Note 8. KBC Merger

On October 1, 2010, we completed the KBC Merger by acquiring all outstanding shares of Kona Brewing Co., Inc.'s (“KBC”) common stock in exchange for $6.2 million in cash and the issuance of 1,667,000 shares of our common stock with a value of $11.7 million to former KBC shareholders.

We believe that the combined entity is able to secure advantages beyond those that had already been achieved in our long-term strategic relationship with KBC in supporting its brand family of products. This acquisition increases the breadth and variety of our brand offerings, creating favorable selling opportunities in a greater number of lucrative markets.

We incurred merger-related expenses, including legal, consulting, accounting and other professional fees, and severance costs of $559,000, which are reflected in merger-related expenses in our Consolidated Statements of Income for the year ended December 31, 2010.

The acquisition of KBC was accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date measured at their fair values. The excess of the consideration transferred and the acquisition date fair value of the previous equity interest held in Kona over the fair value of net assets acquired is recognized as goodwill. The following table summarizes the consideration paid (in thousands):

Fair value of common stock issued	$	11,702
Cash consideration paid		6,237
		17,939
Fair value of equity interest in Kona held at acquisition date		1,200
Total consideration	$	19,139

The fair value of our common stock issued was computed by multiplying the number of shares of common stock issued by $7.02, the closing price of our common stock as reported by Nasdaq as of the date of the acquisition.

The carrying value of our 20% equity interest in Kona was $1.1 million on the acquisition date and we recognized a gain of $91,000 as a result of measuring Kona at fair value. The gain is included in Other income in the Consolidated Statements of Income for the year ended December 31, 2010.

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

Assets
Current assets	$	4,858
Property, equipment and leasehold improvements		4,174
Trade name and trademarks		4,600
Non-compete agreements		440
Total assets acquired		14,072

Liabilities
Current liabilities		4,091
Interest bearing liabilities and other long-term liabilities		1,476
Deferred income tax liabilities, net and other non-current liabilities		2,283
Total liabilities assumed		7,850
Net assets acquired	$	6,222

Goodwill recorded	$	12,917

The KBC Merger was structured as a stock purchase and, therefore, the values assigned to the trade name and trademarks, non-compete agreements and goodwill are not deductible for tax purposes.

Prior to the acquisition date, we accounted for our 20% equity ownership interest in Kona under the equity method of accounting. Upon completion of the business combination, we consolidate the operations of KBC. Our results of operations included net sales of $3.2 million and net income of $309,000 attributable to KBC for the period from October 1, 2010 to December 31, 2010. Net income attributable to KBC for the period includes the effect of acquisition accounting adjustments, primarily amortization of intangible assets.

As a result of the KBC Merger, KBC became a wholly owned subsidiary and, accordingly, KBC's results of operations are included in our consolidated results of operations from October 1, 2010. For the years ended December 31, 2010 and 2009, our share of KBC's net income prior to the KBC Merger was $146,000 and $111,000, respectively.

Unaudited pro forma results of operations as if the KBC Merger had occurred on January 1, 2009 are as follows (in thousands, except per share amounts):

	Year Ended December 31,
	2010		2009
Net sales	$	128,260	$	120,457
Net income	$	2,181	$	391
Basic and diluted earnings per share	$	0.12	$	0.02