##### 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 September 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(Do not check if a smaller reporting company)
Smaller Reporting Company þ  o þ




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##### 



CRAFT BREWERS ALLIANCE, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2010
 TABLE OF CONTENTS
 PagePART I.
    
    Financial InformationITEM 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
    
    
    5Consolidated Notes to Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition  and Results of Operations
    
    
    16ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30ITEM 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    Other InformationITEM 1.
    
    Legal Proceedings
    
    
    31ITEM 1A.
    
    Risk Factors
    
    
    31ITEM 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    37EX-10.1EX-10.2EX-10.3EX-10.4EX-31.1EX-31.2EX-32.1EX-99.1
  2




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PART I.
 
 ITEM 1.
    
    Financial Statements
 
 CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands exceptper share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13
    
    
    $
    11Accounts receivable, net of allowance for doubtful accounts of $25 and $50
at September 30, 2010 and December 31, 2009, respectively
    
    
    13,065
    
    
    
    11,122Inventories
    
    
    9,065
    
    
    
    9,487Deferred income tax asset, net
    
    
    843
    
    
    
    970Other current assets
    
    
    2,044
    
    
    
    3,941Total current assets
    
    
    25,030
    
    
    
    25,531Property, equipment and leasehold improvements, net
    
    
    94,216
    
    
    
    97,339Equity investments
    
    
    6,193
    
    
    
    5,702Intangible and other assets, net
    
    
    12,809
    
    
    
    13,013Total assets
    
    $
    138,248
    
    
    $
    141,585LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,564
    
    
    $
    14,672Accrued salaries, wages, severance and payroll taxes
    
    
    2,992
    
    
    
    4,432Refundable deposits
    
    
    6,361
    
    
    
    6,288Other accrued expenses
    
    
    1,131
    
    
    
    1,185Current portion of long-term debt and capital lease obligations
    
    
    1,550
    
    
    
    1,481Total current liabilities
    
    
    28,598
    
    
    
    28,058Long-term debt and capital lease obligations, net of current portion
    
    
    17,056
    
    
    
    24,685Fair value of derivative financial instruments
    
    
    1,004
    
    
    
    842Deferred income tax liability, net
    
    
    8,190
    
    
    
    7,015Other liabilities
    
    
    387
    
    
    
    353Commitments and ContingenciesCommon stockholders equity:Common stock, par value $0.005 per share, 50,000,000 shares authorized; 17,147,053 shares
and 17,074,063 shares at September 30, 2010 and December 31, 2009 issued
and outstanding, respectively
    
    
    86
    
    
    
    85Additional paid-in capital
    
    
    122,882
    
    
    
    122,682Accumulated other comprehensive loss
    
    
    (617
    )
    
    
    (478
    )Retained deficit
    
    
    (39,338
    )
    
    
    (41,657
    )Total common stockholders equity
    
    
    83,013
    
    
    
    80,632Total liabilities and common stockholders equity
    
    $
    138,248
    
    
    $
    141,585
 The accompanying notes are an integral part of these financial statements.
 3




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share amounts)Sales
    
    $
    39,097
    
    
    $
    34,255
    
    
    $
    108,064
    
    
    $
    101,935Less excise taxes
    
    
    2,379
    
    
    
    2,216
    
    
    
    6,655
    
    
    
    6,522Net sales
    
    
    36,718
    
    
    
    32,039
    
    
    
    101,409
    
    
    
    95,413Cost of sales
    
    
    28,090
    
    
    
    24,714
    
    
    
    75,536
    
    
    
    73,961Gross profit
    
    
    8,628
    
    
    
    7,325
    
    
    
    25,873
    
    
    
    21,452Selling, general and administrative expenses
    
    
    7,717
    
    
    
    6,737
    
    
    
    21,467
    
    
    
    18,763Merger-related expenses
    
    
    353
    
    
    
    
    
    
    
    353
    
    
    
    225Operating income
    
    
    558
    
    
    
    588
    
    
    
    4,053
    
    
    
    2,464Income from equity investments
    
    
    263
    
    
    
    196
    
    
    
    686
    
    
    
    324Interest expense
    
    
    (357
    )
    
    
    (531
    )
    
    
    (1,165
    )
    
    
    (1,668
    )Interest and other income, net
    
    
    75
    
    
    
    88
    
    
    
    203
    
    
    
    258Income before income taxes
    
    
    539
    
    
    
    341
    
    
    
    3,777
    
    
    
    1,378Income tax provision
    
    
    163
    
    
    
    247
    
    
    
    1,458
    
    
    
    620Net income
    
    $
    376
    
    
    $
    94
    
    
    $
    2,319
    
    
    $
    758Basic and diluted earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.04
 The accompanying notes are an integral part of these financial statements.
 4




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine MonthsEnded September 30,2010
    
    
    2009(In thousands)Operating ActivitiesNet income
    
    $
    2,319
    
    
    $
    758Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,230
    
    
    
    5,528Income from equity investments
    
    
    (686
    )
    
    
    (324
    )Deferred income taxes
    
    
    1,400
    
    
    
    601Stock-based compensation
    
    
    85
    
    
    
    40Other
    
    
    (89
    )
    
    
    (42
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,918
    )
    
    
    2,527Inventories
    
    
    204
    
    
    
    (849
    )Income tax receivable and other current assets
    
    
    1,743
    
    
    
    931Other assets
    
    
    25
    
    
    
    (15
    )Accounts payable and other accrued expenses
    
    
    1,978
    
    
    
    (3,613
    )Accrued salaries, wages, severance and payroll taxes
    
    
    (1,440
    )
    
    
    597Refundable deposits and other liabilities
    
    
    (99
    )
    
    
    (293
    )Net cash provided by operating activities
    
    
    8,752
    
    
    
    5,846Investing ActivitiesExpenditures for property, equipment and leasehold improvements
    
    
    (1,611
    )
    
    
    (1,867
    )Proceeds from sale of property, equipment and leasehold improvements
    
    
    102
    
    
    
    61Other
    
    
    195
    
    
    
    Net cash used in investing activities
    
    
    (1,314
    )
    
    
    (1,806
    )Financing ActivitiesPrincipal payments on debt and capital lease obligations
    
    
    (1,102
    )
    
    
    (1,036
    )Net repayments under revolving line of credit
    
    
    (6,400
    )
    
    
    (2,500
    )Issuance of common stock
    
    
    116
    
    
    
    208Amounts paid for debt issue costs
    
    
    (50
    )
    
    
    Net cash used in financing activities
    
    
    (7,436
    )
    
    
    (3,328
    )Increase in cash and cash equivalents
    
    
    2
    
    
    
    712Cash and cash equivalents:Beginning of period
    
    
    11
    
    
    
    11End of period
    
    $
    13
    
    
    $
    723Supplemental DisclosuresCash paid for interest
    
    $
    1,258
    
    
    $
    1,761Cash paid
(received) for income taxes
    
    $
    210
    
    
    $
    (771
    )
 The accompanying notes are an integral part of these financial statements.
 5




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 1. Basis of Presentation
  Organization
 Subsequent Events
  Recent Accounting Pronouncements
 Consolidation
 Overall.
 2. Inventories
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials
    
    $
    2,851
    
    
    $
    3,660Work in process
    
    
    2,538
    
    
    
    2,023Finished goods
    
    
    2,095
    
    
    
    1,647Packaging materials
    
    
    342
    
    
    
    892Promotional merchandise
    
    
    1,147
    
    
    
    1,184Pub food, beverages and supplies
    
    
    92
    
    
    
    81$
    9,065
    
    
    $
    9,487
  3. Other Current Assets
  6




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Deposits paid to keg lessor
    
    $
    1,436
    
    
    $
    3,279Prepaid property taxes
    
    
    
    
    
    
    171Prepaid insurance
    
    
    103
    
    
    
    88Other
    
    
    505
    
    
    
    403$
    2,044
    
    
    $
    3,941
 4. Equity Investments
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Fulton Street Brewery, LLC (FSB)
    
    $
    5,085
    
    
    $
    4,544Kona Brewery LLC (Kona)
    
    
    1,108
    
    
    
    1,158$
    6,193
    
    
    $
    5,702
 FSB
  Kona
   Subsequent Events
 7




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 5. Debt and Capital Lease Obligations
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Term loan payable to bank, due July 1, 2018
    
    $
    12,735
    
    
    $
    13,012Line of credit payable to bank, due September 30, 2015 (as of
September 30, 2010)
    
    
    
    
    
    
    6,400Promissory notes payable to individual lenders, all due July 1, 2015
    
    
    600
    
    
    
    600Premium on promissory notes
    
    
    528
    
    
    
    587Capital lease obligations on equipment
    
    
    4,743
    
    
    
    5,56718,606
    
    
    
    26,166Less current portion of long-term debt
    
    
    1,550
    
    
    
    1,481$
    17,056
    
    
    $
    24,685
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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
   th
 6. Derivative Financial Instruments and Fair Value Measurement
 Interest Rate Swap Contracts
  Derivatives and Hedging
   9




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 September 30,
    
    
    December 31,Balance Sheet Location
    
    
    2010
    
    
    2009(in thousands)Derivative instruments in liability positions:Derivatives designated as hedging instruments under ASC 815Interest rate swap contracts
    
    Non-current liabilities
 derivative financial instruments
    
    $
    991
    
    
    $
    768Derivatives not designated as hedging instruments under ASC 815Interest rate swap contracts
    
    Non-current liabilities  derivative financial instruments
    
    
    13
    
    
    
    74$
    1,004
    
    
    $
    842
  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)September 30, 2010Derivative financial instruments  interest
rate swap contracts
    
    $
    
    
    
    $
    1,004
    
    
    $
    
    
    
    $
    1,004December 31, 2009Derivative financial instruments  interest
rate swap contracts
    
    $
    
    
    
    $
    842
    
    
    $
    
    
    
    $
    842
 7. Common Stockholders Equity
   10




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED 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
    
    
    (55
    )
    
    
    2.11Outstanding at September 30, 2010
    
    
    187
    
    
    $
    2.19
    
    
    $
    1,102Exercisable at September 30, 2010
    
    
    60
    
    
    $
    2.19
    
    
    $
    321
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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
    Outstanding
    
    
    ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageExercise
    
    
    Remaining
    
    
    
    
    
    
    Exercise
    
    
    RemainingRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Contractual Life
    
    
    Options
    
    
    Price
    
    
    Contractual Life(in thousands)
    
    
    (per share)
    
    
    (in years)
    
    
    (in thousands)
    
    
    (per share)
    
    
    (in years)$1.25 to $2.00
    
    
    40
    
    
    $
    1.41
    
    
    
    6.4
    
    
    
    18
    
    
    $
    1.61
    
    
    
    4.0$2.01 to $3.00
    
    
    135
    
    
    
    2.34
    
    
    
    7.9
    
    
    
    30
    
    
    
    2.16
    
    
    
    2.3$3.01 to $3.15
    
    
    12
    
    
    
    3.15
    
    
    
    4.6
    
    
    
    12
    
    
    
    3.15
    
    
    
    4.6$1.25 to $3.15
    
    
    187
    
    
    $
    2.19
    
    
    
    7.4
    
    
    
    60
    
    
    $
    2.19
    
    
    
    3.3
 8. Earnings per Share
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share amounts)Numerator for basic and diluted earnings per share:Net income
    
    $
    376
    
    
    $
    94
    
    
    $
    2,319
    
    
    $
    758Denominator for basic earnings per share:Weighted average common shares outstanding
    
    
    17,119
    
    
    
    17,026
    
    
    
    17,093
    
    
    
    16,981Dilutive effect of stock options on weighted
average
common shares
    
    
    113
    
    
    
    76
    
    
    
    60
    
    
    
    33Denominator for diluted earnings per share
    
    
    17,232
    
    
    
    17,102
    
    
    
    17,153
    
    
    
    17,014Basic and diluted earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.04
  9. Comprehensive Income
  12




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Net income
    
    $
    376
    
    
    $
    94
    
    
    $
    2,319
    
    
    $
    758Other comprehensive income (loss):Unrealized gains
(losses) on
derivative
financial
instruments, net of
tax
    
    
    (31
    )
    
    
    (42
    )
    
    
    (139
    )
    
    
    160Comprehensive income
    
    $
    345
    
    
    $
    52
    
    
    $
    2,180
    
    
    $
    918
 10. Income Taxes
    11. Subsequent Events
 Merger with KBC
   13




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
    Accounting for the Acquisition of KBC
  (in thousands)Fair value of common stock issued
    
    $
    11,702Cash
consideration paid
    
    
    6,116Total consideration transferred
    
    $
    17,818
   (in thousands)KBC assets acquired and liabilities assumed:Current assets
    
    $
    4,827Property, equipment and leasehold improvements
    
    
    4,210Trade name and trademarks
    
    
    4,600Intangible assets  non-compete agreements
    
    
    440Total assets acquired
    
    
    14,077Current liabilities
    
    
    (4,109
    )Interest
bearing liabilities
    
    
    (1,421
    )Deferred income tax liability, net and other noncurrent liabilities
    
    
    (2,305
    )Total liabilities assumed
    
    
    (7,835
    )Net assets acquired
    
    
    6,242Excess of purchase price over net assets acquired
    
    
    11,576Plus adjustments to Company assets and liabilities:Elimination
of investment in Kona
    
    
    1,108Incremental
direct costs incurred by the
Company
    
    
    921,200Goodwill recorded
    
    $
    12,776
  14




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CRAFT BREWERS ALLIANCE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
 Unaudited Pro Forma Results of Operations
  Pro Forma Results
    
    Pro Forma ResultsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009(In thousands)Net sales
    
    $
    35,150
    
    
    $
    31,384
    
    
    $
    98,649
    
    
    $
    93,552Gross profit
    
    $
    10,994
    
    
    $
    8,978
    
    
    $
    32,142
    
    
    $
    26,864Income before income taxes
    
    $
    369
    
    
    $
    122
    
    
    $
    3,609
    
    
    $
    1,367Net income
    
    $
    636
    
    
    $
    (26
    )
    
    $
    2,592
    
    
    $
    779Basic and diluted
earnings per share
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.14
    
    
    $
    0.04
   Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Non-recurring
expenses reflected in unaudited pro forma combined results:Merger-related expenses
    
    $
    353
    
    
    $
    
    
    
    $
    353
    
    
    $
    Incentive compensation incurred by KBC
    
    
    449
    
    
    
    
    
    
    
    449
    
    
    
    Cost savings associated with synergies secured at
Merger, including salary costs
    
    
    105
    
    
    
    
    
    
    
    316
    
    
    
    $
    907
    
    
    $
    
    
    
    $
    1,118
    
    
    $
    
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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 I, 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 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
    16




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Nine months ended September 30, 2010 compared with nine months ended September 30, 2009
   Business Combinations
     17




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Results of Operations
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2010
    
    2009
    
    2010
    
    2009Sales
    
    
    106.5
    %
    
    
    106.9
    %
    
    
    106.6
    %
    
    
    106.8
    %Less excise taxes
    
    
    6.5
    
    
    
    6.9
    
    
    
    6.6
    
    
    
    6.8Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    76.5
    
    
    
    77.1
    
    
    
    74.5
    
    
    
    77.5Gross profit
    
    
    23.5
    
    
    
    22.9
    
    
    
    25.5
    
    
    
    22.5Selling, general and
administrative expenses
    
    
    21.0
    
    
    
    21.0
    
    
    
    21.2
    
    
    
    19.7Merger-related expenses
    
    
    1.0
    
    
    
    
    
    
    
    0.3
    
    
    
    0.2Operating income
    
    
    1.5
    
    
    
    1.9
    
    
    
    4.0
    
    
    
    2.6Income from equity investments
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.3Interest expense
    
    
    (0.9
    )
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (1.8
    )Interest and other income, net
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3Income before income taxes
    
    
    1.5
    
    
    
    1.1
    
    
    
    3.7
    
    
    
    1.4Income tax provision
    
    
    0.5
    
    
    
    0.8
    
    
    
    1.4
    
    
    
    0.6Net income
    
    
    1.0
    
    
    
    0.3
    %
    
    
    2.3
    %
    
    
    0.8
    %
 Non-GAAP Financial Measures
   For the TrailingFour Quarters EndedSeptember 30, 2010(In thousands)Net income
    
    $
    2,448Interest expense
    
    
    1,636Income tax provision
    
    
    1,024Depreciation expense
    
    
    6,373Amortization expense
    
    
    642Merger-related expenses
    
    
    353Other non-cash charges
    
    
    159EBITDA per the Loan Agreement
    
    $
    12,635
 18




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##### Table of Contents



Three months ended September 30, 2010 compared with three months ended September 30, 2009
  Three MonthsEnded September 30,
    
    
    Increase /
    
    
    %2010
    
    
    2009
    
    
    (Decrease)
    
    
    Change(Dollars in thousands)Sales
    
    $
    39,097
    
    
    $
    34,255
    
    
    $
    4,842
    
    
    
    14.1
    %Less excise taxes
    
    
    2,379
    
    
    
    2,216
    
    
    
    163
    
    
    
    7.4Net sales
    
    
    36,718
    
    
    
    32,039
    
    
    
    4,679
    
    
    
    14.6Cost of sales
    
    
    28,090
    
    
    
    24,714
    
    
    
    3,376
    
    
    
    13.7Gross profit
    
    
    8,628
    
    
    
    7,325
    
    
    
    1,303
    
    
    
    17.8Selling, general and administrative expenses
    
    
    7,717
    
    
    
    6,737
    
    
    
    980
    
    
    
    14.5Merger-related expenses
    
    
    353
    
    
    
    
    
    
    
    353
    
    
    
    Operating income
    
    
    558
    
    
    
    588
    
    
    
    (30
    )
    
    
    (5.1
    )Income from equity investments
    
    
    263
    
    
    
    196
    
    
    
    67
    
    
    
    34.2Interest expense
    
    
    (357
    )
    
    
    (531
    )
    
    
    (174
    )
    
    
    (32.8
    )Interest and other income, net
    
    
    75
    
    
    
    88
    
    
    
    (13
    )
    
    
    (14.8
    )Income before income taxes
    
    
    539
    
    
    
    341
    
    
    
    198
    
    
    
    58.1Income tax provision
    
    
    163
    
    
    
    247
    
    
    
    (84
    )
    
    
    (34.0
    )Net income
    
    $
    376
    
    
    $
    94
    
    
    $
    282
    
    
    
    300.0
    %
  Three MonthsEnded September 30,Increase /
    
    
    %2010
    
    
    2009
    
    
    (Decrease)
    
    
    Change(Dollars in thousands)Sales Revenues by CategoryA-B and A-B related (1)
    
    $
    30,920
    
    
    $
    28,112
    
    
    $
    2,808
    
    
    
    10.0
    %Contract brewing
    
    
    718
    
    
    
    102
    
    
    
    616
    
    
    
    N/MAlternating proprietorship
    
    
    3,845
    
    
    
    2,782
    
    
    
    1,063
    
    
    
    38.2Pubs and other (2)
    
    
    3,614
    
    
    
    3,259
    
    
    
    355
    
    
    
    10.9Total Sales
    
    $
    39,097
    
    
    $
    34,255
    
    
    $
    4,842
    
    
    
    14.1
    %
 
 Note 1 A-B related revenues include fees earned on wholesaler or distibutor sales made via a non-wholesaler.Note 2 Other revenues include international sales, sales of promotional merchandise and other.N/M      Not Meaningful Gross Sales .
 19




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Shipments  Customer
 Three Months Ended September 30,2010 Shipments
    
    
    2009 Shipments
    
    
    Increase /
    
    
    %Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease)
    
    
    Change(In barrels)A-B (1)
    
    
    59,200
    
    
    
    96,700
    
    
    
    155,900
    
    
    
    59,100
    
    
    
    86,600
    
    
    
    145,700
    
    
    
    10,200
    
    
    
    7.0
    %Contract brewing
    
    
    6,300
    
    
    
    
    
    
    
    6,300
    
    
    
    800
    
    
    
    
    
    
    
    800
    
    
    
    5,500
    
    
    
    N/MPubs and other (1,2)
    
    
    2,500
    
    
    
    700
    
    
    
    3,200
    
    
    
    2,400
    
    
    
    600
    
    
    
    3,000
    
    
    
    200
    
    
    
    6.7Total shipped
    
    
    68,000
    
    
    
    97,400
    
    
    
    165,400
    
    
    
    62,300
    
    
    
    87,200
    
    
    
    149,500
    
    
    
    15,900
    
    
    
    10.6
    %
 
 Note 1 2009 shipments have been reclassified to be consistent with the 2010 classification.Note 2 Other includes international, pubs and other.N/M      Not Meaningful Pricing and Fees
   20




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Shipments  Brand
 Three Months Ended September 30,2010 Shipments
    
    
    2009 Shipments
    
    
    Increase /Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease)
    
    
    % Change(In barrels)Widmer Brothers
    
    
    35,400
    
    
    
    38,300
    
    
    
    73,700
    
    
    
    37,500
    
    
    
    36,800
    
    
    
    74,300
    
    
    
    (600
    )
    
    
    (0.8
    )%Redhook
    
    
    12,400
    
    
    
    33,800
    
    
    
    46,200
    
    
    
    12,700
    
    
    
    31,500
    
    
    
    44,200
    
    
    
    2,000
    
    
    
    4.5Kona
    
    
    13,900
    
    
    
    25,300
    
    
    
    39,200
    
    
    
    11,300
    
    
    
    18,900
    
    
    
    30,200
    
    
    
    9,000
    
    
    
    29.8Total shipped(1)
    
    
    61,700
    
    
    
    97,400
    
    
    
    159,100
    
    
    
    61,500
    
    
    
    87,200
    
    
    
    148,700
    
    
    
    10,400
    
    
    
    7.0
    %
 
 Note 1 
    
    Total shipments by brand exclude private label shipments produced under the Companys contract brewing arrangements.  Excise Taxes
 Cost of Sales .
  21




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##### Table of Contents



Selling, General and Administrative Expenses
   Merger-Related Expenses
 22




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##### Table of Contents



Income from Equity Investments . Investments.
 Interest Expense.
 Other Income, net
 Income Taxes .
 Nine months ended September 30, 2010 compared with nine months ended September 30, 2009
  23




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Nine MonthsEnded September 30,
    
    
    Increase /2010
    
    
    2009
    
    
    (Decrease)
    
    
    % Change(Dollars in thousands)Sales
    
    $
    108,064
    
    
    $
    101,935
    
    
    $
    6,129
    
    
    
    6.0
    %Less excise taxes
    
    
    6,655
    
    
    
    6,522
    
    
    
    133
    
    
    
    2.0Net sales
    
    
    101,409
    
    
    
    95,413
    
    
    
    5,996
    
    
    
    6.3Cost of sales
    
    
    75,536
    
    
    
    73,961
    
    
    
    1,575
    
    
    
    2.1Gross profit
    
    
    25,873
    
    
    
    21,452
    
    
    
    4,421
    
    
    
    20.6Selling, general and administrative expenses
    
    
    21,467
    
    
    
    18,763
    
    
    
    2,704
    
    
    
    14.4Merger-related expenses
    
    
    353
    
    
    
    225
    
    
    
    128
    
    
    
    56.9Operating income
    
    
    4,053
    
    
    
    2,464
    
    
    
    1,589
    
    
    
    64.5Income from equity investments
    
    
    686
    
    
    
    324
    
    
    
    362
    
    
    
    111.7Interest expense
    
    
    (1,165
    )
    
    
    (1,668
    )
    
    
    (503
    )
    
    
    (30.2
    )Interest and other income, net
    
    
    203
    
    
    
    258
    
    
    
    (55
    )
    
    
    (21.3
    )Income before income taxes
    
    
    3,777
    
    
    
    1,378
    
    
    
    1,393
    
    
    
    174.1Income tax provision
    
    
    1,458
    
    
    
    620
    
    
    
    838
    
    
    
    135.2Net income
    
    $
    2,319
    
    
    $
    758
    
    
    $
    555
    
    
    
    205.9
    %
  Nine MonthsEnded September 30,
    
    
    Increase /2010
    
    
    2009
    
    
    (Decrease)
    
    
    % Change(In thousands)Sales Revenues by CategoryA-B and A-B related (1)
    
    $
    87,254
    
    
    $
    84,538
    
    
    $
    2,716
    
    
    
    3.2
    %Contract brewing
    
    
    1,828
    
    
    
    102
    
    
    
    1,726
    
    
    
    N/MAlternating proprietorship
    
    
    9,846
    
    
    
    8,429
    
    
    
    1,417
    
    
    
    16.8Pubs and other (2)
    
    
    9,136
    
    
    
    8,866
    
    
    
    270
    
    
    
    3.0Total Sales
    
    $
    108,064
    
    
    $
    101,935
    
    
    $
    6,129
    
    
    
    6.0
    %
 
 Note 1
    
     A-B related revenues include fees earned on wholesaler or distibutor sales made via a non-wholesaler.Note 2
    
     Other revenues include international sales, sales of promotional merchandise and other.N/M
    
     Not Meaningful Gross Sales .
  
    
    The Company generated revenues of $1.8 million under the contract brewing arrangement
during the first nine months of 2010. Implementation of contact brewing occurred during the
latter part of the third quarter of 2009.
    
    Alternating proprietorship fees increased $1.4 million from $8.4 million for the first nine
months of 2009 to $9.8 million for the first nine months of 2010. These fees are earned from
Kona for leasing the Oregon Brewery and sales of raw materials during the corresponding
periods and reflect both the increased demand for Kona-branded
 24




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##### Table of Contents



products for the first nine
months of 2010 as compared with the corresponding period a year ago and utilization of the
Oregon Brewery to source some of the Kona-branded products for the Companys eastern markets
during the  third quarter of 2010.
    
    Additionally, revenues from pubs and other sales increased by $270,000 for the first nine
months of 2010 as compared with the corresponding period a year ago.
 Shipments  Customer
 Nine Months Ended September 30,2010  Shipments
    
    
    2009  Shipments
    
    
    Increase /Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease)
    
    
    % Change(In barrels)A-B (1)
    
    
    169,100
    
    
    
    271,600
    
    
    
    440,700
    
    
    
    175,800
    
    
    
    261,800
    
    
    
    437,600
    
    
    
    3,100
    
    
    
    0.7
    %Contract brewing
    
    
    17,000
    
    
    
    
    
    
    
    17,000
    
    
    
    800
    
    
    
    
    
    
    
    800
    
    
    
    16,200
    
    
    
    N/MPubs and other (1,2)
    
    
    5,800
    
    
    
    1,500
    
    
    
    7,300
    
    
    
    5,100
    
    
    
    2,200
    
    
    
    7,300
    
    
    
    
    
    
    
    Total shipped
    
    
    191,900
    
    
    
    273,100
    
    
    
    465,000
    
    
    
    181,700
    
    
    
    264,000
    
    
    
    445,700
    
    
    
    19,300
    
    
    
    4.3
    %
 
 Note 1
    
     2009 shipments have been reclassified to be consistent with the 2010 classification.Note 2
    
     Other includes international, non-wholesalers, pubs and other.N/M
    
     Not Meaningful Pricing and Fees
   Shipments  Brand
 25




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Nine Months Ended September 30,2010 - Shipments
    
    
    2009 - Shipments
    
    
    Increase /Draft
    
    
    Bottle
    
    
    Total
    
    
    Draft
    
    
    Bottle
    
    
    Total
    
    
    (Decrease)
    
    
    % Change(In barrels)Widmer brand
    
    
    103,400
    
    
    
    109,700
    
    
    
    213,100
    
    
    
    110,800
    
    
    
    107,700
    
    
    
    218,500
    
    
    
    (5,400
    )
    
    
    (2.5
    )%Redhook brand
    
    
    35,900
    
    
    
    95,600
    
    
    
    131,500
    
    
    
    38,600
    
    
    
    99,100
    
    
    
    137,700
    
    
    
    (6,200
    )
    
    
    (4.5
    )Kona brand
    
    
    35,600
    
    
    
    67,800
    
    
    
    103,400
    
    
    
    31,500
    
    
    
    57,200
    
    
    
    88,700
    
    
    
    14,700
    
    
    
    16.6Total shipped(1)
    
    
    174,900
    
    
    
    273,100
    
    
    
    448,000
    
    
    
    180,900
    
    
    
    264,000
    
    
    
    444,900
    
    
    
    3,100
    
    
    
    0.7
    %
 
 Note 1 Total shipments by brand exclude private label shipments produced under the Companys contract brewing arrangements.  Excise Taxes
 Cost of Sales .
   26




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##### Table of Contents



Selling, General and Administrative Expenses
  Merger-Related Expenses
 Income from Equity Investments .
 Interest Expense.
 Other Income, net
 27




---



##### Table of Contents



Income
Taxes .
 Liquidity and Capital Resources
      28




---



##### Table of Contents



th
  Trend
  Critical Accounting Policies and Estimates
 29




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##### Table of Contents



Income Taxes . Income Taxes
     Recent Accounting Pronouncements
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  30




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##### Table of Contents



Derivatives and Hedging.
  
 ITEM 4. Controls and Procedures
    
 PART II. Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  The market price of our common stock may decline as a result of the KBC Merger.
 31




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##### Table of Contents



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.
  Our shareholders may not realize a benefit from the KBC Merger commensurate with the ownership
dilution they have experienced in connection with the KBC Merger.
 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.
 Our business is sensitive to reductions in discretionary consumer spending, which may result
from the prolonged U.S. economic recession.
 Increased competition could adversely affect sales and results of operations.
 32




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##### Table of Contents



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 holds certain rights affecting corporate governance and significant corporate
transactions.
 The impact of A-Bs ownership by Anheuser-Busch InBev, a global consumer products
conglomerate, on our business remains unclear.
 We are dependent on our distributors for the sale of our products.
 33




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##### Table of Contents



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.
 We are dependent upon the services of our key personnel.
 34




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##### Table of Contents



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.
 35




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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 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
    
    Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2002 Stock Option
Plan
 36




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##### Table of Contents



10.2
    
    Services Agreement dated January 1, 2009 between the Registrant and Kona Brewery LLC *10.3
    
    Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability Company
and Widmer Brothers Brewing Company10.4
    
    Amended and Restated Continental Distribution and Licensing Agreement between the Registrant and
Kona Brewery LLC dated March 27, 2009 *10.5
    
    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)31.1
    
    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 November 12, 2010
 
 *
    
     Portions omitted pursuant to a request for confidential treatment filed with the Securities
and Exchange Commission (SEC). A complete copy of the agreement has been separately filed
with the SEC.
 
 SIGNATURES
  CRAFT BREWERS ALLIANCE, INC.November 12, 2010
    BY:

/s/
Joseph K. OBrienJoseph K. OBrienController and Chief Accounting Officer 37