Edgar Filing: CRAFT BREW ALLIANCE, INC.

form10k.htm

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, 2012

o 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		91-1141254
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

929 North Russell Street Portland, Oregon		97227-1733
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (503) 331-7270

Securities Registered pursuant to Section 12(b) of the Act:
Title of each class		Name of each exchange on which registered
Common Stock, $0.005 par value		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 o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required 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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o Nox

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 29, 2012 (based upon the closing price of the registrant’s common stock, as reported by the NASDAQ Stock Market, of $8.18 per share) was $85,840,781.

The number of shares outstanding of the registrant’s common stock as of February 26, 2013 was 18,887,323 shares.

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for the 2013 Annual Shareholders’ Meeting are incorporated by reference into Part III.

CRAFT BREW ALLIANCE, INC.

2012 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page
	PART I

Item 1.	Business	2

Item 1A.	Risk Factors	13

Item 1B.	Unresolved Staff Comments	17

Item 2.	Properties	17

Item 3.	Legal Proceedings	18

Item 4.	Mine Safety Disclosures	18

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18

Item 6.	Selected Financial Data	20

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 8.	Financial Statements and Supplementary Data	34

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	61

Item 9A.	Controls and Procedures	61

Item 9B.	Other Information	63

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	63

Item 11.	Executive Compensation	63

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	63

Item 13.	Certain Relationships and Related Transactions, and Director Independence	64

Item 14.	Principal Accountant Fees and Services	64

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	64

Signatures		65

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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, Inc. is an independent craft brewer formed by the union of four unique and pioneering craft beer brands:

Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;

Widmer Brothers Brewing founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon;

Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii; and

Omission Beer internally developed by our brewing team in 2012 in Portland, Oregon.

Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beers in the United States. Today, as an independent craft brewer, we possess several distinct advantages unique in the craft beer category. These advantages derive from the combination of our innovative quality craft beers; the strength of our distinct, authentic brand portfolio; our seamless national distribution and national sales and marketing reach; our financial capabilities as a public company; our owned brew pubs; and our bi-coastal breweries.

We proudly brew our craft beers in four company-owned breweries including three mainland breweries located in Portsmouth, New Hampshire; Portland, Oregon; and the Seattle suburb of Woodinville, Washington; and one Hawaii brewery located in Kailua-Kona, Hawaii. We also own and operate a small pilot brewery, primarily used for small batch production and innovative brews, at the Rose Quarter sports arena in Portland, Oregon.

We distribute our beers to retailers through independent wholesalers that are aligned with the Anheuser-Busch, LLC (“A-B”) network. These sales are made pursuant to a Master Distributor Agreement (the “A-B Distributor Agreement”) with A-B. Our agreement with A-B initially allowed us to establish relationships nationwide with these wholesalers. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers own the 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 31 states. Omission Beer recently became available nationally and we continue to expand into new markets in both the U.S. and internationally. Separate from our wholesalers, we maintain an independent sales and marketing organization with resources across the key functions of brand management, field marketing, field sales, and national retail sales.

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We operate in two segments: Beer Related operations and Pubs. Beer Related operations include the brewing and sale of craft beers from our five breweries, both domestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our Beer Related operations, other merchandise sales, and sales of our beers directly to customers.

New Brands and Packaging

During the second quarter of 2012, we introduced Omission Beer, the first craft beer brand in the United States focused exclusively on brewing great tasting craft beers with traditional beer ingredients, including malted barley, that are specially crafted to remove gluten. The brand includes two styles: Omission Lager and Omission Pale Ale. Unlike many other beers in the fast-growing gluten-free category, Omission beers have flavor profiles that consumers would expect from traditionally brewed lagers and pale ales. Our innovative brewing process, which allows us to reduce the gluten levels to well below the widely accepted international Codex gluten-free standard of 20 parts per million for food and beverages, is unique to Omission Beer.

In March and April 2012, we began offering Kona Longboard Island Lager and Redhook Long Hammer IPA, respectively, in 12 oz. cans on a national basis. These new packages allow Kona Brewing and Redhook fans to enjoy our craft beers during more occasions – especially those where glass bottles may not be the best option, such as on the beach, in the ballpark or at the pool.

In March of 2012, coinciding with the start of the Major League Soccer season, Redhook partnered with the Seattle Sounders and their fan support club, the Emerald City Supporters (ECS), to jointly develop and launch a beer for their fans and supporters. This partnership is a manifestation of Redhook’s foray into the sports lifestyle platform and consumption occasions, in addition to Redhook’s partnership with sportscaster and television & radio personality Dan Patrick.

In August 2012, Kona Big Wave Golden Ale, which had previously only been available in Hawaii, joined Kona’s portfolio on the mainland that includes its flagship Longboard Island Lager, Fire Rock Pale Ale and the trio of Aloha Series seasonals. Big Wave Golden Ale is one of Kona’s original beers, first brewed at our Kailua-Kona home brewery in 1995, and is a great session beer with a bright, quenching finish. Like Longboard, Big Wave Golden Ale is a year-round offering and is available in all of Kona’s markets.

Industry Background

We are a brewer in the craft brewing segment of the U.S. brewing industry. The domestic beer market is comprised of ales and lagers produced by large domestic brewers, international brewers and craft brewers. Shipments of craft beer in the United States are estimated by industry sources to have increased by approximately 12.0% in 2012 over 2011 and by 14.5% for 2011 over 2010. While the overall domestic market experienced a modest increase of 1.2% in 2012, the craft beer segment continued its strong growth and captured market share from the rest of the domestic market. Craft beer shipments in 2012 and 2011 were approximately 6.6% and 5.9%, respectively, of total beer shipped in the U.S. Approximately 13.7 million barrels and 12.3 million barrels, respectively, were shipped in the United States by the craft beer segment during 2012 and 2011, while total beer sold in the U.S., including imported beer, was 208.8 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. Approximately twenty years ago, Redhook and Widmer Brothers Brewery were among the approximately 200 craft breweries in operation. By the end of 2012, the number of craft breweries in operation had grown to 2,300. Industry sources estimate that craft beer produced by regional and national craft brewers, similar to us, accounts for approximately two-thirds of total craft beer sales, with one-third of the production brewed by smaller craft breweries.

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The recent competitive environment has been characterized by two divergent trends; the number and diversity of craft brewers have significantly increased while, simultaneously, the national domestic brewers have acquired or been acquired by other national domestic and foreign brewers. In 2012, according to industry sources, A-B and MillerCoors accounted for more than 80% of total beer shipped in the United States, 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

Our consumer mission is to satisfy more consumers, at more times, in more locations through more authentic, distinct craft beer and brands than any other competitor.

The central elements of our business strategy include:

An innovative portfolio of distinct, authentic craft beer brands. We have brought together a collection of brands from original innovators in the craft beer industry to enable us to match individual brands to a variety of consumer preferences. Through beer taste profiles and brand personalities, customers are able to forge a strong relationship with the targeted brands. The breadth of our product offerings also provides consumers with the opportunity to match specific consumer occasions with a product in our brand families.

National sales and marketing reach combined with seamless national distribution. We believe that we are able to leverage our national sales and marketing capabilities and complementary brand families to create a unique identity in the distribution channel and with the consumer. We believe that the combination of the complementary brand families promoted by one integrated sales and marketing organization delivers both financial benefits and greater impact at the point of sale. We have invested in technologies that allow us to not only focus our brand families and product offerings on those markets and regions that represent the most significant opportunities, but also measure the results of those efforts. Our sales force has been structured to be able to call on all retail channels nationally, including grocery, drug and convenience stores, where most other craft brewers are not able to do so.

We distribute our beers to retailers through independent wholesalers that are aligned with the A-B distribution network. These sales are made pursuant to the A-B Distributor Agreement. Our agreement with A-B initially allowed us to establish relationships nationwide with these wholesalers. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. 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 company.

Bi-coastal brewing capability with significant additional capacity. Our breweries are located on both coasts and in Hawaii, which allows for efficient brewing and distribution of our beers. We prefer to own and operate our breweries to optimize the quality and consistency of our products and to achieve greater control over our production costs. We believe that maximizing the production under our direct ownership and through selection of 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. Our New Hampshire Brewery has room for bolt-on capacity additions, while our Oregon Brewery was expanded with additional fermentation tanks in the summer of 2012. We believe that our investment in brewing and logistic technologies enables us to minimize brewery operating costs and consistently produce innovative beer styles.

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Five brew-pub restaurants supporting 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. Our brew-pubs provide us with the opportunity to bring those beers to market in test-size batches in order to understand their strengths prior to releasing them on a national level.

Beers

Our beer portfolio is comprised of the Widmer Brothers, Redhook, Kona and Omission brand families.

We produce a variety of specialty craft beers using traditional brewing methods complemented by American innovation and invention. We brew our beers using high-quality hops, malted barley, wheat, rye and other natural traditional and nontraditional ingredients. To help maintain full flavor, our products are not pasteurized and we apply a freshness date to our products for the benefit of wholesalers and consumers. We generally distribute our products in glass bottles and kegs.

Within each brand family, we have created several types and styles of craft beer that align with a variety of consumer taste preferences. We have created year-round brands and flagship brands that help define our brand families’ identities; these are the brands that consumers usually think of when they think of our brand families, and are usually the most widely available.

Seasonal brand offerings provide the consumer compelling variety on the retail shelf or at the pub, restaurant or bar. Many of these brand offerings are brewed to match the seasonal change in weather, specific events (e.g. Oktoberfest) or popular activities and are replaced with new offerings when the season or conditions change. These brands allow our brewers to experiment and innovate with ingredients and brewing styles. Additionally, each of the brand families has developed a wide range of high-end brands, some of which are offered as limited releases, that are offered exclusively at our restaurants and pubs.

Given the long relationship that many consumers have had with each of the brands and the growing consumer interest in high-end craft beers, we have also developed a group of higher-end specialty beers that are brewed, bottled and packaged in a manner befitting the unique nature of these beers. Our high-end brands are marketed toward the select segment of consumers that enjoy unique beer experiences, a rapidly growing segment within the craft beer segment.

The brands within each of the brand families are categorized below, with details provided for key year round contributors within each of the families. These brands are usually offered both in draft and packaged formats.

Widmer Brothers Beers

Since 1984, Widmer Brothers has fostered the brotherhood of craft beer by creating uncommon beer experiences to be discovered and shared by fellow beer lovers. Widmer Brothers beers frequently use newly developed hop varieties and unusual ingredients in their recipes. Key segments within the Widmer Brothers brand family are core beers, seasonal beers and high-end beers.

The Widmer Brothers core beers are available year-round and are suitable for a variety of beer drinking occasions. Widmer Brothers Hefeweizen is “The Original American Hefeweizen,” first brewed in 1986, and the brewery’s most popular beer. The Rotator IPA Series allows our brewers to experiment with new India Pale Ale recipes and share those limited-release beers with beer drinkers through this unique, experimental year-round series. The Widmer Brothers core lineup continues to evolve as our brewers develop new, innovative and market-relevant recipes.

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Widmer Brothers Brewing was the first craft brewery in the United States to offer an annual full lineup of four seasonal beers. From our use of experimental hops in recipe development to unique takes on traditional beer styles, the Widmer Brothers seasonal lineup offers beer drinkers an opportunity to enjoy uncommon and seasonally-relevant beer experiences.

The Widmer Brothers high-end beers include the W Series and Brothers’ Reserve. Beers in the W Series are made for those who share our passion for the art of brewing and the taste for authentic beers. The W Series includes year-round beers and three limited release beers offered at different times throughout the year. Beers in this brand are offered in draft and in four-pack 12oz. as well as 22oz. bottles. Our Brothers’ Reserve beers are the specialty high-end offerings for the Widmer Brothers brand. The beers chosen for this brand reflect the passion and uniqueness of the Widmer brothers and are extremely limited. This series of beers is focused on the knowledgeable and enthusiastic beer lover who is looking for something exclusive, rare and collectible.

Redhook Beers

The Redhook family of beers is comprised of sessionable (lower alcohol by volume) and approachable beers with character that push style boundaries without being over the top. Key segments within the Redhook brand family are core, seasonal and regional beers.

The Redhook core beers are made up of four offerings that are approachable and easy to drink beers with enough malt and hop character to distinguish them as craft.

Seasonal offerings under Redhook are also approachable and easy to drink. Redhook seasonal beers are brewed with seasonal beer drinking occasions in mind such as barbequing, snow sports and tailgating.

Regionally, Redhook also brews the Blueline Series in Washington and the Backyard Series in the Northeast. The beers in these series are more experimental in nature than core Redhook beers and designed to appeal to consumers that enjoy higher-end, specialty craft beers.

Kona Beers

The Kona Brewing portfolio is comprised of beers that deliver the authentic essence of the Hawaiian Islands that is “Always Aloha.” Our brewers’ approach is to create complex, full tasting beers with a relaxed style and charm that celebrates the one of a kind lifestyle of Hawaii.

Kona’s year-round brews deliver what you would expect from a brewery born in Hawaii – approachable, refreshing ales and lagers of uncompromised quality – the perfect reward after a day in the surf.

The Aloha Series seasonal lineup features beers brewed with non-traditional ingredients unique to the Islands, such as passion fruit and toasted coconut. These beers not only showcase our brewers’ talents and creativity, but also capture unique flavors of Hawaiian experience. Additionally, visitors to the Kona Brewery will find over a dozen draft only offerings that are served exclusively in Hawaii.

Omission Beers

The Omission brand family is comprised of handcrafted beers made from barley, hops, water and yeast, brewed using a proprietary process to remove gluten. Key brands within the Omission brand family are Lager and Pale Ale.

Omission Lager is a refreshing, crisp beer brewed in the traditional lager style. Omission Lager’s aromatic hop profile offers a unique, easy-drinking craft beer for those looking for a lighter and approachable beer style. Bold and hoppy, Omission Pale Ale is a hop-forward American pale ale, brewed to showcase the Cascade hop profile. Amber in color, Omission Pale Ale’s floral aroma is complimented by a caramel malt body making for a deliciously balanced craft beer.

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Multi-Brand Beer Packages

In 2012, we developed a multi-brand seasonal variety pack, including brands from Kona, Widmer Brothers and Redhook, called the Winter Variety Pack that satisfied consumers’ growing thirst for two major trends in craft beer, the popularity of both seasonal beers and variety packs.

New Products and Brands

In an effort to stay current with consumer style and flavor preferences, we routinely analyze consumer trends and behavior, trends in other food and beverage segments, and our brand families and product offerings to identify beer styles or consumer taste preferences that appear to be under-served or not currently addressed. After identifying a potential new product offering, we will either tap into our brewing recipe library to determine if we have offered the targeted style either on a one-time basis or as a limited seasonal run or will use our pilot brewing system to create an experimental new beer. We may then offer this experimental new brew directly to consumers through on-premise test marketing at our own pubs and at exclusive retail sites. If the initial consumer reception of an experimental or new brew appears to meet the desired taste profile, we develop a brand identity to solidify the consumer perception of the product. We believe that our continued success is based on our ability to be attentive and responsive to consumer desires for new and distinctive tastes, and our capacity to meet these desires with original and novel taste profiles while maintaining consistently high product quality.

Contract Brewing

In order to profitably use excess capacity, we have a contract brewing arrangement under which we produce beer in volumes and per specifications as designated by the arrangement. Prior to September 1, 2012, we had two contract brewing arrangements.

Effective September 1, 2012, in the best interest of both parties, we mutually agreed with Fulton Street Brewery, LLC (“FSB”) to end our contract brewing arrangement with them. Under the termination agreement, we phased out production of FSB branded beers utilizing remaining inventory on-hand. In consideration, FSB will pay us $70,000 per month through September 2013. We recorded $838,000 in Sales from September 1, 2012 to December 31, 2012 under the terms of the termination agreement and $3.1 million in sales pursuant to the contract brewing arrangement from January 1, 2012 to November 30, 2012.

During 2012, we shipped 49,600 barrels under these contract brewing arrangements, 24,400 of which were to FSB.

Brewing Operations

Brewing Facilities

We use highly automated brewing equipment at our four production breweries and also operate a smaller, manual brewpub-style brewing system. As of December 31, 2012, our total production capacity was 1,075,000 barrels. Our breweries consist of the following:

Oregon Brewery. Our Oregon Brewery is our largest capacity production brewery, consisting of a 230 barrel brewing system with an 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. During 2010, the Hawaiian Brewery installed a 229-kilowatt photovoltaic solar energy generating system to supply approximately 50 percent of its energy requirements through renewable energy.

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Rose Quarter Brewery. Our Rose Quarter Brewery maintains a 10 barrel pilot brewing system at the Rose Quarter sports arena in Portland, Oregon and is our smallest brewery.

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, extending the 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 a panel of internal testers (our taste panel) who ensure 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.

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 seamless national distribution, which results in both a highly 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 A-B” 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 2012 and 2011, we sold approximately 660,000 barrels and 611,200 barrels, respectively, to the wholesalers in A-B’s distribution network through the A-B Distributor Agreement, accounting for 91.0% and 90.9%, respectively, of our shipment volume for the corresponding periods.

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Sales and Marketing

We promote our products through a variety of means, including i) creating and executing a range of advertising programs; ii) training and educating wholesalers and retailers about our products; iii) promoting our name, product offerings and brands, and experimental beers at local festivals, venues and pubs; iv) selling our beers in the restaurants and pubs operated by us; and v) targeted discounting to create competitive advantage within the market place.

We advertise and promote our products through an assortment of media, including television, radio, billboard, print and social media, including Facebook and Twitter, in key markets and by participating in co-operative 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 also sell various items of apparel and memorabilia bearing our trademarks, which creates further awareness of our beers and reinforces our quality 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

The Amended and Restated Exchange and Recapitalization Agreement (the “Exchange Agreement”) is an agreement with A-B under which we granted A-B certain contractual rights. The Exchange Agreement was entered into as part of a recapitalization in which we redeemed preferred shares held by A-B in exchange for cash and our common stock currently held by A-B, which total 32.2% of our outstanding shares of common stock at December 31, 2012.

The Exchange Agreement entitles A-B to designate two members of our board of directors. A-B also generally has the right to have a designee on each committee of the board of directors, except where prohibited by law or stock exchange requirements, or with respect to a committee formed to review or determine transactions or proposed transactions between A-B and us. The Exchange Agreement also contains limitations on our ability to take certain actions without A-B’s prior consent, including, but not limited to, our ability to issue equity securities or acquire or sell assets or stock, amend our Articles of Incorporation 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 Widmer Brothers, Redhook, Kona and Omission beers 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.

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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 certain incompatible conduct that is not cured to A-B's satisfaction (at A-B’s sole discretion) within 30 days. Incompatible conduct is defined as any act or omission that, in A-B’s opinion, damages the reputation or image of A-B or the brewing industry;

any A-B competitor or affiliate thereof acquires 10% or more of our outstanding equity securities, and that entity designates one or more persons 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.

As of both December 31, 2012 and 2011, A-B owned approximately 32.2% of our outstanding common stock.

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 19 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.

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.

Competition within the domestic craft beer segment and the specialty beer market is based on product quality, taste, consistency and freshness, ability to differentiate products, promotional methods and product support, distribution coverage, local appeal and price.

The craft beer segment is increasingly competitive due to the proliferation of small craft brewers, including contract brewers, and the large number of 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 Goose Island and Shock Top divisions. Because of the large number of participants and number of different products offered in this segment, the competition for bottled 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 four brand families and the scale of our production breweries.

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We also compete against producers of 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 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 Goose Island and Shock Top 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 Smirnoff Ice, Bacardi Silver and Mike’s Hard Lemonade have captured sizable market share in the higher-priced end of the malt beverage industry. We believe sales 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 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 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for the required segment and enterprise-wide information.

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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, although smaller brewers producing less than two million barrels annually, including us, benefit from favorable treatment.

We operate our breweries under federal licensing requirements imposed by the TTB. The TTB requires the filing of a “Brewer’s Notice” upon 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 in the future.

The U.S. federal government currently levies an excise tax of $18 per barrel on beer sold for consumption in the United States; however, brewers that 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. It is possible that 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.

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 Widmer Brothers, Redhook, Kona Brewing, and Omission marks and certain other marks are also registered in various foreign countries. We regard our Widmer Brothers, Redhook, Kona Brewing, Omission 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.

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Employees

At December 31, 2012, we employed approximately 740 people, including 345 employees in the pubs and retail stores, 205 employees in production, 140 employees in sales and marketing and 50 employees in corporate and administration. The pubs and restaurants have 220 part-time employees and 35 seasonal or temporary employees, both of which are included in the totals above. 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 or furnish them to 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 Web site 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 manner, our sales and market share will decrease.

The costs and management attention involved in maintaining an innovative brand portfolio have been, and are expected to continue to be, significant. If 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.

Increased competition could adversely affect sales and results of operations.

We compete in the highly competitive craft brewing market, as well as in the much larger specialty beer category, which includes the imported beer 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 production, loss of critical information, or other events, any of which could harm our future sales or operating results.

Our business is sensitive to reductions in discretionary consumer spending.

Consumer demand for luxury or perceived luxury goods, including craft beer, can be sensitive to downturns in the economy and the corresponding impact on discretionary spending. There is no assurance that the craft brewing segment will continue to experience growth in future periods. 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.

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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. 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 might be imposed or that there may be renewed efforts to impose, at either the federal or state level, increased excise or other taxes on beer sold in the United States. If beer in general were to fall out of favor among 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.

We have a continuing relationship with Anheuser-Busch, LLC and the current distribution network.

Substantially all of our products are sold and distributed through A-B’s distribution network. If the A-B Distributor Agreement were terminated, we would be faced with a number of operational tasks, including implementing an order management system, 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. 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.

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 owns 32.2% 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.

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Operating breweries at production levels substantially below their current designed capacities could negatively impact our financial results.

As of December 31, 2012, the annual working capacity of our breweries was approximately 1,075,000 barrels. Due to many factors, including 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.

Our sales are concentrated in the Pacific Northwest and California.

Approximately 60% of our sales in 2012 were in the Pacific Northwest and California and, consequently, our future sales may be adversely affected 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 wine producers and flavored alcohol beverages.

We are dependent upon the services of our key personnel.

If we lose the services of any members of senior management or key personnel for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our operations. Additionally, the loss of Terry Michaelson as our chief executive officer, and the failure to find a replacement satisfactory to A-B, would be a default under the A-B Distributor Agreement.

Our gross margin may fluctuate.

Future gross margin may fluctuate and even decline as a result of many factors, including: product pricing levels; sales mix between draft and bottled 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.

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 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. Certain actions undertaken by us 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. 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, 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.

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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.

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 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 as well as leased from a third-party vendor, and, on a limited basis, from A-B. During periods when we experience stronger sales, we may need to rely on kegs leased from A-B and the third-party vendor to address the additional demand. If shipments of 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. We may also decide to pursue other alternatives for leasing or purchasing kegs, but there is no assurance that we will be successful in securing additional kegs.

A loss of involvement by the founders of Widmer Brothers Brewing Company in promoting that brand family could adversely affect sales.

The founders of Widmer Brothers Brewing Company, Kurt R. Widmer (“Kurt”) and Robert P. Widmer (“Rob”), are integral to our current Widmer 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. If this were to occur, we would need to adapt our strategy for communicating key messages that currently include their images. Any such change in our messaging strategy might have a detrimental impact on our future growth.

We are dependent on certain suppliers for key raw materials, packaging materials and production inputs.

Although we seek to maintain back-up and alternative suppliers for all key raw materials and production inputs, we are reliant on certain third parties for 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.

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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, the founders of Widmer Brothers Brewing Company (“WBBC”) and their close family members own approximately 3.3 million shares, or 17.4%, of our common stock. Collectively, these two groups own 49.6% of our equity. All of these shares are available for sale in the public market, subject to volume, manner of sale and other limitations under Rule 144 in the case of shares held by shareholders who are affiliates of us. Such sales in the public market or the perception that such sales could occur may cause the market price of our 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 Bank of America (“BofA”), we are not permitted to declare or pay a dividend without BofA’s prior consent. As a result, only appreciation of the price of our common stock will provide a return to shareholders. Investors seeking cash dividends should not invest in our common stock.

The fair value of our intangible assets, including goodwill, may become impaired.

As a result of the KBC Merger, we have recognized a significant increase in our total intangible assets, including goodwill. As of December 31, 2012, we had $29.9 million in an assortment of intangible assets, on a net basis, which represented nearly 18% of our total assets. If any circumstances were to occur, such as economic recession or other factors causing a reduction in consumer demand, or for any other reason we were to experience a significant decrease 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 breweries: the Hawaiian Brewery, the New Hampshire Brewery, the Oregon Brewery and the Washington Brewery, as well as a small, pilot brewing system at the Rose Quarter Brewery in Portland, Oregon. We lease the sites upon which the Hawaiian Brewery and Pubs, the New Hampshire Brewery and Pub, the Rose Quarter 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. These operating leases expire at various times between 2013 and 2047. Certain of these leases are with related parties. See Notes 18 and 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for further discussion regarding these arrangements.

Certain information regarding our production breweries is as follows (capacity in thousands of barrels):

Production Breweries	Square Footage		Current Annual Capacity		Maximum Annual Capacity
Oregon Brewery		185,000		630		650
Washington Brewery		128,000		220		280
New Hampshire Brewery		125,000		215		280
Hawaiian Brewery		11,000		10		10
				1,075		1,220

As a result of adding fermentation capacity and modifying our brewing schedules during 2012, the total annual capacity of all our breweries was approximately 1,075,000 barrels as of December 31, 2012. 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.

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Substantially all of the personal property and the real properties associated with the Oregon Brewery and the Washington Brewery secure our loan agreement with BofA. See Note 10 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 will not likely have a material adverse effect on our financial condition or results of operations.

Item 4.

Mine Safety Disclosures

Not applicable.

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 sale prices of our common stock, as reported on the NASDAQ:

2011	High		Low
Quarter 1	$	9.59	$	6.96
Quarter 2		10.17		8.10
Quarter 3		8.95		5.31
Quarter 4		7.22		5.08

2012	High		Low
Quarter 1	$	7.98	$	5.84
Quarter 2		8.47		7.03
Quarter 3		8.92		7.50
Quarter 4		8.00		5.62

We had 18,887,323 common shareholders of record as of February 26, 2013.

We have not declared or paid any dividends during our existence. Under the terms of our loan agreement with BofA, we may not declare or pay 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 2012.

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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.

	Base		Indexed Returns
	Period		Year Ended
Company/Index	12/31/07		12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
Craft Brew Alliance, Inc.	$	100.00	$	18.05	$	36.09	$	111.13	$	90.53	$	97.44
NASDAQ Composite		100.00		59.46		85.55		100.02		98.22		113.85
S&P 500 Beverages Index		100.00		79.98		96.16		110.25		115.26		121.19

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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	Year Ended December 31,
Statement of Operations Data	2012		2011		2010		2009		2008
Net sales(1)	$	169,287	$	149,197	$	131,731	$	124,713	$	79,761
Cost of sales		119,261		104,011		98,064		97,230		65,646
Gross profit	$	50,026	$	45,186	$	33,667	$	27,483	$	14,115
Selling, general and administrative expenses	$	44,890	$	39,742	$	29,938	$	24,911	$	19,894
Loss on impairment of assets(2)	$	-	$	-	$	-	$	-	$	30,589
Operating income (loss)	$	5,136	$	5,444	$	3,170	$	2,347	$	(36,761	)
Gain on sale of equity interest in Fulton Street Brewery, LLC	$	-	$	10,432	$	-	$	-	$	-
Income before provision (benefit) for income taxes	$	4,477	$	15,692	$	2,786	$	1,073	$	(37,655	)
Provision (benefit) for income taxes		1,951		6,041		1,100		186		(4,377	)
Net income (loss)	$	2,526	$	9,651	$	1,686	$	887	$	(33,278	)

Basic and diluted net income (loss) per share	$	0.13	$	0.51	$	0.10	$	0.05	$	(2.63	)

Shares used in basic per share calculations		18,862		18,834		17,523		17,004		12,660
Shares used in diluted per share calculations		18,934		18,931		17,568		17,041		12,660

	December 31,
	2012		2011		2010			2009			2008
Balance Sheet Data
Cash and cash equivalents	$	5,013	$	795	$	164		$	11		$	11
Working capital (deficit)		5,207		2,327		(4,435	)		(2,527	)		(927	)
Total assets		165,664		158,908		158,266			141,585			147,805
Current portion of long-term debt and capital leases		642		596		2,460			1,481			1,394
Long-term debt and capital leases, net of current portion		12,440		13,188		24,675			24,685			31,834
Other long-term obligations		17,903		16,261		11,388			8,210			8,082
Shareholders’ equity		108,195		104,509		94,196			80,632			79,281

(1)	The increase in net sales in 2009 compared to 2008 was primarily due to the merger with Widmer Brothers Brewing Company, which occurred July 1, 2008.

(2)	Loss on impairment of assets in 2008 included a $22.7 million charge for total impairment of goodwill, a $6.5 million charge for the partial write-down of trademarks associated with the Widmer brand and a $1.4 million charge for the partial write down of equity-method investments.

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Craft Brew Alliance is an independent craft brewer formed by the union of four unique and pioneering craft beer brands:

Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;

Widmer Brothers Brewing founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon;

Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii; and

Omission Beer internally developed by our brewing team in 2012 in Portland, Oregon.

Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beers in the United States. Today, as an independent craft brewer, we possess several distinct advantages, unique in the craft beer category. These advantages derive from the combination of our innovative quality craft beers; the strength of our distinct, authentic brand portfolio; our seamless national distribution and national sales and marketing reach; our financial capabilities as a public company; our owned brew pubs; and our bi-coastal breweries.

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. Our agreement with A-B initially allowed us to establish relationships nationwide with these wholesalers. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers own the 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 31 states. Omission Beer recently became available nationally and we continue to expand into new markets in both the U.S. and internationally. Separate from our A-B wholesalers, we maintain an independent sales and marketing organization complete with resources across the key functions of brand management, field marketing, field sales, and national retail sales.

Following is a summary of our financial results:

	Net Sales	Net Income	Number of Barrels Sold
2012	$169.3 million	$2.5 million		724,900
2011	$149.2 million	$9.7 million		672,600
2010	$131.7 million	$1.7 million		607,800

The comparability of our results is impacted by the merger with Kona Brewing Co., Inc. (“KBC”), which closed October 1, 2010 (the “KBC Merger”), and by the sale of our equity interest in Fulton Street Brewery, LLC (“FSB”) during the second quarter of 2011. See Notes 7 and 8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more detailed information.

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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):

	Year Ended December 31,
	2012			2011			2010
Sales		107.5	%		107.9	%		106.9	%
Less excise tax		7.5			7.9			6.9
Net sales		100.0			100.0			100.0
Cost of sales		70.4			69.7			74.4
Gross profit		29.6			30.3			25.6
Selling, general and administrative expenses		26.5			26.6			22.7
Merger related expenses		-			-			0.4
Operating income		3.0			3.6			2.4
Income from equity method investments		-			0.5			0.6
Gain on sale of FSB		-			7.0			-
Interest expense		(0.4	)		(0.6	)		(1.1	)
Interest and other income, net		-			-			0.2
Income before income taxes		2.6			10.5			2.1
Income tax provision		1.2			4.0			0.8
Net income		1.5	%		6.5	%		1.3	%

(1) Percentages may not sum due to rounding.

Segment Information

Net sales, gross profit and gross margin information by segment was as follows (dollars in thousands):

	Year Ended December 31,
2012	Beer Related			Pubs and Other			Total
Net sales	$	145,670		$	23,617		$	169,287
Gross profit	$	46,341		$	3,685		$	50,026
Gross margin		31.8	%		15.6	%		29.6	%

2011
Net sales	$	127,376		$	21,821		$	149,197
Gross profit	$	41,626		$	3,560		$	45,186
Gross margin		32.7	%		16.3	%		30.3	%

2010
Net sales	$	119,389		$	12,342		$	131,731
Gross profit	$	31,797		$	1,870		$	33,667
Gross margin		26.6	%		15.2	%		25.6	%

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Sales by Category

The following tables set forth a comparison of sales by category (dollars in thousands):

	Year Ended December 31,						Dollar
Sales by Category	2012			2011			Change			% Change
A-B and A-B related	$	147,628		$	130,137		$	17,491			13.4	%
Contract brewing and beer related(1)		10,773			9,042			1,731			19.1	%
Excise taxes		(12,731	)		(11,803	)		(928	)		7.9	%
Net beer related sales		145,670			127,376			18,294			14.4	%
Pubs(2)		23,617			21,821			1,796			8.2	%
Net sales	$	169,287		$	149,197		$	20,090			13.5	%

	Year Ended December 31,						Dollar
Sales by Category	2011			2010			Change			% Change
A-B and A-B related	$	130,137		$	114,231		$	15,906			13.9	%
Contract brewing and beer related(1)		9,042			4,433			4,609			104.0	%
Excise taxes		(11,803	)		(9,121	)		(2,682	)		29.4	%
Net beer related sales		127,376			109,543			17,833			16.3	%
Pubs(2)		21,821			12,342			9,479			76.8	%
Alternating proprietorship		-			9,846			(9,846	)		(100.0	)%
Net sales	$	149,197		$	131,731		$	17,466			13.3	%

(1)

Beer related includes international beer sales.

(2)

Pubs sales include sales of promotional merchandise and sales of beer directly to customers.

Shipments by Category

Shipments by category were as follows (in barrels):

Year Ended December 31,	2012 Shipments		2011 Shipments		Increase		% Change			Change in Depletions(1)
A-B and A-B related		660,000		611,200		48,800		8.0	%		6	%
Contract brewing and beer related(2)		52,700		51,300		1,400		2.7	%
Pubs		12,200		10,100		2,100		20.8	%
Total		724,900		672,600		52,300		7.8	%

Year Ended December 31,	2011 Shipments		2010 Shipments		Increase		% Change			Change in Depletions(1)
A-B and A-B related		611,200		574,900		36,300		6.3	%		6	%
Contract brewing and beer related(2)		51,300		23,200		28,100		121.1	%
Pubs		10,100		9,700		400		4.1	%
Total		672,600		607,800		64,800		10.7	%

(1)

Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.

(2)

Contract brewing and beer related includes international shipments of our beers.

The increase in sales to A-B and A-B related in 2012 compared to 2011 was primarily due to increased volume, higher selling prices for our beers, and a shift in product mix towards bottle and high-end product, both of which carry a higher price per unit than draft. Gross sales in 2012 was also favorably impacted by a decrease in the per barrel fee associated with sales to A-B as a result of an amendment to our A-B Distributor Agreement in May 2011. This lower fee level for the period of January 2012 through April 2012 generated approximate savings of $1.2 million as compared to the same period in 2011.

The increase in sales to A-B and A-B related in 2011 compared to 2010 was primarily due to an increase in volume, higher selling prices for our beers and a shift in product mix towards bottle and high-end product. Gross sales were also favorably impacted by a decrease in the per barrel fee associated with sales to A-B as a result of amendments to our A-B Distributor Agreement, which is netted against revenue. Our savings from both the 2010 and 2011 amendments to the A-B Distributor Agreement totaled approximately $3.9 million for 2011.

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We estimate that, had the modification to the A-B Distributor Agreement been in place throughout 2010, the increase in 2010 sales resulting from the reduced distribution fees would have been approximately $3.3 million. The amount of increase in sales realized for future periods may differ from this estimate due to the level, timing and geographic distribution of our shipments to A-B.

Exclusive of the impact of the favorable change in our per barrel margin fee, the average revenue per barrel on shipments of beer through the A-B distribution network increased by 4.2% in 2012 compared to 2011 and 4.7% in 2011 compared to 2010, primarily due to pricing increases and a shift in product mix towards both bottle and high-end product as mentioned above. Price changes implemented by us have generally followed craft beer market pricing trends. During 2012, 2011 and 2010, we sold 91.0%, 90.9% and 94.6%, respectively, of our beer through A-B at wholesale pricing levels.

The increase in contract brewing and beer related sales in 2012 compared to 2011 was due to an increase in shipments under the arrangement with FSB. Effective September 1, 2012, in the best interest of both parties, we mutually agreed with FSB to end our contract brewing arrangement. Under the termination agreement, we phased out production of FSB branded beers by the end of November 2012 utilizing remaining inventory on-hand. In consideration, FSB will pay us $70,000 per month through September 2013. We recorded $838,000 in Sales during the period from September 1, 2012 to December 31, 2012 under the terms of the termination agreement.

The increase in contract brewing and beer related sales in 2011 compared to 2010 was primarily due to an increase in shipments under an existing third-party contract and the contribution of shipments under a contract brewing arrangement with FSB, which was entered into in the first quarter of 2011.

Sales to FSB through the contract brewing arrangement, classified in Sales, were as follows (dollars in thousands):

Year Ended December 31,
	2012	2011		2010
$	3,083	$	2,863	$	28

The overall increase in volume in 2012 compared to 2011 was primarily driven by our increased sales and marketing efforts, timing of programs and new brand and package introductions, partially offset by a decline in our event volume, which is included in Pubs.

The increase in excise taxes in 2012 compared to 2011 was due to higher shipments in 2012 compared to 2011.

The increase in excise taxes in 2011 compared to 2010 was driven by three factors: i) increases in shipments; ii) the addition of excise taxes relating to shipments of Kona beers that were previously recognized by Kona prior to the KBC Merger; and iii) a marginal tax rate increase after the KBC Merger as the combined companies are eligible for only a single excise tax exemption. Also contributing to the increase was an increase in the marginal tax rate for beer produced in Washington state, which became effective in the second half of 2010.

Pubs sales increased in 2012 compared to 2011 primarily due to increased guest counts and pricing in certain markets. The increase was also attributable to an increase in the number of barrels sold, primarily as a result of the increase in guest counts.

The increase in Pubs and Other sales in 2011 compared to 2010 was primarily due to the addition of pub operations acquired with the KBC Merger.

Prior to the KBC Merger, we earned revenue in connection with an alternating proprietorship agreement with Kona, including fees for leasing the Oregon Brewery and sales of raw materials. Subsequent to the KBC Merger, any such intercompany activities are eliminated, including the revenues associated with the alternating proprietorship agreement.

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Shipments by Brand

The following table sets forth a comparison of shipments by brand (in barrels):

Year Ended December 31,	2012 Shipments		2011 Shipments		Increase (Decrease)			% Change			Change in Depletions
Widmer Brothers		264,300		271,200		(6,900	)		(2.5	)%		(5	)%
Kona		220,000		172,800		47,200			27.3	%		23	%
Redhook		191,000		179,300		11,700			6.5	%		6	%
Total(1)		675,300		623,300		52,000			8.3	%		6	%

Year Ended December 31,	2011 Shipments		2010 Shipments		Increase (Decrease)			% Change			Change in Depletions
Widmer Brothers		271,200		277,200		(6,000	)		(2.2	)%		(2	)%
Kona		172,800		133,400		39,400			29.5	%		29	%
Redhook		179,300		174,100		5,200			3.0	%		3	%
Total(1)		623,300		584,700		38,600			6.6	%		6	%

(1)

Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.

The decrease in our Widmer Brothers brand shipments in 2012 compared to 2011 was primarily due to pressure on our Hefeweizen beer which is experiencing competition from large, multi-national wheat beer competitors, particularly in draft in California. Partially offsetting this decrease was the positive effect of our focus on the core Widmer Brothers brands including our Rotator IPAs and seasonals, and our high-end offerings, which is fueling broader consumer awareness of the overall Widmer Brothers brand.

The decrease in the Widmer Brothers brand shipments in 2011 compared to 2010 was primarily due to the continuing pressure on our Hefeweizen beer in the very competitive wheat beer category in the craft segment. Partially offsetting this decrease was the success of our focus on the core and high-end Widmer Brothers brands.

Kona continues to be one of the fastest growing brands in the craft category, as seen in the increase in shipments in 2012 compared to 2011 and 2011 compared to 2010. We believe this sales growth is due to the Always Aloha message and quality of the beer resonating with consumers.

The increase in our Kona brand shipments in 2012 compared to 2011 was also due to the success of our Kona variety packs and the increased velocity of our Kona flagship, Longboard Lager, in existing markets. During the third quarter of 2012, we launched our Big Wave Golden Ale, previously available only in Hawaii, on the mainland. We continue to successfully introduce our Kona beers to new markets, which has been contributing to the brand’s shipment growth. The introduction of our Kona beer in cans in March 2012 also contributed to the increase.

The increase in our Redhook brand shipments in 2012 compared to 2011 and in 2011 compared to 2010 were the result of our investments in new packaging, brand introductions and marketing initiatives. These investments have resulted in the unique Redhook brand position, which we believe is resonating with consumers.

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The following table sets forth a comparison of our shipments by package, excluding private label shipments produced under our contract brewing arrangements (in barrels):

Year Ended	2012					2011					2010
December 31,	Shipments		% of Total			Shipments		% of Total			Shipments		% of Total
Draft		214,800		31.8	%		219,400		35.2	%		227,100		38.8	%
Bottle		460,500		68.2	%		403,900		64.8	%		357,600		61.2	%
Total		675,300		100.0	%		623,300		100.0	%		584,700		100.0	%

The shift in package mix from draft to bottle in both 2012 compared to 2011 and in 2011 compared to 2010 was primarily the result of the increase in volumes on our Kona bottle beer and lower volumes on our Hefeweizen draft beer. There is also increased general competition across the industry for on-premise draft sales as the large, multi-national brewers enter the craft beer segment.

Cost of 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):

	Year Ended December 31,				Dollar
	2012		2011		Change		% Change
Beer Related	$	99,329	$	85,750	$	13,579		15.8	%
Pubs		19,932		18,261		1,671		9.2	%
Total	$	119,261	$	104,011	$	15,250		14.7	%

	Year Ended December 31,				Dollar
	2011		2010		Change			% Change
Beer Related	$	85,750	$	87,592	$	(1,842	)		(2.1	)%
Pubs		18,261		10,472		7,789			74.4	%
Total	$	104,011	$	98,064	$	5,947			6.1	%

The increase in Beer Related Cost of sales in 2012 compared to 2011 was due to the increase in shipments discussed above, as well as the mix shift from draft to bottle as the per barrel equivalent cost of bottle is more than draft. In addition, increased distribution costs, including offsite storage and fuel, increased labor, and higher grain prices, contributed to the increase.

The decrease in Beer Related Cost of sales in 2011 compared to 2010 was primarily due to the elimination of costs associated with our Kona operations prior to the KBC Merger, including elimination of all alternating proprietorship related costs, and improved performance and quality trends in 2011. This was partially offset by the increase in shipments discussed above, including the mix shift from draft to bottle, as well as increased shipping costs due to fuel surcharges.

The increase in Pubs Cost of sales in 2012 compared to 2011 was primarily due to the increase in guest counts noted above, as well as increased labor, food and beverage costs in certain markets.

The increase in Pubs Cost of sales in 2011 compared to 2010 was primarily associated with the acquired Kona pub operations. These operations had a positive impact on our gross profit as discussed below.

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Gross Profit

Information regarding gross profit was as follows (dollars in thousands):

	Year Ended December 31,				Dollar
	2012		2011		Change		% Change
Beer Related	$	46,341	$	41,626	$	4,715		11.3	%
Pubs		3,685		3,560		125		3.5	%
Total	$	50,026	$	45,186	$	4,840		10.7	%

	Year Ended December 31,				Dollar
	2011		2010		Change		% Change
Beer Related	$	41,626	$	31,797	$	9,829		30.9	%
Pubs		3,560		1,870		1,690		90.4	%
Total	$	45,186	$	33,667	$	11,519		34.2	%

Gross profit as a percentage of net sales, or gross margin rate, was as follows:

	Year Ended December 31,
	2012			2011			2010
Beer Related		31.8	%		32.7	%		26.6	%
Pubs		15.6	%		16.3	%		15.2	%
Total		29.6	%		30.3	%		25.6	%

The increase in Gross profit in 2012 compared to 2011 was due to increases in shipment volumes discussed above, partially offset by declines in overall gross margin rates. The decline in the beer related gross margin rate was primarily due to the higher brewery variable costs on a per barrel basis. The decline was partially offset by better fixed cost coverage, a shift in mix to our higher-end beers and the $838,000 recorded in Sales under the terms of the termination agreement with FSB with no associated costs. The increase in Pubs Gross profit in 2012 compared to 2011 was primarily due to increases in guest counts and pricing, partially offset by increases in labor, food and beverage costs, which contributed to the lower gross margin rate.

The increases in gross profit in 2011 compared to 2010 were primarily due to the improvements in gross margin rate and the increases in sales discussed above, which included the reduction in A-B fees. The improvements in gross margin rate were primarily due to an improved cost structure related to our Kona operations following the KBC Merger, which included elimination of the alternating proprietorship revenue and cost of sales, improved brewery performance and quality trends, increased capacity utilization and a shift in mix to our higher-end beer products. These improvements were partially offset by the mix shift from draft to bottle sales as the barrel equivalent of bottle gross profit is lower than draft, as well as an increased cost of shipping as a result of fuel surcharges.

Total approximate capacity utilization is calculated by dividing total shipments by the approximate working capacity and was as follows:

	Year Ended December 31,
	2012			2011			2010
Capacity utilization		73	%		75	%		66	%

During the second quarter of 2012, we added additional fermentation vessels to our breweries, which increased the combined capacity of our production breweries from approximately 900,000 barrels per year to approximately 1,075,000 barrels per year as of December 31, 2012.

Our contract brewing agreement with FSB, which was entered into during the first quarter of 2011, contributed to the improvement in capacity utilization in 2011 compared to 2010.

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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.

Information regarding SG&A was as follows (dollars in thousands):

	Year Ended December 31,						Dollar
	2012			2011			Change		% Change
	$	44,890		$	39,742		$	5,148		13.0	%
As a % of Net sales		26.5	%		26.6	%

	Year Ended December 31,						Dollar
	2011			2010			Change		% Change
	$	39,742		$	29,938		$	9,804		32.7	%
As a % of Net sales		26.6	%		22.7	%

The increase in SG&A in 2012 compared to 2011 was primarily due to increases in labor costs as we expand our national footprint into new geographies and increased costs associated with the launch of our Omission and Big Wave brands. Our investments in sales and marketing are consistent with our strategic focus on firmly establishing our brands’ national footprint and competitively addressing the varied needs of craft beer consumers. These increases were partially offset by lower packaging design and development costs.

The increase in SG&A and SG&A as a percentage of Net sales in 2011 compared to 2010 was primarily due to an increase in sales and marketing costs, principally comprised of labor costs related to our national sales organization, packaging design and development, promotions and sponsorship activity, point of sale and related trade merchandise, and brand platform enhancements. Administrative costs associated with the operations acquired with the KBC Merger in October 2010 also contributed to the increase.

Income from Equity Method Investments

Income from equity method investments included our share of FSB’s net income through the date of sale in May 2011 and our share of Kona’s net income through the date of the KBC Merger in October 2010. Since completion of the KBC Merger, Kona’s operating results have been included in our consolidated operating results.

Income from equity method investments was as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
FSB	$	-	$	691	$	696
Kona		-		-		146
Total	$	-	$	691	$	842

Gain on Sale of FSB

Our pre-tax gain on the sale of FSB in 2011 totaled $10.4 million, which resulted from proceeds of $16.3 million less the investment in FSB of $5.9 million.

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Interest Expense

Information regarding interest expense was as follows (dollars in thousands):

	Year Ended December 31,				Dollar
	2012		2011		Change			% Change
Interest expense	$	663	$	918	$	(255	)		(27.8	)%

	2011		2010
Interest expense	$	918	$	1,497	$	(579	)		(38.7	)%

	Year Ended December 31,
	2012			2011			2010
Average debt outstanding	$	13,436		$	20,163		$	24,236
Average interest rate		2.74	%		3.43	%		3.34	%

The decrease in Interest expense in 2012 compared to 2011 was due to lower average outstanding borrowings and lower average interest rates. The average interest rates shown in the above table represent cash interest, exclusive of our interest rate swap. The decreases in average outstanding borrowings were primarily the result of using a portion of the proceeds from the sale of FSB in May 2011 to repay the $8.8 million outstanding on our line of credit and $4.2 million outstanding related to capital leases.

The decrease in interest expense in 2011 compared to 2010 was due to the expiration of a non-qualifying interest rate swap in the fourth quarter of 2010 and lower average outstanding borrowings. The increase in the average interest rate on outstanding borrowings was due to the reduction in the outstanding balance on lower interest rate debt during 2011, partially offset by modifications we negotiated with our primary lender in the latter part of 2010 as a result of our improved financial condition. The decrease in average outstanding borrowings was primarily the result of using a portion of the proceeds from the sale of FSB to repay the $7.5 million outstanding on our line of credit.

Income Tax Provision

Our effective income tax rate was 43.6%, 38.5% and 39.5% in 2012, 2011 and 2010, respectively. The effective income tax rates reflect the impact of non-deductible expenses, primarily meals and entertainment, and state and local taxes and tax credits. The rate in 2012 reflects the impact of increasing the tax 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.

The rate in 2010 also reflects non-deductible merger-related expenses and a $100,000 reduction to our valuation allowance during the second quarter of 2010. We made this reduction, eliminating the valuation allowance, due to the cumulative earnings generated and other evidence available to us regarding the potential of fully utilizing our outstanding net operating loss carryforwards.

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 flow from operations, bank borrowings and the sale of common and preferred stock. We anticipate meeting our obligations for the twelve months beginning January 1, 2013 primarily from cash flows generated from operations. In addition, we may borrow under our line of credit facility as the need arises. Capital resources available to us at December 31, 2012 included $5.0 million of Cash and $22.0 million available under our line of credit facility.

We had $5.0 million of Cash and $5.2 million of working capital at December 31, 2012. Our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 10.8% at December 31, 2012.

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A summary of our cash flow information was as follows (dollars in thousands):

	Year Ended December 31,
	2012			2011			2010
Cash flows provided by operating activities	$	13,105		$	6,728		$	10,798
Cash flows provided by (used in) investing activities		(8,683	)		7,131			(10,313	)
Cash flows used in financing activities		(204	)		(13,228	)		(332	)
Increase in cash	$	4,218		$	631		$	153

Cash provided by operating activities of $13.1 million in 2012 resulted from our Net income of $2.5 million, net non-cash expense of $8.7 million and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, decreased $2.8 million to $10.5 million at December 31, 2012 compared to $13.3 million at December 31, 2011. This decrease was primarily due to a $1.9 million decrease in our receivable from A-B, which totaled $6.4 million at December 31, 2012. Historically, we have not had collection problems related to our accounts receivable.

Inventories increased $2.3 million to $11.7 million at December 31, 2012 compared to $9.4 million at December 31, 2011, primarily to support an increase in shipment volume.

Accounts payable increased $1.3 million to $12.3 million at December 31, 2012 compared to $11.0 million at December 31, 2011, primarily due to increased inventory purchases to support our increased level of sales, partially offset by a $53,000 decrease in the portion of our payable to A-B that is included in Accounts payable, which totaled $1.4 million at December 31, 2012.

As of December 31, 2012, we had state net operating loss carryforwards (“NOLs”) available to offset payment of future income taxes of $73,000, tax-effected; and we had no federal NOLs remaining. We also had $609,000 in federal alternative minimum tax (“AMT”) credit carry forwards and federal insurance contributions act (“FICA”) credit carryforwards of $29,000 tax-effected.

We anticipate that we will utilize the remaining state NOLs and federal credit carry forwards in the near future and, accordingly, once utilized, we will be required to satisfy all of our income tax obligations with cash.

Capital expenditures of $9.1 million in 2012 were primarily for capacity, efficiency and cooperage purposes. For 2013, we anticipate capital expenditures of approximately $11 million to $13 million primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail.

We have a loan agreement (as amended, the “Loan Agreement”) with BofA, which is presently comprised of a $22.0 million revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $11.8 million term loan (“Term Loan”). We may draw upon the Line of Credit for working capital and general corporate purposes. At December 31, 2012, we had no borrowings outstanding under the Line of Credit and we were in compliance with the financial covenants associated with the Loan Agreement.

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Contractual Commitments and Obligations

The following is a summary of our contractual commitments and obligations as of December 31, 2012 (in thousands):

	Payments Due By Period
Contractual Obligation	Total		2013		2014 and 2015		2016 and 2017		2018 and beyond
Term loan	$	11,822	$	456	$	1,002	$	1,137	$	9,227
Interest on term loan(1)		718		143		268		242		65
Promissory notes		600		-		600		-		-
Interest on promissory notes		348		144		204		-
Note with related party		346		181		165		-		-
Interest on note with related party		16		12		4		-		-
Operating leases		16,741		1,303		1,989		1,625		11,824
Capital leases		17		6		10		1		-
Purchase commitments		20,758		16,331		3,810		617		-
Sponsorship obligations		3,989		2,241		1,579		169		-
Interest rate swap(2)		190		190		-		-		-
	$	55,545	$	21,007	$	9,631	$	3,791	$	21,116

(1)	The variable interest rate on our term loan was 1.21% at December 31, 2012.

(2)	The fixed rate on our interest rate swap is 4.48%. We pay that fixed rate less the Benchmark Rate, which, at December 31, 2012, was 0.21%.

See Notes 10, 11 and 18 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information.

Inflation

We believe that the impact of inflation was minimal on our business in 2012, 2011 and 2010.

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

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. All goodwill has been allocated to our Beer Related reporting unit based on the relative fair value of the future benefit of the purchased and existing operations. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Our reporting units are consistent with the operating segments identified in “Note 13. Segment Results and Concentrations” in Part II, Item 8 of this Form 10-K.

We perform an annual impairment assessment as of December 31 of each year, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, and entity specific factors such as strategies and financial performance. We are not required to perform a qualitative assessment for our annual impairment test and may instead bypass the qualitative assessment and perform the two-step goodwill impairment test.

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For reporting units in which the impairment assessment concludes that it is more likely than not that the fair value is less than its carrying value, we perform the first step of the goodwill impairment test, which compares the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, the second step includes determining the implied fair value of goodwill, which is then compared with the carrying amount to determine if an impairment loss is recorded. We use a combination of valuation methods, market capitalization and income approach, to estimate the fair value of the reporting units.

The significant estimates and assumptions used by management in assessing the recoverability of goodwill are estimated future cash flows, present value discount rate, estimated growth of the overall craft beer segment, and other factors. If our estimated future cash flows were to significantly decline, an impairment charge could result. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment.

Indefinite-Lived Intangible Assets

We review indefinite-lived intangible assets, primarily comprised of our trademarks, domain name and recipes, for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For indefinite-lived intangible assets that we conclude that it is more likely than not that the fair value is more than its carrying value, no further testing is required. For those for which we do not conclude that it is more likely than not that the fair value is more than the carrying value, we test the asset for recoverability. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If it is determined that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. We are not required to perform a qualitative assessment for our annual impairment test and may instead bypass the qualitative assessment and perform the quantitative test.

The assumptions and estimates used to determine future values and remaining useful lives of our intangibles are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for specific product lines.

Long-Lived Asset Impairment

We evaluate potential impairment of our long-lived assets, including our distributor agreements, non-compete agreements and other intangible assets, when facts and circumstances indicate that the carrying values of such long-lived assets may be impaired. In such cases, an evaluation of recoverability is performed by comparing the carrying value of the assets to the projected future undiscounted cash flows and by preparing other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss during the current period. We did not identify indicators of impairment during 2012, 2011 or 2010.

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Refundable Deposits on Kegs

We distribute our draft beer in kegs that are owned by us, as well as in kegs that have been leased from third parties. Kegs that are owned by us are reflected 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, regardless of whether the keg is owned or leased, 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.

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.

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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 long-term debt. To mitigate this risk, we entered into a five-year interest rate swap agreement, which expires July 1, 2013, to hedge the variability of interest payments associated with our variable-rate borrowings. Through this swap agreement, we pay interest at a fixed rate of 4.48% and receive interest at a floating-rate of the one-month LIBOR, which was 0.21% at December 31, 2012. Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment. This interest rate swap reduces our overall interest rate risk. We did not have any unhedged variable rate debt outstanding at December 31, 2012.

Due to the nature of our highly liquid cash, an increase or decrease in interest rates would not materially affect the fair value of our cash or the related interest income.

Item 8.

Financial Statements and Supplementary Data

Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2012 is as follows:

2012 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	38,499		$	44,264		$	44,588		$	41,936
Cost of sales		26,792			30,926			30,964			30,579
Gross profit		11,707			13,338			13,624			11,357
Selling, general and administrative expenses		10,373			12,222			11,907			10,388
Operating income		1,334			1,116			1,717			969
Other expense, net		(161	)		(176	)		(155	)		(167	)
Income before income taxes		1,173			940			1,562			802
Income tax provision		475			381			614			481
Net income	$	698		$	559		$	948		$	321
Basic and diluted net income per share	$	0.04		$	0.03		$	0.05		$	0.01

Shares used in basic per share calculation		18,845			18,857			18,872			18,874
Shares used in diluted per share calculation		18,911			18,931			18,954			18,940

2011 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	32,297		$	41,496		$	40,477		$	34,927
Cost of sales		23,069			28,038			27,762			25,142
Gross profit		9,228			13,458			12,715			9,785
Selling, general and administrative expenses		9,289			10,670			10,530			9,253
Operating income (loss)		(61	)		2,788			2,185			532
Income from equity-method investments		356			335			-			-
Gain on sale of equity interest in Fulton Street Brewery, LLC		-			10,398			-			34
Other expense, net		(269	)		(253	)		(183	)		(170	)
Income before income taxes		26			13,268			2,002			396
Income tax provision		10			5,108			771			152
Net income	$	16		$	8,160		$	1,231		$	244
Basic and diluted net income per share	$	-		$	0.43		$	0.07		$	0.01

Shares used in basic per share calculation		18,819			18,829			18,843			18,845
Shares used in diluted per share calculation		18,928			18,945			18,935			18,942

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To 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, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with generally accepted accounting principles in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Craft Brew Alliance, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2013 expressed an unqualified opinion thereon.

/s/ Moss Adams LLP

Seattle, Washington

March 12, 2013

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CRAFT BREW ALLIANCE, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

	December 31,
	2012			2011

Assets
Current assets:
Cash	$	5,013		$	795
Accounts receivable, net		10,512			13,326
Inventories		11,749			9,446
Deferred income tax asset, net		1,250			894
Other current assets		3,809			2,816
Total current assets		32,333			27,277

Property, equipment and leasehold improvements, net		102,852			100,725
Goodwill		12,917			12,917
Intangible and other assets, net		17,562			17,989
Total assets	$	165,664		$	158,908

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	12,255		$	10,994
Accrued salaries, wages and payroll taxes		5,267			4,524
Refundable deposits		7,896			7,400
Other accrued expenses		1,066			1,436
Current portion of long-term debt and capital lease obligations		642			596
Total current liabilities		27,126			24,950

Long-term debt and capital lease obligations, net of current portion		12,440			13,188
Fair value of derivative financial instruments		219			572
Deferred income tax liability, net		17,156			15,210
Other liabilities		528			479
Total liabilities		57,469			54,399

Commitments and contingencies

Common shareholders' equity:
Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 18,874,256 and 18,844,817		94			94
Additional paid-in capital		136,030			135,091
Accumulated other comprehensive loss		(135	)		(356	)
Accumulated deficit		(27,794	)		(30,320	)
Total common shareholders' equity		108,195			104,509
Total liabilities and common shareholders' equity	$	165,664		$	158,908

The accompanying notes are an integral part of these financial statements.

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CRAFT BREW ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

	Year Ended December 31,
	2012			2011			2010


Sales	$	182,018		$	161,000		$	140,852
Less excise taxes		12,731			11,803			9,121
Net sales		169,287			149,197			131,731
Cost of sales		119,261			104,011			98,064
Gross profit		50,026			45,186			33,667
Selling, general and administrative expenses		44,890			39,742			29,938
Merger related expenses		-			-			559
Operating income		5,136			5,444			3,170
Income from equity method investments		-			691			842
Gain on sale of equity interest in Fulton Street Brewery, LLC		-			10,432			-
Interest expense		(663	)		(918	)		(1,497	)
Interest and other income, net		4			43			271
Income before income taxes		4,477			15,692			2,786
Income tax provision		1,951			6,041			1,100
Net income	$	2,526		$	9,651		$	1,686

Basic and diluted net income per share	$	0.13		$	0.51		$	0.10

Shares used in basic per share calculations		18,862			18,834			17,523

Shares used in diluted per share calculations		18,934