CRAFT BREW ALLIANCE, INC. - FORM 8-K/A - EX-99.2

Attached files

file	filename
8-K/A - FORM 8-K/A - CRAFT BREW ALLIANCE, INC.	v57556e8vkza.htm
EX-99.3 - EX-99.3 - CRAFT BREW ALLIANCE, INC.	v57556exv99w3.htm
EX-99.1 - EX-99.1 - CRAFT BREW ALLIANCE, INC.	v57556exv99w1.htm
EX-23.1 - EX-23.1 - CRAFT BREW ALLIANCE, INC.	v57556exv23w1.htm

Exhibit 99.2

Kona Brewing Company, Inc.
and Subsidiaries

Consolidated Financial Statements (Unaudited)
June 30, 2010

Kona Brewing Company, Inc. and Subsidiaries
Index
June 30, 2010


	Page(s)

Consolidated Financial Statements

Balance Sheets June 30, 2010 and December 31, 2009		1

Statements of Operations for the Six Months Ended June 30, 2010 and 2009		2

Statements of Stockholders’ Equity for the Six Months Ended June 30, 2010 and 2009		3

Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009		4

Notes to Financial Statements		5-13

Kona Brewing Company, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2010 and December 31, 2009


	(unaudited)
	June 30,		December 31,
	2010		2009
Assets
Current assets
Cash and cash equivalents	$	1,515,665	$	1,001,209
Accounts receivable (less allowance for doubtful accounts of $49,638 at June 30, 2010 and December 31, 2009)		3,537,513		2,425,245
Inventory		714,693		877,520
Prepaid expenses		195,780		110,304
Marketable securities available-for-sale		774,802		404,234
Refundable income taxes		73,160		—
Deferred income taxes		—		59,800
Other current assets		82,137		19,724

Total current assets		6,893,750		4,898,036

Property and equipment, net		3,130,878		2,272,337
Intangible assets, net		26,262		30,837
Deferred income taxes		94,900		68,100

Total assets	$	10,145,790	$	7,269,310


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	2,613,926	$	2,185,668
Accrued salaries and wages		720,343		809,731
Other accrued expenses		1,561,520		333,242
Deposits on kegs		74,340		214,462
Income taxes payable		—		165,644
Deferred income taxes		307,800		—
Deferred rent		7,569		7,569
Capital lease obligation		11,088		11,603

Total current liabilities		5,296,586		3,727,919

Notes payable		1,068,384		284,902
Deferred rent		13,246		17,030
Capital lease obligation		24,339		29,556

Total liabilities		6,402,555		4,059,407


Stockholders’ equity
Common stock, $1 par value — 250,000 shares authorized; 2,500 shares issued and outstanding		2,500		2,500
Additional paid-in capital		1,697,119		1,697,119
Retained earnings		1,222,336		934,853
Accumulated other comprehensive income		386,069		157,159
Noncontrolling interest in subsidiary		435,211		418,272

Total stockholders’ equity		3,743,235		3,209,903

Total liabilities and stockholders’ equity	$	10,145,790	$	7,269,310

The accompanying notes are an integral part of the consolidated financial statements.

Kona Brewing Company, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

Six Months Ended June 30, 2010 and 2009


	June 30,
	2010			2009
Net sales	$	13,382,953		$	12,649,353
Cost of operations		8,927,361			8,360,911

Gross profit		4,455,592			4,288,442

General and administrative expenses		3,081,866			2,771,163
Sales and marketing expenses		613,505			487,963
Depreciation and amortization		182,072			189,733

Total operating expenses		3,877,443			3,448,859

Operating profit		578,149			839,583

Interest and other income		3,125			5,425
Interest expense		(21,233	)		(19,871	)

Income before income taxes		560,041			825,137
Income tax provision		235,158			227,522

Net income		324,883			597,615
Less: Net income attributable to noncontrolling interest		37,400			123,600

Net income attributable to Kona Brewing Company, Inc.	$	287,483		$	474,015

The accompanying notes are an integral part of the consolidated financial statements.

Kona Brewing Company, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Unaudited)
Six Months Ended June 30, 2010 and 2009


	Kona Brewing Co., Inc. Stockholders
							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive		Noncontrolling
	Stock		Capital		Earnings		Income		Interest			Total

Balance, January 1, 2009	$	2,500	$	1,697,119	$	318,439	$	32,299	$	276,976		$	2,327,333

Distribution of capital		—		—		—		—		(4,853	)		(4,853	)

Comprehensive income
Net income		—		—		474,015		—		123,600			597,615
Unrealized holding gain on securities, net of tax		—		—		—		87,404		—			87,404

Comprehensive income													685,019

Balance, June 30, 2009	$	2,500	$	1,697,119	$	792,454	$	119,703	$	395,723		$	3,007,499


Balance, January 1, 2010	$	2,500	$	1,697,119	$	934,853	$	157,159	$	418,272		$	3,209,903

Distribution of capital		—		—		—		—		(20,461	)		(20,461	)

Comprehensive income
Net income		—		—		287,483		—		37,400			324,883
Unrealized holding gain on securities, net of tax		—		—		—		228,910		—			228,910

Comprehensive income													553,793

Balance, June 30, 2010	$	2,500	$	1,697,119	$	1,222,336	$	386,069	$	435,211		$	3,743,235

The accompanying notes are an integral part of the consolidated financial statements.

Kona Brewing Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2010 and 2009


	June 30,
	2010			2009
Cash flows from operating activities
Net income	$	324,883		$	597,615
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		182,072			189,733
Deferred income taxes		199,143			(27,479	)
Deferred rent		(3,784	)		(18,264	)
Changes in
Accounts receivable		(1,112,268	)		(1,126,405	)
Inventory		162,827			281,311
Prepaid expenses		(85,476	)		28,467
Other assets		(62,413	)		(2,453	)
Accounts payable		428,258			32,256
Accrued salaries and wages		(89,388	)		(21,081	)
Other accrued expenses		1,228,278			780,770
Deposits on kegs		(140,122	)		5,370
Refundable income taxes / income taxes payable		(238,804	)		355,532

Net cash provided by operating activities		793,206			1,075,372

Cash flows from investing activities
Additions to property and equipment		(1,036,039	)		(18,448	)
Acquisition of intangible assets		—			(10,437	)

Net cash used in investing activities		(1,036,039	)		(28,885	)

Cash flows from financing activities
Proceeds from note payable		783,482			—
Payments on notes payable		—			(246,428	)
Noncontrolling interest		(20,461	)		(4,853	)
Payments on capital leases		(5,732	)		(3,123	)

Net cash provided by (used in) financing activities		757,289			(254,404	)

Net increase in cash and cash equivalents		514,456			792,083
Cash and cash equivalents
Beginning of period		1,001,209			779,394

End of period	$	1,515,665		$	1,571,477

The accompanying notes are an integral part of the consolidated financial statements.

Kona Brewing Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2010

1.		Summary of Significant Accounting Policies and Practices

		Description of Business

		Kona Brewing Company, Inc. and Subsidiaries (the “Company”) is principally engaged in the operation of two pubs, one on the island of Hawaii and the other on the island of Oahu. The Company also distributes craft beer in Japan and Taiwan. Kona Brewery LLC (“KB LLC”), an 80%-owned subsidiary, is primarily engaged in the brewing and distribution of craft beer throughout the United States.

		Principles of Consolidation

		The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary Kona Brew Enterprises LLC (“KBE”), and 80%-owned subsidiary KB LLC. Craft Brewers Alliance, Inc. (“CBAI”) holds the remaining 20% noncontrolling ownership interest in KB LLC.

		All significant intercompany balances and transactions have been eliminated. Non-controlling interests are included as a separate component of stockholders’ equity in the consolidated balance sheets.

		Concentrations of Risk

		Financial instruments that potentially expose the Company to credit risk consist principally of cash and accounts receivables. The Company maintains its cash with a financial institution in the State of Hawaii. The aggregate balance is insured by federal agencies up to $250,000. Amounts on deposit typically exceed federally insured limits.

		The Company extends credit to customers in the ordinary course of business. CBAI accounted for approximately 90% of gross accounts receivable at June 30, 2010 and December 31, 2009. CBAI also accounted for 64% of the Company’s net sales for the six months ended June 30, 2010 and 2009. No other customer exceeded 10% of the Company’s gross accounts receivable balance or net sales as of or for the six months ended June 30, 2010 and 2009.

		Cash Equivalents

		The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.

		Accounts Receivable

		Accounts receivables are recorded at the amounts due from customers. Generally, accounts past due by more than 30 days are considered delinquent. The allowance for doubtful accounts represents management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company estimated the allowance based on an analysis of specific customers, taking into consideration the age of past due accounts and the customer’s ability to pay. However, because of the uncertainties inherent in assessing the collectibility of receivables, it is at least reasonably possible that there will be near-term changes in management’s estimate due to actual losses and other factors.

		Inventories

		Inventories, comprised of raw materials, work in process, finished goods, and other inventory items are stated at the lower of cost or market. Beer cost is determined using the standard cost method which approximates the first-in, first-out method. For materials produced in the Hawaii brewery, the cost elements of items included in work in process and finished goods include raw materials only, with direct labor recorded as a period cost. Materials produced under the alternating proprietorship agreement with CBAI are valued at their fully-loaded cost. All recorded inventory quantities are adjusted based on the results of periodic physical inventory counts.

Kona Brewing Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2010

Marketable Securities

The Company considers its investment in the common stock of CBAI to be available-for-sale. The investment is carried at fair value based on quoted market prices, with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of stockholders’ equity, net of related income taxes.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Major renewals and improvements are capitalized. Replacements, maintenance and repairs which do not improve or extend asset lives are charged to expense as incurred. Gains or losses from property and equipment disposals are included in other income (expense).

Depreciation of buildings, machinery and other equipment is provided on the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements and assets acquired under capital leases are amortized over the shorter of the asset’s useful life or the lease term.

Estimated useful lives of buildings, machinery, and other equipment used to depreciate various asset categories are as follows:


Buildings		25 years
Computer and related office equipment		3 years
Other equipment		5 years

Impairment of Long-Lived Assets

Management reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of an asset is deemed not recoverable if it exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount of an asset is deemed not recoverable, an impairment loss is recognized to the extent the carrying amount of the asset exceeds its estimated fair value.

Intangible Assets

Intangible assets with finite useful lives are amortized over the period which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. Intangible assets maintained by the Company as of June 30, 2010 and December 31, 2009 were comprised of design costs for merchandise and other items used in the Company’s operations.

Deposits on Kegs

The Company distributes its draft beer in kegs that are owned by the Company as well as in kegs that have been leased from third parties. Kegs that are owned by the Company are reflected in the Company’s consolidated balance sheet at cost and are depreciated over their estimated useful lives. When draft beer is shipped to the wholesaler, regardless of whether the keg is owned or leased, the Company collects a refundable deposit, presented as a current liability (refundable keg deposits) in the Company’s consolidated balance sheets. Upon return of the keg to the Company, the deposit is refunded to the wholesaler.

The Company has experienced some loss of kegs and anticipates that some loss will occur in future periods due to the significant volume of kegs handled, the homogeneous nature of kegs owned by most brewers, and the relatively small deposit collected for each keg when compared with its market value. The Company believes that this is an industry-wide problem and the

Kona Brewing Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2010

Company’s loss experience is not atypical. In order to estimate forfeited deposits attributable to lost kegs, the Company periodically uses internal records, records maintained by other third party vendors, and historical information to estimate the physical count of kegs held by others. These estimates affect the amount recorded as equipment and refundable deposits as of the date of the financial statements. The actual liability for refundable deposits could differ from these estimates.

Deferred Rent

Rental expense on operating leases is recognized on a straight-line basis over the respective lease terms, with the difference between rental expense recognized for financial statement purposes and the actual amounts paid recorded as a deferred rent liability.

Revenue Recognition

The Company recognizes revenue from the sale of its bottle and keg beer products when the associated products are shipped to customers. The Company also earns revenue via retail sales at its two pubs and franchise revenues associated with a restaurant located at the Honolulu International Airport. Revenues are reported gross of general excise taxes passed on to customers. General excise taxes collected from customers approximated $197,000 and $183,000 for the six months ended June 30, 2010 and 2009, respectively.

Income Taxes

For federal and state income tax purposes, Kona Brewing Company, Inc. and KBE file a consolidated income tax return. Separate partnership returns are filed for KB LLC.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In 2009, the Company adopted the provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 740-10. FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of applying FASB ASC 740-10 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption.

The Company recognizes the effect of a tax position only to the extent that the tax position is more likely than not to be sustained upon examination, based on the technical merits of the position. Changes in the recognition or measurement of tax positions are reflected in the period in which the change of judgment occurs. Management has determined that there were no material uncertain tax positions requiring recognition or disclosure in the consolidated financial statements as of June 30, 2010 or for the period then ended.

The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2006.

Advertising and Promotion Costs

Advertising and promotion costs are charged to expense as incurred. The total amounts charged to advertising and promotion expense approximated $76,000 for each of the six months ended June 30, 2010 and 2009.