##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended June 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-26542
 CRAFT BREWERS ALLIANCE, INC.
  Washington
    
    91-1141254(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 929 North Russell Street
Portland, Oregon 97227
 (503) 331-7270
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated Filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
  o þ




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##### 



CRAFT BREWERS ALLIANCE, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2010
 TABLE OF CONTENTS
 PagePART I. Financial InformationITEM 1. Financial StatementsBalance Sheets as of June 30, 2010 and December 31, 2009
    
    
    3Statements of Operations for the Three and
Six Months Ended June 30, 2010 and 2009
    
    
    4Statements of Cash Flows for the
Six Months Ended June 30, 2010 and 2009
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29ITEM 4T. Controls and Procedures
    
    
    29PART II. Other InformationITEM 1. Legal Proceedings
    
    
    30ITEM 1A. Risk Factors
    
    
    30ITEM 5. Other Information
    
    
    35ITEM 6. Exhibits
    
    
    36SIGNATURES
    
    
    37EX-10.1EX-10.2EX-10.3EX-10.4EX-10.5EX-31.1EX-31.2EX-32.1EX-99.1
  2




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##### Table of Contents



PART I.
 
 ITEM 1. Financial Statements
 CRAFT BREWERS ALLIANCE, INC.
 
 BALANCE SHEETS
 (Unaudited)June 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands exceptper share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11
    
    
    $
    11Accounts receivable, net of allowance for doubtful
accounts of $25 and $50
at June 30, 2010 and December 31, 2009, respectively
    
    
    15,544
    
    
    
    11,122Inventories
    
    
    9,242
    
    
    
    9,487Deferred income tax asset, net
    
    
    991
    
    
    
    970Other current assets
    
    
    2,208
    
    
    
    3,941Total current assets
    
    
    27,996
    
    
    
    25,531Property, equipment and leasehold improvements, net
    
    
    95,221
    
    
    
    97,339Equity investments
    
    
    6,105
    
    
    
    5,702Intangible and other assets, net
    
    
    12,802
    
    
    
    13,013Total assets
    
    $
    142,124
    
    
    $
    141,585LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,676
    
    
    $
    14,672Accrued salaries, wages, severance and payroll taxes
    
    
    3,321
    
    
    
    4,432Refundable deposits
    
    
    5,854
    
    
    
    6,288Other accrued expenses
    
    
    1,948
    
    
    
    1,185Current portion of long-term debt and capital lease obligations
    
    
    1,526
    
    
    
    1,481Total current liabilities
    
    
    31,325
    
    
    
    28,058Long-term debt and capital lease obligations, net of current portion
    
    
    18,774
    
    
    
    24,685Fair value of derivative financial instruments
    
    
    976
    
    
    
    842Deferred income tax liability, net
    
    
    8,108
    
    
    
    7,015Other liabilities
    
    
    377
    
    
    
    353Commitments and ContingenciesCommon stockholders equity:Common stock, par value $0.005 per share, 50,000,000 shares
authorized; 17,105,063 shares
and 17,074,063 shares at June 30, 2010 and December
31, 2009 issued
and outstanding, respectively
    
    
    85
    
    
    
    85Additional paid-in capital
    
    
    122,779
    
    
    
    122,682Accumulated other comprehensive loss
    
    
    (586
    )
    
    
    (478
    )Retained deficit
    
    
    (39,714
    )
    
    
    (41,657
    )Total common stockholders equity
    
    
    82,564
    
    
    
    80,632Total liabilities and common stockholders equity
    
    $
    142,124
    
    
    $
    141,585
 The accompanying notes are an integral part of these financial statements.
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CRAFT BREWERS ALLIANCE, INC.
 
 STATEMENTS OF OPERATIONS
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share amounts)Sales
    
    $
    39,645
    
    
    $
    37,959
    
    
    $
    68,967
    
    
    $
    67,680Less excise taxes
    
    
    2,406
    
    
    
    2,323
    
    
    
    4,276
    
    
    
    4,306Net sales
    
    
    37,239
    
    
    
    35,636
    
    
    
    64,691
    
    
    
    63,374Cost of sales
    
    
    26,841
    
    
    
    26,766
    
    
    
    47,446
    
    
    
    49,247Gross profit
    
    
    10,398
    
    
    
    8,870
    
    
    
    17,245
    
    
    
    14,127Selling, general and administrative expenses
    
    
    7,545
    
    
    
    6,259
    
    
    
    13,750
    
    
    
    12,026Merger-related expenses
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    225Operating income
    
    
    2,853
    
    
    
    2,498
    
    
    
    3,495
    
    
    
    1,876Income from equity investments
    
    
    338
    
    
    
    99
    
    
    
    423
    
    
    
    128Interest expense
    
    
    (409
    )
    
    
    (571
    )
    
    
    (808
    )
    
    
    (1,137
    )Interest and other income, net
    
    
    75
    
    
    
    79
    
    
    
    128
    
    
    
    170Income before income taxes
    
    
    2,857
    
    
    
    2,105
    
    
    
    3,238
    
    
    
    1,037Income tax provision
    
    
    1,123
    
    
    
    366
    
    
    
    1,295
    
    
    
    373Net income
    
    $
    1,734
    
    
    $
    1,739
    
    
    $
    1,943
    
    
    $
    664Basic and diluted earnings per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.04
 The accompanying notes are an integral part of these financial statements.
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CRAFT BREWERS ALLIANCE, INC.
 
 STATEMENTS OF CASH FLOWS
 Six MonthsEnded June 30,2010
    
    
    2009(In thousands)Operating ActivitiesNet income
    
    $
    1,943
    
    
    $
    664Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,589
    
    
    
    3,700Income from equity investments
    
    
    (424
    )
    
    
    (128
    )Deferred income taxes
    
    
    1,109
    
    
    
    362Provision for inventory obsolescence
    
    
    299
    
    
    
    99Stock-based compensation
    
    
    74
    
    
    
    36Other
    
    
    (42
    )
    
    
    (3
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,397
    )
    
    
    (532
    )Inventories
    
    
    (257
    )
    
    
    (1,385
    )Income tax receivable and other current assets
    
    
    1,713
    
    
    
    (274
    )Other assets
    
    
    39
    
    
    
    40Accounts payable and other accrued expenses
    
    
    4,816
    
    
    
    641Accrued salaries, wages, severance and payroll taxes
    
    
    (1,111
    )
    
    
    (92
    )Refundable deposits
    
    
    (538
    )
    
    
    (355
    )Net cash provided by operating activities
    
    
    6,813
    
    
    
    2,773Investing ActivitiesExpenditures for property, equipment and leasehold improvements
    
    
    (1,090
    )
    
    
    (1,431
    )Proceeds from sale of property, equipment and leasehold improvements
    
    
    65
    
    
    
    28Other, net
    
    
    20
    
    
    
    Net cash used in investing activities
    
    
    (1,005
    )
    
    
    (1,403
    )Financing ActivitiesPrincipal payments on debt and capital lease obligations
    
    
    (731
    )
    
    
    (687
    )Net repayments under revolving line of credit
    
    
    (5,100
    )
    
    
    (500
    )Issuance of common stock
    
    
    23
    
    
    
    53Net cash used in financing activities
    
    
    (5,808
    )
    
    
    (1,134
    )Increase in cash and cash equivalents
    
    
    
    
    
    
    236Cash and cash equivalents:Beginning of period
    
    
    11
    
    
    
    11End of period
    
    $
    11
    
    
    $
    247Supplemental DisclosuresCash paid for interest
    
    $
    870
    
    
    $
    1,194Cash paid for income taxes
    
    $
    205
    
    
    $
    18
 The accompanying notes are an integral part of these financial statements.
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CRAFT BREWERS ALLIANCE, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 1. Basis of Presentation
  Recent Accounting Pronouncements
 Consolidation
 Overall.
 2. Inventories
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials
    
    $
    2,990
    
    
    $
    3,660Work in process
    
    
    2,356
    
    
    
    2,023Finished goods
    
    
    2,487
    
    
    
    1,647Packaging materials
    
    
    128
    
    
    
    892Promotional merchandise
    
    
    1,195
    
    
    
    1,184Pub food, beverages and supplies
    
    
    86
    
    
    
    81$
    9,242
    
    
    $
    9,487
  3. Other Current Assets
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Deposits paid to keg lessor
    
    $
    1,795
    
    
    $
    3,279Prepaid property taxes
    
    
    
    
    
    
    171Prepaid insurance
    
    
    83
    
    
    
    88Other
    
    
    330
    
    
    
    403$
    2,208
    
    
    $
    3,941
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 4. Equity Investments
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Fulton Street Brewery, LLC (FSB)
    
    $
    4,922
    
    
    $
    4,544Kona Brewery LLC (Kona)
    
    
    1,183
    
    
    
    1,158$
    6,105
    
    
    $
    5,702
 FSB
  Kona
   Subsequent Events
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 5. Debt and Capital Lease Obligations
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Term loan payable to bank, due July 1, 2018
    
    $
    12,828
    
    
    $
    13,012Line of credit payable to bank, due January 1, 2013
    
    
    1,300
    
    
    
    6,400Promissory notes payable to individual lenders, all due July 1, 2015
    
    
    600
    
    
    
    600Premium on promissory notes
    
    
    552
    
    
    
    587Capital lease obligations on equipment
    
    
    5,020
    
    
    
    5,56720,300
    
    
    
    26,166Less current portion of long-term debt
    
    
    1,526
    
    
    
    1,481$
    18,774
    
    
    $
    24,685
      8




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
  Financial Covenants Required by the
Loan Agreement, as Amended
 Ratio of Funded Debt to EBITDA, as definedFrom September 30, 2010
    
    3.50 to 1From December 31, 2010 and thereafter
    
    3.00 to 1Fixed Charge Coverage Ratio
    
    1.25 to 1
 th
 6. Derivative Financial Instruments and Fair Value Measurement
 Interest Rate Swap Contracts
    9




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Liability Derivatives at June 30, 2010Balance Sheet Location
    
    Fair Value(in thousands)Derivatives designated as hedging instruments under ASC 815Interest rate swap contracts
    
    Non-current liabilities - derivative financial instruments
    
    $
    942Derivatives not designated as hedging instruments under ASC 815Interest rate swap contracts
    
    Non-current liabilities - derivative financial instruments
    
    
    34Total derivatives
    
    
    
    $
    976
  Fair Value Measurements
  Fair Value Measurements and
Disclosures
 Level 1:
    
    Observable inputs (unadjusted) in active markets for identical assets and liabilities;Level 2:
    
    Inputs other than quoted prices included within Level 1 that are either directly or
indirectly observable for the asset or liability, including quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in inactive markets and inputs other than quoted prices that are observable for
the asset or liability;Level 3:

    
    Unobservable inputs for the asset or liability, including situations where there is
little, if any, market activity or data for the asset or liability.
  Fair Value Hierarchy AssessmentLevel 1
    
    Level 2
    
    Level 3
    
    Total(in thousands)Derivative financial instruments  interest
rate swap contracts
    
    $
    
    
    
    $
    976
    
    
    $
    
    
    
    $
    976
 7. Common Stockholders Equity
   10




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Stock Plans
      Stock Option Plan Activity
  Weighted
    
    
    AggregateAverage
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Value(in thousands)
    
    
    (per share)
    
    
    (in thousands)Outstanding at December 31, 2009
    
    
    137
    
    
    $
    2.00
    
    
    $
    67Granted
    
    
    105
    
    
    
    2.39Exercised
    
    
    (13
    )
    
    
    (1.79
    )Outstanding at June 30, 2010
    
    
    229
    
    
    $
    2.19
    
    
    $
    552Exercisable at June 30, 2010
    
    
    101
    
    
    $
    2.20
    
    
    $
    244
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
   Outstanding
    
    
    ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedWeighted

    
    
    Average
    
    
    
    
    
    
    Weighted
    
    
    AverageAverage

    
    
    Remaining
    
    
    
    
    
    
    Average
    
    
    RemainingExercise
    
    
    Contractual
    
    
    
    
    
    
    Exercise
    
    
    ContractualRange of Exercise Prices
    
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price
    
    
    Life(in thousands)
    
    
    (per share)
    
    
    (in years)
    
    
    (in thousands)
    
    
    (per share)
    
    
    (in years)$1.25
    
    to
    
    $
    2.00
    
    
    
    43
    
    
    $
    1.44
    
    
    
    6.3
    
    
    
    20
    
    
    $
    1.64
    
    
    
    3.8$2.01
    
    to
    
    $
    3.00
    
    
    
    170
    
    
    
    2.29
    
    
    
    6.9
    
    
    
    65
    
    
    
    2.14
    
    
    
    2.1$3.01
    
    to
    
    $
    3.15
    
    
    
    16
    
    
    
    3.15
    
    
    
    4.9
    
    
    
    16
    
    
    
    3.15
    
    
    
    4.9$1.25
    
    to
    
    $
    3.15
    
    
    
    229
    
    
    $
    2.19
    
    
    
    6.6
    
    
    
    101
    
    
    $
    2.20
    
    
    
    2.9
 8. Earnings per Share
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share amounts)Numerator for basic and diluted earnings per share:Net income
    
    $
    1,734
    
    
    $
    1,739
    
    
    $
    1,943
    
    
    $
    664Denominator for basic earnings per share:Weighted average common shares outstanding
    
    
    17,084
    
    
    
    16,967
    
    
    
    17,079
    
    
    
    16,957Dilutive effect of stock options on weighted average
common shares
    
    
    47
    
    
    
    24
    
    
    
    34
    
    
    
    5Denominator for diluted earnings per share
    
    
    17,131
    
    
    
    16,991
    
    
    
    17,113
    
    
    
    16,962Basic and diluted earnings per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.04
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 9. Comprehensive Income
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Net income
    
    $
    1,734
    
    
    $
    1,739
    
    
    $
    1,943
    
    
    $
    664Other comprehensive income (loss):Unrealized gains
(losses) on
derivative
financial
instruments, net of
tax
    
    
    (66
    )
    
    
    181
    
    
    
    (108
    )
    
    
    202Comprehensive income
    
    $
    1,668
    
    
    $
    1,920
    
    
    $
    1,835
    
    
    $
    866
 10. Income Taxes
    11. Subsequent Events
 Agreement and Plan of Merger
    13




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
     14




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This quarterly report on Form 10-Q 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 Craft
Brewers Alliance, Inc. (the Company) believes are reasonable, but are by their nature inherently
uncertain. Many possible events or factors could affect the Companys 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
Part II, Item 1A. Risk Factors and
those described from time to time in the Companys 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 quarterly report.
 The following discussion and analysis should be read in conjunction with the Financial
Statements and Notes thereto of the Company included herein, as well as the audited Financial
Statements and Notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2009 (2009 Annual Report). The discussion and analysis includes
period-to-period comparisons of the Companys financial results. Although period-to-period
comparisons may be helpful in understanding the Companys financial results, the Company believes
that they should not be relied upon as an accurate indicator of future performance.
 Overview
    15




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Six months
ended June 30, 2010 compared with six months ended June 30, 2009
  16




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Results of Operations
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    
    106.5
    %
    
    
    106.5
    %
    
    
    106.6
    %
    
    
    106.8
    %Less excise taxes
    
    
    6.5
    
    
    
    6.5
    
    
    
    6.6
    
    
    
    6.8Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    72.1
    
    
    
    75.1
    
    
    
    73.3
    
    
    
    77.7Gross profit
    
    
    27.9
    
    
    
    24.9
    
    
    
    26.7
    
    
    
    22.3Selling, general and
administrative expenses
    
    
    20.2
    
    
    
    17.6
    
    
    
    21.3
    
    
    
    19.0Merger-related expenses
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.4Operating income
    
    
    7.7
    
    
    
    7.0
    
    
    
    5.4
    
    
    
    2.9Income from equity investments
    
    
    0.9
    
    
    
    0.3
    
    
    
    0.7
    
    
    
    0.2Interest expense
    
    
    (1.1
    )
    
    
    (1.6
    )
    
    
    (1.3
    )
    
    
    (1.8
    )Interest and other income, net
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Income before income taxes
    
    
    7.7
    
    
    
    5.9
    
    
    
    5.0
    
    
    
    1.6Income tax provision
    
    
    3.0
    
    
    
    1.0
    
    
    
    2.0
    
    
    
    0.6Net income
    
    
    4.7
    %
    
    
    4.9
    %
    
    
    3.0
    %
    
    
    1.0
    %
 Non-GAAP Financial Measures
  For the TrailingFour Quarters EndedJune 30, 2010(In thousands)Net income
    
    $
    2,166Interest expense
    
    
    1,810Income tax provision
    
    
    1,108Depreciation expense
    
    
    6,425Amortization expense
    
    
    776Other non-cash charges
    
    
    140EBITDA per the loan agreement
    
    $
    12,425
 17




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Three months ended June 30, 2010 compared with three months ended June 30, 2009
  Three MonthsEnded June 30,
    
    
    Increase /
    
    
    %2010
    
    
    2009
    
    
    (Decrease)
    
    
    Change(Dollars in thousands)Sales
    
    $
    39,645
    
    
    $
    37,959
    
    
    $
    1,686
    
    
    
    4.4
    %Less excise taxes
    
    
    2,406
    
    
    
    2,323
    
    
    
    83
    
    
    
    3.6Net sales
    
    
    37,239
    
    
    
    35,636
    
    
    
    1,603
    
    
    
    4.5Cost of sales
    
    
    26,841
    
    
    
    26,766
    
    
    
    75
    
    
    
    0.3Gross profit
    
    
    10,398
    
    
    
    8,870
    
    
    
    1,528
    
    
    
    17.2Selling, general and administrative expenses
    
    
    7,545
    
    
    
    6,259
    
    
    
    1,286
    
    
    
    20.5Merger-related expenses
    
    
    
    
    
    
    113
    
    
    
    (113
    )
    
    
    (100.0
    )Operating income
    
    
    2,853
    
    
    
    2,498
    
    
    
    355
    
    
    
    14.2Income from equity investments
    
    
    338
    
    
    
    99
    
    
    
    239
    
    
    
    241.4Interest expense
    
    
    (409
    )
    
    
    (571
    )
    
    
    (162
    )
    
    
    (28.4
    )Interest and other income, net
    
    
    75
    
    
    
    79
    
    
    
    (4
    )
    
    
    (5.1
    )Income before income taxes
    
    
    2,857
    
    
    
    2,105
    
    
    
    752
    
    
    
    35.7Income tax provision
    
    
    1,123
    
    
    
    366
    
    
    
    757
    
    
    
    206.8Net income
    
    $
    1,734
    
    
    $
    1,739
    
    
    $
    (5
    )
    
    
    (0.3
    )
  Three MonthsEnded June 30,
    
    
    Increase/
    
    
    %2010
    
    
    2009
    
    
    (Decrease)
    
    
    Change(Dollars in thousands)Sales Revenues by CategoryA-B and A-B related (1)
    
    $
    32,234
    
    
    $
    31,471
    
    
    $
    763
    
    
    
    2.4
    %Contract brewing
    
    
    695
    
    
    
    
    
    
    
    695
    
    
    
    Alternating proprietorship
    
    
    3,741
    
    
    
    3,441
    
    
    
    300
    
    
    
    8.7Pubs and other (2)
    
    
    2,975
    
    
    
    3,047
    
    
    
    (72
    )
    
    
    (2.4
    )Total Sales
    
    $
    39,645
    
    
    $
    37,959
    
    
    $
    1,686
    
    
    
    4.4
    %
 
 Note 1 
    
    A-B related revenues include fees earned on wholesaler or distributor sales made via a non-wholesalerNote 2 
    
    Other revenues include international sales, sales of
promotional merchandise and other Gross Sales .
  18




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
    
    The Company generated revenues of $695,000 under the contract brewing arrangement during
the second quarter of 2010. The Company did not have a contract brewing arrangement during the
second quarter of 2009.
    
    Alternating proprietorship fees increased $300,000 from $3.4 million for the second quarter
of 2009 to $3.7 million for the second quarter of 2010. These fees are earned from Kona for
leasing the Oregon Brewery and sales of raw materials during the corresponding periods, and
reflect the increased demand for Kona-branded products in the second quarter of 2010 as
compared with the corresponding quarter a year ago.
 Shipments  Customer
 Three Months Ended June 30,2010 Shipments
    
    
    2009 Shipments
    
    
    Increase /
    
    
    %Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease )
    
    
    Change(In barrels)A-B (1)
    
    
    60,000
    
    
    
    102,500
    
    
    
    162,500
    
    
    
    61,400
    
    
    
    98,600
    
    
    
    160,000
    
    
    
    2,500
    
    
    
    1.6
    %Contract brewing
    
    
    5,900
    
    
    
    
    
    
    
    5,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,900
    
    
    
    Pubs and
other (1,2)
    
    
    2,000
    
    
    
    500
    
    
    
    2,500
    
    
    
    1,500
    
    
    
    900
    
    
    
    2,400
    
    
    
    100
    
    
    
    4.2Total shipped
    
    
    67,900
    
    
    
    103,000
    
    
    
    170,900
    
    
    
    62,900
    
    
    
    99,500
    
    
    
    162,400
    
    
    
    8,500
    
    
    
    5.2
    %
 
 Note 1
    
    2009 Shipments have been reclassified to be consistent with
the 2010 classification.Note 2
    
    Other includes international, pubs and other Pricing and Fees
   19




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Shipments  Brand
 Three Months Ended June 30,2010 Shipments
    
    
    2009 Shipments
    
    
    Increase /
    
    
    %Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease )
    
    
    Change(In barrels)Widmer Brothers
    
    
    37,400
    
    
    
    40,800
    
    
    
    78,200
    
    
    
    38,300
    
    
    
    40,900
    
    
    
    79,200
    
    
    
    (1,000
    )
    
    
    (1.3)
    %Redhook
    
    
    12,500
    
    
    
    34,800
    
    
    
    47,300
    
    
    
    13,300
    
    
    
    33,800
    
    
    
    47,100
    
    
    
    200
    
    
    
    0.4Kona
    
    
    12,100
    
    
    
    27,400
    
    
    
    39,500
    
    
    
    11,300
    
    
    
    24,800
    
    
    
    36,100
    
    
    
    3,400
    
    
    
    9.4Total shipped(1)
    
    
    62,000
    
    
    
    103,000
    
    
    
    165,000
    
    
    
    62,900
    
    
    
    99,500
    
    
    
    162,400
    
    
    
    2,600
    
    
    
    1.6
    %
 
 Note 1 
    
    Total shipments by brand exclude private label shipments produced under the Companys contract brewing arrangements.  Excise Taxes
 Cost of Sales .
  20




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##### Table of Contents



Selling, General and Administrative Expenses
  Merger-Related Expenses
 Income from Equity Investments . Investments.
 Interest Expense.
 21




---



##### Table of Contents



Other Income, net
 Income Taxes .
 Six months ended June 30, 2010 compared with six months ended June 30, 2009
  Six MonthsEnded June 30,
    
    
    Increase /
    
    
    %2010
    
    
    2009
    
    
    (Decrease )
    
    
    Change(Dollars in thousands)Sales
    
    $
    68,967
    
    
    $
    67,680
    
    
    $
    1,287
    
    
    
    1.9
    %Less excise taxes
    
    
    4,276
    
    
    
    4,306
    
    
    
    (30
    )
    
    
    0.7Net sales
    
    
    64,691
    
    
    
    63,374
    
    
    
    1,317
    
    
    
    2.1Cost of sales
    
    
    47,446
    
    
    
    49,247
    
    
    
    (1,801
    )
    
    
    3.7Gross profit
    
    
    17,245
    
    
    
    14,127
    
    
    
    3,118
    
    
    
    22.1Selling, general and administrative expenses
    
    
    13,750
    
    
    
    12,026
    
    
    
    1,724
    
    
    
    14.3Merger-related expenses
    
    
    
    
    
    
    225
    
    
    
    (225
    )
    
    
    (100.0
    )Operating income
    
    
    3,495
    
    
    
    1,876
    
    
    
    1,619
    
    
    
    86.3Income from equity investments
    
    
    423
    
    
    
    128
    
    
    
    295
    
    
    
    230.5Interest expense
    
    
    (808
    )
    
    
    (1,137
    )
    
    
    (329
    )
    
    
    (28.9
    )Interest and other income, net
    
    
    128
    
    
    
    170
    
    
    
    (42
    )
    
    
    (24.7
    )Income before income taxes
    
    
    3,238
    
    
    
    1,037
    
    
    
    2,201
    
    
    
    212.2Income tax provision
    
    
    1,295
    
    
    
    373
    
    
    
    922
    
    
    
    247.2Net income
    
    $
    1,943
    
    
    $
    664
    
    
    $
    1,279
    
    
    
    192.6
    %
 22




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##### Table of Contents



Six MonthsEnded June 30,
    
    
    Increase /
    
    
    %2010
    
    
    2009
    
    
    (Decrease )
    
    
    Change( In thousands )Sales Revenues by CategoryA - B and A - B related(1)
    
    $
    56,334
    
    
    $
    56,426
    
    
    $
    (92
    )
    
    
    (0.2
    )%Contract brewing
    
    
    1,110
    
    
    
    
    
    
    
    1,110
    
    
    
    Alternating proprietorship
    
    
    6,001
    
    
    
    5,647
    
    
    
    354
    
    
    
    6.3Pubs and other(2)
    
    
    5,522
    
    
    
    5,607
    
    
    
    (85
    )
    
    
    (1.5
    )Total Sales
    
    $
    68,967
    
    
    $
    67,680
    
    
    $
    1,287
    
    
    
    1.9
    %
 
 Note 1 
    
    A-B related revenues include fees earned on wholesaler or
distributor sales made via a non-wholesalerNote 2 
    
    Other revenues include international sales, sales of promotional merchandise and other Gross Sales .
  
    
    The decrease in shipments to A-B of 7,100 barrels from shipments of 291,900 barrels in the
first six months of 2009 to 284,800 barrels in the first six months of 2010. Shipments to A-B
for the first six months of 2010 as compared with the corresponding period one year ago were
impacted by the reduction in wholesalers inventories at the end of the second quarter of 2010
as compared to the corresponding period one year ago. The rate of change in depletions, or
sales by the wholesalers to retailers, for the first six months of 2010 increased at a 0.2%
rate from the prior period a year ago.
    
    Additionally, revenues from pubs and other sales decreased by $85,000 for the first six
months of 2010 as compared with the corresponding period a year ago.
 Shipments  Customer
 Six Months Ended June 30,2010-Shipments
    
    
    2009-Shipments
    
    
    Increase /
    
    
    %Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease )
    
    
    Change(In barrels)A-B (1)
    
    
    109,900
    
    
    
    174,900
    
    
    
    284,800
    
    
    
    116,700
    
    
    
    175,200
    
    
    
    291,900
    
    
    
    (7,100
    )
    
    
    (2.4
    )%Contract brewing
    
    
    10,700
    
    
    
    
    
    
    
    10,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,700
    
    
    
    Pubs and other (1,2)
    
    
    3,300
    
    
    
    800
    
    
    
    4,100
    
    
    
    2,700
    
    
    
    1,600
    
    
    
    4,300
    
    
    
    (200
    )
    
    
    (4.7
    )Total shipped
    
    
    123,900
    
    
    
    175,700
    
    
    
    299,600
    
    
    
    119,400
    
    
    
    176,800
    
    
    
    296,200
    
    
    
    3,400
    
    
    
    1.1
    %
 
 Note 1
    
    2009 Shipments have been reclassified to be consistent with the 2010 classification.Note 2
    
    Other includes international, non- wholesalers, pubs and other Pricing and Fees
 23




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Shipments  Brand
 Six Months Ended June 30,2010-Shipments
    
    
    2009-Shipments
    
    
    Increase /
    
    
    %Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease)
    
    
    Change(In barrels)Widmer brand
    
    
    68,000
    
    
    
    71,400
    
    
    
    139,400
    
    
    
    73,300
    
    
    
    70,900
    
    
    
    144,200
    
    
    
    (4,800
    )
    
    
    (3.3
    )%Redhook brand
    
    
    23,500
    
    
    
    61,800
    
    
    
    85,300
    
    
    
    25,900
    
    
    
    67,600
    
    
    
    93,500
    
    
    
    (8,200
    )
    
    
    (8.8
    )Kona brand
    
    
    21,700
    
    
    
    42,500
    
    
    
    64,200
    
    
    
    20,200
    
    
    
    38,300
    
    
    
    58,500
    
    
    
    5,700
    
    
    
    9.7Total shipped(1)
    
    
    113,200
    
    
    
    175,700
    
    
    
    288,900
    
    
    
    119,400
    
    
    
    176,800
    
    
    
    296,200
    
    
    
    (7,300
    )
    
    
    (2.5
    )%
 
 Notes :1 
    
    Total shipments by brand exclude private label shipments produced under the Companys contract brewing arrangement.  Excise Taxes
 Cost of Sales .
 24




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Selling, General and Administrative Expenses
  25




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##### Table of Contents



Merger-Related Expenses
 Income from Equity Investments .
 Interest Expense.
 Other Income, net
 Income Taxes .
 Liquidity and Capital Resources
   26




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##### Table of Contents



Financial Covenants Required by the  Loan Agreement, as Amended
 Ratio of Funded Debt to EBITDA , as definedFrom September 30, 2010
    
    
    3.50 to 1From December 31, 2010 and thereafter
    
    
    3.00 to 1Fixed Charge Coverage Ratio
    
    
    1.25 to 1
 th
 27




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##### Table of Contents



Trend
  Critical Accounting Policies and Estimates
   Income Taxes . Income Taxes
  28




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##### Table of Contents



Recent Accounting Pronouncements
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 Derivatives and Hedging.
  
 ITEM 4T. Controls and Procedures
    29




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##### Table of Contents



PART II. Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  The proposed merger with Kona Brewing Co., Inc. may not occur, and failure to complete the
transaction may have a negative impact on our stock price and our future business and financial
results.
   
    
    Our failure to pursue other beneficial opportunities as a
result of the focus of management on the KBC Merger,
without realizing any of the anticipated benefits of
completing the transaction;
    
    a decline in market price of our common stock; and
    
    our costs related to the KBC Merger, such as legal,
professional and accounting fees, must be paid even if the
merger is not completed.
  30




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##### Table of Contents



Even if the KBC Merger is completed, the market price of our common stock may decline as a
result of the KBC Merger.
 
    
    we do not achieve the perceived benefits of the KBC Merger as rapidly or to the
extent anticipated by financial or industry analysts or investors;
    
    the effect of the KBC Merger on our business and prospects does not meet the
expectations of financial or industry analysts or investors; or    
    investors react negatively to the effect of the KBC Merger on their equity ownership.
 Even if the KBC Merger is completed, we may be unable to successfully integrate our operations
and realize all of the anticipated benefits of the KBC Merger.
 
    
    maintaining operational, financial and management controls, reporting systems and procedures;
    
    coordinating geographically disparate organizations, systems and facilities;
    
    assimilating personnel with diverse business backgrounds;
    
    integrating distinct corporate cultures;
    
    consolidating operations;
    
    retaining key employees; and
    
    preserving collaboration, distribution and other important relationships of both companies.
  If we fail to implement and maintain proper and effective internal controls in our efforts to
integrate KBC, our ability to produce accurate financial statements could be impaired, which could
adversely affect our business and investors perceptions.
 Even if the KBC Merger is completed, our shareholders may not realize a benefit from the KBC
Merger commensurate with the ownership dilution they will experience in connection with the KBC
Merger.
 Our business is sensitive to reductions in discretionary consumer spending, which may result
from the prolonged U.S. economic recession.
 31




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##### Table of Contents



Increased competition could adversely affect sales and results of operations.
 We are dependent upon our continuing relationship with Anheuser-Busch, Incorporated (A-B)
and the current distribution network.
  Our agreements with A-B place limitations on our ability to engage in or reject certain
transactions, including acquisitions and changes of control.
 A-B has significant control and influence over us.
 The impact of A-Bs ownership by Anheuser-Busch InBev, a global consumer products
conglomerate, on our business remains unclear.
 32




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##### Table of Contents



We are dependent on our distributors for the sale of our products.
 We are dependent on certain A-B information systems and operational support.
 Operating breweries at production levels substantially below their current designed capacities
could negatively impact our financial results.
 Our sales are concentrated in the Pacific Northwest and California.
 The craft beer business is seasonal in nature, and we are likely to experience fluctuations in
results of operations and financial condition.
 Changes in consumer preferences or public attitudes about alcohol could decrease demand for
our products.
 33




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##### Table of Contents



We are dependent upon the services of our key personnel.
 Our gross margin may fluctuate.
 We are subject to governmental regulations affecting our breweries and pubs.
  An increase in excise taxes could adversely affect our financial condition and results of
operations.
 Changes in state laws regarding distribution arrangements may adversely impact our operations.
 34




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##### Table of Contents



We may experience a shortage of kegs necessary to distribute draft beer.
 We are dependent on certain suppliers for key raw materials, packaging materials and
production inputs.
 Loss of income tax benefits could negatively impact our results of operations.
 A small number of shareholders hold a significant ownership percentage of the Company and
uncertainty over their continuing ownership plans could cause the market price of our common stock
to decline.
 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.
 
 ITEM 5. Other Information
   35




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##### Table of Contents



ITEM 6. Exhibits
  2.1
    
    Agreement and Plan of Merger among Craft Brewers Alliance, Inc., Kona Brewery
Co., Inc. and related parties, dated July 31, 2010 (Incorporated by reference
from Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on August
3, 2010)10.1
    
    Letter of Agreement between the Registrant and Kurt R. Widmer dated May 26, 201010.2
    
    Letter of Agreement between the Registrant and Robert P. Widmer dated May 26, 201010.3
    
    Form of Nonstatutory Stock Option Agreement (Executive Officer Grants) for the
2007 Stock Option Plan10.4
    
    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.10.5
    
    Second Amendment dated August 6, 2010 to Master Distributor Agreement dated as
of July 1, 2004 between the Registrant and Anheuser-Busch, Incorporated31.1
    
    Certification of Chief Executive Officer of Craft Brewers Alliance, Inc. pursuant
to Exchange Act Rule 13a-14(a)31.2
    
    Certification of Chief Financial Officer of Craft Brewers Alliance, Inc. pursuant
to Exchange Act Rule 13a-14(a)32.1
    
    Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 135099.1
    
    Press release dated August 13, 2010
 36




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SIGNATURES
  CRAFT BREWERS ALLIANCE, INC.August 13, 2010
    By:
    /s/ Joseph K. OBrienJoseph K. OBrienController and Chief Accounting Officer 37