Craft Brew Alliance Inc Annual Report 2008

FY2008 Annual Report · Craft Brew Alliance Inc

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Craft Brewers Alliance, Inc.

2008 Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

Commission File Number 0-26542

CRAFT BREWERS ALLIANCE, INC.

(Exact name of registrant as specified in its charter)

Washington
(State of incorporation)

929 North Russell Street
Portland, Oregon
(Address of principal executive offices)

91-1141254
(I.R.S. Employer
Identification Number)

97227-1733
(Zip Code)

(503) 331-7270
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.005 Per Share

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes n

No ¥

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 n

No ¥

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 ¥

No n

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 the 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. ¥

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer n Accelerated filer n

Smaller reporting company ¥

Non-accelerated filer n
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes n

No ¥

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of the last day of the registrant’s
most recently completed second quarter on June 30, 2008 (based upon the closing sale price of the registrant’s Common Stock, as
reported by The Nasdaq Stock Market) was $23,501,241. (1)

The number of shares of the registrant’s Common Stock outstanding as of March 16, 2009 was 16,948,063.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates specified information by reference from the proxy statement for the annual meeting of shareholders to be

held on May 29, 2009.
(1) Excludes shares held of record on that date by directors and executive officers and greater than 10% shareholders of the

registrant. Exclusion of such shares should not be construed to indicate that any such person directly or indirectly possesses the
power to direct or cause the direction of the management of the policies of the registrant.

CRAFT BREWERS ALLIANCE, INC.

FORM 10-K

TABLE OF CONTENTS

PART I

ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

PART II

ITEM 5.

ITEM 6.
ITEM 7.

Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Management’s Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . 48
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
ITEM 9A(T). Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ITEM 9B.

ITEM 7A.
ITEM 8.
ITEM 9.

PART III

ITEM 10.
ITEM 11.
ITEM 12.

ITEM 13.
ITEM 14.

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . 84
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . 85
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

ITEM 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

PART IV

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

In this report, we refer to Craft Brewers Alliance, Inc. as “we,” “us,” “our,” “the Company,” or “CBA.”

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 the Company believes are reasonable, but are by their nature
inherently uncertain. Many possible events or factors could affect the Company’s future financial results and
performance, and could cause actual results or performance to differ materially from those expressed,
including those risks and uncertainties described in “Item 1A. — Risk Factors” and those described from time
to time in the Company’s future reports filed with the Securities and Exchange Commission. Caution should be
taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this
annual report.

Third Party Information

In this report, the Company relies and refers to information regarding industry data obtained from market
research, publicly available information, industry publications, U.S. government sources or other third parties.
Although the Company believes the information is reliable, it cannot guarantee the accuracy or completeness
of the information and has not independently verified it.

Item 1. Business

PART I

Craft Brewers Alliance, Inc. (“CBA” or the “Company”) resulted from the merger between Redhook Ale

Brewery, Incorporated. (“Redhook”) and Widmer Brothers Brewing Company (“Widmer”) on July 1, 2008.
Previously known as Redhook, the Company has been an independent brewer of craft beers in the United
States since its formation in Seattle, Washington in 1981 and is considered to be one of the pioneers of the
domestic craft brewing segment. Widmer was founded in 1984 by brothers Kurt and Rob Widmer in Portland,
Oregon. Widmer is best recognized for introducing unfiltered wheat beer or Hefeweizen to beer drinkers in
America with the introduction of the brand’s flagship, Widmer Hefeweizen, in 1986.

The Company owns and operates three production brewing facilities: one that is Widmer-branded in

Portland, Oregon and two that are Redhook-branded, one in Woodinville, Washington and the other in
Portsmouth, New Hampshire. The Company also operates a small pilot brewpub style brewery in Portland,
Oregon that is Widmer-branded. Management believes that the Company’s production capacity is of high
quality and that the Company is one of only two domestic craft brewers that own and operate substantial
production facilities in both the western and eastern regions of the United States. Management is focused on
delivering to its targeted markets the freshest and highest quality product, while maximizing the channel
fulfillment sourced from the most effective production resource available.

The Company produces a variety of specialty craft beers using traditional European and American
brewing methods, using only high-quality hops, malted barley, wheat, rye and other natural ingredients. The
Company’s beers are divided into two primary brand families: Widmer Brothers Beers and Redhook Beers.
The Company also has brewing, sales and marketing relationships with the Kona Brewery LLC (“Kona”) of
Kona, Hawaii. See “Products” below. In addition, CBAI has sales and marketing relationships with Fulton
Street Brewing, LLC (“FSB”) of Chicago, Illinois, which brews malt beverages under the brand name Goose
Island Beer Company. The Company holds minority equity interests in Kona and FSB.

The Company’s products are widely distributed in the United States in all major retail channels through a
distribution agreement with Anheuser-Busch, Incorporated (“A-B”). See “Product Distribution — Relationship
with A-B” below.

Merger with Widmer

In seeking to merge with Widmer, the Company believes that the combined entity will be able to secure
efficiencies, beyond those that had already been achieved by its existing relationships with Widmer, by using
the two companies’ breweries and a national sales force, as well as by reducing duplicate functions. Utilizing
the combined breweries offers a greater opportunity to rationalize production capacity in line with product
demand. The national sales force of the combined entity will also support further promotion of the products of
Kona and FSB. The Company expects that the combined entity may have greater access to capital markets
driven by its increased size and expected growth rates.

On July 1, 2008, the Merger was consummated. Pursuant to the Merger Agreement and by operation of
law, upon the merger of Widmer with and into the Company, the Company acquired all of the assets, rights,
privileges, properties, franchises, liabilities and obligations of Widmer. Each outstanding share of capital stock
of Widmer was converted into the right to receive 2.1551 shares of Company common stock, or
8,361,514 shares. The Merger resulted in Widmer shareholders and existing Company shareholders each
holding approximately 50% of the outstanding shares of the Company. No Widmer shareholder exercised
statutory appraisal rights in connection with the Merger.

In connection with the Merger, Craft Brands Alliance, LLC (“Craft Brands”), a sales and marketing joint

venture between the Company and Widmer, was terminated, with all assets and liabilities merged with and
into the Company effective July 1, 2008. All existing agreements, including all associated future commitments
and obligations, between the Company and Craft Brands and between Craft Brands and Widmer terminated as
a result of the merger of Craft Brands.

The common stock of the Company continues to trade on the Nasdaq Stock Market under the trading

symbol “HOOK.”

Industry Background

The Company is 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 in 2008 are estimated by industry sources to have
increased by approximately 5.5% over 2007 shipments, after an approximately 12% increase from 2006 to
2007. Craft beer shipments in 2008 and 2007 were approximately 4.0% and 3.8%, respectively, of total beer
shipped in the United States. Approximately 8.6 million and 8.1 million barrels were shipped in the United
States by the craft beer segment during 2008 and 2007, while total beer sold in the United States including
imported beer was 212.7 million barrels and 211.5 million barrels, respectively. The number of craft brewers
in the United States grew dramatically from 1994 to 2000, increasing from 627 participants at the end of 1994
and peaking at nearly 1,500 in 2000. At the end of 2008, the number of craft brewers was estimated to be
1,483.

The recent competitive environment has been characterized by two divergent trends; the number and

diversity of craft brewers have increased while simultaneously the national domestic brewers have acquired
other national domestic and foreign brewers, spurring consolidation in the quest for market share and
penetration into emerging global markets. National foreign brewers have also entered the merger and
acquisition market. This trend culminated with SABMiller and Molson Coors creating a joint venture, merging
their U.S. operations as MillerCoors to better compete with market leader A-B. MillerCoors was momentarily
the world’s largest brewer by volume, but was trumped by InBev’s acquisition of A-B, which was
consummated in the fourth quarter of 2008. According to industry sources, A-B and MillerCoors accounted
for nearly 80% of total beer shipped in the United States, including imports, in 2008.

By the latter half of the 1980s, a new domestic industry segment had developed in response to the
increasing consumer demand for fuller-flavored beers. Across the country, a proliferation of specialty brewers,

defined as annually selling more than 15,000 barrels but less than two million barrels of craft beer brewed at
their own facilities; contract brewers, defined as selling craft beer brewed by a third party to the contract
brewer’s specifications; microbreweries, defined as annually selling less than 15,000 barrels; and brewpubs,
which are restaurants-breweries selling 25% or more of their brewed product on-site, emerged to form the
craft beer industry. This new segment was able to deliver the fuller-flavored products presented by the
imported beers while still offering a fresher product than most imports and one which could appeal to local
taste preferences. Craft beer producers tend to concentrate on fuller flavors and less on appealing to mass
markets. The strength of consumer demand has enabled certain craft brewers, such as the Company, to evolve
from microbreweries into regional and national specialty brewers by constructing larger breweries while still
adhering to the traditional European brewing methods that typically characterize the craft brewing segment.
Industry sources estimate that craft beer produced by regional and national specialty brewers, such as the
Company, account for approximately two-thirds of total craft beer sales. Other craft brewers have sought to
take advantage of growing consumer demand and excess industry capacity, when available, by contract
brewing at underutilized facilities.

Since its formation in the 1980s, the rate at which the craft beer segment has grown has fluctuated. The

late 1980s and early 1990s were years of significant growth for the segment, followed by several years of
minimal growth in the late 1990s through the early 2000s. Recent industry reports for the performance for the
period from 2006 to 2008 indicate favorable trends once again. The craft beer segment’s success has been
impacted, both positively and negatively, by the success of the larger specialty beer category as well as
changes in the domestic alcoholic beverage market. Imported beers have enjoyed resurgence in demand since
the mid-1990s; however, the imported beer segment experienced a decrease in shipments of 3.4% during 2008.
Certain national domestic brewers have increased the competition by producing their own fuller-flavored
products to compete against craft beers. In 2001 and 2002, flavored malt beverages were introduced to the
market, initially gaining significant interest but recently experiencing smaller growth. Finally, the wine and
spirits market has seen a surge in recent years, attributable to competitive pricing, television advertising,
increased merchandising, and resurgent consumer interest in wine and spirits.

Business Strategy

The Company strives to be the preeminent specialty craft brewing company in the United States,

producing the highest quality ale products in company-owned facilities, and marketing and selling them
responsibly through its three-tier distribution system.

The central elements of the Company’s business strategy include:

Production of high-quality craft beers. The Company is committed to the production of a variety of

distinctive, flavorful craft beers. The Company brews its craft beers according to traditional European
brewing styles and methods, using only high-quality ingredients to brew in company-owned and operated
brewing facilities. As a symbol of quality, a number of the Company’s products are Kosher certified by
the Orthodox Union, a certification rarely sought by other brewers. The Company does not intend to
compete directly in terms of production style, pricing or extensive mass-media advertising typical of large
national brands.

Offering a full complement of beers through a robust collection of brand families. The Company

has established a collection of brand families to enable it to match individual brands to a variety of
preferences exhibited at the local and regional level. The Company expects this to enable it to deploy
brands that will appeal to the idiosyncrasies exhibited within the diversity of local markets throughout the
United States. Through the taste profiles and brand awareness created by the Company, customers are
able to forge a strong relationship with the targeted brands. The breadth of the Company’s product
offerings also provides consumers with the opportunity to match their mood, surroundings and activities
within the Company’s brand families.

Strategic distribution relationship with domestic industry leader. Since October 1994, the Company

has maintained a distribution relationship with A-B, pursuant to which the Company distributes its
products in substantially all of its markets through A-B’s wholesale distribution network. A-B’s domestic

network consists of more than 540 independent wholesale distributors, most of which are geographically
contiguous and independently owned and operated, and 12 branches owned and operated by A-B. This
distribution relationship with A-B has offered efficiencies in product delivery, state reporting and
licensing, billing and collections. The distribution relationship with A-B has also provided the Company
with access to A-B distributors at A-B’s distributor conventions, communications about the Company in
printed distributor materials, and A-B-supported opportunities for the Company to educate A-B distribu-
tors about the Company’s specialty products. The Company believes that these opportunities to access
A-B distributors have benefited the Company by creating increased awareness of and demand for CBA
products among A-B distributors. The Company has been able to reap the benefits of this distribution
relationship with A-B while, as an independent company, maintaining control over the production and
marketing of its products. Recent developments in the relationship between A-B and its independent
wholesalers have led to an increase in craft and specialty brewers with access to this channel, diminishing
the benefit to the Company of this relationship.

Control of production. Currently, the Company owns and operates all of its brewing facilities to
optimize the quality and consistency of its products and to achieve greater control over its production
costs. Management believes that its ability to engage in ongoing product innovation and to control
product quality provides critical competitive advantages. The Company’s highly automated breweries are
designed to produce beer in smaller batches relative to the national domestic brewers. The Company
believes that its investment in technology enables it to optimize employee productivity, to contain related
operating costs and to produce innovative beer styles and tastes. This brewing configuration provides
adequate production flexibility with minimal loss of efficiency and enhanced process reliability. The
Company will continue to evaluate production strategies to maximize its brewing efficiency and flexibility
to meet market demands.

Sales and marketing efforts focused on identifying and monetizing profitable channel opportunities.

As a result of the Merger, Management believes that the Company will be able to capitalize on the
strength of the Craft Brands workforce, utilizing the sales and marketing skills of a diverse talent pool
and leveraging the complementary brand families and product offerings to create a unique identity in the
distribution channel and with the end consumer. The Company believes that the combination of the three
complementary brand families promoted by one focused sales and marketing organization not only
delivers financial benefits but also delivers greater impact at the point of sale. The Company will focus
its brand families and product offerings on those markets and regions that represent the most significant
growth opportunities from the standpoint of sales and profitability.

Promotion of products. The Company promotes its products through a variety of advertising
programs with its wholesalers; by training and educating wholesalers and retailers about the Company’s
products; through promotions at local festivals, venues, and pubs; by utilizing its pubs located at the
Company’s breweries through price discounting; and, up to July 1, 2008, through Craft Brands. The
Company’s principal advertising programs include television, radio, billboards and print advertising
(magazines, newspapers, industry publications). The Company also markets its products to distributors,
retailers and consumers through a variety of specialized training and promotional methods, including
training sessions for distributors and retailers focused on the brewing process, the craft beer segment and
the Company’s brand families and product offerings and dissemination of point of sale and promotional
support items, such as in-store and signage displays. Promotional methods focused on our consumers
include hosting sampling sessions of the Company’s draft products in pubs and restaurants, using
promotional items including tap handles, glassware and coasters, and participating in local festivals and
sports venues to increase brand name recognition. In addition, the Company’s prominently located
breweries feature pubs and retail outlets and offer guided tours to further increase consumer awareness of
CBA’s brands.

The Company will occasionally enter into advertising and promotion programs where the entire program
is funded by the Company; however, in recent years, the Company has favored co-operative programs where
the Company’s spending is matched with an investment by a local distributor. Co-operative programs align the
interests of the Company with those of the wholesaler whose local market knowledge contributes to more

effective promotions. Sharing these efforts with a wholesaler helps the Company to leverage its investment in
advertising programs and gives the participating wholesaler a vested interest in the program’s success.

Products

The Company produces a variety of specialty craft beers using traditional European brewing methods.

The Company brews its beers using only high-quality hops, malted barley, wheat, rye and other natural
ingredients, and does not use any rice, corn, sugar, syrups or other adjuncts. The Company’s beers are
marketed on the basis of freshness and distinctive flavor profiles. To help maintain full flavor, the Company’s
products are not pasteurized. As a result, it is suggested that they be kept cool so that oxidation and heat-
induced aging will not adversely affect the original taste, and that they be distributed and served as soon as
possible, generally within three or four months after packaging to maximize freshness and flavor. The
Company distributes its products in glass bottles and kegs. The Company expects to begin distributing in the
second quarter of 2009 its beer in 5-liter steel cans. The Company applies a freshness date to its products for
the benefit of wholesalers and consumers.

The Company’s products are divided into three primary brand families: Widmer Brothers Beers and
Redhook Beers, both of which it owns, and Kona Brewing, which it offers through a distribution agreement
with Kona. The Company also utilizes its relationship with FSB to market product offerings by Goose Island
as complementary to these brand families. In addition, the Company also brews and sells in select markets
Pacific Ridge Pale Ale through a licensing arrangement with A-B. This beer is offered only on draft.

Widmer Brothers’ Beers

Widmer Hefeweizen. Available year-round. The top selling beer within the brand family is a golden,

cloudy wheat beer with a pronounced citrus aroma and flavor. This beer is intentionally left unfiltered to
create its unique appearance and flavor profile and is usually served with a lemon slice to enhance the beer’s
natural citrus notes. This beer’s relatively low alcohol content by volume makes it perfect for consumption as
a session beer. Its most recent award, among many, was the 2008 World Cup Gold medal winner for the
American-style Hefeweizen category.

Drifter Pale Ale (“Drifter”). Available year-round beginning in 2009. This beer possesses a unique

citrus character, smooth drinkability, and a distinctive hop character. Brewed with generous amounts of
Summit hops, a variety known for its intense citrus flavors and aromas, this beer has a taste unique to the Pale
Ale category. This beer started as a seasonal offering and was a 2006 Great American Beer Festival (“GABF”)
Silver Medal Winner for the American-style Pale Ale category.

Drop Top Amber Ale (“Drop Top”). Available year-round. Drop Top has a mild fruity aroma that is
complimented by toasted malt flavors, a pleasant maple character and a silky smooth finish. This beer was a
2008 GABF Gold Medal Winner for the Bitter or Pale Mild Ale category.

Broken Halo IPA (“Broken Halo”). Available year-round. Broken Halo is an Indian Pale Ale (“IPA”)

that features a bold, citrus hop aroma and bitterness that is balanced by a generous maltiness and a juicy,
quenching finish.

W Series. Available late Winter through early Summer. At the beginning of each year, Widmer
introduces a new beer to the market under the W Series. These beers showcase the talents of the Company’s
brewers and can range from IPAs to Belgians to bold Red Ales.

Okto. Available late Summer and Fall. The Okto was the first commercially available Oktoberfest beer
brewed in the United States. This beer has subtle hop notes with a mild fruity character, slightly sweet malty
flavor and is balanced by mild bitterness.

Brrr. Available late Fall and Winter. Brrr is a deep red ale with a bold citrus hop aroma and flavor that

is complimented by a rich and generous malt sweetness.

Redhook Beers

Long Hammer IPA (“Long Hammer”). Available year-round. The top-selling beer within the brand

family and is a premium English pub-style bitter ale with a pronounced hop profile and aroma, yet is
approachable and easy to drink with a dry, crisp finish.

Slim Chance Light Ale (“Slim Chance”). Available year-round beginning early Spring 2009. Slim
Chance is brewed in the blonde-style tradition, using a wide variety of golden-kilned malts, a touch of wheat
and subtle aroma hops. At 125 calories per 12 ounces, Slim Chance combines the best attributes of a crisp,
refreshing ale with the benefit of having fewer calories.

Redhook ESB (“ESB”). Available year-round. The ESB is a rich, copper-colored ale with a balanced

flavor profile featuring toasted malts, fresh hops and a pleasant finishing sweetness.

Blackhook Porter (“Blackhook”). Available year-round. A London-style porter, Blackhook has an ebony
tone, a pleasant toasted character produced by highly roasted barley, and a dark malt flavor suggesting coffee
and chocolate, balanced by lively hopping.

Copperhook Ale (“Copperhook”). Available in late Winter & Spring. This ale is cold fermented so beer

drinkers can enjoy its full flavored characteristics. With its brilliant copper color, Copperhook has a light
maltiness, pleasant hop aroma, and distinctive citrus flavor.

Sunrye Ale (“Sunrye”). Available in Summer. Gently roasted barley, delicate hops and a touch of rye
combine for a well balanced yet lighter style ale. Slightly unfiltered to exude a pearl glow, Sunrye is styled for
warm weather refreshment. This beer’s relatively low alcohol content by volume makes it perfect for
consumption as a session beer. Sunrye was a 2006 GABF Gold Medal winner in the Rye beer category.

Late Harvest Autumn Ale (“Late Harvest”). Available late Summer and Fall. Late Harvest is a robust,

yet well-balanced beer with a toasted malt aroma and flavor that is complimented by a complex Saaz hop
profile.

Winterhook. Available late Fall and Winter. A rich, holiday ale formulated specially each year for cold-
weather enjoyment, Winterhook typically is deep in color and rich in flavor, with complex flavors and a warm
finish. The Company usually changes the style of this ale every year.

Kona Brewing Beers

Longboard Lager. Available year-round. Kona’s top selling beer and flagship brand is a traditionally
brewed lager with a delicate, slightly spicy hop aroma that is complimented by a fresh, malt forward flavor
and a smooth, refreshing finish.

Fire Rock Pale Ale (“Fire Rock”). Available year-round. Fire Rock is a crisp “Hawaiian Style” pale ale

with pronounced citrus and floral hop aromas and flavors that are backed up by a generous malt profile.

Wailua Wheat (“Wailua”). Available Spring and Summer. Wailua is a golden, sun colored ale with a
bright, citrusy flavor. This beer is brewed with a touch of tropical passion fruit to impart a slightly tart and
crisp finish.

Pipeline Porter (“Pipeline”). Available Fall and Winter. Pipeline is smooth and dark with distinctive,
roasty aroma and earthy flavor. This ale is brewed with fresh 100% Kona coffee to impart a rich complexity
not found in many beers. Pipeline was a 2007 GABF Bronze Medal winner in the Coffee Flavored beer
category.

New Products and Brands.

In an effort to remain current with shifting consumer style and flavor

preferences, the Company routinely analyzes its brand families and product offering to identify beer styles or
consumer taste preferences that it is under serving or missing entirely. After identifying a potentially new
product offering, the Company will attempt to determine whether it may have offered this style in a previous
incarnation, either on a one-time basis or as a limited run seasonal. When the Company determines that it has
previously brewed this style or taste profile, the Company’s marketing department may modify the brand

identity and the associated packaging as required to align with the stated consumer preference. Several of the
Company’s current offerings, including Drifter and Broken Halo, were developed through this process. In the
case where the Company has not brewed this style or taste profile in the past, it may use its Rose Quarter pilot
brewhouse to brew an experimental or new beer. The Company then may offer this experimental or new brew
directly to consumers through on-premise test marketing at its own pubs and exclusive retail sites or it may
refine this product through customer preference and focus group testing. If the initial consumer reception of an
experimental or new brew appears to meet the desired taste profile, the Company develops a brand identity to
solidify the consumer perception of the product. Drop Top is an example of a product offering developed by
the Company in this manner. The Company believes that its continued success will be based on its ability to
be attentive and responsive to consumer desires for new and distinctive tastes, and capacity to meet these
desires with original and novel taste profiles while maintaining consistently high product quality.

Contract brewing. Prior to the Merger, the Company also sold Widmer Hefeweizen in the Midwest and

Eastern United States under an arrangement with Widmer. Beginning in 2003, the Company entered into a
licensing agreement with Widmer to produce and sell the Widmer Hefeweizen product in states east of the
Mississippi River. In March 2007, the distribution territory was expanded to include all of the Company’s
Midwest markets, and then modified again in the fourth quarter of 2007, when Widmer exercised its
contractual right to exclude the state of Texas from the distribution territory. The licensing agreement
automatically renewed on February 1, 2008 and was in effect until the Merger was consummated. In
conjunction with this agreement, Redhook discontinued brewing and selling its “Hefe-weizen” brand beer, and
during the term of this agreement, Redhook did not brew, advertise, market, or distribute any product that was
labeled or advertised as a “Hefeweizen” or any similar product in the agreed-upon Midwest and eastern
territory. The Company believes that this agreement increased capacity utilization and strengthened the
Company’s product portfolio. Pursuant to the licensing arrangement, the Company shipped 12,500 and
28,800 barrels of Widmer Hefeweizen during the first six months of 2008 and for the year ended December 31,
2007, respectively. Licensing fees paid to Widmer under this agreement totaling $165,000 and $432,000 are
reflected in the Company’s statements of operations for the corresponding periods.

Brewing Operations

The Brewing Process. Beer is made primarily from four natural ingredients: malted grain, hops, yeast

and water. The grain most commonly used in brewing is barley. The Company uses the finest barley malt,
using predominantly strains of barley having two rows of grain in each ear. A broad assortment of hops may
be used as some varieties best confer bitterness, while others are chosen for their ability to impart distinctive
aromas to the beer. Most of the yeasts used to induce or augment fermentation of beer are of the species
Saccharomyces cerevisiae, a top-fermenting yeast used in ale production, or of the species Saccharomyces
uvarum, a bottom-fermenting yeast used to produce lagers.

The brewing process begins when the malt supplier soaks the barley in water, thereby initiating

germination, and then dries and cures the grain through kilning. This process, referred to as malting, breaks
down protein so that starches in the grain can be easily extracted by the brewer. The malting process also
imparts color and flavor characteristics to the grain. The cured grain, referred to as malt, is then sold to the
brewery. At the brewery, various malts are cracked by milling, and mixed with warm water. This mixture, or
mash, is heated and stirred in the mash tun, allowing the simple carbohydrates and proteins to be converted
into fermentable sugars. Naturally occurring enzymes facilitate this process. The mash is then strained and
rinsed in the lauter tun to produce a residual liquid, high in fermentable sugars, called wort, which then flows
into a brew kettle to be boiled and concentrated. Hops are added during the boil to impart bitterness, balance
and aroma. The specific mixture of hop types used further affects the flavor and aroma of the beer. After the
boil, the wort is strained and cooled before it is moved to a fermentation cellar, where specially cultured yeast
is added to induce fermentation. During fermentation, the sugars from the wort are metabolized by the yeast,
producing carbon dioxide and alcohol. Some of the carbon dioxide is recaptured and absorbed back into the
beer, providing a natural source of carbonation. After fermentation, the beer is cooled for several days while
the beer is clarified and full flavor develops. Filtration, the final step for a filtered beer, removes unwanted
yeast. At this point, the beer is in its peak condition and ready for bottling or keg racking. The entire brewing

process of ales, from mashing through filtration, is typically completed in 14 to 21 days, depending on the
formulation and style of the product being brewed.

Brewing Equipment. The Company uses highly automated brewing equipment at its three main brewery

facilities and also operates a small, manual brewpub-style brewing system.

Since 1994, the Company has owned and operated a brewing location in Woodinville, Washington, a

suburb of Seattle (“Washington Brewery”). The Washington Brewery employs a 100-barrel mash tun, lauter
tun, wort receiver, wort kettle, whirlpool kettle; five 70,000-pound, one 35,000-pound and two 25,000-pound
grain silos; two 100-barrel, fifty-four 200-barrel and ten 600-barrel fermenters; and two 300-barrel and four
400-barrel bright tanks.

As a result of the Merger, the Company owns and operates two facilities in Portland, Oregon. These
facilities are its largest capacity brewery (“Oregon Brewery”) and its pilot brewhouse at the Rose Quarter
(“Rose Quarter Brewery”). The Oregon Brewery is comprised of a 230-barrel mash tun, lauter tun, wort
receiver, wort kettle, whirlpool kettle; two 100,000-pound and two 25,000-pound grain silos; six 1,000-barrel,
six 1,500-barrel and six 750-barrel fermenters as well as 14 smaller fermenters; and five 200-barrel, four
250-barrel and three 160-barrel bright tanks. The Rose Quarter Brewery is the Company’s smallest brewery
with a 10-barrel mash tun, lauter tun, wort receiver, wort kettle, whirlpool kettle; three 10-barrel fermenters;
and a 10-barrel bright tank. The Rose Quarter is a sports and entertainment venue featuring two multi-purpose
arenas, including the home arena for the National Basketball Association’s Portland Trail Blazers professional
basketball team.

Since 1996, the Company has owned and operated a brewing location in Portsmouth, New Hampshire

(“New Hampshire Brewery”). The New Hampshire Brewery employs a 100-barrel mash tun, lauter tun, wort
receiver, wort kettle, whirlpool kettle; four 70,000-pound and two 35,000-pound grain silos; nine 100-barrel,
two 200-barrel and thirty-four 400-barrel fermenters; four 400-barrel, two 200-barrel, one 600-barrel and one
130-barrel bright tanks, and an anaerobic waste-water treatment facility that completes the process cycle.

Packaging. The Company packages its craft beers in bottles, kegs and beginning in 2009, 5-liter steel
cans. All of the Company’s breweries have fully automated bottling and keg lines. The bottle filler at all of
the breweries utilizes a carbon dioxide environment during bottling ensuring that minimal oxygen is dissolved
in the beer, thereby extending product shelf life.

Quality Control. The Company monitors production and quality control at all of its breweries, with
central coordination at the Oregon Brewery. All of the breweries have an on-site laboratory where microbiol-
ogists and lab technicians supervise on-site yeast propagation, monitor product quality, test products, measure
color and bitterness, and test for oxidation and unwanted bacteria. The Company also regularly utilizes outside
laboratories for independent product analysis.

Ingredients and Raw Materials. The Company currently purchases a significant portion of its malted
barley from two suppliers and its premium-quality select hops, mostly grown in the Pacific Northwest, from
competitive sources. The Company also periodically purchases small lots of European hops that it uses to
achieve a special hop character in certain of its beers. In order to ensure the supply of the hop varieties used
in its products, the Company enters into supply contracts for its hop requirements. The Company believes 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 the Company’s current arrangements. The
Company currently cultivates its own Saccharomyces cerevisiae yeast supply and maintains a separate, secure
supply in-house. The Company has access to multiple competitive sources for packaging materials, such as
labels, six-pack carriers, crowns and shipping cases.

Product Distribution

The Company’s products are available for sale to consumers in draft and bottles at restaurants, bars and
liquor stores, as well as in bottles at supermarkets, warehouse clubs, convenience stores and drug stores. Like
substantially all craft brewers, the Company’s products are delivered to these retail outlets through a network
of local distributors whose principal business is the distribution of beer and, in some cases, other alcoholic

beverages, and who traditionally have distribution relationships with one or more national beer brands. The
Company offers products directly to consumers at the Company’s three on-premise retail establishments
located at the Company’s production breweries. The Forecasters Public House and the Cataqua Public House
at the Washington Brewery and the Portsmouth Brewery, respectively, offer Redhook-branded products. The
Gasthaus Pub and Restaurant at the Oregon Brewery offers Widmer-branded products.

The Company’s products have been distributed in 48 of the 50 states since 1997, primarily due to a series
of distribution agreements, either directly executed with A-B or indirectly maintained via Craft Brands. These
agreements allowed the Company access to A-B’s national distribution network to distribute its products. The
current form of the distribution agreement for Widmer-, Redhook- and Kona-branded products was signed in
2004, (“A-B Distribution Agreement”), as amended July 1, 2008, pursuant to which the Company sells its
product through sales to A-B and movement of its product through the A-B distribution network.

Effective July 1, 2008, the Company executed an agreement to which A-B is a party, modifying and
amending the A-B Distribution Agreement, among other agreements, to reflect A-B’s consent to the Merger
(“Consent and Amendment Agreement”). The Consent and Amendment Agreement extended the expiration
date of the A-B Distribution Agreement by four years; and modified, in part, the scope of the distribution area
to include those regions that were previously covered under agreements between the Company and Craft
Brands, which was primarily the Western United States. Presently, substantially all of the Company’s products
distributed in the United States by a wholesaler are distributed pursuant to the amended A-B Distribution
Agreement.

For the period from July 2004 to the effective date of the Merger, the Company was party to agreements

with Widmer with respect to the operation of Craft Brands. Under this arrangement, the Company sold its
product to Craft Brands at a price substantially below wholesale pricing levels; Craft Brands, in turn,
advertised, marketed, sold and distributed this product to wholesale outlets in the western United States via a
distribution agreement between Craft Brands and A-B.

For additional information regarding the Company’s relationship with A-B and Craft Brands, see

“Relationship with A-B” and “Relationship with Craft Brands” below.

A-B distributes its products throughout the United States through a network of more than 540 independent

wholesale distributors, most of whom are geographically contiguous and independently owned and operated,
and 12 branches owned and operated by A-B. The Company believes that the typical A-B distributor is
financially stable and has both a long-standing presence and a substantial market share of beer sales in its
territory. According to industry sources, A-B’s products accounted for 49.2% of total beer shipped by volume
in the United States in 2008.

The Company chose to align itself with A-B initially on a limited basis, expanding further in 1997, and
then again through the 2004 A-B Distribution Agreement, which along with the distribution agreement then
held by Craft Brands with A-B, garnered the Company access to quality distribution throughout the United
States. The Company was the first and is the largest independent craft brewer to have a formal distribution
agreement with a major U.S. brewer. Management believes that the Company’s competitors in the craft beer
segment generally negotiate distribution relationships separately with distributors in each locality and, as a
result, typically distribute through a variety of wholesalers representing differing national beer brands with
uncoordinated territorial boundaries. Because A-B’s distributors are assigned territories that generally are
contiguous, the distribution relationship with A-B enables the Company to reduce the gaps and overlaps in
distribution coverage often experienced by the Company’s competitors.

In 2008 and 2007, the Company sold approximately 328,600 barrels and 107,900 barrels, respectively, to

A-B through the A-B Distribution Agreement, accounting for 77.3% and 34.0%, respectively, of the
Company’s sales volume for the period. During these same periods, the Company shipped approximately
58,100 barrels and 121,900 barrels to Craft Brands, representing 13.7% and 38.5%, respectively, of the
Company’s sales volume.

Relationship with Anheuser-Busch, Incorporated

In July 2004, the Company executed three agreements with A-B, the A-B Distribution Agreement, an
exchange and recapitalization agreement (“Exchange Agreement”), and a registration rights agreement, which
collectively, represent the framework of its current relationship with A-B. On July 1, 2008, the Company and
A-B entered into a Consent and Amendment Agreement pursuant to which A-B consented to the Merger, and
the A-B Distribution Agreement and the Exchange Agreement were amended to reflect the effects of the
Merger and to amend pricing under the A-B Distribution Agreement.

Pursuant to the amended Exchange Agreement, A-B is entitled to designate two members of the board of

directors of the Company. A-B also generally has the contractual right to have one of its designees observe
each committee of the board of directors of the Company. The amended Exchange Agreement also contains
limitations on the Company’s ability to take certain actions without A-B’s prior consent, including but not
limited to the Company’s ability to issue equity securities or acquire or sell assets or stock, amend its Articles
of Incorporation or bylaws, grant board representation rights, enter into certain transactions with affiliates,
distribute its products in the United States other than through A-B or as provided in the A-B Distribution
Agreement, or voluntarily delist or terminate its listing on the Nasdaq Stock Market. Further, if the A-B
Distribution Agreement is terminated, A-B has the right to solicit and negotiate offers from third parties to
purchase all or substantially all of the assets or securities of the Company or to enter into a merger or
consolidation transaction with the Company and the right to cause the board of directors of the Company to
consider any such offer.

The amended A-B Distribution Agreement provides for the distribution of Widmer-, Redhook- and Kona-

branded products in all states, territories and possessions of the United States, including the District of
Columbia. Prior to the Merger, the A-B Distribution Agreement covered distribution in the Midwest and
Eastern United States, with the Western United States being covered via the distribution agreement with Craft
Brands. Under the amended A-B Distribution Agreement, the Company has granted A-B the first right to
distribute the Company’s products, including products marketed by the Company under any agreements
between Kona and the Company, and any new products. The Company is responsible for marketing its
products to A-B’s distributors, as well as to retailers and consumers. The A-B distributors then place orders
with the Company through A-B for the Company’s products, except for those states where state law requires
the Company to sell directly to the wholesaler, such as in Washington state. The Company separately packages
and ships these orders in refrigerated trucks to the A-B distribution center closest to the distributor or, under
certain circumstances, directly to the distributor.

Effective in 2008, A-B modified the restrictions around its program associated with its decade-long policy

of rewarding with financial incentives those wholesalers and distributors that exclusively distributed products
within the A-B brand family and its allies, including the Company’s products. Introduced in 1996, the intent
of the program was to create ‘100 percent share of Mind’ of the core A-B brands and create barriers of entry
for rival brands. However, with the increasing market share and resulting financial significance of the specialty
and craft beer segments, wholesalers and distributors negotiated with A-B to allow them to carry a small
volume of specialty and local craft brands without forgoing the financial incentives associated with the
exclusivity program. Media reports indicated that at the height of this program, 70 percent of A-B sales were
made through wholesalers and distributors carrying only the A-B and alliance brands, but this amount has
steadily declined to its present level at less than 60 percent. Under the current version of the program, a
second tier is available for those wholesalers and distributors who may carry up to three percent of their
volume in competitive beer brands and non-alcohol brands, but retain the financial incentives of being
designated an aligned A-B wholesaler or distributor. This modification has led to increased direct competition
as many specialty, regional and local craft brewers are able to access the distribution channels through which
the Company markets its products.

The amended A-B Distribution 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 the
Company on or prior to June 30, 2018. The amended A-B Distribution Agreement is also subject to early
termination, by either party, upon the occurrence of certain events. The amended A-B Distribution Agreement

may be terminated immediately, by either party, upon the occurrence of any one or more of the following
events:

1) a material default by the other party in the performance of any of the provisions of the A-B

Distribution Agreement or any other agreement between the parties, which default is either:

i. curable within 30 days, but is not cured within 30 days following written notice of default; or

ii. not curable within 30 days and either:

a) the defaulting party fails to take reasonable steps to cure as soon as reasonably possible

following written notice of such default; or

b) such default is not cured within 90 days following written notice of such default;

2) default by the other party in the performance of any of the provisions of the amended A-B
Distribution Agreement or any other agreement between the parties, which default is not described in
1) above and which is not cured within 180 days following written notice of such default;

3) the making by the other party of an assignment for the benefit of creditors; or the commencement
by the other party of a voluntary case or proceeding or the other party’s consent to or acquiescence in the
entry of an order for relief against such other party in an involuntary case or proceeding under any
bankruptcy, reorganization, insolvency or similar law;

4) the appointment of a trustee or receiver or similar officer of any court for the other party or for a
substantial part of the property of the other party, whether with or without the consent of the other party,
which is not terminated within 60 days from the date of appointment thereof;

5) the institution of bankruptcy, reorganization, insolvency or liquidation proceedings by or against
the other party without such proceedings being dismissed within 90 days from the date of the institution
thereof; or

6) any representation or warranty made by the other party under or in the course of performance of

the amended A-B Distribution Agreement that is false in any material respects.

Additionally, the amended A-B Distribution Agreement may be terminated by A-B, upon six months’

prior written notice to the Company, in the event:

1) the Company engages in certain Incompatible Conduct which is not curable or is not cured to A-

B’s satisfaction (in A-B’s sole opinion) within 30 days. Incompatible Conduct is defined as any act or
omission of the Company that, in A-B’s determination, damages the reputation or image of A-B or the
brewing industry;

2) any A-B competitor or affiliate thereof acquires 10% or more of the outstanding equity securities
of the Company, and one or more designees of such person becomes a member of the board of directors
of the Company;

3) the current chief executive officer of the Company ceases to function as chief executive officer

and within six months of such cessation a successor satisfactory in the sole, good faith discretion of A-B
is not appointed. The change from the co-chief executive positions to Terry Michaelson assuming the sole
chief executive officer position in November 2008 was confirmed as satisfactory by A-B;

4) the Company is merged or consolidated into or with any other entity or any other entity merges

or consolidates into or with the Company; or

5) A-B or its corporate affiliates incur any liability or expense as a result of any claim asserted

against them by or in the name of the Company or any shareholder of the Company as a result of the
equity ownership of A-B or its affiliates in the Company, or any equity transaction or exchange between
A-B or its affiliates and the Company, and the Company does not reimburse and indemnify A-B and its
corporate affiliates on demand for the entire amount of such liability and expense.

As of December 31, 2008 and 2007, A-B owned approximately 35.8% and 33.1%, respectively, of the

Company’s common stock.

Fees. Generally, the Company pays the following fees to A-B in connection with the sale of the

Company’s products:

Margin and Additional Margin.

In connection with all sales through the A-B Distribution Agreement,

the Company pays a Margin fee to A-B (“Margin”). The Margin does not apply to sales from the Company’s
retail operations or to dock sales. Through the period ended effective with the Merger, the Margin also did not
apply to the Company’s sales to Craft Brands as it would have paid a comparable fee to A-B on its resale of
the product. The A-B Distribution Agreement also provides that the Company shall pay an additional fee to
A-B on all shipments that exceed fiscal year 2003 shipments in the same territory (the “Additional Margin”).
The calculation of the 2003 shipment levels was adjusted at the time of the Merger to include the shipments
of Widmer and Kona and to increase the affected territory to include sales in the Western states for the
applicable period. As the shipments in the applicable territories exceeded the restated 2003 shipments, the
Company paid A-B the Additional Margin on 89,800 barrels and 30,000 barrels, respectively. The Margin and
Additional Margin are reflected as a reduction of sales in the Company’s statements of operations.

Invoicing Cost. Since July 1, 2004, the invoicing cost is payable on sales through the A-B Distribution
Agreement. The fee does not apply to sales by the Company’s retail operations or to dock sales. Additionally,
the fee did not apply to the Company’s sales to Craft Brands as it would have paid a comparable fee to A-B.
The basis for this charge is number of pallet lifts. The fee per pallet lift is generally adjusted on January 1 of
each year under the terms of the A-B Distribution Agreement.

Staging Cost and Cooperage Handling Charge. The Staging Cost is payable on all sales through the
A-B Distribution Agreement that are delivered to an A-B brewery or A-B distribution facility. The fee does
not apply to product shipped directly to a wholesaler or wholesaler support center. The Cooperage Handling
Charge is payable on all draft sales through the A-B Distribution Agreement that are delivered to a wholesaler
support center or directly to a wholesaler. The basis for these fees is number of pallet lifts. According to the
terms of the A-B Distribution Agreement, the Staging Cost and Cooperage Handling Charge fees are generally
adjusted on January 1 of each year.

Inventory Manager Fee. The Inventory Manager Fee is paid to reimburse A-B for a portion of the salary

of a corporate inventory management employee, a substantial portion of whose responsibilities are to
coordinate and administer logistics of the Company’s product distribution to wholesalers. From 2004 to the
time of the Merger, this fee has remained relatively constant; however, as a result of the Merger and the
associated increase in coordination responsibilities associated with the shipment levels for Widmer and Kona,
the Inventory Manager Fee was increased to $208,000 per year.

The Invoicing Cost, Staging Cost, Cooperage Handling Charge and Inventory Manager Fee are reflected

in cost of sales in the Company’s statements of operations. These fees totaled approximately $205,000 and
$150,000 for the years ended December 31, 2008 and 2007, respectively.

Wholesaler Support Center Fee.

In certain instances, the Company may ship its product to A-B
wholesaler support centers rather than directly to the wholesaler. Wholesaler support centers assist the
Company by consolidating small wholesaler orders with orders of other A-B products prior to shipping to the
wholesaler. A wholesaler support center fee of $179,000 and $171,000 is reflected in the Company’s
statements of operations for the years ended December 31, 2008 and 2007, respectively.

The Company purchased certain materials, primarily bottles and other packaging materials, through A-B
totaling $17.1 million and $9.6 million in 2008 and 2007, respectively. During 2008, the Company paid A-B
amounts totaling $989,000 for media purchases and advertising services.

Management believes that the benefits of the distribution arrangement with A-B, particularly the increased

sales volume and efficiencies in delivery, state reporting and licensing, billing and collections, are significant
to the Company’s business. The Company believes that the existence of the amended A-B Distribution
Agreement, presentations by Company management at A-B’s distributor conventions, A-B communications

about CBA in printed distributor materials, and A-B supported opportunities for CBA to educate A-B
distributors about its specialty products have resulted in increased awareness of and demand for CBA products
among A-B’s distributors.

If the amended A-B Distribution Agreement were terminated early, as described above, it would be
extremely difficult for the Company to rebuild its distribution network without a severe negative impact on the
Company’s sales and results of operations. It is likely that the Company would need to raise additional funds
to develop a new distribution network. It is possible that under the changes to A-B’s exclusivity program
wholesalers and distributors within the A-B alliance presently carrying the Company’s products could continue
to carry the Company’s products within the three percent allowance offered to aligned wholesalers and
distributors without financial penalty to them. In this event, the Company might not be required to rebuild its
existing distribution network; however, if it were required to do so, there is no guarantee that the Company
would be able to successfully rebuild all, or part, of its distribution network or that any additional financing
would be available when needed, or that any such financing would be on commercially reasonable terms.

Relationship with Craft Brands Alliance LLC

Craft Brands was a joint venture sales and marketing entity formed by the Company and Widmer in July
2004. The Company and Widmer manufactured and sold their product to Craft Brands at a price substantially
below wholesale pricing levels; Craft Brands, in turn, advertised, marketed, sold and distributed the product to
wholesale outlets in the western United States through a distribution agreement between Craft Brands and A-
B. The western states covered in the distribution agreement were Alaska, Arizona, California, Colorado,
Hawaii, Idaho, Montana, New Mexico, Nevada, Oregon, Washington and Wyoming. Due to state liquor
regulations, the Company sold its product in Washington state directly to third-party beer distributors and
returned a portion of the revenue to Craft Brands based upon a contractually determined formula.

Until the effective date of the Merger, the Company and Widmer were each 50% members of Craft
Brands, with each holding rights to designate two directors to Craft Brands’ six member board. A-B held the
rights to designate the other two directors. Profits and losses of Craft Brands were generally shared between
the Company and Widmer based on the cash flow percentages of 42% and 58%, respectively. The Company
and Widmer had entered into an operating agreement with regards to Craft Brands (“Operating Agreement”),
which governed the operations of Craft Brands and the obligations of its members, including capital
contributions, loans and allocations of profits and losses. In connection with the Merger, Craft Brands was also
merged with and into the Company effective July 1, 2008. All existing agreements, including the Operating
Agreement, all associated future commitments and obligations between the Company and Craft Brands and
between Craft Brands and Widmer terminated as a result of the merger of Craft Brands.

As a result of the merger with Craft Brands, the Company adjusted its residual investment in and wrote

off its net receivable from Craft Brands to the total purchase consideration, which resulted in increases to
goodwill of $339,000 and $21,000, respectively.

Prior to Craft Brands’ merger into the Company, the Company had assessed its investment in Craft
Brands pursuant to the provisions of FASB Interpretation No. 46 Revised, Consolidation of Variable Interest
Entities — an Interpretation of ARB No. 51 (“FIN 46R”). In applying FIN 46R, the Company did not
consolidate the financial statements of Craft Brands with the financial statements of the Company, but instead
accounted for its investment in Craft Brands under the equity method, as outlined by Accounting Principles
Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB
18”). The Company recognized its share of the net earnings of Craft Brands by an increase to its investment in
Craft Brands on the Company’s balance sheet and recognized income from equity investment in the
Company’s statements of operations. Any cash distributions received or the Company’s share of losses reported
by Craft Brands were reflected as a decrease in investment in Craft Brands on the Company’s balance sheet.
Prior to the merger of Craft Brands, the Company did not control the amount or timing of cash distributions
by Craft Brands.

Prior to Craft Brands’ merger, the Company’s share of the earnings of Craft Brands contributed a
significant portion of income to the Company’s results of operations. In accordance with Rule 8-03(b)(3) of

Regulation S-X, the Company has presented selected financial data for Craft Brands in Part II, Item 8.
Financial Statements and Supplementary Data, Note 7. “Equity Investments.”

Sales and Marketing

The Company promotes its products through a variety of means, including a) creating and executing a

range of advertising programs with its wholesalers; b) training and educating wholesalers and retailers about
the Company’s products; c) promoting the Company’s name, product offering and brands, and experimental
beers at local festivals, venues and pubs; d) utilizing the pubs located at the Company’s three production
breweries; e) discounting its sales price to create competitive advantage within the market place; and f) until
the Merger, utilizing Craft Brands to create greater brand identity.

The Company advertises its products through an assortment of media, including television, radio,
billboard, print and the internet, in key markets and by participating in a co-operative program with its
distributors whereby the Company’s spending is matched by the distributor. The Company believes that the
financial commitment by the distributor helps align the distributor’s interests with those of the Company, 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 the Company’s products.

The Company incurs costs for the promotion of its products through a variety of advertising programs

with its wholesalers and downstream retailers. The Company’s sales and marketing staff offers education,
training and other support to wholesale distributors of the Company’s products. Because the Company’s
wholesalers generally also distribute much higher volume national beer brands and frequently other specialty
brands, a critical function of the sales and marketing staff is to elevate each distributor’s awareness of the
Company’s products and to maintain the distributor’s interest in promoting increased sales of these products.
This is accomplished primarily through personal contact with each distributor, including on-site sales training,
educational tours of the Company’s breweries, and promotional activities and expenditures shared with the
distributors. The Company’s sales representatives also provide other forms of support to wholesale distributors,
such as direct contact with restaurant and grocery chain buyers, direct involvement in the in-store display
design; stacking, merchandising and exhibition of beer inventory, and dissemination of point-of-sale materials
to the off-premise retailer.

The Company’s sales representatives devote considerable effort to the promotion of on-premise consump-

tion at participating pubs and restaurants. The Company believes that educating retailers about the freshness
and quality of the Company’s products will in turn allow retailers to assist in educating consumers. The
Company considers on-premise product sampling and education to be among its most effective tools for
building brand awareness with consumers and establishing word-of-mouth reputation. On-premise marketing is
also accomplished through a variety of other point-of-sale tools, such as neon signs, tap handles, coasters,
table tents, banners, posters, glassware and menu guidance. The Company seeks to identify its products with
local markets by participating in or sponsoring cultural and community events, local music and other
entertainment venues, local craft beer festivals and cuisine events, and local sporting events.

The Company’s breweries also play a significant role in increasing consumer awareness of the Company’s

products and enhancing its image as a craft brewer. Many visitors take tours at the Company’s breweries. All
of the Company’s breweries have a retail pub on-site where the Company’s products are served. In addition,
the breweries have meeting rooms that the public can rent for business meetings, parties and holiday events,
and that the Company uses to entertain and educate distributors, retailers and the media about the Company’s
products. See Item 2. Properties. At its pubs, the Company also sells various items of apparel and memorabilia
bearing the Company’s trademarks, which creates further awareness of the Company’s beers and reinforces the
Company’s quality image.

To further promote retail bottled product sales and in response to local competitive conditions, the

Company regularly offers “post-offs,” or price discounts, to distributors in most of its markets. Distributors and
retailers usually participate in the cost of these price discounts.

Prior to the Merger, the Craft Brands joint sales and marketing organization served the operations of

Redhook and Widmer in the Western Territory by advertising, marketing, selling and distributing both
companies’ products to wholesale outlets through a distribution agreement between Craft Brands and A-B.
Similar to the Company, Craft Brands promoted its products through a variety of advertising programs with its
wholesalers, through training and education of wholesalers and retailers, through promotions at local festivals,
venues, and pubs, by utilizing the pubs located at the Company’s three breweries, and through price
discounting. Management believes that, in addition to having achieved certain synergies through combined
sales and marketing forces, Craft Brands was able to capitalize on both companies’ sales and marketing skills
and complementary product portfolios. The Company believes that the combination of the two brewers’
complementary brand portfolios, led by one focused sales and marketing organization, will not only deliver
financial benefits, but will also deliver greater impact at the point-of-sale.

Seasonality

Sales of the Company’s products generally reflect a degree of seasonality, with the first and fourth
quarters historically being the slowest and the other two quarters typically demonstrating stronger sales. The
volume of sales may also be affected by weather conditions. Therefore, the Company’s results for any quarter
may not be indicative of the results that may be achieved for the full fiscal year.

Competition

The Company competes in the highly competitive craft brewing market as well as in the much larger
specialty beer market, which encompasses producers of imported beers, major national brewers that have
introduced fuller-flavored products, and large spirit companies and national brewers that produce flavored
alcohol beverages. Beyond the beer market, craft brewers have also faced increasing competition from
producers of wines and spirits. See “Industry Background” above.

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, transportation costs, distribution coverage, local appeal and price.

The craft beer segment is highly 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. Just as the Company expanded distribution of
its products to markets outside of its home in the Pacific Northwest, so have other craft brewers expanded
distribution of their products to other regions of the country, leading to an increase in the number of craft
brewers in any given market. Competition also varies by regional market. Depending on the local market
preferences and distribution, the Company has encountered strong competition from microbreweries, from
regional specialty brewers as well as several national craft brewers. 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 the Company,
management believes that the Company possesses certain competitive advantages, including its Company-
owned production facilities and its relationships with A-B.

The Company also competes against producers of imported brands, such as Heineken, Corona Extra, and

Guinness. Most of these foreign brewers have significantly greater financial resources than the Company.
Although imported beers currently account for a greater share of the U.S. beer market than craft beers, the
Company believes 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 some of their bigger 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 have significantly

greater financial resources than the Company 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, the Company believes 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. The Company believes
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. The success of the flavored alcohol
beverages will likely subject the Company to increased competition.

Competition for consumers of craft beers has also come from wine and spirits. Some of the growth in the
past five years in the wine and spirits market, industry sources believe, has been drawn from the beer market.
Media reports indicate that the U.S. beer market has lost nearly 1% share of alcohol beverage servings per
year since 2003. This trend showed signs of abating in 2008, with wine and spirits being also impacted by the
economic downturn. Despite this, industry sources indicate that the wine industry will experience its fourteenth
consecutive year of growth by volume and the spirits industry its tenth consecutive year of growth by volume.
This growth 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.

A significant portion of the Company’s sales continue to be in the Pacific Northwest and in California,

which the Company believes are among the most competitive craft beer markets in the United States, both in
terms of number of participants and consumer awareness. The Company believes that these areas offer
significant competition to its products, not only from other craft brewers but also from the growing wine
market and from flavored alcohol beverages. This intense competition is magnified because some of the
Company’s brands are viewed as being relatively mature. Focus studies in the past have indicated that, while
the Company’s brands do possess brand awareness among target consumers, it also appeared to not attract key
consumers who seem to be more interested in experimenting with new products. The Company’s recent
marketing efforts have been to focus on new product introductions and generating consumer interest in these
offerings while strengthening the identities of the Company’s flagship brands.

Regulation

The Company’s business is highly regulated at Federal, state and local levels. Various permits, licenses
and approvals necessary to the Company’s brewery and pub operations and the sale of alcoholic beverages are
required from various agencies, including the U.S. Treasury Department, 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 for the states in which the Company sells its products, 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 the Company, benefit from favorable treatment.

Management believes that the Company currently has all of the licenses, permits and approvals required
for its current operations. However, existing permits or licenses could be revoked if the Company was to fail
to comply with the terms of such permits or licenses and additional permits or licenses may be required in the
future for the Company’s existing operations or as a result of the Company expanding its operations in the
future. If licenses, permits or approvals required for the Company’s brewery or pub operations were
unavailable or unduly delayed, or if any such permits or licenses that it currently holds were to be revoked,
the Company’s ability to conduct its business could be substantially and adversely affected.

Alcoholic Beverage Regulation and Taxation. All of the Company’s breweries and pubs are subject to
licensing and regulation by a number of governmental authorities. The Company operates its 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 Brewers’ Notice any time there is a
material change in the brewing or warehousing locations, brewing or packaging equipment, brewery’s
ownership, officers or directors. The Company’s operations are subject to audit and inspection by the TTB at
any time.

In addition to the regulations imposed by the TTB, the Company’s breweries are subject to federal and

state regulations applicable to wholesale and retail sales, pub operations, deliveries and selling practices in
those states in which the Company sells its products. Failure of the Company to comply with these regulations
could result in limitations on the Company’s ability to conduct its business. Revocation of a TTB permit may
result from failure to pay taxes, to keep proper accounts, to pay fees, to bond premises, to abide by federal
alcoholic beverage production and distribution regulations, or if holders of 10% or more of the Company’s
shares are found to be of questionable character. Permits issued by state regulatory agencies may be revoked
for many of the same reasons.

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. While
the Company is not aware of any plans by the federal government to reduce or eliminate this benefit to small
brewers, any such reduction in a material amount would have an adverse effect on the Company. In addition,
the Company will lose the benefit of this rate structure if its annual production exceeds the two million barrel
threshold. Certain states also levy excise taxes on alcoholic beverages, which have also been subject to change.
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. Any such increases in excise
taxes, if enacted, could adversely affect the Company.

Federal and State Environmental Regulation. The Company’s brewery operations are subject to environmen-
tal regulations and local permitting requirements and agreements regarding, among other things, air emissions,
water discharges and the handling and disposal of hazard wastes. While the Company has no reason to believe
the operations of its facilities 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, the Company 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. The Company’s pubs have addressed this issue by maintaining relatively reasonable hours of
operations and routinely performing training for their personnel. Significant uninsured damage awards against
the Company could adversely affect the Company’s financial condition.

Trademarks

The Company has obtained U.S. trademark registrations for its numerous products including its

proprietary bottle designs. Trademark registrations generally include specific product names, marks and label
designs. The Widmer and Redhook marks and certain other Company marks are also registered in various
foreign countries. The Company regards its Widmer, Redhook and other trademarks as having substantial
value and as being an important factor in the marketing of its products. The Company is not aware of any
infringing uses that could materially affect its current business or any prior claim to the trademarks that would
prevent the Company from using such trademarks in its business. The Company’s policy is to pursue
registration of its trademarks in its markets whenever possible and to oppose vigorously any infringement of
its trademarks.

Employees

At December 31, 2008, the Company employed approximately 400 people, including 150 employees in
the pubs, restaurant and retail stores, 126 employees in production, 85 personnel in sales and marketing, and

33 employees in corporate and administration. Of these, 87 people in the pubs and 1 person in production
were part-time employees. The Company believes its relations with its employees to be good.

Available Information

Our Internet address is www.craftbrewers.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, and any amendments to those
reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the
Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed through the investor relations
section of our Web site. 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

Cautionary Language Regarding Forward-Looking Statements. This report contains “forward looking

statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements
include the discussion of our business strategies and expectations concerning future operations, margins,
profitability, liquidity and capital resources. In addition, in certain portions of this report, the words
“anticipate,” “project,” “believe,” “estimate,” “may,” “will,” “expect,” “plan” and “intend” and similar
expressions, as they relate to us or our management, are intended to identify forward looking statements.
These forward looking statements involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by these forward looking statements. These statements are
based upon the current expectations and assumptions of, and on information available to, our management.
Further, investors are cautioned that, unless required by law, we do not assume any obligation to update
forward-looking statements based on unanticipated events or changed expectations. In addition to specific
factors that may be described in connection with any particular forward-looking statement, factors that could
cause actual results to differ materially from those expressed or implied by the forward looking statements
include (but are not limited to) the following:

Our business is sensitive to reductions in discretionary consumer spending, which may result from the
recent downturn in the U.S. economy. Consumer demand for luxury or perceived luxury goods, including
craft beer, are sensitive to downturns in the economy and the corresponding impact on discretionary spending.
Changes in discretionary consumer spending or consumer preferences brought about by the factors such as
perceived or actual general economic conditions, job losses and the resultant rising unemployment rate, the
current housing crisis, the current credit crisis, perceived or actual disposable consumer income and wealth,
the current U.S. economic recession and changes in consumer confidence in the economy, could significantly
reduce customer demand for craft beer in general, and the products we offer specifically. Certain of our core
markets, particularly in the West, have been harder hit by the economic recession, with job loss and
unemployment rates in excess of the national averages. Furthermore, any of these factors may cause consumers
to substitute our products with the fuller-flavored national brands or other more affordable, although lower
quality, alternatives available to the consumers. In either event, this would likely have a significant negative
impact on our operating results.

We are partially capitalized with long-term debt. As of December 31, 2008, we have approximately
$33.2 million in outstanding borrowed debt, principally financed by one lender. The terms of the loan agreement
require that we meet certain financial covenants. Although we expect to meet these covenants in the future, we
were unable to meet the covenants associated with our loan agreement in the past, requiring us to seek
modification of the agreement and the associated covenants with our lenders. We may not be able to generate
financial results sufficient to meet the financial covenant measurements, which would cause us to be in violation
of the loan agreement. Failure to meet the covenants required by the loan agreement is an event of default and,
at its option, the lender could deny a request for a waiver and declare the entire outstanding loan balance
immediately due and payable. In such a case, we would seek to refinance the loan with one or more lenders,
potentially at less desirable terms. Given the current economic environment and the tightening of lending

standards by many financial institutions, including some of the banks that we might seek credit from, there can
be no guarantee that additional financing would be available at commercially reasonable terms, if at all.

We are dependent upon our continuing relationship with A-B. Substantially all of our products are sold
and distributed through A-B. If our relationship with A-B deteriorates, distribution of our products will suffer
significant disruption and such event will have a long-term severe negative impact on our sales and results of
operations, as it would be extremely difficult to rebuild a distribution network. In such an event, we would be
faced with finding another national distribution partner similar to A-B, and entering into a complex distribution
arrangement with that entity, or negotiating separate distribution agreements with individual distributors
throughout the United States. Currently, we distribute our product through a network of more than 540
independent wholesale distributors, most of whom are geographically contiguous and independently owned
and operated, and 12 branches owned and operated by A-B. If we had to negotiate separate agreements with
individual distributors, such an undertaking would require a significant amount of time to complete, during
which our products would not be distributed. It would also be extremely difficult for us to build a distribution
network as seamless and contiguous as the one we currently enjoy through A-B. Additionally, we would need
to raise significant capital to fund the development of a new distribution network and continue operations.
There can be no guarantee that financing would be available when needed, or that any such financing would
be on commercially reasonable terms. Given the difficulty that we would face if we needed to rebuild our
distribution network, if the current distribution arrangement with A-B were to be terminated, we may not be
able to continue as a going concern. We believe that the benefits of the relationship that we have enjoyed with
A-B, in particular distribution and material cost efficiencies, have offset the costs associated with the
relationship. However, there can be no assurance that these costs will not have a negative impact on our sales
revenues and results of operations. A-B has introduced products and may in the future introduce additional
new products or form relationships with other companies with products that compete with our products.
Introduction of and support by A-B of these competing products may reduce wholesaler attention and financial
resources committed to our products. There is no assurance that we will be able to successfully compete in the
marketplace against other A-B supported products. Such an increase in competition could cause our sales and
results of operations to be adversely affected.

We may be unable to successfully integrate our operations and realize all of the anticipated benefits of

the Merger. We acquired Widmer with the expectation that, among other things, we would be able to
capitalize on the opportunities for synergies in expanding the breweries and efficiently utilizing the available
production capacity, implementing a national sales strategy and reducing costs associated with duplicate
functions and to become a stronger and more competitive company. We have achieved some of these benefits;
however, there are some benefits that we have not yet achieved and hope to achieve in the future. There can
be no assurance that these synergies will be realized within the time periods contemplated or that they will be
realized at all. There also can be no assurance that our integration with Widmer will result in the realization of
the full benefits that we anticipated.

Our cost saving initiatives may not generate sufficient liquidity. Management has focused aggressively

on identifying areas within the Company that can yield significant cost savings, whether driven by the
synergies of the Merger and integration or generated by general cost-reduction programs, and has executed
appropriate measures to secure these savings. The Company has been implementing these cost savings
initiatives since the Merger and will continue to do so into 2009. Management believes that the Company can
meet its normal cash flow requirements and comply with the terms of its loan agreement, but there is no
assurance that it can do so. The failure to satisfy our working capital requirements could have a material
adverse effect on our financial position and future operations.

Our agreements with A-B contain limitations on our ability to engage in or reject certain transactions,

including acquisitions and changes of control. The amended Exchange Agreement requires us to obtain the
consent of A-B prior to taking certain actions, or to offer to A-B a right of first refusal, including the
following:

(cid:129) issuing equity securities;

(cid:129) acquiring or selling assets or stock;

(cid:129) amending our articles of incorporation or bylaws;

(cid:129) granting board representation rights to others;

(cid:129) entering into certain transactions with affiliates;

(cid:129) distributing our products in the United States other than through A-B or as provided in the amended

distribution agreement with A-B;

(cid:129) distributing or licensing the production of any malt beverage product in any country outside of the

United States; or

(cid:129) voluntarily delisting or terminating our listing on the Nasdaq Stock Market.

Additionally, A-B has the right to terminate the amended A-B Distribution Agreement if any competitor

of A-B acquires more than 10% of our outstanding common stock.

Further, if the amended A-B Distribution Agreement is terminated, A-B has the right to solicit and
negotiate offers from third parties to purchase all or substantially all of our assets or securities or to enter into
a merger or consolidation transaction with us and the right to cause the board of directors to consider any such
offer. The practical effect of the foregoing restrictions is to grant A-B the ability to veto certain transactions
that management may believe to be in the best interest of our shareholders, including our expansion through
acquisitions of other craft brewers or new brands, mergers with other brewing companies or our distribution of
our products outside the United States. As a result, our results of operations and the trading price of our
common stock may be adversely affected.

A-B has significant control and influence over us. As of December 31, 2008, A-B owns approximately

35.8% of our outstanding common stock and, under the amended Exchange Agreement, has the right to
appoint two designees to our board of directors and to observe the conduct of all board committees. As a
result, A-B is able to exercise significant control and influence over us and matters requiring approval of our
shareholders, including the election of directors and approval of significant corporate transactions, such as
another merger or other sale of our assets. This could limit the ability of other shareholders to influence
corporate matters and may have the effect of delaying or preventing a third party from acquiring control of us.
In addition, A-B may have actual or potential interests that diverge from the rest of our shareholders. The
securities markets may also react unfavorably to A-B’s ability to influence certain matters involving us, which
could have a negative impact on the trading price of our common stock.

We do not know what impact, if any, the acquisition of Anheuser-Busch by InBev (now Anheuser-Busch

Inbev) will have on our business. On November 18, 2008, InBev completed the acquisition of the parent
company of A-B and changed the acquiring entity’s name to Anheuser-Busch Inbev to reflect the combined
operations. Anheuser-Busch Inbev is the leading global brewer, one of the world’s top five consumer products
companies, headquartered in Leuven, Belgium. Anheuser-Busch InBev manages a portfolio of over 200 brands
that includes global flagship brands Stella Artois and Beck’s, in addition to A-B’s Budweiser. As mentioned
previously, A-B has a significant ownership stake in the Company. We do not know what impact, if any, the
acquisition of A-B by Anheuser-Busch InBev will have on our distribution or ownership relationships with A-B.

We are dependent on our distributors 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 distributors, most of which are
independent wholesalers, 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, the loss of a major wholesaler as a customer or the termination of the
distribution relationship with A-B, could hinder our ability to get our products to retailers and could have a
material adverse impact on our sales and results of operations.

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 market, which encompasses
producers of import beers, major national brewers that produce fuller-flavored products, and large spirit
companies and national brewers that produce flavored alcohol beverages. Beyond the beer market, craft

brewers have also faced competition from producers of wines and spirits. Increasing competition could cause
our future sales and results of operations to be adversely affected. Our rate of future growth in sales revenues
is volatile and could be negative. We have historically operated with little or no backlog and, therefore, our
ability to predict sales for future periods is limited.

Future price promotions to generate demand for our products may be unsuccessful. The prices that we
charge in the future for our products may decrease from historical levels, depending on competitive factors in
various markets. In order to stimulate demand for our products, we participate in price promotions with
wholesalers and retail customers in most markets. The number of markets in which we choose to participate in
price promotions and the frequency of such promotions may increase in the future. There can be no assurance,
however, that these price promotions will be successful in increasing demand for our products.

Operating breweries at production levels substantially below their current designed capacities could
negatively impact our gross margins. At December 31, 2008, the annual working capacity of our breweries
totaled approximately 797,000 barrels. Due to many factors, including seasonality, production schedules of
various draft products and bottled products and packages, and expected production losses, actual production
capacity will always be less than 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 are unable to achieve significant sales growth, the resulting excess capacity and
unabsorbed overhead will have an adverse effect on our gross margins, operating cash flows and overall
financial performance. We will periodically evaluate whether we expect to recover the costs of our production
facilities 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 in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 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.

Due to our concentration of sales in the Pacific Northwest and California, our results of operations and
financial condition may be subject to fluctuations in regional economic conditions. A significant portion of
our sales have been in the Pacific Northwest and California and, consequently, business may be adversely
affected by changes in economic and business conditions nationally and specifically within these areas. In
2008, approximately one third of beer shipped by the Company was to wholesalers located in Oregon and
Washington. Shipments to California wholesalers represented approximately another one quarter of the
Company’s total shipments, resulting in a total concentration approaching 60% in these three western states.
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 the increasing wine
market and from flavored alcohol beverages. This intense competition is magnified because certain of our
brands are viewed as being relatively mature.

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 the slowest and the rest of the year generating stronger sales. As well, our
sales volume may also be affected by weather conditions. Therefore, the results for any quarter may 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 consumer preferences or public attitudes about our products could reduce demand.
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
flavored alcohol beverage market, the wine market, or the spirits market continues to grow, this could draw
consumers away from our products and have an adverse effect on 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. If beer consumption in general were to fall out
of favor among domestic consumers, or if the domestic beer industry were subjected to significant additional
governmental regulation, our operations could be adversely affected.

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 amended A-B Distribution Agreement. We do not carry key person life insurance on any
of our executive officers.

Our gross margin may fluctuate. Future gross margin may fluctuate and even decline as a result of many

factors, including the 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 and packaging materials, sales
mix between draft and bottled product sales, sales mix of various bottled product packages, and rates charged
for freight and federal or state excise taxes. Our high level of fixed and semi variable operating costs causes
our gross margin to be especially sensitive to relatively small increases or decreases in sales volume.

We are subject to governmental regulations affecting our breweries and pubs; the costs of complying with

governmental regulations, or our failure to comply with such regulations, could affect our financial condition
and results of operations. Our breweries and pubs are subject to licensing and regulation by a number of
governmental authorities, including the TTB, the U.S. Department of Agriculture, the U.S. Food and Drug
Administration, state alcohol regulatory agencies in the states in which we sell our products, and state and
local health, sanitation, safety, fire and environmental agencies. Failure to comply with applicable federal, state
or local regulations could result in limitations on our ability to conduct business. TTB permits can be revoked
for failure to pay taxes, to keep proper accounts, to pay fees, to bond premises, or to abide by federal
alcoholic beverage production and distribution regulations, or if holders of 10% or more of our common stock
are found to be of questionable character. TTB permits are also required in connection with establishing a
commercial brewery, expanding or modifying existing brewing operations, entering into a contract brewing
arrangement, and entering into an alternating proprietorship agreement, such as our arrangement with Kona.
Other permits or licenses could be revoked if we fail to comply with the terms of such permits or licenses,
and additional permits or licenses could be required in the future for existing or expanded operations. Because
our sales objective and growth plans may rely on any one of these approaches, 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 could be substantially and adversely affected.

Management believes that the Company currently has all of the licenses, permits and approvals required
for its current operations. However, the Company does business in almost every state with its products being
distributed though the A-B distribution network, and for many of these states, relies on the licensing,
permitting and approvals maintained by A-B. If a state or a number of states required the Company to obtain
its own licensing, permitting or approvals to operate within the state’s boundaries, a combination of events
may occur, including a disruption of sales or significant increases in compliance costs. If licenses, permits or
approvals not previously required for the sale of the Company’s malt beverage products were to be suddenly
required, the Company’s ability to conduct its business could be substantially and adversely affected.

An increase in excise taxes could adversely affect our financial condition or 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 at taxed at $7 per barrel
on the first 60,000 barrels shipped, with the remainder of the shipments taxed at the normal rate. While we are
not aware of any plans by the federal government to reduce or eliminate this benefit to small brewers, any
such reduction in a material amount could have an adverse effect on our financial condition and results of
operations. In addition, we would lose the benefit of this rate structure if our annual production exceeds the
two million barrel threshold. Certain states also levy excise taxes on alcoholic beverages, which have also

been subject to change. It is possible that excise taxes will be increased in the future by either 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. Due in part
to the economic recession and the follow-on effect on state budgets, a number of states are proposing
legislation, including a key market in the state of Oregon, which would lead to significant increases in the
excise tax rate on alcoholic beverages for their states. Any such increases in excise taxes, if enacted, would
adversely affect our financial condition or results of operations.

Changes in state laws regarding distribution arrangements may adversely impact our operations.
2006, the Washington state legislature enacted legislation removing the long-standing requirement that small
producers of wine and beer distribute their products through wholesale distributors, thus permitting these small
producers to distribute their products directly to retailers. The law further provides that any brewery that
produces more than 2,500 barrels annually may distribute its products directly to retailers, if its distribution
facilities are physically separate and distinct from its production facilities. The legislation stipulates that prices
charged by a brewery must be uniform for all distributors and retailers, but does not mandate the price retailers
may charge consumers. Our operations will continue to be substantially impacted by the Washington state
regulatory environment, and while it is difficult to predict what impact, if any, this law will have, the beer and
wine market is likely to experience an increase in competition that could cause future sales and results of
operations to be adversely affected. This law may also impact the financial stability of Washington state
wholesalers on which we rely.

Other states in which we have a significance sales presence may enact similar legislation, which is likely

to have the same or similar effect on the competitive environment for those states. An increase in the
competitive environment in those states could have an adverse effect on our future sales and results of
operations.

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. 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. As well, we may decide to pursue other alternatives for leasing or purchasing kegs.
There is no assurance, though, that we will be successful in securing additional kegs.

Our key raw materials may continue to increase in cost and adequate supplies may become even more

difficult to secure. According to industry and media sources, the cost of barley, wheat and hops, all primary
ingredients in our products, have increased significantly in the prior two years. Media sources explain that the
cost of barley increased 48% from August 2006 through June 2007, largely driven by a lower supply of barley
as farmers shifted their focus to growing corn, a key component of biofuels. The beer industry appears to also
be experiencing a decline in the supply of hops, driven by a number of factors: excess supply in the 1990s led
some growers to switch to more lucrative crops, resulting in an estimated 40% decrease in worldwide hop-
growing acreage; poor weather in eastern Europe and Germany caused substantial hops crop losses in 2007;
hops crop production in England has declined approximately 85% since the mid-1970s; and 2007 U.S., New
Zealand, and Australia hops crop yields were only average. Wheat exports have increased by 30% because of
the weak U.S. dollar and poor worldwide harvests, leading to U.S. supplies of wheat that are at the lowest
levels in 60 years. While we have historically utilized fixed price contracts to secure adequate supplies of key
raw materials, including barley, wheat and hops, recent fixed price contracts reflect current market pricing that
is significantly higher than historical pricing. If we experience difficulty in securing our key raw materials or
continue to experience increases in the cost of these materials, it would adversely affect our financial condition
or results of operations.

Loss of income tax benefits could negatively impact our results of operations. As of December 31, 2008,
our deferred tax assets were primarily comprised of federal net operating losses (“NOLs”) of $29.1 million, or
$9.9 million tax-effected; state NOL carryforwards of $299,000 tax-effected; and federal and state alternative

minimum tax credit carryforwards of $183,000 tax effected. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income during the periods in which those temporary
differences become deductible. As of December 31, 2008, we recorded a valuation allowance of $1.0 million
against certain of our deferred tax assets based on our assessment that it was more likely than not that these
deferred tax assets would not be realized. To the extent that we continue to generate NOLs in the future, or
otherwise are unable to generate adequate taxable income in future periods, we may be unable to recognize
additional tax benefits. In addition, we may be required to record an increase to the valuation allowance to
provide for other deferred tax assets in the event that our assessment is that they are more likely than not to
not be realized.

In conjunction with the Merger, we reviewed Section 382 of the Internal Revenue Code, which can limit

the use of NOLs in instances where there has been a change in ownership of greater than 50% of the stock
owned by one or more shareholders holding five percent or more of the outstanding stock, and do not believe
that Section 382 impacts our ability to utilize the NOLs in the future. While we are not aware of any plans by
the federal or state governments to amend the rules regarding utilization of NOLs, any such modification could
have an adverse effect on our financial condition and results of operations.

Our common stock could be de-listed from the NASDAQ Global Market if our stock price were to trade

below $1.00 per share for an extended period of time. Since the beginning of 2009, our stock price has been
trading in a range from $0.86 to $1.27 per share. Under NASDAQ’s Marketplace Rule 4450(a)(5), (“Rule”)
any Company whose stock has a closing bid price less than $1.00 for 30 consecutive days may be subject to a
de-listing proceeding instigated by the NASDAQ. On October 16, 2008, NASDAQ announced that it had
suspended the enforcement of the Rule until January 19, 2009, and then on December 23, 2008, NASDAQ
announced the suspension of enforcement of this rule until April 20, 2009. In the event that we receive notice
that our common stock is being subjected to de-listing procedures from the NASDAQ Global Market,
NASDAQ rules permit us to appeal any de-listing determination by the NASDAQ staff to a NASDAQ Listing
Qualifications Panel. Alternatively, NASDAQ may permit us to transfer the listing of our common stock to the
NASDAQ Capital Market if we satisfy the requirements for initial inclusion set forth in Marketplace
Rule 4310(c), except for the bid price requirement. We will continue to monitor the bid price for our common
stock and consider various options available to us if our common stock does not trade at a level that is likely
to maintain compliance or the NASDAQ does not further extend the suspension of the Rule.

Delisting from the NASDAQ Global Market could have an adverse effect on our business and on the

trading of our common stock. If a delisting of our common stock from the NASDAQ Stock Market were to
occur, our common stock would trade on the OTC Bulletin Board or on the “pink sheets” maintained by the
National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and
our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.

The expiration of lock-up agreements entered into with certain Widmer shareholders in connection with
the Merger could cause the market price of our common stock to decline. As a condition to the closing of
the Merger, certain shareholders of Widmer executed lock-up agreements pursuant to which these holders
generally agreed that, from the closing date of the Merger to the first anniversary of the closing, they will not
directly or indirectly sell or otherwise transfer any shares of our common stock then held or thereafter
acquired without the consent of our board of directors. These Widmer shareholders received 4,002,343 shares
of our common stock pursuant to the Merger, which represents approximately 23.6% of the outstanding shares
as of December 31, 2008. Upon the expiration of the lock-up agreements, all of these shares will be 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 any of these shareholders who are affiliates of the Company. Such sales in the public
market after the lock-up agreements expire, or the perception that such sales could occur, could cause the
market price of our common stock to decline.

Our relationships with Kona and FSB may not provide anticipated benefits. As a result of the Merger,
we have a 20% equity interest in Kona and a 42% equity interest in FSB; however as a result of the Merger,
we recorded these investments as our percentage share of the associated fair value of the entities, resulting in
an amount greater than our percentage share of the net book value of the corresponding entity. As a result of

declines deemed to be other than temporary in the estimated future profitability of these entities, we recorded
charges to loss on impairment of $100,000 and $1.3 million associated with our corporate investment in Kona
and FSB, respectively, for the year ended December 31, 2008. If the sales or operations of Kona or FSB
experience further declines that are deemed to be other than temporary in nature and substantial in volume or
quantity, our analyses of the fair values of these equity investments as compared with their carrying values
may indicate that additional impairment losses have been incurred. Any such impairment losses would be
charged against current operations.

The fair value of our intangible Widmer trademark asset may decrease further. One of the assets
acquired in the Merger was the intangible Widmer trademark, which we recorded at its estimated fair value of
$16.3 million as of the effective date of the Merger. As a result of a decrease in the estimated cash flows
associated with this asset, our analysis concluded that a decrease in the fair value of this asset had occurred.
This resulted in our recognizing a loss on impairment of this asset of $6.5 million during the fourth quarter of
2008. If the current recession causes a reduction in consumer demand, or we, for any other reason, experience
a decrease in sales growth, a further decrease in the cash flows projected to be generated by this asset may
occur. If this decrease is significant, our analysis of the fair value of this intangible asset as compared with its
carrying value may indicate that an additional impairment loss has been incurred. Any such impairment loss
would be charged against current operations.

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 in the future. Further, due to our loan agreement with Bank of America, N.A. (“BofA”)
as modified, we are not able to declare or pay a dividend without our lender’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.

Our modified credit agreement limits our near-term capital expenditures. Maintaining our facilities or
entering into new product or packaging introduction may require incremental capital expenditures; however,
per the terms of our borrowing arrangement with our lender, our capital expenditures will be limited in each
of the first two quarters of 2009 to specified amounts. If the capital expenditures necessary to maintain our
facilities or bring new products or packaging to market are greater than the amounts to which we are limited
by this arrangement, our ability to maintain or increase sales growth could be impaired, which could materially
adversely affect our business.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company currently owns and operates three highly automated small-batch breweries, the Washington

Brewery, the Portland Brewery and the New Hampshire Brewery, as well as a small, manual brewpub-style
brewing system at the Rose Quarter Brewery. The Company leases the sites upon which the New Hampshire
Brewery and Rose Quarter Brewery are located, in addition to its office space and warehouse locations in
Portland, Oregon for its corporate, administrative and sales functions. These operating leases expire at various
times between 2011 and 2047. Certain of these leases are with entities that have members that include related
parties to the Company. See Notes 16 and 17 to the Financial Statements included elsewhere herein for further
discussion regarding these arrangements.

The Washington Brewery. The Washington Brewery, located on approximately 22 acres (17 of which are

developable) in Woodinville, Washington, a suburb of Seattle, is across the street from the Chateau Ste.
Michelle Winery and next to the Columbia Winery. The Washington Brewery is comprised of an approx-
imately 88,000 square-foot building, a 40,000 square-foot building and an outdoor tank farm. The two
buildings house a 100-barrel brewhouse, fermentation cellars, filter rooms, grain storage silos, a bottling line, a
keg filling line, dry storage, two coolers and loading docks. The brewery includes a retail merchandise outlet
and the Forecasters Public House, a 4,000 square-foot family-oriented pub that seats 200 patrons and features

an outdoor beer garden that seats an additional 200 people. Additional entertainment facilities include a
4,000 square-foot special events room accommodating up to 250 people. The brewery also houses office space,
in a portion of which some of the Company’s Operations staff are located. The remaining space is leased out
to a third party through October 2009. The Company purchased the land in 1993 and believes that its value
has appreciated. The brewery’s annual production capacity as of year end 2008 was approximately 230,000 bar-
rels, which is also the expected annual production capacity for 2009. The Company’s annual production
capacity is estimated assuming a total of two weeks shut down for maintenance and other interruptions, and
also assumes a standard mix of brands and package changes.

The Oregon Brewery. The Oregon Brewery, located in Portland, Oregon, is comprised of an approxi-
mately 135,000 square-foot building housing the primary brewery equipment, a 40,000 square-foot building
and a 10,000 square-foot addition. The three structures house a 230-barrel brewhouse, fermentation cellars,
filter rooms, grain storage silos, a bottling line, a keg filling line, dry storage, two coolers and loading docks.
The brewery includes a retail merchandise outlet and the Gasthaus Pub and Restaurant, a 3,100 square-foot
family-oriented pub that seats 125 patrons. There are also two special events rooms that combined represent
3,700 square feet and can accommodate up to 125 people. The brewery also houses office space, where most
of the Company’s corporate and sales and marketing staff are located. The brewery’s annual production
capacity as of year end 2008 is approximately 377,000 barrels, which is also the expected annual production
capacity for 2009.

The New Hampshire Brewery. The New Hampshire Brewery is located on approximately 23 acres in
Portsmouth, New Hampshire. The Company leases the land under a contract that expires in 2047, with an
option to renew for up to two seven-year extensions. The New Hampshire Brewery is modeled after the
Washington Brewery and is similarly equipped, but is larger in design, covering 125,000 square feet to
accommodate all phases of the Company’s brewing operations under one roof. Also included is a retail
merchandise outlet; the Cataqua Public House, a 4,000 square-foot family-oriented pub with an outdoor beer
garden, and a special events room accommodating up to 250 people. Production began in October 1996, with
an initial brewing capacity of approximately 100,000 barrels per year. In order to accommodate sales growth,
the Company has steadily expanded the production capacity at this location. As of December 31, 2008, the
brewery’s annual production capacity is approximately 190,000 barrels, which is also the expected annual
production capacity for 2009.

The Rose Quarter Brewery. The Company also operates a second location in Portland, Oregon, which is

a pilot 10-barrel brewhouse at the Rose Quarter. The Rose Quarter is a sports and entertainment venue
featuring two multi-purpose arenas, including the home arena for the National Basketball Association’s
Portland Trail Blazers professional basketball team.

Substantially all of the personal property and the real properties associated with the Oregon Brewery and
the Washington Brewery secure the Company’s loan agreement with BofA. See Notes 6 and 9 to the Financial
Statements included elsewhere herein.

Item 3. Legal Proceedings

The Company is involved from time to time in claims, proceedings and litigation arising in the normal

course of business. The Company believes that, to the extent that any pending or threatened litigation
involving the Company or its properties exists, such litigation will not likely have a material adverse effect on
the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Executive Officers of the Company

Terry E. Michaelson (55) — Chief Executive Officer

Mr. Michaelson has served as the Company’s sole Chief Executive Officer since November 13, 2008 and
was the Company’s Co-Chief Executive Officer prior to that beginning with the effective date of the Merger,
July 1, 2008. He served as President of Craft Brands from July 2004 to July 1, 2008. From March 1995 to
June 2004, he served as Chief Operating Officer and Executive Vice President of Widmer Brothers Brewing
Company (Widmer), and from August 1993 to June 2004, Mr. Michaelson served as a director of Widmer.
From January 1994 to February 1995, he served as Director of Operations of Widmer.

Mark D. Moreland (44) — Chief Financial Officer and Treasurer

Mr. Moreland has served as the Company’s Chief Financial Officer and Treasurer since August 19, 2008

and prior to that was the Company’s Chief Accounting Officer, beginning with the effective date of the
Merger. From April 1, 2008 to June 30, 2008, Mr. Moreland served as Chief Financial Officer of Widmer
Brothers Brewing Company. He was Executive Vice President and Chief Financial Officer of Knowledge
Learning Corporation from July 2006 to November 2007. From July 2005 to June 2006, Mr. Moreland held
the positions of Interim CFO, Senior Vice President — Finance and Treasurer with Movie Gallery, Inc., which
operates the Movie Gallery and Hollywood Entertainment video rental chains. From August 2002 to July
2005, he was Senior Vice President, Finance and Treasurer of Hollywood Entertainment Corporation, which
Movie Gallery, Inc. acquired in April 2005. Movie Gallery and each of its U.S. affiliates filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code on October 16, 2007, and the plan of reorganization
was subsequently confirmed by the U.S. Bankruptcy Court in 2008.

V. Sebastian Pastore (42) — Vice President, Brewing Operations and Technology

Mr. Pastore has served as Vice President, Brewing Operations and Technology for the Company since the
Merger. Prior to that, Mr. Pastore has served as Vice President of Brewing of Widmer from March 2002 to the
effective date of the Merger. From June 2000 to March 2002, he worked for Coca-Cola Enterprises. From
December 1994 to June 2000, Mr. Pastore worked at Widmer serving as the Director of Brewing and from
January 1990 to November 1994, he served as the Assistant Brewmaster.

Martin J. Wall (37) — Vice President, Sales

Mr. Wall has served as Vice President, Sales for the Company since the Merger. Prior to that, Mr. Wall
served as Vice President of Sales of Craft Brands from July 2004 to the effective date of the Merger. From
September 2000 to June 2004, he served as Vice President of Sales of Widmer. Prior to September 2000,
Mr. Wall held various positions at Widmer, including Market Manager and Brewery Representative.

There is no family relationship between any of the directors or executive officers of the Company, except
that Kurt R. Widmer, the Chairman of the Company’s Board, is the brother of Robert Widmer, who serves as
the Company’s Vice President of Corporate Quality Assurance and Industry Relations, a non-executive
position.

PART II

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

Equity Securities

The Company’s Common Stock trades on the Nasdaq Stock Market under the trading symbol HOOK.

The table below sets forth, for the fiscal quarters indicated, the reported high and low sale prices of the
Company’s Common Stock, as reported on the NASDAQ Stock Market:

High

Low

2008

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.63
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.90
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.89
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.80

2007

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.80
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.08
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.21
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.11

$4.00
$3.85
$2.78
$1.11

$5.00
$6.17
$5.68
$5.84

As of March 16, 2009, there were 690 common stockholders of record, although the Company believes

that the number of beneficial owners of its common stock is substantially greater.

The Company has not paid any dividends during the past 10 years, and has never declared or paid normal

or ordinary dividends during its existence. Under the terms of the Company’s loan agreement with Bank of
America, N.A. (“BofA”) as modified, the Company may not declare or pay dividends without our lender’s
consent. The Company anticipates that for the foreseeable future, all earnings, if any, will be retained for the
operation and expansion of its business and that it will not pay cash dividends. The payment of dividends, if
any, in the future will be at the discretion of the board of directors and will depend upon, among other things,
future earnings, capital requirements, restrictions in future financing agreements, the general financial
condition of the Company and general business conditions.

Item 6. Selected Financial Data

Not applicable.

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

The following discussion and analysis should be read in conjunction with the Company’s Financial
Statements and Notes thereto included herein. The discussion and analysis includes period-to-period compar-
isons of the Company’s financial results. Although period-to-period comparisons may be helpful in understand-
ing the Company’s financial results, the Company believes that they should not be relied upon as an accurate
indicator of future performance.

Merger with Widmer Brothers Brewing Company

On November 13, 2007, the Company entered into an Agreement and Plan of Merger with Widmer
Brothers Brewing Company, an Oregon corporation (“Widmer”). On July 1, 2008, the merger of Widmer with
and into the Company was completed (the “Merger”). In connection with the Merger, the name of the
Company was changed from Redhook Ale Brewery, Incorporated to Craft Brewers Alliance, Inc. The common
stock of the Company continues to trade on the Nasdaq Stock Market under the trading symbol “HOOK.”

The Company believes that the combined entity has the potential to secure efficiencies, beyond those that
had already been achieved by its existing relationships with Widmer, in utilizing the two companies’ breweries

and a national sales force, as well as by reducing duplicate functions. Utilizing the combined breweries offers
a greater opportunity to rationalize production capacity in line with product demand. The national sales force
of the combined entity will support further promotion of the products of its corporate investments, Kona
Brewery LLC (“Kona”), which brews Kona malt beverage products, and to a lesser extent, the Fulton Street
Brewery, LLC (“FSB”), which brews Goose Island malt beverage products. The Company also expects that the
combined entity may have greater access to capital markets driven by its increased size and expected growth
rates.

Overview

Since its formation, the Company has focused its business activities on the brewing, marketing and selling

of craft beers in the United States. The Company generated gross sales of $86.0 million and a net loss of
$33.3 million for the year ended December 31, 2008, compared with gross sales of $46.5 million and a net
loss $939,000 for the corresponding period in 2007. The Company generated a loss per share of $2.63 on
12.7 million shares for fiscal year 2008 compared with a loss per share of $0.11 on 8.3 million shares for
fiscal year 2007. The results for the year ended December 31, 2008 reflect a non-cash charge of $30.6 million
as a loss on impairment of assets recorded by the Company due to its analysis at year end of the estimated
fair value of certain assets that were acquired by the Company in the Merger as compared to their respective
carrying value in light of current economic circumstances. The comparability of the two fiscal periods is
further impacted by the Merger.

The Company’s sales volume (shipments) increased 34.1% to 424,900 barrels in 2008 as compared with

316,900 barrels in 2007, due primarily to shipments of Widmer- and Kona-branded products in the second half
of 2008 as a result of the Merger. Sales in the craft beer industry generally reflect a degree of seasonality,
with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating
stronger sales. The Company has historically operated with little or no backlog, and its ability to predict sales
for future periods is limited.

Since July 1, 2008, the Company has produced its specialty bottled and draft Redhook-branded and

Widmer-branded products in its four Company-owned breweries, one in the Seattle suburb of Woodinville,
Washington (“Washington Brewery”), another in Portsmouth, New Hampshire (“New Hampshire Brewery”),
and two in Portland, Oregon. The two in Portland, Oregon are the Company’s largest production facility
(“Oregon Brewery”) and its smallest, a manual brewpub-style brewery at the Rose Quarter (“Rose Quarter
Brewery”). The Company sells these products in addition to the Kona branded products predominantly to
Anheuser-Busch, Incorporated (“A-B”) and its network of wholesalers pursuant to the July 1, 2004 Master
Distributor Agreement (the “A-B Distribution Agreement”), as amended. These products are available in
48 states.

In addition to the sale of Redhook-branded and Widmer-branded beer, the Company also earns revenue in

connection with two operating agreements with Kona — an alternating proprietorship agreement and a
distribution agreement. Pursuant to the alternating proprietorship agreement, Kona produces a portion of its
malt beverages at the Oregon Brewery. The Company sells raw materials to Kona prior to production
beginning and receives from Kona a facility leasing fee based on the barrels brewed and packaged at the
Company’s brewery. These sales and fees are reflected as revenue in the Company’s statements of operations.
Under the distribution agreement, the Company purchases and distributes product manufactured by Kona and
then markets, sells and distributes the Kona-branded products pursuant to the A-B Distribution Agreement. As
Kona’s distributor, the Company also markets, sells and distributes any Kona-branded products manufactured
at the Company’s Oregon Brewery.

The Company also derives other revenues from sources including the sale of retail beer, food, apparel and

other retail items in its three brewery pubs. The Company added the third pub, located in Portland, Oregon
and attached to the Oregon Brewery, in the Merger.

In conjunction with the Merger, the Company acquired from Widmer a 20% equity ownership in Kona

and a 42% equity ownership in FSB, brewer of Goose Island-branded products. Both investments are

accounted for under the equity method, as outlined by Accounting Principles Board Opinion (“APB”) No. 18,
The Equity Method of Accounting for Investments in Common Stock (“APB 18”).

From July 1, 2004 through June 30, 2008, the Company produced its specialty bottled and draft

Redhook-branded products at the Washington Brewery and the New Hampshire Brewery and distributed these
products in the Midwest and Eastern United States pursuant to the A-B Distribution Agreement and in the
western United States through Craft Brands Alliance LLC (“Craft Brands”). In addition to the sale of
Redhook-branded beer, the Company also brewed, marketed and sold Widmer Hefeweizen in the Midwest and
Eastern United States in conjunction with a 2003 licensing agreement with Widmer and brewed Widmer-
branded products for Widmer in connection with contract brewing arrangements.

Craft Brands was a joint venture sales and marketing entity formed by the Company and Widmer in July
2004. The Company and Widmer manufactured and sold their product to Craft Brands at a price substantially
below wholesale pricing levels; Craft Brands, in turn, advertised, marketed, sold and distributed the product to
wholesale outlets in the western United States through a distribution agreement between Craft Brands and
A-B. (Due to state liquor regulations, the Company sold its product in Washington state directly to third-party
beer distributors and returned a portion of the revenue to Craft Brands based upon a contractually determined
formula.) Profits and losses of Craft Brands were generally shared between the Company and Widmer based
on the cash flow percentages of 42% and 58%, respectively. In connection with the Merger, Craft Brands was
merged with and into the Company, effective July 1, 2008. All existing agreements between the Company and
Craft Brands and between Craft Brands and Widmer terminated as a result of the merger of Craft Brands with
and into the Company.

For additional information regarding the A-B Distribution Agreement and Craft Brands, see Part 1, Item 1,

Business “— Product Distribution,” “ — Relationship with Anheuser-Busch, Incorporated” and “— Relation-
ship with Craft Brands Alliance LLC.”

The Company’s sales are affected by several factors, including consumer demand, price discounting and
competitive considerations. The Company competes in the highly competitive craft brewing market as well as
in the much larger beer, wine, spirits and flavored alcohol markets, which encompass producers of import
beers, major national brewers that produce fuller-flavored products, large spirit companies, and national
brewers that produce flavored alcohol beverages. The craft beer segment is highly competitive due to the
proliferation of small craft brewers, including contract brewers, and the large number of products offered by
such brewers. Certain national domestic brewers have also sought to appeal to this growing demand for craft
beers by producing their own fuller-flavored products. These fuller-flavored products have been most
successful within the wheat beer category, including Shock Top Belgian White and Blue Moon Belgian White.
These beers are generally considered to be within the same category as the Company’s Hefeweizen beer,
putting them in direct competition. The wine and spirits market has also experienced significant growth in the
past five years or so, attributable to competitive pricing, increased merchandising, and increased consumer
interest in wine and spirits. In recent years, the specialty segment has seen the introduction of flavored alcohol
beverages, the consumers of which, industry sources generally believe, correlate closely with the consumers of
the import and craft beer products. Sales of these flavored alcohol beverages were initially very strong, but
growth rates have slowed in recent years. While there appear to be fewer participants in the flavored alcohol
category than at its peak, there is still significant volume associated with these beverages. Because the number
of participants and number of different products offered in this segment have increased significantly in the
past ten years, the competition for bottled and draft product placements has intensified.

While the craft beer market has seen a significant growth in the number of competitors, the national
domestic and international brewers have undergone a second round of consolidation, reducing the number of
market participants at the top of the beer market. A number of factors have driven this consolidation, including
the desire to capture market share and positioning as either the largest brewer or second largest brewer in any
given market. The U.S. beer market, in which the Company competes, was once dominated by three
companies, A-B, Miller Brewing Company and Adolph Coors Company. During the past decade, Miller
Brewing Company and Adolph Coors Company were merged with international brewers, South African
Brewers (“SAB”) and Molson of Canada, respectively, to increase the global market reach of their brands.

During the current year, the resulting companies, SABMiller and MolsonCoors, completed the terms of a joint
venture to merge their U.S. operations, competing under the name MillerCoors. Likewise, A-B was acquired
by Belgium-based InBev in a deal consummated in the fourth quarter of 2008. Shipments for the two entities,
A-B and MillerCoors, represented nearly 80% of the total U.S. market, including imports, for 2008.

Another factor driving this is the desire on the part of these larger consolidated national brewers to
control the rising cost of the majority of the inputs to the brewing process, primarily barley, wheat and hops,
and packaging and shipping costs. While consolidation promises to alleviate these cost pressures for the
national brewers, the Company faces these same pressures with limited resources available to achieve similar
benefits.

Management monitors the annual working capacity of each brewery in connection with production and

resource planning. Because an industry standard for defining brewery capacity does not exist, there are
numerous variables that can be considered in arriving at an estimate of annual working capacity. Following the
Merger, management reviewed each facility, scrutinized the factors important to the Company in arriving at a
practical definition of capacity, and recomputed the annual working capacity of each brewery. Among the
factors that management considered in estimating annual working capacity are:

(cid:129) Brewhouse capacity, fermentation capacity, and packaging capacity;

(cid:129) A normal production year;

(cid:129) The product mix and product cycle times; and

(cid:129) Brewing losses and packaging losses.

Because the conditions under which each brewery operates differs (such as age of equipment, local
environment, product mix), the impact that these factors have on the estimate of capacity also vary by brewery.
For example, while the New Hampshire Brewery and the Oregon Brewery are constrained by the volume of
beer that each can ferment (each brewery can brew more beer than it can ferment), the Washington Brewery is
constrained by the size of its brewhouse (the brewery has adequate capacity to ferment all product that it
brews).

Management did not consider the impact that seasonality clearly has on the capacity calculation. Rather,

management assumed that each brewery produces beer at 100% of working capacity throughout a 50 week
year. But because seasonality is a notable factor affecting the Company’s sales, the Company expects that the
breweries’ capacity will be more efficiently utilized during periods when the Company’s sales are strongest
and there likely will be periods where the breweries’ capacity utilization will be lower.

Management estimates the annual working capacity after the Merger for its breweries as follows:

Oregon Brewery(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington Brewery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Hampshire Brewery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual Working
Capacity at
December 31, 2008
(In barrels)
377,000
230,000
190,000

797,000

Note 1 — Excludes the annual working capacity for the Rose Quarter Brewery, which is less than 1,000 barrels.

In order to accommodate volume growth in the markets served by the New Hampshire Brewery, the
Company has expanded the brewery’s fermentation capacity several times during the past several years. During
the year ended December 31, 2007, the Company completed the installation of four additional 400-barrel
fermenters, one 70,000 pound grain silo and upgraded its process control automation at an estimated cost of
$1.3 million. These improvements added approximately 21,700 barrels of capacity to the New Hampshire
Brewery. During the year ended December 31, 2008, the Company added eight 400-barrel fermenters and four

bright tanks, and began an upgrade of its incoming water filtration and water treatment systems, which is
expected to be completed during the first quarter of 2009. For the year ended December 31, 2008, the
Company has expended $4.1 million associated with these projects and increased annual working capacity by
43,300 barrels, bringing the annual working capacity to 190,000 barrels. Further expansion of the New
Hampshire Brewery’s fermentation capacity and improvements to its refrigeration facility has been deferred
from their scheduled completion in 2008 into the third quarter of 2009.

The Company’s capacity utilization has a significant impact on gross profit. Generally, when facilities are

operating at their working capacities, profitability is favorably affected because fixed and semi-variable
operating costs, such as depreciation and production salaries, are spread over a larger sales base. Because
current period production levels have been below the Company’s working capacity, gross margins have been
negatively impacted. If the Company is unable to achieve significant sales growth, the resulting excess
capacity and unabsorbed overhead of the Company will have an adverse effect on the Company’s gross
margins, operating cash flows and overall financial performance.

In addition to capacity utilization, other factors that could affect cost of sales and gross margin include

changes in freight charges, the availability and prices of raw materials and packaging materials, the mix
between draft and bottled product sales, the sales mix of various bottled product packages, and fees related to
the A-B Distribution Agreement. Prior to July 1, 2008, sales to Craft Brands at a price substantially below
wholesale pricing levels and sales of contract beer at a pre-determined contract price also affected cost of
sales, gross margins and the comparability of fiscal periods.

Brand Trends

Redhook Beers. The Redhook brand has lagged the trend in the growth of the craft segment for the last

several years, due in part to the life cycle of the brand family’s former flagship, ESB, which had matured in
key markets even while the overall segment continued to grow. To offset this factor, the Company engaged in
systematic initiatives, including rebranding Redhook IPA into Long Hammer IPA and relaunching this brand
with new packaging and a concentrated focus as the new Redhook flagship in January 2007. Leveraging off of
the growth of the IPA category, this rebranding effort resulted in an increase in shipments of Long Hammer
IPA the Company estimates approximated 15% from 2007 to 2008. As part of these initiatives, the Company
reexamined its pricing strategy and has increased the brand family to price points comparable to the market
leaders in the last couple of years.

The Company will continue to look for niche areas of category growth for Redhook on which to
capitalize. For example, in early 2009 the Company has launched Slim Chance Light Ale to fulfill consumer
demand for full-flavored, low-calorie craft beer. In order to reconnect the Redhook brand with the craft
community, a high-end line of Redhook beers was launched in late 2008. Each beer in this line is marketed
toward the beer connoisseur, premium-priced, and only available for a limited time.

Since these efforts were initiated, the Redhook brand sales trends in the Western United States have
shown a slowing in the rate of decline and modest growth during some periods, driven primarily by a reversal
of the negative trend in Washington state. For 2008, overall shipments of Redhook-branded products declined
approximately 2.6%.

Widmer Brothers’ Beers. The Widmer Brothers’ brand has experienced significant growth in recent
years, led by the popular consumer response to the Hefeweizen category within the craft beer segment and the
role that Widmer Hefeweizen has enjoyed as a leader in this category. This category continues to experience
positive trends nationally, but has more recently seen a significant increase in competitive products from other
craft brewers as well as offerings from large domestic brewers such as A-B’s Shock Top Belgian White and
MillerCoors’ Blue Moon Belgian White attempting to participate in the same category. Widmer Hefeweizen has
also been particularly impacted by the downturn in the restaurant industry as a result of the U.S. economic
recession worsening during the fourth quarter of 2008. This brand is significantly more dependent on on-
premise sales than any of the Company’s other brands.

As a result of the Merger, the Company now has the ability to sell and market other Widmer-branded
products in the Midwest and Eastern United States. This will round out the Widmer-brand offering in these
regions, giving the consumers in these areas a true Widmer brand family to enjoy, including Drop Top Amber
Ale and Drifter Pale Ale, which has been launched in 2009. In an effort to keep Widmer Hefeweizen top of
mind with consumers and to shift the emphasis of this brand from the on-premise market, beginning in 2009,
the Company will offer Widmer Hefeweizen in the Western U.S. markets in a 5-liter steel mini keg. This is
expected to allow consumers the opportunity to enjoy the draft experience of this brand at home.

Except for Widmer-branded products brewed and shipped under the contract brewing arrangements and
Widmer Hefeweizen shipped under the licensing agreement, sales and shipments for Widmer-branded product
were not reflected in the Company’s statements of operations prior to the Merger.

Kona Brewing Beers. Prior to its association with the Company, the Kona Brewing brand had
experienced strong growth as a result of forming relationships with Widmer and Craft Brands beginning in
2004. However, Kona-branded product is relatively new outside of Hawaii and has been recently introduced
into a number of new markets in the continental United States. Kona-branded products have experienced the
rapid growth of a new brand that benefits from growing distribution and new trial from consumers. The brand
family has a clear identity, the Company markets it as “Liquid Aloha”, which is easily grasped by consumers,
and the beer is of high quality, making it easy to sell to wholesalers, retailers and consumers.

Despite lapping strong launch volumes in the Kona brand’s biggest mainland market, California, the

brand continues to see double-digit growth in this market, suggesting that consumers have formed a strong
bond with the brand, purchasing it repeatedly. The Company identifies Longboard Island Lager as the brand
family’s flagship, creating a direct connection to Hawaii with consumers. The Company believes that the Kona
brand’s growth potential is significant not only from organic growth within its current markets, but also from
geographic expansion into the Eastern United States.

Sales and shipments for Kona-branded product were not reflected in the Company’s statements of

operations prior to the Merger.

For additional information about risks and uncertainties facing the Company, see Part 1, Item 1A. Risk

Factors.

Results of Operations

The following table sets forth, for the periods indicated, certain items from the Company’s Statements of

Operations expressed as a percentage of net sales:

Year Ended
December 31,
2008
2007

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.8% 112.2%
Less excise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12.2

7.8

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0
82.3
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0
88.7

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity investment in Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from equity investments in Kona & FSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17.7
24.9
38.4
2.2
1.7

(46.1)
—
(1.2)
0.1

(47.2)
(5.5)

11.3
19.9
—
1.4
6.8

(3.2)
—
(0.7)
1.2

(2.7)
(0.4)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(41.7)% (2.3)%

Non-GAAP Financial Measures

The Company’s loan agreement as modified subjects the Company to a financial covenant based on

earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Liquidity and Capital
Resources.” EBITDA is defined per the modified loan agreement and requires additional adjustments, among
other items, to (a) exclude defined costs associated with restructuring, (b) adjust losses (gains) on sale or
disposal of assets, and (c) exclude certain other non-cash income and expense items. Per the covenant in the
modified loan agreement, EBITDA is to be measured on a one-quarter basis until September 30, 2009 when
the measurement will be on a trailing four-quarter basis. EBITDA as defined under the modified loan
agreement was $1.7 million for the quarter ended December 31, 2008. The following table reconciles net
income to EBITDA per the modified loan agreement for the quarter ended December 31, 2008:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring costs, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale or disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowable indirect merger-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Quarter Ended
December 31, 2008
(In thousands)
$(30,101)
541
(2,719)
1,645
367
30,589
140
1,044
18
150

EBITDA per the modified loan agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,674

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

The following table sets forth, for the periods indicated, a comparison of certain items from the

Company’s Statements of Operations:

Year Ended December 31,

2008

2007

Increase/
(Decrease) % Change

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,013
6,252
Less excise taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Selling, general and administrative expenses . . . . . . . . . . . . .
Loss on impairment of asset . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity investment in Craft Brands . . . . . . . . . . .

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from equity investments in Kona and FSB . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79,761
65,646

14,115
19,894
30,589
1,783
1,390

(36,761)
(11)
(993)
110

(37,655)
(4,377)

(Dollars in thousands)
$46,544
5,074

$ 39,469
1,178

41,470
36,785

4,685
8,257
—
584
2,826

(1,330)
—
(302)
517

(1,115)
(176)

38,291
28,861

9,430
11,637
30,589
1,199
(1,436)

(35,431)
(11)
(691)
(407)

(36,540)
(4,201)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,278)

$ (939)

$(32,339)

84.8%
23.2

92.3
78.5

201.3
140.9
—
205.3
(50.8)

N/M
—
228.8
(78.7)

N/M
N/M

N/M

Note: N/M — Not Meaningful

Sales. Total sales increased $39.5 million in 2008 compared with 2007, due to the factors discussed

below:

Sales Revenues by Category

Year Ended December 31,

2008

2007

Increase/
(Decrease) % Change

A-B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Craft Brands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract brewing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternating proprietorship . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pubs and other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$62,364
6,914
2,956
5,761
8,018

(In thousands)

$18,879
13,885
7,363
—
6,417

$43,485
(6,971)
(4,407)
5,761
1,601

Total Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$86,013

$46,544

$39,469

230.3%
(50.2)
(59.9)
—
24.9

84.8%

(1) Other includes international, non-wholesalers and other

(cid:129) An increase in shipments of 220,700 barrels or 204.5% to A-B from shipments of 107,900 barrels in
2007 to 328,600 barrels in 2008 due in part to the effects of the Merger, including shipments in the
West for the second half of the year being made via A-B at wholesale price levels instead of Craft
Brands at below wholesale price levels. Additionally, both draft and bottled products experienced a
pricing increase at the wholesale level from a year ago;

(cid:129) With the Merger and the related merger of Craft Brands into the Company, the termination of several
sales and contract agreements effective July 1, 2008, including the distribution agreement with Craft

Brands and the contract brewing agreement with Widmer, which led to a $7.0 million and $4.4 million,
respectively, reduction in sales revenues from fiscal year 2007 to fiscal year 2008;

(cid:129) The inclusion of alternating proprietorship fees of $5.8 million earned from Kona for leasing the
Oregon Brewery and sales of raw materials during the last six months of 2008 (no such activity
occurred prior to the Merger); and

(cid:129) An increase of $1.6 million in pub and other sales in 2008 primarily due to the half year of sales

generated by the pub in Portland, Oregon, which was acquired as a result of the Merger.

Shipments — Brand. The following table sets forth a comparison of shipments by brand for the periods

indicated:

Year Ended December 31,

2008 Shipments
Bottle

Draft

Total

Draft

2007 Shipments
Bottle

Total

Increase /
(Decrease)

%
Change

Redhook brand . . . . . . . . . .
Widmer brand(1) . . . . . . . . . 100,700
18,800
Kona brand . . . . . . . . . . . . .

61,000 139,800
76,800
27,800

200,800
177,500
46,600

(In barrels)
66,400 139,800
43,500
67,200
—
—

206,200
110,700

(5,400)
66,800
— 46,600

(2.6)%
60.3
—

Total shipped. . . . . . . . . . . . 180,500

244,400

424,900

133,600 183,300

316,900

108,000

34.1%

(1) Shipments of Widmer-branded product in 2007 and for the first six months of 2008 are only those products brewed and shipped by

the Company and do not include Widmer-branded products shipped by Widmer or Craft Brands. The Company’s shipments were made
pursuant to a licensing agreement and contract brewing arrangements with Widmer, all of which were terminated in connection with
the Merger.

Total Company shipments increased 34.1% to 424,900 barrels in 2008 as compared with 316,900 barrels
in 2007, primarily driven by shipments of Widmer-branded products acquired in the Merger and shipments of
Kona-branded products pursuant to a distribution arrangement with Kona.

Although the Company has brewed and distributed Redhook-branded beer for the Company’s entire

existence, the Company first began to expand its brand portfolio in 2003 by entering into a licensing
arrangement with Widmer. Under the licensing agreement, the Company brewed Widmer Hefeweizen in the
New Hampshire Brewery and sold it in the Midwest and in Eastern markets. In 2004 following the formation
of Craft Brands, the Company further expanded its production of Widmer-branded products by entering into
two contract brewing arrangements with Widmer. In 2007, the Company brewed and shipped approximately
28,800 barrels of Widmer Hefeweizen in the Midwest and Eastern United States pursuant to the licensing
agreement and another 81,900 barrels of Widmer-branded products in conjunction with the contract brewing
arrangements. Although the licensing agreement and the contract brewing arrangements were terminated when
the Merger was consummated, those brewing activities still continue and are only a portion of total Widmer-
branded shipments. Although the Company plans to expand the distribution of other Widmer- and Kona-
branded products in the Midwest and Eastern United States, shipments in these states in the last six months of
2008 were limited to Widmer Hefeweizen and totaled approximately 9,900 barrels.

During the year ended December 31, 2008, 69.6% of Redhook-branded shipments were shipments of
bottled beer versus 67.8% in the same period for 2007. The sales mix of Kona-branded beer is also weighted
toward bottled product, although somewhat less than Redhook-branded beer with 59.7% of Kona-branded
shipments being bottled beer. The sales mix of Widmer-branded products contrasts significantly from that of
the Redhook and Kona brands with only 43.3% of Widmer-branded products being bottled beer in 2008.
Although the average revenue per barrel for sales of bottled beer is generally 40% to 50% higher than that of
draft beer, the cost per barrel is also higher, resulting in a gross margin that is approximately 10% less than
that of draft beer sales.

Shipments — Customer. The following table sets forth a comparison of shipments by customer for the

periods indicated:

2008 Shipments
Bottle

Draft

Total

Draft

2007 Shipments
Bottle

Total

Increase/
(Decrease)

%
Change

Year Ended December 31,

(In barrels)

A-B . . . . . . . . . . . . . . . . . . 142,400
16,300
Craft Brands . . . . . . . . . . . .
16,500
Contract brewing . . . . . . . . .
5,300
Pubs and other(1) . . . . . . . .

186,200
41,800
14,500
1,900

328,600
58,100
31,000
7,200

46,100
35,300
48,300
3,900

61,800
86,600
33,600
1,300

107,900
121,900
81,900
5,200

220,700
(63,800)
(50,900)
2,000

204.5%
(52.3)
(62.1)
38.5

Total shipped. . . . . . . . . . . . 180,500

244,400

424,900

133,600 183,300

316,900

108,000

34.1%

(1) International, non-wholesalers, pubs and other

Prior to July 1, 2008, the Company’s products were shipped through A-B in the Midwest and Eastern

United States and through Craft Brands in the west, ultimately being shipped to either a consumer or retailer
through wholesalers in the A-B distribution network. In connection with the Merger, Craft Brands was merged
with and into the Company and all shipments in the United States began to be sold through A-B through
wholesalers in the A-B distribution network.

Pricing and Fees. Average revenue per barrel on shipments of beer for 2008 was 34.3% higher than
average revenue per barrel for 2007. Comparison between the two years has been significantly impacted by
the Merger. During the last six months of 2008, the Company sold 98.4% of its beer through A-B at wholesale
pricing levels throughout the United States. During the corresponding period in 2007, the Company sold
34.0% of its product at wholesale pricing levels in the Midwest and Eastern United States, another 38.8% at
lower than wholesale pricing levels to Craft Brands in the Western United States, and 25.4% at agreed-upon
pricing levels for beer brewed on a contract basis.

Management believes that most, if not all, craft brewers are reviewing their pricing strategies in response
to recent increases in the costs of raw materials. Pricing changes implemented by the Company have generally
followed pricing changes initiated by large domestic or import brewing companies. While the Company has
implemented modest price increases during the past few years, some of the benefit has been offset by
competitive promotions and discounting. The Company may experience a decline in sales in certain regions
following a price increase.

In connection with all sales through the A-B Distribution Agreement, as amended, the Company pays a

Margin fee to A-B. The Margin does not apply to sales from the Company’s retail operations or to dock sales.
The Margin also did not apply to the Company’s sales to Craft Brands during all of 2007 and the first six
months of 2008 because Craft Brands paid a comparable fee to A-B on its resale of the product. The A-B
Distribution Agreement also provides that the Company shall pay the Additional Margin on shipments of
Redhook-, Widmer-, and Kona-branded product that exceed shipments in the same territory during the same
periods in fiscal 2003. During the year ended December 31, 2008, the Margin was paid to A-B on shipments
totaling 328,600 barrels. During the year ended December 31, 2007, the Margin was paid to A-B on shipments
totaling 107,900 barrels. As 2008 shipments in the United States and 2007 shipments in the Midwest and
Eastern United States exceeded 2003 shipments in the corresponding territories, the Company paid A-B the
Additional Margin. For the year ended December 31, 2008 and 2007, the Company paid a total of $3.1 million
and $1.0 million, respectively, to A-B related to the total of Margin and Additional Margin. These fees are
reflected as a reduction of sales in the Company’s statements of operations.

As of December 31, 2008, the net amount due to A-B under all Company agreements with A-B totaled

$2.3 million. In connection with the sale of beer pursuant to the A-B Distribution Agreement, the Company’s
accounts receivable reflect significant balances due from A-B, and the refundable deposits and accrued
expenses reflect significant balances due to A-B. Although the Company considers these balances to be due to
or from A-B, the final destination of the Company’s products is an A-B wholesaler and payments by the

wholesaler are settled through A-B. The Company purchases packaging, other materials and services under
separate arrangements; balances due to A-B under these arrangements are reflected in accounts payable and
accrued expenses. These amounts are also included in the net amount presented above.

Alternating Proprietorship.

In conjunction with an alternating proprietorship agreement, Kona produces

a portion of its malt beverages at the Oregon Brewery under a brewery leasing arrangement. The Company
receives a leasing fee based on the barrels Kona brews and packages at the Company’s brewery and also sells
raw materials to Kona prior to production occurring. Revenues associated with these activities for the year
ended December 31, 2008 were $5.8 million.

Retail Operations and Other Sales. Sales through the Company’s retail operations and other sales
increased $1.6 million to $8.0 million in 2008 from $6.4 million in 2007, primarily as the result of the
addition of a third pub pursuant to the Merger.

Excise Taxes. Excise taxes for the year ended December 31, 2008 increased $1.2 million, or 23.2%,
primarily due to the increase in shipments of Widmer-branded products and the effect of the marginal excise
tax rate on these shipments of $18 per barrel. Excise taxes for 2008 decreased as a percentage of net sales and
on a per barrel basis when compared with the same 2007 period because Kona was responsible for the excise
tax on the Kona-branded shipments.

Cost of Sales. Cost of sales increased 78.5% to $65.6 million for the year ended December 31, 2008
from $36.8 million in the same 2007 period and increased $38.42 or 33.1% on a per barrel basis from $116.08
per barrel for 2007 to $154.50 per barrel for 2008. In contrast, cost of sales decreased as a percentage of net
sales to 82.3% from 88.7% because of the significant change in product mix and pricing caused by the
Merger. Comparability of the periods was significantly affected by the Merger and the change in operations
for the resulting remaining six months of 2008, including a 93.9% increase in shipments for the last six
months compared with the first half of the 2008 year, the addition of another production brewery, a change in
the mix of products shipped, the addition of the alternating proprietorship relationship, a third pub and the
elimination of the licensing agreement and contract brewing arrangements.

Cost of sales for 2008 includes third and fourth quarters of 2008 costs to produce Widmer-branded
products that were brewed by Widmer prior to the Merger. These Widmer-branded products are in addition to
those produced by the Company prior to the Merger pursuant to the licensing agreement and the contract
brewing arrangements. The increase in direct costs to produce these Widmer-branded products was slightly
offset by the elimination of licensing fees paid to Widmer in connection with the licensing agreement that
terminated upon consummation of the Merger. The years ended December 31, 2008 and 2007 include
$165,000 and $432,000 for licensing fees paid to Widmer in connection with the Company’s shipment of
12,500 barrels and 28,800 barrels, respectively, of Widmer Hefeweizen in the Midwest and Eastern United
States.

The annual working capacity of the Oregon Brewery acquired in the Merger is approximately 377,000 bar-
rels, nearly equal to the combined annual working capacity of the Company’s Washington and New Hampshire
Breweries before the Merger. Cost of sales increased significantly as a result the Oregon Brewery’s fixed and
semi-variable costs, including depreciation, utilities, labor, rent, and property taxes. For example, depreciation
and amortization expense charged to cost of sales for the year ended December 31, 2008 increased
approximately 83.4%, or $2.3 million more than depreciation and amortization expense charged to cost of
sales for the year ended December 31, 2007. While the fixed and semi-variable costs other than depreciation
may not have increased to the same degree as depreciation, the increases in these costs were substantial.

Based upon the Company’s total average working capacity of 572,400 barrels and 365,900 barrels for
2008 and 2007, respectively, the utilization rate was 74.2% and 86.6%, respectively. Capacity utilization rates
are calculated by dividing the Company’s total shipments by the average working capacity. See “Overview”
for discussion of the Company’s methodology in calculating annual working capacity.

Cost of sales for 2008 includes third and fourth quarters of 2008 costs associated with two distinct Kona

revenue streams: (i) direct and indirect costs related to the alternating proprietorship arrangement with Kona

and (ii) the cost paid to Kona for the Kona-branded finished goods that are marketed and sold by the Company
to wholesalers through the A-B Distribution Agreement.

Inventories acquired pursuant to the Merger were recorded at their estimated fair values as of July 1,
2008, resulting in an increase (the “Step Up Adjustment”) over the cost at which these inventories were stated
on the June 30, 2008 Widmer balance sheet. The July 1, 2008 Step Up Adjustment totaled approximately
$1.0 million for raw materials acquired and $118,000 for work in process and finished goods acquired. During
the year ended December 31, 2008, approximately $430,000 of the Step Up Adjustment was expensed to cost
of sales in connection with normal production and sales.

Cost of sales and gross margin for 2008 were negatively impacted by an increase in the cost of some raw

materials, malt and hops in particular, certain packaging materials and shipping costs due to relatively high
fuel costs for a majority of the year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2008
increased $11.6 million to $19.9 million from expenses of $8.3 million for 2007. Comparability of the two
periods is difficult because the Merger resulted in a significant increase in sales, marketing and administrative
functions, particularly in the third and fourth quarters of 2008:

(cid:129) Prior to July 1, 2008, selling, general and administrative expense in the Company’s statements of

operations reflected the sales and marketing efforts only for the Midwest and Eastern United States
because Craft Brands performed these functions for the Western United States. In the third and fourth
quarters of 2008, all promotion, marketing and sales efforts for the entire United States for all malt
beverage products are reflected in the Company’s statements of operations.

(cid:129) Finance, accounting and information technology functions performed in Woodinville, Washington prior
to the Merger were transferred to staff in the Portland, Oregon office following the Merger. Because the
transition of these functions was not complete until the end of the third quarter of 2008, selling, general
and administrative expenses for 2008 include salaries and related administrative costs associated with
both locations for an entire quarter.

(cid:129) The Company experienced a work-force reduction during the fourth quarter of 2008 as a result of the
execution of its cost-containment strategies. This action was intended to reduce duplicative functions,
but also represented a redeployment of certain functions to more profitable opportunities. During the
fourth quarter of 2008, the Company recorded costs of $1.0 million for severance and benefit accruals
related to this action. The Company does not expect there will be significant costs recognized in
succeeding years associated with this action.

Loss on Impairment of Assets. During the year ended December 31, 2008, the Company recorded a non-

cash charge of $30.6 million associated with a loss on the impairment of assets that were acquired as a result
of the Merger. Due to a combination of factors, including the U.S. economic environment, particularly during
the fourth quarter of 2008, the Company’s expectations of a follow-on impact on consumer demand, the
increase in competition from both other craft and specialty brewers and the fuller-flavored offerings from the
national domestic brewers, and the Company’s plans for the near and medium term, the Company believed
that impairments may have occurred to certain of its assets acquired in the Merger. Based on its analyses of its
tangible and intangible assets, the Company determined that its goodwill asset was fully impaired, and the
Company’s intangible Widmer trademark and its corporate investments were partially impaired. See further
discussion below at Critical Accounting Policies and Estimates. No loss on impairment of assets was
recognized during the year ended December 31, 2007.

Merger-related Expenses.

In connection with the Merger, the Company incurred merger-related expen-

ditures, including legal, consulting, meeting, filing, printing and severance costs. During 2008 and 2007,
merger-related expenses totaling $1.8 million and $584,000, respectively, were recorded as expenses in the
Company’s statements of operations. During the year ended December 31, 2008, other merger-related costs
totaling $663,000 were capitalized as a component of goodwill on the balance sheet; however, these costs
were charged to earnings when the Company recognized the loss on impairment of assets. Capitalized merger
costs of $154,000 were presented as other current assets during the corresponding period in 2007.

Merger-related expenses include severance payments to employees and officers whose employment were
or will be terminated as a result of the Merger. The Company estimates that merger-related severance benefits
totaling approximately $214,000 will be paid in 2009 to all affected former Redhook employees and officers
and affected former Widmer employees. Merger-related severance costs totaling approximately $430,000 will
be paid out to this employee group after 2009. Of the total severance, $1.5 million was recognized as a
merger-related expense in the Company’s statements of operations during the year ended December 31, 2008.

Income from Equity Investment in Craft Brands. Because Craft Brands was merged with and into the

Company in connection with the Merger, the Company did not recognize income from its investment in Craft
Brands after June 30, 2008. For the year ended December 31, 2008, the Company’s share of Craft Brands’ net
income totaled $1.4 million compared with $2.8 million for the same period in 2007.

Loss from Equity Investments in Kona and FSB.

In conjunction with the Merger, the Company acquired

from Widmer a 20% equity ownership in Kona and a 42% equity ownership in Fulton Street Brewery, LLC.
Both investments are accounted for under the equity method, consistent with APB 18. For the year ended
December 31, 2008, the Company’s share of Kona’s net loss totaled $14,000 and the Company’s share of
FSB’s net income totaled $3,000.

Interest Expense.

Interest expense increased approximately $691,000 to $993,000 in 2008 from

$302,000 in 2007, due to a higher level of debt outstanding during the current period. In connection with the
Merger, the Company increased its leverage, such that average outstanding debt for 2008 was $14.4 million as
compared with average outstanding debt of $4.2 million for 2007.

Interest and Other Income, net.

Interest and other income, net decreased by $407,000 to $110,000 for

2008 from $517,000 for the same period of 2007, primarily attributable to a $270,000 decrease in interest
income earned on interest-bearing deposits. The Company’s interest-bearing deposits were significantly lower
than 2007 deposits as a result of the repayment of the $4.3 million term loan in December 2007 and the
acquisition of additional debt in connection with the Merger.

Income Taxes. The Company’s provision for income taxes was a benefit of $4.4 million for 2008 as
compared with $176,000 for 2007. The tax provision is driven by pre-tax results relative to other components
of the tax provision calculation, such as the exclusion of the loss from impairment for assets, primarily the
impairment of the goodwill asset, from the taxable loss, the effect of other non-deductible expenses and the
increase of the valuation allowance to provide for Company’s NOLs and other deferred tax assets.

At December 31, 2008, based upon the available evidence and due to the Company’s taxable loss for the

current year exceeding its preliminary projections, the Company believes that it is more likely than not that
certain deferred tax assets will not be realized. As a result, the Company recorded a valuation allowance of
$1.0 million recorded as a reduction of the tax benefit for the year ended December 31, 2008. To the extent
that the Company continues to be unable to generate adequate taxable income in future periods, the Company
may not be able to recognize additional tax benefits and may be required to increase the valuation allowance
to provide for NOLs and other deferred tax assets for which a valuation allowance had not been previously
recorded. At December 31, 2007, the Company’s balance sheet included a valuation allowance of $1.1 million
to provide for certain federal and state NOLs. In connection with the Merger, the Company determined that
the previously established valuation allowance was no longer required and recorded the release against
goodwill.

Liquidity and Capital Resources

The Company has required capital principally for the construction and development of its production
facilities. Historically, the Company has financed its capital requirements through cash flow from operations,
bank borrowings and the sale of common and preferred stock. The Company expects to meet its future
financing needs and working capital and capital expenditure requirements through cash on hand, operating
cash flow and borrowings under its loan agreement.

The Company is in compliance with all applicable contractual financial covenants at December 31, 2008.
However, the Company and BofA executed a loan modification to its loan agreement effective November 14,

2008, as a result of the Company’s inability to meet its covenants as of September 30, 2008. BofA
permanently waived the noncompliance effective September 30, 2008, restoring the Company’s borrowing
capacity pursuant to the loan agreement. The terms of the modification to the loan agreement are discussed in
more detail below. The Company refinanced borrowings assumed as a result of the Merger by concurrently
entering into a loan agreement (the “Loan Agreement”) with BofA. The Loan Agreement is comprised of a
$15.0 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 $13.5 million term loan (“Term Loan”). The Company
may draw upon the Line of Credit for working capital and general corporate purposes. The Line of Credit
matures on January 1, 2013 at which time the outstanding principal balance and any accrued but unpaid
interest will be due. At December 31, 2008, the Company had $12.0 million outstanding under the Line of
Credit with $3.0 million of availability for further cash borrowing.

The Company had $11,000 and $5.5 million of cash and cash equivalents at December 31, 2008 and

2007, respectively. At December 31, 2008, the Company had a working capital deficit of $927,000. The
Company’s debt as a percentage of total capitalization (total debt and common stockholders’ equity) was
29.5% and 0.1% at December 31, 2008 and 2007, respectively. Cash used by operating activities totaled
$4.9 million for the year ended December 31, 2008 as compared with cash provided by operating activities of
$1.6 million for the year ended December 31, 2007.

As of December 31, 2008 and February 28, 2009, the Company’s available liquidity was $4.0 million and

$3.6 million, respectively, comprised of accessible cash and cash equivalents and further borrowing capacity.

Capital expenditures for 2008 were $6.7 million for the year ended December 31, 2008. Major 2008
projects included, at the New Hampshire Brewery, an expansion of brewing and fermentation capacity and
improvements to the water treatment system costing $2.6 million and $1.5 million, respectively; and for all of
the production breweries, purchases of additional kegs costing $2.2 million. Future capital expenditures are
expected to be funded with operating cash flows and borrowings under the Company’s loan agreement.
Although the Company is subject to limits on its capital expenditures due to the modification of its loan
agreement, the Company expects that all projects in progress will be able to be completed within the revised
covenants.

As discussed above, at September 30, 2008, the Company was not in compliance with the covenants for
the Loan Agreement as it was unable to meet either of the two required financial covenants, the funded debt
to bank EBITDA ratio or the fixed charge coverage ratio, for the trailing twelve months ended September 30,
2008. Bank EBITDA is defined as Earnings before interest, taxes, depreciation, amortization and certain other
adjustments as defined in the Loan Agreement. The Company and BofA executed a modification to the loan
agreement effective November 14, 2008 (“Modification Agreement”) that permanently waived the noncompli-
ance as an event of default at September 30, 2008. The Modification Agreement subjects the Company to
certain terms and conditions different than under the original Loan Agreement. Those terms and conditions as
modified are summarized below.

Under the Modification Agreement, the Company may select from one of the following two interest rate
benchmarks as the basis for calculating interest on the outstanding principal balance of the Line of Credit: the
London Inter-Bank Offered Rate (“LIBOR”) or the Inter-Bank Offered Rate (“IBOR”) (each, a “Benchmark
Rate”). Interest accrues at an annual rate equal to the Benchmark Rate plus a marginal rate. The Company
may select different Benchmark Rates for different tranches of its borrowings under the Line of Credit. The
marginal rate is fixed at 3.50% until September 30, 2009 at which time it will vary from 1.75% to 3.50%
based on the ratio of the Company’s funded debt to EBITDA, as defined. LIBOR rates may be selected for
one, two, three, or six month periods, and IBOR rates may be selected for no shorter than 14 days and no
longer than six months. Under the Modification Agreement, the Company may not draw upon the Line of
Credit in increments of less than $1 million. Accrued interest for the Line of Credit is due and payable
monthly. At December 31, 2008, the weighted-average interest rate for the borrowings outstanding under the
Line of Credit was 3.90%.

An annual fee will be payable in advance on the notional amount of each standby letter of credit issued

and outstanding multiplied by an applicable rate ranging from 1.13% to 1.50%.

Interest on the Term Loan will accrue on the outstanding principal balance in the same manner as

provided for under the Line of Credit, as established under the LIBOR one-month Benchmark Rate. The
interest rate on the Term Loan was 3.95% as of December 31, 2008. Accrued interest for the Term Loan is
due and payable monthly. At December 31, 2008, principal payments are due monthly in accordance with an
agreed-upon schedule set forth in the Loan Agreement. Any unpaid principal balance and unpaid accrued
interest will be due on July 1, 2018.

Under the Modification Agreement, a quarterly fee on the unused portion of the Line of Credit, including

the undrawn amount of the Standby Letter of Credit, will accrue at a rate of 0.50% payable quarterly. A loan
fee associated with the Term Loan for $25,000 was paid during the three months ended September 30, 2008,
and a loan fee associated with the Modification Agreement for $30,000 was paid during the three months
ended December 31, 2008. These amounts were fully charged to interest expense during the year ended
December 31, 2008.

The Modification Agreement also revised the types of financial covenants that the Company is required

to meet for each quarter through June 30, 2009. The Company generated EBITDA under the Modified
Agreement of $1.7 million for the quarter ended December 31, 2008, and as of December 31, 2008 was in
compliance with the loan covenants under the Modification Agreement. EBITDA under the Modified
Agreement is defined similar to Bank EBITDA but includes certain adjustments specific to the Modification
Agreement.

The following table summarizes the financial covenant ratios required pursuant to the Modification

Agreement:

Financial Covenants Required by Modification Agreement

Minimum EBITDA, as defined (in thousands)

For the quarter ending March 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the quarter ending June 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the quarter ending September 30, 2009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . .

850
2,300
Does not apply

Asset Coverage Ratio

For the quarter ending March 31, 2009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.50 to 1

Capital Expenditures (in thousands)
To spend or incur obligations less than the following:

For the quarter ending March 31, 2009(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the quarter ending June 30, 2009(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the quarter ending September 30, 2009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . .

1,350
550
Does not apply

(1) - Provides for carryover spending of any amount not used in the prior quarter

The Loan Agreement is secured by substantially all of the Company’s personal property and by the real

properties located at 924 North Russell Street, Portland, Oregon and 14300 NE 145th Street, Woodinville,
Washington (“Collateral”), which comprise its larger-scale automated Portland, Oregon brewery and its
Woodinville, Washington brewery, respectively. The Company was requested by BofA to obtain a deed of trust
on the real property at the New Hampshire Brewery; however, this was subject to consent by the lessor of the
land upon which the brewery is located. The Company made commercially reasonable efforts to obtain this
from the lessor but was unable to obtain the consent. BofA subsequently rescinded this requirement in
February 2009.

In addition, the Company is restricted in its ability to declare or pay dividends, repurchase any

outstanding common stock, acquire additional debt or enter into any agreement that would result in a change
in control of the Company. Effective September 30, 2009, the Company will be required to meet the financial
covenant ratios of funded debt to EBITDA, as defined, and fixed charge coverage in the manner established
pursuant to the original Loan Agreement, but at levels specified by the Modification Agreement.

If the Company is unable to generate sufficient EBITDA to meet the associated covenants either under
the Modified Agreement or its Loan Agreement, as applicable, this would result in a violation. Failure to meet
the covenants is an event of default and, at its option, BofA could deny a request for another waiver and
declare the entire outstanding loan balance immediately due and payable. In such a case, the Company would
seek to refinance the loan with one or more lenders, potentially at less desirable terms. However, there can be
no guarantee that additional financing would be available at commercially reasonable terms, if at all.

As a result of the Merger, the Company assumed Widmer’s promissory notes signed in connection with

the acquisition of commercial real estate related to the Portland, Oregon brewery. These notes were separately
executed by Widmer with three individuals, but under substantially the same terms and conditions. Each
promissory note is secured by a deed of trust on the commercial real estate. The outstanding note balance to
each lender as of December 31, 2008 was $200,000, with each note bearing a fixed interest rate of 24% per
annum, subject to a one-time adjustment on July 1, 2010 to reflect the change in the consumer price index
from the date of issue, July 1, 2005, to the date of adjustment. The promissory notes are carried at the total of
stated value plus a premium reflecting the difference between the Company’s incremental borrowing rate and
the stated note rate. The effective interest rate for each note is 6.31%. Each note matures on the earlier of the
individual lender’s death or July 1, 2015, but in no event prior to July 1, 2010, with prepayment of principal
not allowed under the notes’ terms. Interest payments are due and payable monthly.

As a result of the Merger, the Company assumed Widmer’s capital equipment lease obligation to BofA,
which is secured by substantially all of the brewery equipment and restaurant furniture and fixtures located in
Portland, Oregon. The outstanding balance for the capital lease as of December 31, 2008 was $6.6 million,
with monthly loan payments of $119,020 required through the maturity date of June 30, 2014. The capital
lease carries an effective interest rate of 6.56%. The capital lease is subject to a prepayment penalty of the
product of a specified percentage and the amount prepaid. This specified percentage began at 4% and, except
in the event of acceleration due to an event of default, ratably declines 1% for every year the lease is
outstanding until July 31, 2011, at which time the capital lease is not subject to a prepayment penalty. The
specified percentage is 3% as of December 31, 2008. In the event of acceleration due to an event of default,
the prepayment penalty is restored to 4%.

A minimal balance remains outstanding of other capital lease obligations consisting of agreements

executed by the Company in prior years for the use of small production equipment and machinery.

Trend

Since July 1, 2008, the Company has experienced a $3.6 million decline in working capital. The decline

for this period was partially attributable to $4.0 million in capital expenditures, $1.5 million in debt and
interest payments, and $945,000 in merger-related costs, net of the working capital position assumed from
Widmer. These declines in working capital have impacted the Company’s financial position, including the
Company’s ability to comply with the financial covenants required by its loan agreement.

The Company recognizes the need to evaluate and improve its operating cost structure. Management has
focused aggressively on identifying areas within the Company that can yield significant cost savings, whether
driven by the synergies of the Merger and integration or generated by general cost-reduction programs, and
executing appropriate measures to secure these savings. The Company has been implementing these cost
savings initiatives since the Merger and will continue to do so into 2009. Management believes that the
Company can meet its normal cash flow requirements and comply with the terms of its loan agreement, but
there is no assurance that it can do so. The failure to meet the working capital requirements could have a
material adverse effect on the Company’s future operations and growth.

Certain Considerations: Issues and Uncertainties

The Company does not provide forecasts of future financial performance or sales volumes, although this
Annual Report contains certain other types of forward-looking statements that involve risks and uncertainties.
The Company may, in discussions of its future plans, objectives and expected performance in periodic reports
filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference

therein) and in written and oral presentations made by the Company, include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on assumptions that the
Company believes are reasonable, but are by their nature inherently uncertain. In all cases, there can be no
assurance that such assumptions will prove correct or that projected events will occur. Actual results could
differ materially from those projected depending on a variety of factors, including, but not limited to, the
successful execution of market development and other plans, the availability of financing and the issues
discussed in “Part I, Item 1A. Risk Factors” above. In the event of a negative outcome of any one these
factors, the trading price of the Company’s common stock could decline and an investment in the Company’s
common stock could be impaired.

Critical Accounting Policies and Estimates

The Company’s financial statements are based upon the selection and application of significant accounting
policies that require management to make significant estimates and assumptions. Management believes that the
following are some of the more critical judgment areas in the application of the Company’s accounting
policies that currently affect its financial condition and results of operations. Judgments and uncertainties
affecting the application of these policies may result in materially different amounts being reported under
different conditions or using different assumptions.

Goodwill, other intangible assets and long-lived assets.

In accordance with SFAS No. 142, Goodwill

and Other Intangible Assets (“SFAS 142”), goodwill and other intangible assets with indefinite useful lives are
not amortized but are reviewed periodically for impairment.

The provisions of SFAS 142 require that an intangible asset that is not subject to amortization, including
goodwill, be tested for impairment annually, or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The provisions also require that a two-step test be performed to assess
goodwill for impairment. First, the fair value of each reporting unit is compared with its carrying value,
including goodwill. If the fair value exceeds the carrying value then goodwill is not impaired and no further
testing is performed. If the carrying value of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step
compares the fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. An
impairment loss would be recognized in an amount equal to the excess of the carrying amount of goodwill
over the fair value of the goodwill.

Due to a combination of factors, including the U.S. economic environment, particularly during the fourth

quarter of 2008, the Company’s expectations of a follow-on impact on consumer demand, the increase in
competition from both other craft and specialty brewers and the fuller-flavored offerings from the national
domestic brewers, and the Company’s plans for the near and medium term, the Company believed that
impairments may have occurred to certain of its assets acquired in the Merger.

In performing its analysis of the fair value of its intangible trademark asset in accordance with SFAS 142,

the Company based its estimates of fair value on an income methodology using a discounted cash flow
valuation model under a relief from royalty methodology. The relief from royalty model incorporates the
Company’s estimates of the royalty rate that a market participant would assume, projections of future revenues
and the Company’s judgment regarding the applicable discount rates used to discount those estimated cash
flows. The analysis resulted in a partial impairment of the Company’s Widmer brand trademark. Given that
certain of these inputs are unobservable, management assessed this to be a level 3 measurement within the
hierarchy established by SFAS No. 157 Fair Value Measurements (“SFAS 157”).

In performing the second step of the Company’s analysis of the fair value of its goodwill asset in

discount rates used to discount those estimated cash flows. The market methodology compared the market
capitalization of other publicly traded regional and national brewing companies against their revenues and
EBITDA to derive a market capitalization multiple. This multiple was applied against the Company’s
forecasted EBITDA. The transactional methodology compared revenues and specified earnings multiples on
recent merger transactions involving a similarly situated specialty brewer to derive an estimated revenue
multiple to apply against the Company’s revenue projections. The analysis resulted in a complete impairment
of the Company’s goodwill balance. Given that certain of these inputs are unobservable, management assessed
this to be a level 3 measurement within the hierarchy established by SFAS 157.

In performing its analysis of the fair values of its equity investments in accordance with APB 18, the

Company based its estimates on an income methodology using a discounted cash flow valuation model. The
discounted cash flow model incorporates the Company’s estimates of 1) the future cash flows associated with
the investments, 2) future growth rates for those entities and 3) the applicable discount rates used to discount
those estimated cash flows. The analysis resulted in a partial impairment of the Company’s equity investment
in FSB of $1.3 million and its equity investment in Kona of $100,000. Given that certain of these inputs are
unobservable, management assessed this to be a level 3 measurement within the hierarchy established by
SFAS 157.

The Company will evaluate potential impairment of long-lived assets in accordance with SFAS 144,

Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 establishes
procedures for review of recoverability and measurement of impairment, if necessary, of long-lived assets and
certain identifiable intangibles. When facts and circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the
assets to projected future undiscounted cash flows in addition to other quantitative and qualitative analyses.
Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an
impairment loss by a charge against current operations.

Refundable 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 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, the
Company collects a refundable deposit, reflected as a current liability in the Company’s balance sheets. Upon
return of the keg to the Company, the deposit is refunded to the wholesaler. When a wholesaler cannot account
for some of the Company’s kegs for which it is responsible, the wholesaler pays the Company, for each keg
determined to be lost, a fixed fee and also forfeits the deposit. For the years ended December 31, 2008 and
2007, the Company reduced its brewery equipment by $770,000 and $716,000, respectively, comprised of lost
keg fees and forfeited deposits.

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 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. The Company believes that this is an industry-wide problem and the Company’s loss
experience is typical of the industry. In order to estimate forfeited deposits attributable to lost kegs, the
Company periodically uses 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 financial statements. The actual
liability for refundable deposits could differ from estimates. For the years ended December 31, 2008 and 2007,
the Company decreased its refundable deposits and brewery equipment related to these adjustments by
$596,000 and $48,000, respectively. As of December 31, 2008 and 2007, the Company’s balance sheets
include $5.7 million and $3.1 million, respectively, in refundable deposits on kegs and $5.0 million and
$655,000 in keg equipment, net of accumulated depreciation.

Revenue Recognition. Effective with the Merger, the Company recognizes revenue from product sales,
net of excise taxes, discounts and certain fees the Company must pay in connection with sales to A-B, when
the products are delivered to A-B or the wholesaler. In prior periods, it had recognized revenues from these

activities when the associated products were shipped to the customers as the time between shipment and
delivery is short, product damage claims and returns are insignificant and the volume of shipments involved
was relatively low. The Company assessed the cumulative impact of this change in accounting policy and
determined that the change is not material to the consolidated financial statements as of and for the year ended
December 31, 2008 or any prior period.

The Company also earns revenue in connection with two operating agreements with Kona — an
alternating proprietorship agreement and a distribution agreement. Pursuant to the alternating proprietorship
agreement, Kona produces a portion of its malt beverages at the Oregon Brewery. The Company receives a
facility fee from Kona based on the barrels brewed and packaged at the Company’s brewery. Fees are
recognized as revenue upon completion of the brewing process and packaging of the product. In connection
with the alternating proprietorship agreement, the Company also sells certain raw materials to Kona for use in
brewing. Revenue is recognized when the raw materials are removed from the Company’s stock. Under the
distribution agreement, the Company purchases Kona-branded product from Kona, whether manufactured at
Kona’s Hawaii brewery or the Company’s brewery, then sells and distributes the product, recognizing revenue
when the product is delivered to A-B or the wholesaler.

The Company recognizes revenue on retail sales at the time of sale. The Company recognizes revenue

from events at the time of the event.

Income Taxes. The Company records federal and state income taxes in accordance with FASB
SFAS No. 109, Accounting for Income Taxes. Deferred income taxes or tax benefits reflect the tax effect of
temporary differences between the amounts of assets and liabilities for financial reporting purposes and
amounts as measured for tax purposes as well as for tax net operating loss (“NOLs”) and credit carryforwards.

As of December 31, 2008, the Company’s deferred tax assets were primarily comprised of federal NOL

carryforwards of $29.1 million, or $9.9 million tax-effected; state NOL carryforwards of $299,000 tax-
effected; and federal and state alternative minimum tax credit carryforwards of $183,000 tax-effected. In
assessing the realizability of its deferred tax assets, the Company considered both positive and negative
evidence when measuring the need for a valuation allowance. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income during the periods in which those temporary
differences become deductible. Among other factors, the Company considered future taxable income generated
by projected differences between financial statement depreciation and tax depreciation, including the depreci-
ation on the assets acquired in the Merger. Based upon this, the Company determined that its previously
established valuation allowance of approximately $1.1 million was no longer required, and recorded the release
of the valuation allowance against goodwill as of the date of the Merger.

At December 31, 2008, based upon the available evidence and due to the Company’s taxable loss for the

There were no unrecognized tax benefits as of December 31, 2008 or December 31, 2007. The Company

does not anticipate significant changes to its unrecognized tax benefits within the next twelve months.

Tax years that remain open for examination by the Internal Revenue Service include the years from 2005
through 2008. In addition, tax years from 1997 to 2004 may be subject to examination by the Internal Revenue
Service and state tax jurisdiction to the extent that the Company utilizes the NOLs from those years in its
current year or future year tax returns.

Fair value of financial instruments. The recorded value of the Company’s financial instruments is
considered to approximate the fair value of the instruments, in all material respects, because the Company’s
receivables and payables are recorded at amounts expected to be realized and paid, the Company’s derivative

financial instruments are carried at fair value, and the carrying value of the Company’s debt obligations that
were assumed in the Merger were adjusted to their respective fair values as of the effective date of the Merger.

The Company has adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which requires that all derivatives be recognized at fair value in the balance sheet, and that
the corresponding gains or losses be reported either in the statement of operations or as a component of
comprehensive income, depending on whether the instrument meets the criteria to apply hedge accounting.
Derivative financial instruments are utilized by the Company to reduce interest rate risk. The counterparties to
derivative transactions are major financial institutions. The Company does not hold or issue derivative financial
instruments for trading purposes.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items at fair value. The objective is
to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 was
effective for fiscal years beginning after November 15, 2007, with early adoption permitted. Although the
Company adopted SFAS 159 as of January 1, 2008, the Company did not elect the fair value option for any
items permitted under SFAS 159.

In December 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue

No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). The EITF defines a collaborative
arrangement and concludes that revenues and costs incurred with third parties in connection with collaborative
arrangements would be presented gross or net based on the criteria in EITF No. 99-19 and other accounting
literature. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented
for all collaborative arrangements existing as of the effective date. The Company does not anticipate the
adoption of EITF 07-1 will have a material effect on the Company’s financial position, results of operations or
cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging

Activities — An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial
reporting. SFAS 161 amends and expands the disclosure requirements of SFAS 133 to provide users of
financial statements with an enhanced understanding of (i) how and why an entity uses derivative instruments;
(ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the impact
that SFAS No. 161 will have on its financial statement disclosures, but does not anticipate the adoption of
SFAS 161 to have a material effect on the Company’s financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life

of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142. FSP FAS 142-3 requires a company estimating the useful life of a recognized intangible
asset to consider its historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would use about renewal or extension
as adjusted for entity-specific factors. FSP FAS 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company anticipates that expanded disclosure may be required, but does not anticipate the

adoption of FSP FAS 142-3 will have a material effect on the Company’s financial position, results of
operations or cash flows.

In October 2008, the FASB issued FAS No. 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active (“FSP FAS 157-3”), which clarifies the application of SFAS 157, in an
inactive market. FSP FAS 157-3 addresses application issues such as how management’s internal assumptions
should be considered when measuring fair value when relevant observable data do not exist; how observable
market information in a market that is not active should be considered when measuring fair value and how the
use of market quotes should be considered when assessing the relevance of observable and unobservable data
available to measure fair value. FSP FAS 157-3 was effective upon issuance. Our adoption of FSP FAS 157-3
did not have a material effect on our financial condition, results of operations or cash flows.

In November 2008, the EITF reached a consensus on issue No. 08-6, Equity Method Investment
Accounting Considerations (“EITF 08-6”). EITF 08-6 requires a company to measure its equity method
investment initially at cost in accordance with SFAS No. 141(R) Business Combinations. EITF 08-6 also
outlines the factors that a company should take into consideration when an impairment is recognized under the
provisions of APB 18. EITF 08-6 is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively. The
Company does not anticipate the adoption of EITF 08-6 will have a material effect on the Company’s financial
position, results of operations or cash flows.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company has assessed its vulnerability to certain market risks, including interest rate risk associated
with financial instruments included in cash and cash equivalents and long-term debt. To mitigate this risk, the
Company entered into a five-year interest rate swap agreement to hedge the variability of interest payments
associated with its variable-rate borrowings. Through this swap agreement, the Company pays interest at a
fixed rate of 4.48% and receives interest at a floating-rate of the one-month LIBOR. 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 under SFAS 133.

This interest rate swap reduces the Company’s overall interest rate risk. However, due to the remaining
outstanding borrowings that continue to have variable interest rates, management believes that interest rate risk
to the Company could be material if prevailing interest rates increase materially.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Craft Brewers Alliance, Inc.
(formerly Redhook Ale Brewery, Incorporated)

We have audited the accompanying balance sheets of Craft Brewers Alliance, Inc. (formerly Redhook Ale

Brewery, Incorporated) (“the Company”) as of December 31, 2008 and 2007 and the related statements of
operations, common stockholders’ equity and cash flows for each of the years in the two year period ended
December 31, 2008. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these 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 audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Craft Brewers Alliance, Inc. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the two year period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of America.

Seattle, Washington
March 25, 2009

CRAFT BREWERS ALLIANCE, INC.

BALANCE SHEETS

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $64 and $95 in
2008 and 2007, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivable from Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, equipment and leasehold improvements, net . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2008

December 31,
2007

(Dollars in thousands except per
share amounts)

$ 5,527

12,499
—
9,729
724
767
3,951

27,681
101,389
5,189
13,546

3,893
670
2,928
—
944
1,043

15,005
55,862
416
107

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$147,805

$71,390

LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade payable to Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued salaries, wages, severance and payroll taxes . . . . . . . . . . . . . . . . . . . .
Refundable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt and capital lease obligations . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term debt and capital lease obligations, net of current portion . . . . . . . . . . .

Fair value of derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred income tax liability, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,000
—
3,630
6,191
2,393
1,394

28,608

31,834

1,252

6,552

278

Common Stockholders’ Equity:

Common stock, par value $0.005 per share, 50,000,000 shares authorized;
16,948,063 shares in 2008 and 8,354,239 shares in 2007 issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85
122,433
(693)
(42,544)

Total common stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79,281

$ 3,149
416
1,524
3,500
687
15

9,291

—

1,762

226

42
69,304
—
(9,266)

60,080

Total liabilities and common stockholders’ equity . . . . . . . . . . . . . . . . . . .

$147,805

$71,390

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

CRAFT BREWERS ALLIANCE, INC.

STATEMENTS OF OPERATIONS

Year Ended December 31,

2008

2007

(In thousands, except per
share amounts)

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,013
6,252
Less excise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairments of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity investment in Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from equity investments in Kona and FSB . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79,761
65,646

14,115
19,894
30,589
1,783
1,390

(36,761)
(11)
(993)
110

(37,655)
(4,377)

$46,544
5,074

41,470
36,785

4,685
8,257
—
584
2,826

(1,330)
—
(302)
517

(1,115)
(176)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,278)

$ (939)

Basic and diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(2.63)

$ (0.11)

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

CRAFT BREWERS ALLIANCE, INC.

STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

Common Stock
Par
Value

Additional
Paid-In
Capital

Balance as of December 31, 2006. . . . . . . . .
Issuance of shares under stock plans . . . . .
Stock-based compensation . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . .

8,281 $41 $ 68,978
157
1
49
169
24 —
—
— —

Balance as of December 31, 2007. . . . . . . . .
Issuance of shares under stock plans . . . . .
Stock-based compensation . . . . . . . . . . . .
Issuance of shares pursuant to merger with
Widmer Brothers Brewing Company . . .

8,354
228

42
1
4 —

69,304
474
20

8,362

52,635

Accumulated
Other
Comprehensive
Income
(In thousands)
$ —
—
—
—

—
—
—

—

Retained
Deficit

Total Common
Stockholders’
Equity

$ (8,327)
—
—
(939)

$ 60,692
158
169
(939)

(9,266)
—
—

60,080
475
20

—

52,677

Comprehensive income:

Unrealized losses on derivative financial
instruments, net of taxes of $407 . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . .

Total comprehensive loss . . . . . . . . . . . . .

— —
— —

— —

—
—

—

(693)
—

—

—
(33,278)

(693)
(33,278)

—

(33,971)

Balance as of December 31, 2008. . . . . . . . . 16,948 $85 $122,433

$(693)

$(42,544)

$ 79,281

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

CRAFT BREWERS ALLIANCE, INC.

STATEMENTS OF CASH FLOWS

Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,278)
Adjustments to reconcile net loss to net cash provided by (used in) operating

$ (939)

Year Ended December 31,

2008

2007

(In thousands)

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity investments less than (in excess of) cash distributions. . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for obsolete inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on disposition of property, equipment and leasehold improvements . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effects of acquisition of Widmer

Brothers Brewing Company:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables from Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade payable to Craft Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued salaries, wages and payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refundable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Expenditures for fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired in acquisition of Widmer Brothers Brewing Company, net . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Principal payments on debt and capital lease obligations . . . . . . . . . . . . . . . . . . . . . .
Net borrowings under revolving line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts paid for debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents:

5,474
88
(4,400)
30,589
155
42
20
(45)

1,416
120
(1,844)
(3,431)
722
(295)
(1,134)
60
734
134
(4,873)

(6,667)
442
2,274
(3,951)

(642)
3,500
475
(25)
3,308
(5,516)

Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

5,527
11

Supplemental Disclosures
Cash paid for interest

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

837

Non-cash Transaction
Net assets of Widmer Brothers Brewing Company acquired in exchange for issuance

of common stock and assumption of debt (see Note 2) . . . . . . . . . . . . . . . . . . . . . $ 80,072

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

2,863
(288)
(224)
—
205
(3)
169
79

(2,077)
184
(561)
(839)
—
113
1,221
91
(23)
1,626
1,597

(1,410)
487
—
(923)

(4,740)
—
158
—
(4,582)
(3,908)

9,435
$ 5,527

332

$ —

CRAFT BREWERS ALLIANCE, INC.

NOTES TO FINANCIAL STATEMENTS

1. Nature of Operations

Craft Brewers Alliance, Inc. (the “Company” or “CBA”) was formed in 1981 to brew and sell craft beer.

The Company produces specialty bottled and draft products at its Company-owned breweries and on the
premises of each of its production breweries, operates a pub or restaurant that promotes the Company’s
products, offers dining and entertainment facilities, and sells retail merchandise.

For more than ten years, the Company’s products have been distributed in the United States in 48 states.
This was accomplished primarily through a series of distribution agreements with Anheuser-Busch, Incorpo-
rated (“A-B”) and with, until its merger, Craft Brands Alliance, LLC (“Craft Brands”), a joint venture that the
Company participated in with Widmer Brothers Brewing Company (“Widmer”). In 2004, the Company
executed three agreements, an exchange and recapitalization agreement (“Exchange Agreement”), a distribu-
tion agreement (“A-B Distribution Agreement”) and a registration rights agreement that collectively constitute
the framework of its existing relationship with A-B. The terms of the Exchange Agreement, as amended,
provided that the Company issue 1,808,243 shares of common stock to A-B in exchange for 1,289,872 shares
of convertible redeemable Series B Preferred Stock held by A-B. The Series B Preferred Stock, then reflected
on the Company’s balance sheet at approximately $16.3 million, was cancelled. In connection with the
Exchange Agreement, the Company also paid $2.0 million to A-B in November 2004. The terms of the A-B
Distribution Agreement provided for the Company to continue to distribute its product in the Midwest and
Eastern United States through A-B’s national distribution network by selling its product to A-B. The A-B
Distribution Agreement is subject to early termination, by either party, upon the occurrence of certain events.

The Company executed an agreement to which A-B is a party effective July 1, 2008, modifying and
amending the A-B Distribution Agreement, Exchange Agreement and registration rights agreement to reflect
A-B’s consent to and effect of the merger transaction discussed below (“Consent and Amendment Agree-
ment”). The Consent and Amendment Agreement extended the expiration date of the A-B Distribution
Agreement to December 31, 2018 and modified, in part, the scope of the distribution area to include those
regions that were previously covered under agreement between the Company and Craft Brands. The amended
A-B Distribution Agreement provides for an automatic renewal for an additional ten-year period absent A-B
providing written notice to the contrary on or prior to June 30, 2018.

The financial statements as of and for the year ended December 31, 2008 reflect the July 1, 2008 merger

of Widmer with and into the Company, as more fully described in Note 2 below. The financial statements as
of December 31, 2008 also reflect the effect of the July 1, 2008 merger on the termination of the agreements
between the Company and Craft Brands, and the resulting merger of Craft Brands with and into the Company.
See Note 7 for further discussion of Craft Brands.

2. Merger with Widmer

On November 13, 2007, the Company entered into an Agreement and Plan of Merger with Widmer,
which was subsequently amended on April 30, 2008 (“Merger Agreement”). The Merger Agreement provided,
subject to customary conditions to closing, for a merger (the “Merger”) of Widmer with and into the Company.
A copy of the Merger Agreement was included as an exhibit to the Company’s current report on Form 8-K
filed with the Securities and Exchange Commission (“SEC”) on November 13, 2007. A copy of Amendment
No. 1 to the Merger Agreement was included as an exhibit to the Company’s registration statement on
Form S-4/A filed with the SEC on May 2, 2008.

The Company believes that the combined entity has the potential to secure efficiencies beyond those that
had already been achieved by its existing relationships with Widmer in utilizing the two companies’ breweries
and a national sales force, as well as by reducing duplicate functions. Utilizing the combined breweries offers
a greater opportunity to rationalize production capacity in line with product demand. The national sales force
of the combined entity will support further promotion of the products of its corporate investments, Kona

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Brewery LLC (“Kona”), which brews Kona malt beverage products, and, to a lesser extent, Fulton Street
Brewery, LLC (“FSB”), which brews Goose Island malt beverage products. The Company also expects that the
combined entity may have greater access to capital markets driven by its increased size and expected growth
rates.

In connection with the Merger, the name of the Company was changed from Redhook Ale Brewery,

Incorporated to Craft Brewers Alliance, Inc. The common stock of the Company continues to trade on the
Nasdaq Stock Market under the trading symbol “HOOK.”

Merger-Related Costs

In connection with the Merger, the Company incurred merger-related expenditures, including legal,

consulting, meeting, filing, printing and severance costs. Certain of the merger-related expenses have been
reflected in the statements of operations as selling, general and administrative expenses. Certain of the other
merger-related costs have been capitalized in accordance with Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations
(“SFAS 141”) as discussed below. The summary of merger-related expenditures incurred during the periods
indicated is as follows:

Year Ended
December 31,
2008
(In thousands)

2007

Merger-related costs and expenses:

Reflected in Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,783
Reflected in Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$584
— 154

Total Merger-related costs & expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,783

$738

As discussed further in Note 12, as of December 31, 2008, the Company recorded a full impairment of its

goodwill asset. All costs capitalized to goodwill, including any capitalized merger costs, were charged to
earnings for the year ended December 31, 2008 as a result. As of December 31, 2007, capitalized merger costs
of $154,000 were presented in other current assets on the Company’s balance sheet.

Merger-related expenses include severance payments to employees and officers whose employment was

or will be terminated as a result of the Merger. The Company estimates that merger-related severance benefits
totaling approximately $644,000 will be paid from 2009 to 2011 to all affected former Redhook employees
and officers, and affected former Widmer employees. The Company recognized $1.5 million as a merger-
related expense in the statement of operations during the year ended December 31, 2008 in accordance with
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The Company estimates that
the remaining severance cost related to the affected employee group will be recognized as a merger-related
expense of approximately $112,000 and $113,000 in the first and second quarters of 2009, respectively.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Accounting for the Acquisition of Widmer

The acquisition of Widmer has been accounted for in accordance with SFAS 141 and SFAS No. 142,
Goodwill and Intangible Assets (“SFAS 142”). Accordingly, the Company’s balance sheet as of December 31,
2008 reflects the acquisition of Widmer tangible and intangible assets and assumption of Widmer liabilities.
The results of operations of Widmer from July 1, 2008 to December 31, 2008 are included in the Company’s
statement of operations for the year ended December 31, 2008.

Under the purchase method of accounting, the aggregate purchase price of Widmer, including direct

merger costs, was allocated to the Company’s estimate of the fair value of Widmer assets acquired and
liabilities assumed on July 1, 2008, the date of acquisition, based upon estimates of their fair value as
indicated below. The excess of the purchase price over the net assets acquired was recorded as goodwill.

The Company has estimated the aggregate purchase price of Widmer as follows:

Fair value of Common Stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing debt assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands)
$52,677
29,669

Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$82,346

The fair value of the common stock issued was the product of the number of shares of common stock
issued to Widmer security holders pursuant to the Merger and $6.30, the average closing price of the common
stock as reported by Nasdaq for the five trading days before and after November 13, 2007, the date of the
Merger Agreement.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The Company has allocated the purchase price as follows:

Widmer assets acquired and liabilities assumed:

(In thousands)

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets — recipes, distributor agreements, and non-compete agreements . . .
Favorable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,887
1,491
44,929
6,600
16,300
3,000
643

Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

91,850

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of derivative financial instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premium on promissory notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liability, net and other noncurrent liabilities . . . . . . . . . . . . . . .

(19,821)
(186)
(686)
(10,718)

Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(31,411)

Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,439

Excess of purchase price over net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incremental direct merger costs incurred by the Company . . . . . . . . . . . . . . . . . . . .
Elimination of valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . .
Elimination of receivables and payables due to/from Widmer and Craft Brands . . . .
Elimination of investment in Craft Brands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,907
879
(1,059)
623
339

782

Goodwill recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,689

Unaudited Pro Forma Results of Operations

The unaudited pro forma combined condensed results of operations are presented below for:

(cid:129) the year ended December 31, 2008 as if the Merger had been completed on January 1, 2008; and

(cid:129) the year ended December 31, 2007 as if the Merger had been completed on January 1, 2007.

Proforma Results
Year Ended December 31,

2008
2007
(In thousands, except
per share data)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,654
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (39,287)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (34,357)
(2.03)
Basic and diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

$100,656
$ (1,109)
(729)
$
(0.04)
$

The unaudited pro forma results of operations are not necessarily indicative of the operating results that

would have been achieved had the Merger been consummated as of the dates indicated, or that may be
achieved in the future. Rather, the unaudited pro forma combined condensed results of operations presented

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

above are based on estimates and assumptions that have been made solely for the purpose of developing such
pro forma results. Historical results of operations were adjusted to give effect to pro forma events that are
(1) directly attributable to the acquisition, (2) factually supportable, and (3) expected to have a continuing
impact on the combined results. These pro forma results of operations do not give effect to any cost savings,
revenue synergies or restructuring costs which may result from the integration of Widmer’s operations.

3. Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to

be cash equivalents. The Company maintains cash and cash equivalent balances with financial institutions that
may exceed federally insured limits. The carrying amount of cash equivalents approximates fair value because
of the short-term maturity of these instruments.

Accounts Receivable

Accounts receivable is comprised of trade receivables due from wholesalers and A-B for beer and
promotional product sales. Because of state liquor laws and each wholesaler’s agreement with A-B, the
Company does not have collectability issues related to the sale of its beer products. Accordingly, the Company
does not regularly provide an allowance for doubtful accounts for beer sales. The Company has provided an
allowance for promotional merchandise that has been invoiced to the wholesaler, which reflects the Company’s
best estimate of probable losses inherent in the accounts. The Company determines the allowance based on
historical customer experience and other currently available evidence. When a specific account is deemed
uncollectible, the account is written off against the allowance.

Inventories

Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost, which

approximates the first-in, first-out method, or market. Pub food, beverages and supplies are stated at the lower
of cost or market.

In coordinating the operations of the merged entity, the Company has identified specific classes of
inventory items that were previously expensed by the Company, but were carried as inventory by Widmer.
Specific classes of inventory items include certain packaging items, promotional merchandise and pub food,
beverages and supplies. Generally this was due to the significance of the item relative to the operations of the
individual entities, reflecting minor differences in the two businesses. The Company revised its policies with
regard to these items as of the beginning of the third quarter of 2008, such that, on a prospective basis,
purchases of these items are now inventoried. The Company assessed the cumulative impact of this change in
accounting policy and determined that the change is not material to the financial statements as of and for the
year ended December 31, 2008 or any prior period.

The Company regularly reviews its inventories for the presence of obsolete product attributed to age,
seasonality and quality. Inventories that are considered obsolete are written off or adjusted to carrying value.
The Company records as a non-current asset the cost of inventory for which it estimates it has more than a
twelve-month supply.

Investment in Subsidiaries

As a result of the merger of Craft Brands with and into the Company, the Company terminated its

agreements with Craft Brands effective July 1, 2008. Prior to this date, the Company had assessed its
investment in Craft Brands pursuant to the provisions of FASB Interpretation No. 46 Revised, Consolidation of
Variable Interest Entities — an Interpretation of ARB No. 51 (“FIN 46R”). In applying FIN 46R, the Company

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

did not consolidate the financial statements of Craft Brands with the financial statements of the Company, but
instead accounted for its investment in Craft Brands under the equity method, as outlined by Accounting
Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock
(“APB 18”). The Company recognized its share of the net earnings of Craft Brands by an increase to its
investment in Craft Brands on the Company’s balance sheet and recognized income from equity investment in
the Company’s statement of operations. Any cash distributions received or the Company’s share of losses
reported by Craft Brands were reflected as a decrease in investment in Craft Brands on the Company’s balance
sheet. Prior to the merger, the Company did not control the amount or timing of cash distributions by Craft
Brands.

As a result of the Merger, the Company acquired a 42% equity ownership interest in FSB and a 20%

equity ownership interest in Kona. The Company accounts for these investments under the equity method in
accordance with APB 18. For these investments, upon acquisition in the Merger, the Company recorded the
fair value of the respective investment as its carrying value. The difference between the carrying value of the
equity investment and the Company’s amount of underlying equity in the net assets of the investee is
considered equity method goodwill, which is not amortized. The carrying value of the equity investment is
reviewed for impairment. At December 31, 2008, the Company recorded a loss on impairment of assets
associated with these investments. See Note 12 for further details.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and

accumulated amortization. Expenditures for repairs and maintenance are expensed as incurred; renewals and
betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved
of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in
operations.

Depreciation and amortization of property, equipment and leasehold improvements is provided on the

straight-line method over the following estimated useful lives:

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 - 50 years
Brewery equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 - 25 years
Furniture, fixtures and other equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 10 years
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Useful life or term of
lease, whichever less

Goodwill and Other Intangible Assets

In accordance with SFAS 142, goodwill and other intangible assets with indefinite useful lives are not

amortized but are reviewed periodically for impairment.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The significant estimates and assumptions used by management in assessing the recoverability of
goodwill and other intangible assets are estimated future cash flows, present value discount rate, and other
factors. Any changes in these estimates or assumptions could result in an impairment charge. The estimates of
future cash flows, based on reasonable and supportable assumptions and projections, require management’s
subjective judgment.

The Company will amortize intangible assets with finite lives over their respective finite lives up to their
estimated residual values. The Company will evaluate potential impairment of long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144
establishes procedures for review of recoverability and measurement of impairment, if necessary, of long-lived
assets and certain identifiable intangibles. When facts and circumstances indicate that the carrying values of
long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying
value of the assets to projected future undiscounted cash flows in addition to other quantitative and qualitative
analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company
recognizes an impairment loss by a charge against current operations.

Acquired intangibles and their estimated remaining useful lives include:

Trade name and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite
Recipes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite
Distributor agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 years

Refundable 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
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, the Company collects a refundable
deposit, presented as a current liability — refundable deposits in the Company’s balance sheets. Upon return of
the keg to the Company, the deposit is refunded to the wholesaler. See discussion at Note 17, “Related-Party
Transactions” for impact of lost kegs on the Company’s brewery equipment.

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 by each wholesaler and retailer, 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 that the 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 A-B, records maintained by other third party vendors,
and historical information to estimate the physical count of kegs held by wholesalers and A-B. 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 estimates. For the years ended December 31,
2008 and 2007, the Company decreased its refundable deposits and brewery equipment by $596,000 and
$48,000, respectively. As of December 31, 2008 and 2007, the Company’s balance sheets include $5.7 million
and $3.1 million, respectively, in refundable deposits on kegs and $5.0 million and $655,000, respectively, in
keg equipment, net of accumulated depreciation.

Fair Value of Financial Instruments

The recorded value of the Company’s financial instruments is considered to approximate the fair value of

the instruments, in all material respects, because the Company’s receivables and payables are recorded at
amounts expected to be realized and paid, the Company’s derivative financial instruments are carried at fair

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

value, and the carrying value of the Company’s debt obligations that were assumed in the Merger were
adjusted to their respective fair values as of the effective date of the Merger.

Financial instruments that potentially subject the Company to credit risk consist principally of trade

accounts receivable. While wholesale distributors and A-B account for substantially all trade accounts
receivable, this concentration risk is limited due to the number of distributors, their geographic dispersion, and
state laws regulating the financial affairs of distributors of alcoholic beverages.

The Company has adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and

Hedging Activities (“SFAS 133”), which requires that all derivatives be recognized at fair value in the balance
sheet, and that the corresponding gains or losses be reported either in the statement of operations or as a
component of comprehensive income, depending on whether the instrument meets the criteria to apply hedge
accounting. Derivative financial instruments are utilized by the Company to reduce interest rate risk. The
Company does not hold or issue derivative financial instruments for trading purposes.

Comprehensive Income

The Company accounts for comprehensive income under SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and presentation of elements of comprehensive income,
including deferred gains and losses on unrealized derivative hedge transactions.

Revenue Recognition

Effective with the Merger, the Company recognizes revenue from product sales when the products are

delivered to A-B or the wholesaler. These are recorded net of excise taxes, discounts and certain fees the
Company must pay in connection with sales to A-B. In prior periods, it had recognized revenues from these
activities when the associated products were shipped to the customers as the time between shipment and
delivery was short, product damage claims and returns were insignificant and the volume of shipments
involved was relatively low. The Company assessed the cumulative impact of this change in accounting policy
and determined that the change is not material to the financial statements as of and for the year ended
December 31, 2008 or any prior period.

The Company also earns revenue in connection with two operating agreements with Kona — an
alternating proprietorship agreement and a distribution agreement. Pursuant to the alternating proprietorship
agreement, Kona produces a portion of its malt beverages at the Company’s brewery in Portland, Oregon. The
Company receives a facility fee from Kona based on the barrels brewed and packaged at the Company’s
brewery. Fees are recognized as revenue upon completion of the brewing process and packaging of the
product. In connection with the alternating proprietorship agreement, the Company also sells certain raw
materials to Kona for use in brewing. Revenue is recognized when the raw materials are removed from the
Company’s stock. Under the distribution agreement, the Company purchases Kona-branded product from
Kona, whether manufactured at Kona’s Hawaii brewery or the Company’s brewery, then sells and distributes
the product. The Company recognizes revenue when the product is delivered to A-B or the wholesaler.

The Company recognizes revenue on retail sales at the time of sale. The Company recognizes revenue

from events at the time of the event.

Excise Taxes

The federal government levies excise taxes on the sale of alcoholic beverages, including beer. For brewers
producing less than two million barrels of beer per calendar year, the federal excise tax is $7 per barrel on the
first 60,000 barrels of beer removed for consumption or sale during the calendar year, and $18 per barrel for
each barrel in excess of 60,000 barrels. Individual states also impose excise taxes on alcoholic beverages in
varying amounts. As presented in the Company’s statements of operations, sales reflect the amount invoiced to

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

A-B, wholesalers and other customers. Excise taxes due to federal and state agencies are not collected from
the Company’s customers, but rather are the responsibility of the Company. Net sales, as presented in the
Company’s statements of operations, are reduced by applicable federal and state excise taxes.

Shipping and Handling Costs

Costs incurred to ship the Company’s product are included in cost of sales in the Company’s statements

of operations.

Income Taxes

The Company records federal and state income taxes in accordance with SFAS No. 109, Accounting for

Income Taxes (“SFAS 109”). Deferred income taxes or tax benefits reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial reporting purposes and amounts as
measured for tax purposes as well as for tax net operating loss and credit carryforwards. These deferred tax
assets and liabilities are measured under the provisions of the currently enacted tax laws. Deferred tax assets
are recognized for deductible temporary differences, net operating loss carryforwards and tax credit
carryforwards if it is more likely than not that the tax benefits will be realized. For deferred tax assets that
cannot be recognized under the more likely than not standard, the Company has established a valuation
allowance. The effect on deferred taxes upon a change in valuation allowance is recognized in the period that
the change occurs.

Penalties incurred in connection with tax matters are classified as general and administrative expenses,

and interest assessments incurred in connection with tax matters are classified as interest expense.

Advertising Expenses

Advertising costs, comprised of television, radio, print and outdoor advertising, sponsorships and printed

product information, as well as costs to produce these media, are expensed as incurred. For the years ended
December 31, 2008 and 2007, advertising expenses totaling $1.8 million and $443,000, respectively, are
reflected as selling, general and administrative expenses in the Company’s statements of operations.

The Company incurs costs for the promotion of its products through a variety of advertising programs

with its wholesalers and downstream retailers. These costs are included in selling, general and administrative
expenses and frequently involve the local wholesaler sharing in the cost of the program. Reimbursements from
wholesalers for advertising and promotion activities are recorded as a reduction to selling, general and
administrative expenses in the Company’s statements of operations. Reimbursements for pricing discounts to
wholesalers are recorded as a reduction to sales in the Company’s statements of operations.

Segment Information

The Company operates in one principal business segment as a manufacturer of beer and ales across
domestic markets. The Company believes that its pub operations and brewery operations, whether considered
individually or in combination, do not constitute a separate segment under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company believes that its three production brewery
operations are functionally and financially similar. The Company operates its three pubs as an extension of the
marketing of its products and views their primary function to be promotion of these products.

Stock-Based Compensation

The Company maintains several stock incentive plans under which non-qualified stock options, incentive

stock options and restricted stock have been granted to employees and non-employee directors and accounts
for these grants consistent with SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which revises

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

SFAS No. 123 and supersedes APB No. 25. SFAS 123R requires that all share-based payments to employees
and directors be recognized as expense in the statement of operations based on their fair values and vesting
periods. The Company is required to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest
is recognized as expense over the requisite service periods in the Company’s statements of operations.

Earnings (Loss) per Share

The Company follows SFAS No. 128, Earnings per Share. Basic earnings (loss) per share is calculated

using the weighted average number of shares of common stock outstanding. The calculation of adjusted
weighted average shares outstanding for purposes of computing diluted earnings (loss) per share includes the
dilutive effect of all outstanding stock options for the periods when the Company reports net income. The
calculation uses the treasury stock method and the “as if converted” method in determining the resulting
incremental average equivalent shares outstanding as applicable.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the

United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company
bases its estimates on historical experience and on various assumptions that are believed to be reasonable
under the circumstances at the time. Actual results could differ from those estimates under different
assumptions or conditions.

Reclassifications

Certain reclassifications have been made to the prior year’s data to conform to the current year’s

presentation.

Recent Accounting Pronouncements

In December 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue

No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). The EITF defines a collaborative
arrangement and concludes that revenues and costs incurred with third parties in connection with collaborative
arrangements would be presented gross or net based on the criteria in EITF No. 99-19 and other accounting
literature. EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented
for all collaborative arrangements existing as of the effective date. The Company does not anticipate the
adoption of EITF 07-1 will have a material effect on the Company’s results of operations, financial condition
or cash flows.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging

Activities — An Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial
reporting. SFAS 161 amends and expands the disclosure requirements of SFAS 133 to provide users of
financial statements with an enhanced understanding of (i) how and why an entity uses derivative instruments;
(ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial
position, results of operations, and cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the impact
that SFAS No. 161 will have on its financial statement disclosures, but does not anticipate the adoption of
SFAS 161 will have a material effect on the Company’s financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life

of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142. FSP FAS 142-3 requires a company estimating the useful life of a recognized intangible
asset to consider its historical experience in renewing or extending similar arrangements or, in the absence of
such experience, to consider assumptions that market participants would use about renewal or extension as
adjusted for entity-specific factors. FSP FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited.
The Company anticipates that expanded disclosure may be required, but does not anticipate the adoption of
FSP FAS 142-3 will have a material effect on the Company’s financial position, results of operations or cash
flows.

In October 2008, the FASB issued FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset

When the Market for That Asset is Not Active (“FSP FAS 157-3”), which clarifies the application of
SFAS No. 157, “Fair Value Measurements” in an inactive market. FSP FAS 157-3 addresses application issues
such as how management’s internal assumptions should be considered when measuring fair value when
relevant observable data do not exist; how observable market information in a market that is not active should
be considered when measuring fair value and how the use of market quotes should be considered when
assessing the relevance of observable and unobservable data available to measure fair value. FSP FAS 157-3
was effective upon issuance. The Company’s adoption of FSP FAS 157-3 did not have a material effect on the
Company’s financial condition, results of operations or cash flows.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Inventories

Inventories consist of the following:

December 31,

2008

2007

(In thousands)

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,258
1,921
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,624
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
950
Packaging materials, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
907
Promotional merchandise, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
Pub food, beverages and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 538
922
511
487
470
—

$9,729

$2,928

Work in process is beer held in fermentation tanks prior to the filtration and packaging process. The
Company has established reserves for obsolescence and market valuation totaling $581,000 and $208,000 for
its packaging materials and promotional merchandise inventories as of December 31, 2008 and 2007,
respectively.

5. Other Current Assets

Other current assets consist of the following:

Deposits paid to keg lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,182
—
Merger-related costs (see Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
Prepaid property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
201
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
391
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 656
154
—
201
32

December 31,

2008

2007

(In thousands)

6. Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consist of the following:

$3,951

$1,043

December 31,

2008

2007

(In thousands)

Brewery equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,224
50,927
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,573
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,931
Furniture, fixtures and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,731
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
675
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

140,145
38,756

$47,082
35,846
4,604
2,337
2
82
314

90,267
34,405

$101,389

$55,862

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

As of December 31, 2008 and 2007, brewery equipment included property acquired under a capital lease

with a cost of $13.1 million and $77,000, respectively, and accumulated amortization of $869,000 and
$34,000, respectively. The Company’s statements of operations for the years ended December 31, 2008 and
2007 includes $870,000 and $15,000, respectively, in amortization expense related to this leased property.

7. Equity Investments

Equity investments consist of the following:

December 31,
2008
(In thousands)

2007

Fulton Street Brewery, LLC (“FSB”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,103
Kona Brewery LLC (“Kona”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,086
Craft Brands Alliance LLC (“Craft Brands”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —
—
— 416

$5,189

$416

During the year ended December 31, 2008, the Company recognized impairment losses deemed to be

other than temporary for its investments in FSB and Kona; see discussion at Note 12 for further details.

FSB

For the year ended December 31, 2008, the Company’s share of FSB’s net income totaled $3,000. The
Company’s investment in FSB was $4.1 million at December 31, 2008, and the Company’s portion of equity
as reported on FSB’s financial statement was $1.9 million as of that date. The Company did not have an
investment in FSB at December 31, 2007 as it acquired its interest in FSB as a result of the Merger. The
Company has not received any cash capital distributions associated with FSB during its ownership period. At
December 31, 2008, the Company has recorded a payable to FSB of $1.1 million primarily for amounts owing
for purchases of Goose Island-branded product. The Company has recorded a receivable from FSB of $36,000
primarily for marketing fees associated with sales of Goose Island-branded product in the Company’s
distribution area.

Kona

For the year ended December 31, 2008, the Company’s share of Kona’s net loss totaled $14,000. The
Company’s investment in Kona was $1.1 million at December 31, 2008, and the Company’s portion of equity
as reported on Kona’s financial statement was $347,000 as of that date. The Company did not have an
investment in Kona at December 31, 2007 as it acquired its interest in Kona as a result of the Merger. The
Company has not received any cash capital distributions associated with Kona during its ownership period. At
December 31, 2008, the Company has recorded a receivable from Kona of $3.0 million primarily related to
amounts owing under its alternative proprietorship and distribution agreements. Also at that date, the Company
has recorded a payable to Kona of $1.9 million primarily for amounts owing for purchases of Kona-branded
product.

Craft Brands

On July 1, 2004, the Company entered into agreements with Widmer with respect to the operation of a

joint venture sales and marketing entity, Craft Brands. Pursuant to these agreements, and through June 30,
2008, the Company manufactured and sold its product to Craft Brands at prices substantially below wholesale
pricing levels; Craft Brands, in turn, advertised, marketed, sold and distributed the product to wholesale outlets
in the western United States pursuant to a distribution agreement between Craft Brands and A-B.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In connection with the Merger, Craft Brands was also merged with and into the Company, effective July 1,

2008. All existing agreements, including all associated future commitments and obligations, between the
Company and Craft Brands and between Craft Brands and Widmer terminated as a result of the merger of
Craft Brands.

The Operating Agreement addressed the allocation of profits and losses of Craft Brands up to July 1,
2008. During the first six months of 2008 and all of 2007, the Company was allocated 42% of Craft Brands’
profits and losses. Net cash flow, if any, was generally distributed monthly to the Company based upon that
percentage. The Company did not receive a distribution in any event that caused the liabilities of Craft Brands,
adjusted for the liabilities to its members, to be in excess of its assets, or Craft Brands to be unable to pay its
debts as those debts became due in the ordinary course of business.

As a result of the merger with Craft Brands, the Company adjusted its residual investment in and wrote

off its net receivable from Craft Brands to the total purchase consideration that resulted in increases to
goodwill of $339,000 and $21,000, respectively.

For the years ended December 31, 2008 and 2007, the Company’s share of Craft Brands’ net income
totaled $1.4 million and $2.8 million, respectively. During the years ended December 31, 2008 and 2007, the
Company received cash distributions of $1.5 million and $2.5 million, respectively, representing its share of
the net cash flow of Craft Brands.

The selected financial information presented for Craft Brands for the year ended December 31, 2008
represents the activities for the entity from January 1, 2008 through June 30, 2008. The selected financial
information is as follows:

Year Ended December 31,

2008

2007

(Dollars in thousands)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,463
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,089
3,311
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,310
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,310
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
180,300
Shipments (in barrels) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 65,358
$ 21,271
6,711
$
6,728
$
6,728
$
425,500

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Intangible and Other Assets

Intangible and other assets consist of the following:

December 31,
2008
(In thousands)

2007

Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,027
2,200
Distributor agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700
Recipes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
643
Favorable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
393
Promotional merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,063
517

$378
—
—
—
—
98

476
369

$13,546

$107

During the year ended December 31, 2008, the Company recognized impairment charges associated with

a decrease in the estimated fair value of its Widmer brand trademark; see discussion at Note 12 for further
details.

Accumulated amortization by class consists of the following:

Trademarks and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributor agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2008
2007
(In thousands)
$369
$201
—
73
—
17
—
226

$517

$369

Estimated amortization expenses to be recorded by class for the next five fiscal years are as follows:

Estimated Amortization Expense

2009

Year Ended December 31,
2010
2012
2011
(In thousands)

Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Distributor agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3
147
33
278

$461

$ 3
146
33
104

$286

$
3
147
17
29

$196

$ 2
146
—
5

$153

2013

$
3
147
—
1

$151

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

9. Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following:

Term loan payable to bank, due July 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Line of credit payable to bank, due January 1, 2013. . . . . . . . . . . . . . . . . . . . . . . .
Promissory notes payable to individual lenders, all due July 1, 2015 . . . . . . . . . . . .
Premium on promissory notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations on equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2008
(In thousands)

2007

$13,363
12,000
600
654
6,611

33,228
1,394

$—
—
—
—
46

46
15

$31,834

$31

As a result of the Merger, the Company assumed borrowings under Widmer’s outstanding credit
arrangement; however, the Company refinanced these amounts by concurrently entering into a new loan
agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”). The Loan Agreement is comprised
of a $15.0 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 $13.5 million term loan (“Term Loan”). The
Company may draw upon the Line of Credit for working capital and general corporate purposes. The Line of
Credit matures on January 1, 2013 at which time the outstanding principal balance and any accrued but unpaid
interest will be due. At December 31, 2008, the Company had $12.0 million outstanding under the Line of
Credit with $3.0 million of availability for further cash borrowing.

At September 30, 2008, the Company was not in compliance with the covenants for the Loan Agreement
as it was unable to meet either of the two required financial covenants, the funded debt to bank EBITDA ratio
or the fixed charge coverage ratio, for the trailing twelve months ended September 30, 2008. Bank EBITDA is
defined as Earnings before interest, taxes, depreciation, amortization and certain other adjustments as defined
in the Loan Agreement. The Company and BofA executed a modification to the loan agreement effective
November 14, 2008 (“Modification Agreement”) that permanently waived the noncompliance as an event of
default at September 30, 2008. The Modification Agreement subjects the Company to certain terms and
conditions different than under the original Loan Agreement. Those terms and conditions as modified are
summarized below. As discussed in further detail below, the Company was in compliance with its covenants as
of December 31, 2008.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

An annual fee will be payable in advance on the notional amount of each standby letter of credit issued

and outstanding multiplied by an applicable rate ranging from 1.13% to 1.50%.

Interest on the Term Loan will accrue on the outstanding principal balance in the same manner as

Under the Modification Agreement, a quarterly fee on the unused portion of the Line of Credit, including

The Modification Agreement also revised the types of financial covenants that the Company is required
to meet for each quarter through June 30, 2009. As of December 31, 2008, the Company was in compliance
with the loan covenants under the Modification Agreement. A covenant under the Modification Agreement
requires the Company to generate a specified EBITDA amount measured on a quarterly basis. EBITDA under
the Modified Agreement is defined similar to Bank EBITDA but includes certain adjustments specific to the
Modification Agreement.

The following table summarizes the financial covenant ratios required pursuant to the Modification

Agreement:

Financial Covenants Required by Modification Agreement

Minimum EBITDA, as defined (in thousands)

For the quarter ending March 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the quarter ending June 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the quarter ending September 30, 2009 and thereafter . . . . . . . . . . . . . . . . .

850
$
$
2,300
Does not apply

Asset Coverage Ratio

For the quarter ending March 31, 2009 and thereafter . . . . . . . . . . . . . . . . . . . .

1.50 to 1

Capital Expenditures (in thousands)
To spend or incur obligations less than the following:

For the quarter ending March 31, 2009(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the quarter ending June 30, 2009(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the quarter ending September 30, 2009 and thereafter . . . . . . . . . . . . . . . . .

$
1,350
550
$
Does not apply

(1) - Provides for carryover spending of any amount not used in the prior quarter

The Loan Agreement is secured by substantially all of the Company’s personal property and by the real

In addition, the Company is restricted in its ability to declare or pay dividends, repurchase any

outstanding common stock, acquire additional debt or enter into any agreement that would result in a change

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

in control of the Company. Effective September 30, 2009, the Company will be required to meet the financial
covenant ratios of funded debt to EBITDA, as defined, and fixed charge coverage in the manner established
pursuant to the original Loan Agreement, but at levels specified by the Modification Agreement.

As a result of the Merger, the Company assumed Widmer’s promissory notes signed in connection with

A minimal balance remains outstanding of other capital lease obligations consisting of agreements

executed by the Company in prior years for the use of small production equipment and machinery.

On February 15, 2008, the Company had entered into a credit arrangement with BofA pursuant to which

a $5 million revolving line of credit was provided. Effective June 30, 2008, the Company terminated this
revolving line without drawing upon the line of credit at any time.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

For the Company’s outstanding debt obligations as of December 31, 2008, long-term debt and future

minimum capital lease payments for the next five fiscal years are as follows:

Succeeding periods:

Line of
Credit

Long-term Debt

Term Loan

Promissory
Notes
(In thousands)

Capital Lease
Obligations

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
12,000
—

351
374
396
421
451
11,370

Amount representing interest . . . . . . . . . . . . . . . . . . . . .

—

$12,000

$13,363

12,000

13,363

$ —
—
—
—
—
600

600

—

$600

$ 1,446
1,440
1,432
1,428
1,428
715

7,889

(1,278)

$ 6,611

10. Derivative Financial Instruments and Fair Value Measurements

In connection with the Loan Agreement, the Company entered into a five-year interest rate swap

agreement with a total notional value of $10.1 million to hedge the variability of interest payments associated
with its variable-rate borrowings under the Term Loan. Through this swap agreement, the Company pays
interest at a fixed rate of 4.48% and receives interest at a floating-rate of the one-month LIBOR. 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 under SFAS 133. As of December 31, 2008, an unrealized
net loss of $1.1 million was recorded in accumulated other comprehensive loss as a result of this hedge. There
was no hedge ineffectiveness recognized for the year ended December 31, 2008 associated with this contract.

As a result of the Merger, the Company assumed Widmer’s contract with BofA for a $7.0 million
notional interest rate swap agreement. On the effective date of the Merger, the Company entered into with
BofA an equal and offsetting interest rate swap contract. Neither swap contract qualifies for hedge accounting
under SFAS 133. The assumed contract requires the Company to pay interest at a fixed rate of 4.60% and
receive interest at a floating rate of the one-month LIBOR, while the offsetting contract requires the Company
to pay interest at a floating rate of the one-month LIBOR and receive interest at a fixed rate of 3.47%. Both
contracts expire on November 1, 2010. The Company recorded a net gain on the contracts of $34,000 for the
year ended December 31, 2008, which was recorded to other income. The Company did not have any similar
contracts outstanding during 2007, therefore there were no amounts recorded to earnings for the year ended
December 31, 2007.

All swap obligations with BofA are secured by the Collateral under the Loan Agreement.

Fair Value Measurements

SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell

an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

is a market-based measurement that should be determined based upon assumptions that market participants
would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs (unadjusted) in active markets for identical assets and liabilities;

Level 2:

Inputs other than quoted prices included within Level 1 that are either directly or

indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in inactive markets and inputs
other than quoted prices that are observable for the asset or liability;

Level 3: Unobservable inputs for the asset or liability, including situations where there is little, if

any, market activity or data for the asset or liability.

The Company has assessed its assets and liabilities that are measured and recorded at fair value on a

recurring or non-recurring basis, within the above hierarchy and that assessment is as follows:

Fair Value Hierarchy Assessment

Level 1

Level 2

Level 3

Total

(In thousands)

Recurring
Derivative financial instruments — interest rate swaps . . . .

$—

$1,252

$ — $ 1,252

Non-recurring
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—

—
—
— 10,002
5,189
—

—
10,002
5,189

11. Common Stockholders’ Equity

Issuance of Common Stock

In conjunction with the exercise of stock options granted under the Company’s stock option plans during

the years ended December 31, 2008 and 2007, the Company issued 227,750 and 48,550 shares, respectively, of
common stock and received proceeds on exercise totaling $475,000 and $158,000, respectively. See “Stock-
Based Compensation Expense” for a discussion of the impact on the Company’s statements of operations.

On June 24, 2008, the board of directors approved under the 2007 Stock Incentive Plan (the “2007 Plan”)

a grant of 1,140 shares of fully-vested common stock to each independent, non-employee director except for
the A-B designated directors. In conjunction with these stock grants, the Company issued 4,560 shares of
common stock. See “Stock-Based Compensation Expense” for a discussion of the impact on the Company’s
statements of operations.

On May 22, 2007, the board of directors approved under the 2007 Plan a grant of 2,300 shares of

common stock to each independent, non-employee director (except for the A-B designated directors),
10,000 shares and 5,000 shares of common stock to its then Chief Executive Officer and its then President,
respectively. Each grantee was fully vested in the corresponding grant. In conjunction with these stock grants,
the Company issued 24,200 shares of common stock.

On July 1, 2008, the Company issued 8,361,514 common shares to the then shareholders of Widmer in

exchange for cancellation of the Widmer shares. See Note 2 for further discussion.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Stock Plans

The Company maintains several stock incentive plans under which non-qualified stock options, incentive
stock options and restricted stock are granted to employees and non-employee directors. The Company issues
new shares of common stock upon exercise of stock options. Under the terms of the Company’s stock option
plans, employees and directors may be granted options to purchase the Company’s common stock at the
market price on the date the option is granted. Under these stock option plans, stock options granted at less
than the fair value on the date of grant and stock options granted to non-employee directors are deemed to be
non-qualified stock options rather than incentive stock options.

The Company maintains the 1992 Stock Incentive Plan, as amended (“1992 Plan”) and the Amended and

Restated Directors Stock Option Plan (the “Directors Plan”) under which non-qualified stock options and
incentive stock options were granted to employees and non-employee directors through October 2002.
Employee options were generally designated to vest over a five-year period while director options became
exercisable nine months after the grant date. Vested options are generally exercisable for ten years from the
date of grant. Although the 1992 Plan and the Directors Plan both expired in October 2002, preventing further
option grants, the provisions of these plans remain in effect until all options are terminated or exercised.

The Company’s shareholders approved the 2002 Stock Option Plan (“2002 Plan”) in May 2002. The 2002

Plan provides for granting of non-qualified stock options and incentive stock options to employees, non-
employee directors and independent consultants or advisors. The compensation committee of the board of
directors administers the 2002 Plan, determining the grantees, the number of shares of common stock for
which the options are exercisable, and the exercise prices of such shares, among other terms and conditions.
Under the 2002 Plan, options granted to employees of the Company through December 31, 2008 were
designated to vest over a five-year period, while options granted to the Company’s directors in each year from
2002 through 2005 became exercisable six months following the grant date. Options were granted at an
exercise price equal to fair market value of the underlying common stock on the grant date and terminate on
the tenth anniversary of the grant date. Options granted in 2006 to the Company’s directors (excluding the
A-B designated directors) were at an exercise price less than the fair market value of the underlying common
stock on the grant date. These options were immediately exercisable and each grantee exercised the option on
the day of the grant. The maximum number of shares of common stock for which options may be granted
during the term of the 2002 Plan is 346,000. As of December 31, 2008, the 2002 Plan had 100,259 shares
available for future grants of options.

The 2007 Plan was adopted by the board of directors and approved by the shareholders in May 2007. The

2007 Plan provides for stock options, restricted stock, restricted stock units, performance awards and stock
appreciation rights. While incentive stock options may only be granted to employees, awards other than
incentive stock options may be granted to employees and directors. The 2007 Plan is administered by the
compensation committee of the board of directors. A maximum of 100,000 shares of common stock are
authorized for issuance under the 2007 Plan. As of December 31, 2008, the 2007 Plan had 71,240 shares
available for future grants of stock-based awards.

Stock-Based Compensation Expense

As discussed above, the Company granted common shares to its independent, non-employee directors

during the second quarters of 2008 and 2007, respectively, and common shares to certain of its executive
officers during the second quarter of 2007. As the grants were fully vested, the Company recognized stock-
based compensation of $20,000 and $169,000 in its statements of operations during the years ended
December 31, 2008 and 2007, respectively. See “Issuance of Common Stock” above for further details.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Stock Option Plan Activity

Presented below is a summary of the Company’s stock option plan activity:

Outstanding at January 1, 2008 . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at December 31, 2008 . . . . . . . . .

Exercisable at December 31, 2008 . . . . . . . . . .

Weighted
Average
Exercise Price
(Per share)
$2.57

Weighted
Average
Remaining
Contractual Life
(In years)
3.33

Aggregate
Intrinsic
Value
(In thousands)
$2,809

Options
(In thousands)
689
—
(228)
(30)

431

$2.61

2.36

$ —

The aggregate intrinsic value of the outstanding stock options is calculated as the difference between the
stock closing price as reported by Nasdaq as of the last day of the period and the exercise price of the shares.
The applicable stock closing prices as of December 31, 2008 and 2007 were $1.20 and $6.65 per share,
respectively. For December 31, 2008 and 2007, there was no unrecognized stock-based compensation expense
related to unvested stock options. The total intrinsic value of stock options exercised in 2008 and 2007 was
$380,000 and $168,000, respectively. No options vested in 2008 or 2007.

The following table summarizes information for options outstanding and exercisable at December 31,

2008:

Outstanding and Exercisable

Range of Exercise Prices

$1.49 to $2.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.01 to $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.01 to $3.97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average
Remaining
Contractual Life
(In years)
2.56
3.89
1.04

Options
(In thousands)
178
106
147

$1.49 to $3.97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

431

2.36

Weighted
Average
Exercise
Price
(Per share)
$1.86
$2.11
$3.88

$2.61

12. Loss on Impairment of Assets

The components of the loss on impairment of assets for the year ended December 31, 2008 are as

follows:

Asset Category

Year Ended
December 31,
2008
(In thousands)

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$22,689
6,500
1,400

Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$30,589

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Due to a combination of factors, including the U.S. economic environment, particularly during the fourth

In performing the second step of the Company’s analysis of the fair value of its goodwill asset in

accordance with SFAS 142, the Company based its estimates on the income methodology, a market
methodology and a transactional methodology, weighting each on a probability assessment. The income
methodology employed a discounted cash flow valuation model, using the Company’s projections of future
revenue growth and operating profitability. The discounted cash flow model incorporates the Company’s
estimates of future cash flows, future growth rates and management’s judgment regarding the applicable
discount rates used to discount those estimated cash flows. The market methodology compared the market
capitalization of other publicly traded regional and national brewing companies against their revenues and
EBITDA to derive a market capitalization multiple. This multiple was applied against the Company’s
forecasted EBITDA. The transactional methodology compared revenues and specified earnings multiples on
recent merger transactions involving a similarly situated specialty brewer to derive an estimated revenue
multiple to apply against the Company’s revenue projections. The analysis resulted in a complete impairment
of the Company’s goodwill balance. Given that certain of these inputs are unobservable, management assessed
this to be a level 3 measurement within the hierarchy established by SFAS 157.

In performing its analysis of the fair value of its intangible trademark asset in accordance with SFAS 142,

In performing its analysis of the fair values of its equity investments in accordance with APB 18, the

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

13. Loss per Share

The following table sets forth the computation of basic and diluted loss per common share:

Year Ended
December 31,

2008

2007
(In thousands, except
per share amounts)

Numerator for basic and diluted net loss per share:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(33,278)

$ (939)

Denominator for basic and diluted net loss per share:

Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . .

12,660

8,331

Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(2.63)

$ (0.11)

Certain Company stock options were not included in the computation of diluted earnings per share
because the exercise price of the options was greater than the average market price of the common shares, or
the impact of their inclusion would be antidilutive. Such stock options, with prices ranging from $1.49 to
$3.97 per share at December 31, 2008 and from $1.49 to $5.73 per share at December 31, 2007, averaged
569,000 and 720,000 for the years ended December 31, 2008 and 2007, respectively.

14.

Income Taxes

The components of income tax expense (benefit) are as follows:

Year Ended
December 31,
2008
(In thousands)

2007

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
23
(4,400)

$ 48
(224)

Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(4,377)

$(176)

Current tax expense is attributable to state taxes and the federal alternative minimum tax (“AMT”). The

Company paid income, equity and franchise taxes totaling $47,000 and $53,000 for the years ended
December 31, 2008 and 2007, respectively.

The income tax benefit differs from the amount computed by applying the statutory federal income tax

rate to the loss before income taxes. The sources and tax effects of the differences are as follows:

Year Ended
December 31,
2008
(In thousands)

2007

Benefit at U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent differences, primarily meals and entertainment . . . . . . . . . . . . . . . . .
Loss on impairment of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(12,803)
(418)
130
7,714
—
1,000

$(379)
(25)
80
—
148
—

Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (4,377)

$(176)

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The income tax benefit for the year ended December 31, 2008 was affected by the loss on impairment of

assets but the taxable loss for the year was not as the goodwill asset was recognized for financial statement
purposes only and did not have a tax basis.

Significant components of the Company’s deferred tax liabilities and assets are as follows:

December 31,

2008

2007

(In thousands)

Deferred tax liabilities:

Property, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . . $10,815
4,789
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,133
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,059
—
—
—

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,006

9,059

Deferred tax assets:

Net operating losses and AMT credit carryforwards . . . . . . . . . . . . . . . . . . .
Accrued salaries and severance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,372
834
1,015
(1,000)

8,781
335
184
(1,059)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,221

8,241

Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,785

818

As Presented on the Balance Sheet:
Long-term deferred income tax liability, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,552
767
Current deferred income tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,762
944

$ 5,785

818

As of December 31, 2008, the Company’s deferred tax assets were primarily comprised of federal net
operating loss carryforwards (“NOLs”) of $29.1 million, or $9.9 million tax-effected; state NOL carryforwards
of $299,000 tax-effected; and federal and state AMT credit carryforwards of $183,000 tax-effected. In
assessing the realizability of its deferred tax assets, the Company considered both positive and negative
evidence when measuring the need for a valuation allowance. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income during the periods in which those temporary
differences become deductible. Among other factors, the Company considered future taxable income generated
by the projected differences between financial statement depreciation and tax depreciation, including the
depreciation of the assets acquired in the Merger. Based upon this, the Company determined that its previously
established valuation allowance of approximately $1.1 million was no longer required, and recorded the release
of the valuation allowance against goodwill as of the date of the Merger.

At December 31, 2008, based upon the available evidence and due to the Company’s taxable loss for the

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

There were no unrecognized tax benefits as of December 31, 2008 or 2007. The Company does not

anticipate significant changes to its unrecognized tax benefits within the next twelve months.

Tax years that remain open for examination by the Internal Revenue Service (“IRS”) include the years

from 2005 through 2008. In addition, tax years from 1997 to 2004 may be subject to examination by the IRS
and state tax jurisdictions to the extent that the Company utilizes the NOLs from those years in its current or
future tax returns.

15. Employee Benefit Plan

The Company sponsors a defined contribution or 401(K) plan for all employees 18 years or older.

Employee contributions may be made on a before-tax basis, limited by IRS regulations. The Company matches
the employee’s contribution up to 4% of eligible compensation; however the Company’s match is on a
discretionary basis. Eligibility for the matching contribution begins after the participant has worked a
minimum of three months. The Company’s matching contributions to the plan vest ratably over five years of
service by the employee. The Company’s matching contributions to the plan for participants totaled $445,000
and $216,000 for the years ended December 31, 2008 and 2007, respectively.

16. Commitments

The Company leases office space, restaurant and production facilities, warehouse and storage facilities,

land and equipment under operating leases that expire at various dates through the year ending December 31,
2047. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to
reflect changes in price indices. Certain leases require the Company to pay for insurance, taxes and
maintenance applicable to the leased property. Under the terms of the land lease for the New Hampshire
Brewery, the Company holds a first right of refusal to purchase the property should the lessor decide to sell
the property.

Included in the lease obligations described above are contracts with lessors whose members include
related parties to the Company. These contracts were assumed by the Company as a result of the Merger. The
Company leases its headquarters office space, restaurant and storage facilities located in Portland, land and
certain equipment from two limited liability companies, both of whose members include the Company’s
current Board Chair and a nonexecutive officer of the Company. Lease payments to these lessors totaled
$55,000 for the year ended December 31, 2008. No amounts were paid by the Company to these lessors
during the year ended December 31, 2007. The Company is responsible for taxes, insurance and maintenance
associated with these leases. The lease for the headquarters office space and restaurant facility expires in 2034,
with an extension at the Company’s option for two 10-year periods, while the lease for the other facilities,
land and equipment expires in 2017 with an extension at the Company’s option for two five-year periods.
Rental payments under the leases are adjusted each year to reflect increases in the Consumer Price Index. The
rent during an extension period, if applicable, will be established at fair market levels at the beginning of each
period. The Company holds a right to purchase the headquarters office space and restaurant facility at the
greater of $2.0 million or the fair market value of the property as determined by a contractually established
appraisal method. The right to purchase is not valid in the final year of the lease term or in each of the final
years of the renewal terms, as applicable.

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Minimum aggregate future lease payments under non-cancelable operating leases as of December 31,

2008 are as follows:

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands)

580
574
516
423
422
12,490

$15,005

Rent expense under all operating leases, including short-term rentals as well as cancelable and noncancel-

able operating leases, totaled $1.9 million and $686,000 for the years ended December 31, 2008 and 2007,
respectively.

The Company leases corporate office space to an unrelated party. The lease agreement expires in 2009.
The Company recognized rental income of $193,000 for the years ended December 31, 2008 and 2007. Total
future minimum lease rentals under the agreement are $193,000.

The Company periodically enters into commitments to purchase certain raw materials in the normal

course of business. Furthermore, the Company has entered into purchase commitments and commodity
contracts to ensure it has the necessary supply of malt and hops to meet future production requirements.
Certain of the malt and hop commitments are for crop years through 2013. The Company believes that malt
and hop commitments in excess of future requirements, if any, will not have a material impact on its financial
condition or results of operations. The Company may take delivery of the commodities in excess of or make
payments against the purchase commitments earlier than contractually obligated, which means the Company’s
cash outlays in any particular year may exceed the commitment amount disclosed.

The Company has entered into several multi-year sponsorship and promotional commitments with certain

professional sports teams and entertainment companies, including certain contracts that were assumed as a
result of the merger with Craft Brands. Generally, in exchange for its sponsorship consideration, the Company
posts signage and provides other promotional materials at the site or the event. In certain instances, the
Company is granted an exclusive right to provide the craft beer products at the site or event. The terms of
these sponsorship commitments expire at various dates through the year ending December 31, 2011.

Aggregate payments under unrecorded, unconditional purchase and sponsorship commitments as of

December 31, 2008 are as follows:

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

Purchase
Obligations

Total Noncancelable Commitments
Sponsorship
Obligations
(In thousands)
$293
247
94
—
—

$ 9,038
10,732
1,834
1,522
1,356

$ 9,331
10,979
1,928
1,522
1,356

$24,482

$634

$25,116

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

17. Related-Party Transactions

For the years ended December 31, 2008 and 2007, sales to A-B through the amended A-B Distribution

Agreement totaled $62.4 million and $18.9 million, respectively, which represented 72.5% and 40.6%,
respectively, of the Company’s sales for the corresponding period.

For all sales made pursuant to the amended A-B Distribution Agreement, the Company pays A-B certain

fees, described in further detail below. A Margin fee applies to all product sales, except for sales to the
Company’s retail operations, pubs and restaurants, dock sales and for sales prior to the Merger, the Company’s
sales made to Craft Brands, which paid a comparable fee on its resale of the product. The Company also pays
an additional fee for any shipments that exceed shipment levels as established in the amended A-B Distribution
Agreement (“Additional Margin”). For the years ended December 31, 2008 and 2007, the Company paid a
total of $3.1 million and $1.0 million, respectively, related to the Margin and Additional Margin. These fees
are reflected as a reduction of sales in the Company’s statements of operations.

Also included in the amended A-B Distribution Agreement are fees associated with administration and
handling, including invoicing costs, staging costs, cooperage handling charges and inventory manager fees.
These fees totaled approximately $205,000 and $150,000 for the years ended December 31, 2008 and 2007,
respectively, and are reflected in cost of sales in the Company’s statements of operations.

In certain instances, the Company may ship its product to A-B wholesaler support centers rather than
directly to the wholesaler. Wholesaler support centers consolidate small wholesaler orders for the Company’s
products with orders of other A-B products prior to shipping to the wholesaler. A wholesaler support center
fee for these shipments totaled $179,000 and $171,000 for the years ended December 31, 2008 and 2007,
respectively, and is charged to cost of sales in the Company’s statements of operations.

Under a separate agreement, the Company purchased certain materials, primarily bottles and other

packaging materials, through A-B totaling $17.1 million and $9.6 million in 2008 and 2007, respectively.
During 2008, the Company paid A-B amounts totaling $989,000 for media purchases and advertising services.

The Company entered into a purchase and sale agreement with A-B for the purchase of the Pacific Ridge
brand, trademark and related intellectual property. In consideration, the Company agreed to pay A-B an annual
royalty based upon the Company’s shipments of this brand, expiring in 2023. Royalties of $71,000 are
reflected in cost of sales in the Company’s statements of operations for each of the years ended December 31,
2008 and 2007.

In connection with the shipment of its draft products per the amended A-B Distribution Agreement, the
Company collects refundable deposits on its kegs from A-B’s wholesalers. As these wholesalers generally hold
an inventory of the Company’s kegs at their warehouse and in retail establishments, A-B assists in monitoring
the inventory of kegs received by its wholesalers. The wholesaler pays a flat fee to the Company for each keg
determined to be lost and also forfeits the deposit. For the years ended December 31, 2008 and 2007, the
Company reduced its brewery equipment by $770,000 and $716,000, respectively, for amounts received in lost
keg fees and forfeited deposits.

During 2007 and up to the date of the Merger, the Company periodically leased kegs from A-B pursuant
to a separate agreement. Lease and handling fees of $40,000 and $88,000 are reflected in cost of sales for the
years ended December 31, 2008 and 2007, respectively.

As of December 31, 2008 and 2007, net amounts due to A-B of $2.3 million and from A-B of

$1.1 million, respectively, were outstanding.

The Company sold and shipped Widmer Hefeweizen under several contracts with Widmer prior to the
Merger. One of these contracts was a licensing arrangement under which the Company sold this product in the
Midwest and Eastern United States. The licensed product was brewed at the New Hampshire Brewery under

Craft Brewers Alliance, Inc.

NOTES TO FINANCIAL STATEMENTS — (Continued)

the supervision and direction of Widmer’s brewing staff to insure their brand quality and matching taste
profile. The Company shipped 12,500 barrels and 28,800 barrels of Widmer Hefeweizen during the years ended
December 31, 2008 and 2007, respectively. A licensing fee of $165,000 and $432,000 paid to Widmer is
reflected in the Company’s statements of operations for the years ended December 31, 2008 and 2007,
respectively. The Company also brewed and shipped 31,000 barrels and 81,900 barrels of Widmer draft and
bottled product under a contract brewing arrangement with Widmer during the years ended December 31,
2008 and 2007, respectively. The Company recognized contract brewing revenues of $3.0 million and
$7.4 million received from Widmer, which are reflected in the Company’s statements of operations for the
years ended December 31, 2008 and 2007, respectively. These arrangements, along with all other agreements
between Widmer and the Company, terminated on the effective date of the Merger.

As of December 31, 2007, the net amount due from Widmer was $93,000.

The Company has entered into several lease arrangements with lessors whose members include related
parties to the Company. See discussion at Note 16, “Commitments” for further details regarding these lease
arrangements.

For the year ended December 31, 2008, the Company earned alternative proprietorship fees of $2.4 million

by leasing the Oregon Brewery to Kona and $3.4 million by selling raw materials and packaging products to
Kona. These fees are recorded as sales revenues in the Company’s statement of operations for the period.

At December 31, 2008 the net amount due from Kona was $1.1 million and net amount due to FSB was
$1.0 million. No amounts were due to either entity at December 31, 2007. See discussion at Note 7 for further
details.

At December 31, 2008, the Company had outstanding receivables due from Kona Brewing Co. (“KBC”)

of $107,000. KBC and the Company are the only members of Kona.

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

None.

Item 9A(T). Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) as of the end of the period covered
by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective at the reasonable assurance level.

The Company maintains disclosure controls and procedures that are designed to ensure that information

required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms promulgated by the
Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Management believes that key controls are in place and the
disclosure controls are functioning effectively at the reasonable assurance level as of December 31, 2008.

While reasonable assurance is a high level of assurance, it does not mean absolute assurance. Disclosure

controls and internal control over financial reporting cannot prevent or detect all errors, misstatements or
fraud. In addition, the design of a control system must recognize that there are resource constraints, and the
costs associated with controls must be proportionate to their costs. Notwithstanding these limitations, the
Company’s management believes that its disclosure controls and procedures provide reasonable assurance that
the objectives of its control system are being met.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of 2008, no changes in the Company’s internal control over financial reporting

were identified in connection with the evaluation required by Exchange Act Rule 13a-15 or 15d-15 that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.

Report of Management on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting in accordance with Exchange Act Rule 13a-15(f). The Company’s internal control
system was designed to provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published financial statements. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that a
misstatement of the Company’s financial statements would be prevented or detected.

The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting based on the framework and criteria established in Internal Control — Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2008, at the reasonable assurance level.

This annual report does not include an attestation report of the Company’s registered public accounting

firm regarding internal control over financial reporting. Management’s report was not subject to attestation by
the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The response to this Item is contained in part in the Company’s definitive proxy statement for its 2009
Annual Meeting of Stockholders to be held on May 29, 2009 (the “2009 Proxy Statement”) under the captions
“Board of Directors,” “Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance,”
and the information contained therein is incorporated herein by reference.

Information regarding executive officers is set forth herein in Part I, under the caption “Executive

Officers of the Company.”

Code of Conduct

The Company has adopted a Code of Conduct (code of ethics) applicable to all employees, including the

principal executive officer, principal financial officer, principal accounting officer and directors. This, as well as
the charters of each of the Board committees, are posted on the Company’s website at www.Craftbrewers.com
(select Investor Relations — Governance — Highlights). Copies of these documents are available to any
shareholder who requests them. Such requests should be directed to Investor Relations, Craft Brewers Alliance,
Inc., 929 N. Russell Street, Portland, OR 97227. Any waivers of the code of ethics for the Company’s directors
or executive officers are required to be approved by the Board of Directors. The Company will disclose any such
waivers on a current report on Form 8-K within four business days after the waiver is approved.

Item 11. Executive Compensation

The response to this Item is contained in the 2009 Proxy Statement under the captions “Executive
Compensation,” “Director Compensation” and “Compensation Committee” and the information contained
therein is incorporated herein by reference.

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

Matters

Securities Authorized for Issuance Under Equity Compensation Plans

The following is a summary as of December 31, 2008 of all of the Company’s plans that provide for the

issuance of equity securities as compensation. See Note 11 to the Financial Statements — Common Stockhold-
ers’ Equity for additional discussion.

Plan Category

Number to be Issued
Upon Exercise of
Outstanding
Options and Rights (a)

Weighted Average
Exercise Price of
Outstanding
Options and Rights (b)

Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))(c)

Equity compensation plans approved

by security holders. . . . . . . . . . . . . .

430,790

Equity compensation plans not

approved by security holders . . . . . .

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

430,790

$2.61

—

$2.61

171,499

—

171,499

The remaining response to this Item is contained in part in the 2009 Proxy Statement under the caption
“Security Ownership of Certain Beneficial Owners and Management,” and the information contained therein is
incorporated herein by reference.

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

The response to this Item is contained in the 2009 Proxy Statement under the caption “Related Person
Transactions” and “Board of Directors — Director Independence” and the information contained therein is
incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The response to this Item is contained in the 2009 Proxy Statement under the caption “Proposal No. 2 —

Ratification of Appointment of Independent Registered Public Accounting Firm” and the information
contained therein is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

1. Audited Financial Statements

Report of Moss Adams LLP, Independent Registered Public Accountants . . . . . . . . . . . . . . . .
Balance Sheets as of December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Operations for the Years Ended December 31, 2008 and 2007 . . . . . . . . . . . . . .
Statements of Common Stockholders’ Equity for the Years Ended December 31, 2008 and

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31, 2008 and 2007 . . . . . . . . . . . . .
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

49
50
51

52
53
54

2. Exhibits

Exhibits are listed in the Exhibit Index that appears immediately following the signature page of this
report and is incorporated herein by reference, and are filed or incorporated by reference as part of this Annual
Report on Form 10-K.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Portland, Oregon, on March 25, 2009.

SIGNATURES

Craft Brewers Alliance, Inc.

By: /s/

JOSEPH K. O’BRIEN

Joseph K. O’Brien
Controller and Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below

by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Terry E. Michaelson
Terry E. Michaelson

/s/ Mark D. Moreland
Mark D. Moreland

/s/

Joseph K. O’Brien
Joseph K. O’Brien

/s/ Kurt R. Widmer
Kurt R. Widmer

/s/ Timothy P. Boyle
Timothy P. Boyle

/s/ Andrew R. Goeler
Andrew R. Goeler

/s/ Kevin R. Kelly
Kevin R. Kelly

/s/ David R. Lord
David R. Lord

/s/

John D. Rogers, Jr.
John D. Rogers, Jr.

Anthony J. Short

Chief Executive Officer
(Principal Executive Officer)

March 25, 2009

Chief Financial Officer and Treasurer
(Principal Financial Officer)

March 25, 2009

Controller
(Principal Accounting Officer)

March 25, 2009

Chairman of the Board and Director

March 25, 2009

Director

March 25, 2009

Director

March 25, 2009

Director

March 25, 2009

Director

March 25, 2009

Director

March 25, 2009

Director

Exhibit
Number

2.1

3.1

3.2

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

Exhibit Index

Description

Agreement and Plan of Merger between the Registrant and Widmer Brothers Brewing Company,
dated November 13, 2007, as amended by Amendment No. 1 dated April 30, 2008 and Amendment
No. 2 dated May 13, 2008 (incorporated by reference from Annex A to the Registrant’s Registration
Statement on Form S-4, No. 333-149908)
Restated Articles of Incorporation of the Registrant, dated July 1, 2008 (incorporated by reference
from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)
Amended and Restated Bylaws of the Registrant, dated July 1, 2008 (incorporated by reference from
Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)
Amended and Restated Directors Stock Option Plan (incorporated by reference from Exhibit 10.14 to
the Registrant’s Registration Statement on Form S-1, No. 33-94166)
Amendment dated as of February 27, 1996 to Amended and Restated Directors Stock Option Plan
(incorporated by reference from Exhibit 10.32 to the Registrant’s Form 10-Q for the quarter ended
June 30, 1996 (File No. 0-26542) (“1996 Form 10-Q”))
Form of Stock Option Agreement for the Directors Stock Option Plan (incorporated by reference
from Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 2004)
1992 Stock Incentive Plan, approved October 20, 1992, as amended October 11, 1994 and May 25,
1995 (incorporated by reference from Exhibit 10.16 to the Registrant’s Registration Statement on
Form S-1, No. 33-94166)
Amendment dated as of February 27, 1996 to the 1992 Stock Incentive Plan, as amended
(incorporated by reference from Exhibit 10.31 to the 1996 Form 10-Q)
Amendment dated as of July 25, 1996 to 1992 Stock Incentive Plan, as amended (incorporated by
reference from Exhibit 10.33 to the 1996 Form 10-Q)
Form of Incentive Stock Option Agreement for the 1992 Stock Incentive Plan, as amended
(incorporated by reference from Exhibit 10.8 to the Registrant’s Form 10-K for the year ended
December 31, 2004)
2002 Stock Option Plan (incorporated by reference from Exhibit A to the Registrant’s Proxy
Statement for its 2002 Annual Meeting of Shareholders (File No. 0-26542)
Form of Stock Option Agreement (Directors Grants) for the 2002 Stock Option Plan (incorporated by
reference from Exhibit 10.10 to the Registrant’s Form 10-K for the year ended December 31, 2004)

10.10* Form of Nonqualified Stock Option Agreement (Executive Officer Grants) for the 2002 Stock Option

10.11*

Plan
2007 Stock Incentive Plan (incorporated by reference from Appendix B to the Registrant’s Proxy
Statement for its 2007 Annual Meeting of Shareholders)

10.12* Amended and Restated Employment Agreement between the Registrant and Paul S. Shipman, dated

February 13, 2008 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on February 19, 2008)

10.13* Letter of agreement between the Registrant and David Mickelson dated June 30, 2008 (incorporated

by reference from Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)

10.14* Amended and Restated Letter of Agreement between the Registrant and Terry E. Michaelson dated
March 12, 2009 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on March 25, 2009)

10.15* Amended and Restated Letter of Agreement between the Registrant and Mark D. Moreland dated

March 12, 2009 (incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on March 25, 2009)

10.16* Letter of agreement between the Registrant and Timothy G. McFall dated June 30, 2008

(incorporated by reference from Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on
July 2, 2008)

Exhibit
Number

Description

10.17* Amended and Restated Letter of Agreement between the Registrant and V. Sebastian Pastore dated
March 12, 2009 (incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K filed on March 25, 2009)

10.18* Amended and Restated Letter of Agreement between the Registrant and Martin J. Wall, IV dated

March 12, 2009 (incorporated by reference from Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K filed on March 25, 2009)

10.19* Employment Agreement between the Registrant and Kurt Widmer dated June 30, 2008 (incorporated
by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)

10.20* Employment Agreement between the Registrant and Robert Widmer dated June 30, 2008

(incorporated by reference from Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed on
July 2, 2008)

10.21* Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and
Kurt Widmer (incorporated by reference from Exhibit 10.10 to the Registrant’s Current Report on
Form 8-K filed on July 2, 2008)

10.22* Non-Competition and Non-Solicitation Agreement dated June 30, 2008 between the Registrant and

Robert Widmer (incorporated by reference from Exhibit 10.11 to the Registrant’s Current Report on
Form 8-K filed on July 2, 2008)

10.27

10.25
10.26

10.23* Summary of Compensation Arrangements for Non-Employee Directors
10.24* Form of Lock-Up Agreement with Kurt Widmer, Robert Widmer and Terry Michaelson (incorporated
by reference from Exhibit B to the Agreement and Plan of Merger dated November 13, 2007,
between the Registrant and Widmer Brothers Brewing Company, which was filed as Exhibit 2.1 to
the Registrant’s Current Report on Form 8-K filed on November 13, 2007)
Services Agreement dated January 1, 2009 between the Registrant and Kona Brewery LLC
Sublease between Pease Development Authority as Sublessor and the Registrant as Sublessee, dated
May 30, 1995 (incorporated by reference from Exhibit 10.11 to the Registrant’s Registration
Statement on Form S-1, No. 33-94166)
Assignment of Sublease and Assumption Agreement dated as of July 1, 1995, between the Registrant
and CBA of New Hampshire, Inc. (incorporated by reference from Exhibit 10.24 to the Registrant’s
Registration Statement on Form S-1, No. 33-94166)
Loan Agreement dated as of July 1, 2008 between Registrant and Bank of America, N.A.
(incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
July 7, 2008)
Loan Modification Agreement dated November 14, 2008 to Loan Agreement dated July 1, 2008
between Registrant and Bank of America, N.A. (incorporated by reference from Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2008)
Exchange and Recapitalization Agreement dated as of June 30, 2004 between the Registrant and
Anheuser-Busch, Incorporated (incorporated by reference from Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on July 2, 2004)

10.29

10.28

10.30

10.31† Master Distributor Agreement dated as of July 1, 2004 between the Registrant and Anheuser-Busch,

10.32

Incorporated (incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on July 2, 2004)
Registration Rights Agreement dated as of July 1, 2004 between the Registrant and Anheuser-Busch,
Incorporated (incorporated by reference from Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K filed on July 2, 2004)
Consent and Amendment dated as of July 1, 2008 among the Registrant, Widmer Brothers Brewing
Company, Craft Brands Alliance LLC, and Anheuser-Busch, Incorporated (incorporated by reference
from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2008)
10.34 Master Lease Agreement dated as of June 6, 2007 between Banc of America Leasing & Capital,

10.33

LLC and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.2 from
Amendment No. 1 to the Registrant’s Registration Statement on Form S-4, No. 333-149908 filed on
May 1, 2008 (“S-4 Amendment No. 1”))

Exhibit
Number

10.35

10.36

10.37

10.38

23.1
31.1

31.2

32.1

32.2

Description

Amended and Restated License Agreement dated as of February 28, 1997 between Widmer Brothers
Brewing Company and Widmer’s Wine Cellars, Inc. and Canandaigua Wine Company, Inc.
(incorporated by reference to Exhibit 10.3 from the S-4 Amendment No. 1)
Restated Lease dated as of January 1, 1994 between Smithson & McKay Limited Liability Company
and Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.4 from the S-4
Amendment No. 1)
Commercial Lease (Restated) dated as of December 18, 2007 between Widmer Brothers LLC and
Widmer Brothers Brewing Company (incorporated by reference to Exhibit 10.5 from the S-4
Amendment No. 1)
Amended and Restated Continental Distribution and Licensing Agreement between the Registrant
and Kona Brewing LLC dated March 26, 2009
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer of Craft Brewers Alliance, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of Craft Brewers Alliance, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer of Craft Brewers Alliance, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of Craft Brewers Alliance, Inc. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Denotes a management contract or a compensatory plan or arrangement.
† Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the

agreement, including the redacted terms, has been separately filed with the Securities and Exchange
Commission

CRAFT BREWERS ALLIANCE, INC.

Directors, Executive Officers and Corporate Information

Board of Directors
Kurt R. Widmer
Chairman of the Board
Craft Brewers Alliance, Inc.

Timothy P. Boyle
President and Chief
Executive Officer

Columbia Sportswear, Inc.

Andrew R. Goeler
Vice-President, Import,

Craft and Specialty Group
Anheuser-Busch, Incorporated

Kevin R. Kelly
Chief Executive Officer
McCall Heating and
Cooling, Inc.

David R. Lord
Vice-Chairman
Pioneer Newspapers, Inc.

John D. Rogers, Jr.
Managing Partner
J4 Ranch LLC

Anthony J. Short
Vice-President, Business

and Wholesaler Development

Anheuser-Busch, Incorporated

Executive Officers
Terry E. Michaelson
Chief Executive Officer

Mark D. Moreland
Chief Financial Officer

and Treasurer

V. Sebastian Pastore
Vice President, Brewing

Operations and Technology

Martin J. Wall, IV
Vice President, Sales

Brewery & Pub Locations
Portland, Oregon
Brewery (WB)
924 N. Russell Street
Portland, Oregon 97227
(503) 331-7270
Gasthaus Restaurant and Pub

Portsmouth, New Hampshire
Brewery (R)
35 Pease Drive
Pease International Tradesport
Portsmouth, NH 03801
(603) 430-8600
Cataqua Public House

Woodinville, Washington
Brewery (R)
14300 N.E. 145th Street
Woodinville, Washington 98072
(425) 483-3232
Forecasters Public House

Corporate Headquarters
Craft Brewers Alliance, Inc.
929 N. Russell Street
Portland, Oregon 97227
(503) 331-7270
(503) 281-1496 (fax)
Website
www.craftbrewers.com

2009 Annual Shareholder Meeting
May 29, 2009 1:00 p.m. PDT
at the Portland, Oregon Brewery
924 N. Russell Street
Portland, Oregon 97227

Stock Transfer Agent
For questions regarding your

account, address changes, lost
certificates or change in registered
ownership, contact:

BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252
(877) 255-1004
www.bnymellon.com/shareowner/isd

Stock Exchange Listing
NASDAQ — Global Market
System under the symbol —
“HOOK”

Independent Registered Public
Accounting Firm
Moss Adams LLP

Corporate Counsel
MillerNash LLP, attorneys at law

R — Redhook Beers branded facilities
WB — Widmer Brothers Beers branded facilities

Craft Brewers Alliance, Inc.
929 N. Russell Street
Portland, Oregon 97227