrant and J. Scott Mennen dated August 4, 2014
(incorporated by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2014)
Letter of Agreement between the Registrant and John W. Glick dated August 5, 2014
(incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2014)
Letter of Agreement between the Registrant and Kenneth C. Kunze dated August 5, 2014
(incorporated by reference from Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2014)
10.18*
10.19*
Summary of Compensation Arrangements for Non-Employee Directors as of January 1, 2015
Summary of Annual Cash Incentive Bonus Plan for Executive Officers
E-1
Exhibit
Number
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36†
10.37
Description
Sublease between Pease Development Authority as Sublessor and the Registrant as
Sublessee, dated May 30, 1995 (incorporated by reference from Exhibit 10.11 to the
Registrant’s Registration Statement on Form S-1, No. 33-94166)
Loan Agreement dated as of July 1, 2008 between Registrant and Bank of America, N.A.
(incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on July 7, 2008)
Loan Modification Agreement dated November 14, 2008 to Loan Agreement dated July 1, 2008
between Registrant and Bank of America, N.A. (incorporated by reference from Exhibit 10.1 to
the Registrant’s Form 10-Q for the quarter ended September 30, 2008)
Second Loan Modification Agreement dated June 8, 2010 to the Loan Agreement dated July 1,
2008 between the Registrant and Bank of America, N.A. (incorporated by reference from
Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010)
Third Loan Modification Agreement dated September 30, 2010 to the Loan Agreement dated
July 1, 2008 between the Registrant and Bank of America, N.A. (incorporated by reference
from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 6, 2010)
Fourth Loan Modification Agreement dated November 15, 2013 to the Loan Agreement dated
July 1, 2008 between the Registrant and Bank of America, N.A. (incorporated by reference
from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 19, 2013)
Amended and Restated Exchange and Recapitalization Agreement dated as of May 1, 2011
between the Registrant and A-B (incorporated by reference from Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on May 4, 2011)
Amended and Restated Master Distributor Agreement dated as of May 1, 2011 between the
Registrant and A-B (incorporated by reference from Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed on May 4, 2011)
Amendment to A-B Master Distributor Agreement dated May 11, 2012 (incorporated by
reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August
9, 2012)
Amendment to A-B Master Distributor Agreement dated November 20, 2013 (incorporated by
reference from Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2013)
Registration Rights Agreement dated as of July 1, 2004 between the Registrant and A-B
(incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed on July 2, 2004)
Master Lease Agreement dated as of June 6, 2007 between Banc of America Leasing &
Capital, LLC and Widmer Brothers Brewing Company (incorporated by reference from Exhibit
10.2 to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-4, No. 333-
149908 filed on May 2, 2008 (“S-4 Amendment No. 1”))
Amended and Restated License Agreement dated as of February 28, 1997 between Widmer
Brothers Brewing Company and Widmer’s Wine Cellars, Inc. and Canandaigua Wine
Company, Inc. (incorporated by reference to Exhibit 10.3 from the S-4 Amendment No. 1)
Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability
Company and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.3 to
the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
Commercial Lease (Restated) dated as of December 18, 2007 between Widmer Brothers LLC
and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.5 from the S-
4 Amendment No. 1)
Sublease dated as of September 1, 2010 between Manini Holdings, LLC and Kona Brewing
Co., Inc. (incorporated by reference from Exhibit 10.41 to the Registrant’s Form 10-K for the
year ended December 31, 2010)
Amended and Restated Continental Distribution and Licensing Agreement between the
Registrant and Kona Brewery LLC dated March 26, 2009 (incorporated by reference from
Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010)
Sublease dated as of March 31, 2011 between Manini Holdings, LLC and Kona Brewing Co.,
LLC (incorporated by reference from Exhibit 10.43 to the Registrant’s Amendment No. 1 to
Form 10-K for the year ended December 31, 2010 filed on April 22, 2011)
E-2
Exhibit
Number
21.1
23.1
24.1
31.1
31.2
32.1
99.1
99.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
†
Description
Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to the Registrant’s
Form 10-K for the year ended December 31, 2010 filed on April 1, 2011)
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
Power of Attorney – Directors of Craft Brew Alliance, Inc.
Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer of Craft Brew Alliance, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Form 10-K for the year ended December 31, 2014 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Press Release dated March 4, 2015
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)(cid:2)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
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 redacted terms, has been separately filed with the Securities and
Exchange Commission.
E-3
Dear Fellow Shareholders,
2014 was a milestone year for Craft Brew Alliance and one that reflects the powerful results we can achieve with the right focus, right strategy and
right team in place. Despite an increasingly complex and crowded market and an ambitious internal workload, we delivered against every one of our
performance objectives for the year. Highlights include:
• Record sales growth, which propelled revenue past $200 million in net sales for the first time in our company history.
• Double-digit growth in shipments, reflecting increasing consumer demand for CBA’s distinctive portfolio of award-winning brands.
• Robust gross margin expansion of 130 basis points, underscoring continued achievements in driving operational efficiencies and balancing
production capabilities across our expanded brewing footprint in the U.S.
• Earnings per share growth of $0.06 resulting in full year EPS of $0.16.
CONTINUED BRAND MOMENTUM
We continue to believe that our portfolio of well-loved brands, each with distinctive and authentic stories rooted in real people and real places, will
drive sustained topline growth and differentiate us in today’s competitive market. In 2014, our brand highlights included:
• Kona Brewing launched the biggest integrated media campaign in our company’s history, including broadcast, social and out of home assets. Our
“Dear Mainland” TV ads playfully encouraged audiences in target mainland Kona markets to bring more of Kona’s Liquid Aloha into their lives.
• Widmer Brothers kicked off an ambitious 30-year anniversary celebration, which included revisiting 30 beer recipes from the brewery’s history,
with bottle artwork designed by 30 local Portland artists, a collaboration series with six different innovative Oregon breweries, and a proud
renewed focus on Hefe, America’s Original Hefeweizen.
• Redhook continued its winning partnership strategy to attract the cross-over craft beer drinker, which includes brewing more Game Changer
for consumers in key accounts like Buffalo Wild Wings and bringing beers to sports fans in Redhook’s home market of Washington.
• Omission rose to become the #1 beer in the gluten-free beer category within just three years of launch and continued to build awareness
among the healthy lifestyle, gluten-avoider audience.
• Square Mile continued to grow in the Northwest, becoming the #2 cider in the region at the end of 2014.
• KCCO, our beer brand in partnership with social media powerhouse theCHIVE, was the spotlight at numerous offline CHIVEfests held across the U.S.
INNOVATION & LEADERSHIP IN OUR OPERATIONS
• One of our most noteworthy accomplishments in 2014 was getting our Memphis brewing operations up and running in time for the busy
summer selling season. The expanded capability brings significant opportunities to drive efficiencies in how we leverage our national brewing
footprint and continue growing our gross margin to achieve our long-term gross margin targets.
• Continuing our commitment to sustainability, we issued our first-ever Annual Sustainability Report in 2014, highlighting our focus on water
• We continued to implement initiatives around optimizing our supply chain, including leveraging freight efficiencies, warehouse enhancements
reduction, energy savings and recycling.
and planning.
A NEW LEADERSHIP TEAM
2014 brought a new leadership to the helm of Craft Brew Alliance. Former President of Commercial Operations Andy Thomas stepped into the role
of CEO and appointed a new Executive Leadership Team (ELT) to help direct the company through its next stage of growth. The new ELT is comprised
of eight senior leaders who, combined, bring more than 200 years of beer leadership to CBA.
OUR VISION
We are excited about the future ahead and the opportunities to continue realizing the potential of our differentiated strategy. In 2014, CBA’s
leadership announced its vision for 2020 to the entire company:
CRAFT BREW ALLIANCE, INC.
DIRECTORS
KURT R. WIDMER
CHAIRMAN OF THE BOARD
Craft Brew Alliance, Inc.
KEVIN R. KELLY
DIRECTOR
Sisters of Providence
Pension Trustees
TIMOTHY P. BOYLE
PRESIDENT & CHIEF
EXECUTIVE OFFICER
Columbia Sportswear Company
MARC J. CRAMER
FINANCE DIRECTOR
The Bill Healy Foundation
RANDALL S. JOZWIAKOWSKI
VICE PRESIDENT OF
WHOLESALER DEVELOPMENT
Anheuser-Busch, LLC
THOMAS D. LARSON
SENIOR ASSOCIATE GENERAL COUNSEL
DAVID R. LORD
DIRECTOR
Anheuser-Busch, LLC
Pioneer Newspapers, Inc.
JOHN D. ROGERS, JR.
DIRECTOR OF CONSUMER SALES
Lile International Corporation
ANDREW J. THOMAS
CHIEF EXECUTIVE OFFICER
KENNETH C. KUNZE
CHIEF MARKETING OFFICER
J. SCOTT MENNEN
VICE PRESIDENT OF
BREWERY OPERATIONS
JOHN W. GLICK
VICE PRESIDENT OF SUPPLY
CHAIN & EMERGING BUSINESS
EXECUTIVE OFFICERS
PRINCIPAL CORPORATE OFFICE
Craft Brew Alliance, Inc.
929 N. Russell Street, Portland, Oregon 97227
(503) 331-7270
www.craftbrew.com
CORPORATE INFORMATION
STOCK EXCHANGE LISTING
NASDAQ – Global Market
Under the symbol – “BREW”
2015 ANNUAL
SHAREHOLDER MEETING
May 20, 2015 1:00 PM PDT
Widmer Brothers Banquet Room
947 N. Russell Street
Portland, Oregon 97227
CORPORATE COUNSEL
Miller Nash LLP
Attorneys at Law
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Moss Adams LLP
STOCK TRANSFER AGENT
Computershare Shareowner Services
PO Box 30170, College Station, TX 77842
CBA aspires to be the leader in brewing, branding, and
bringing to market world-class American craft beers.
We recognize the level of effort required to achieve this leadership and believe that our focus and
strategy, along with the vast talent and commitment of our 800 employees, will continue to drive
us forward.
In 2015 and beyond, we commit to continued focus on our financial and gross margin goals and to
building CBA’s long-term health. We also commit to fostering a culture of innovation and respect
so that we may continue to attract great talent, strategic partners and proud shareholders. On
behalf of everyone at CBA, I would like to raise a virtual pint and thank you for your continued
support of our company.
Sincerely,
Andy Thomas
CEO • Craft Brew Alliance
THE HAWAIIAN BREWERY
74-5612 Pawai Place
Kailua-Kona, Hawaii 96740
(808) 334-2739
Kona Pub & Brewery
Koko Marina Pub
Hawaii Kai, Oahu
Both Kona Brewing Branded
THE OREGON BREWERY
924 N. Russell Street
Portland, Oregon 97227
(503) 331-7270
Widmer Brothers Pub
Widmer Brothers Branded
Toll Free - (877) 255-1004
Outside the U.S. - (201) 680-6578
Hearing Impaired - (800) 231-5469
TDD International - (201) 680-6610
www.computershare.com/investor
THE WASHINGTON
BREWERY
14300 N.E. 145th Street
Woodinville, Washington 98072
(425) 483-3232
Forecasters Public House
Redhook Branded
LOCATIONS
THE NEW HAMPSHIRE
BREWERY
35 Pease Drive
Pease International Tradesport
Portsmouth, New Hampshire 03801
(603) 430-8600
Cataqua Public House
Redhook Branded
THE MEMPHIS
PARTNERSHIP BREWERY
5151 Raines Road
Memphis, Tennessee 38118
THE LOS ANGELES
NATIONAL SALES OFFICE
315 Culver Boulevard
Playa del Rey, California 90293
CRAFT BREW ALLIANCE, INC.2015 ANNUAL REPORT