##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number 0-26542
 CRAFT BREWERS ALLIANCE, INC.
  Washington
    
    91-1141254(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 929 North Russell Street
Portland, Oregon 97227
 (503) 331-7270
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



CRAFT BREWERS ALLIANCE, INC.
FORM 10-Q
For The Quarterly Period Ended September 30, 2008
 TABLE OF CONTENTS
 PagePART I. Financial InformationITEM 1. Financial StatementsBalance Sheets as of September 30, 2008 and December 31, 2007
    
    
    3Statements of Operations for the
Three and Nine Months Ended September 30, 2008 and 2007
    
    
    4Statements of Cash Flows for the Nine Months Ended September
30, 2008 and 2007
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    26ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    48ITEM 4T. Controls and Procedures
    
    
    48PART II. Other InformationITEM 1. Legal Proceedings
    
    
    49ITEM 1A. Risk Factors
    
    
    49ITEM 6. Exhibits
    
    
    55SIGNATURES
    
    
    56
  2




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##### Table of Contents



PART I.
 
 ITEM 1. Financial Statements
 CRAFT BREWERS ALLIANCE, INC.
 
 BALANCE SHEETS
 September 30,
    
    
    December31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    252,785
    
    
    $
    5,526,843Accounts receivable, net of allowance for doubtful accounts of $64,008 and $95,243 in 2008 and 2007, respectively
    
    
    11,358,286
    
    
    
    3,892,737Trade receivable from Craft Brands
    
    
    
    
    
    
    670,469Inventories, net
    
    
    8,629,118
    
    
    
    2,927,518Income tax receivable
    
    
    1,531,962
    
    
    
    Deferred income tax asset, net
    
    
    1,485,713
    
    
    
    944,361Other
    
    
    3,702,537
    
    
    
    1,043,034Total current assets
    
    
    26,960,401
    
    
    
    15,004,962Property, equipment and leasehold improvements, net
    
    
    102,696,074
    
    
    
    55,862,297Equity investments
    
    
    6,601,449
    
    
    
    415,592Goodwill
    
    
    22,104,958
    
    
    
    Intangible and other assets, net
    
    
    19,881,871
    
    
    
    107,489Total assets
    
    $
    178,244,753
    
    
    $
    71,390,340LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,551,040
    
    
    $
    3,148,613Trade payable to Craft Brands
    
    
    
    
    
    
    416,116Accrued salaries, wages, severance and payroll taxes
    
    
    2,832,226
    
    
    
    1,524,240Refundable deposits
    
    
    6,735,953
    
    
    
    3,500,200Other accrued expenses
    
    
    2,076,179
    
    
    
    686,261Current portion of long-term debt and capital lease obligations
    
    
    1,373,816
    
    
    
    15,498Total current liabilities
    
    
    29,569,214
    
    
    
    9,290,928Long-term debt and capital lease obligations, net of current portion
    
    
    28,207,273
    
    
    
    31,118Fair value of derivative financial instruments
    
    
    428,384
    
    
    
    Deferred income tax liability, net
    
    
    9,960,416
    
    
    
    1,762,428Other liabilities
    
    
    265,389
    
    
    
    226,123Common stockholders equity:Common stock, par value $0.005 per share, authorized, 50,000,000 shares; 16,948,063
shares in 2008 and 8,354,239 shares in 2007 issued and outstanding
    
    
    84,741
    
    
    
    41,771Additional paid-in capital
    
    
    122,432,736
    
    
    
    69,303,848Other comprehensive income
    
    
    (260,891
    )
    
    
    Retained earnings (deficit)
    
    
    (12,442,509
    )
    
    
    (9,265,876
    )Total common stockholders equity
    
    
    109,814,077
    
    
    
    60,079,743Total liabilities and common stockholders equity
    
    $
    178,244,753
    
    
    $
    71,390,340
 The accompanying notes are an integral part of these financial statements.
 3




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
 
 STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    33,498,577
    
    
    $
    12,357,004
    
    
    $
    55,937,193
    
    
    $
    35,383,514Less excise taxes
    
    
    2,031,390
    
    
    
    1,285,374
    
    
    
    4,319,543
    
    
    
    3,866,318Net sales
    
    
    31,467,187
    
    
    
    11,071,630
    
    
    
    51,617,650
    
    
    
    31,517,196Cost of sales
    
    
    24,846,103
    
    
    
    9,653,674
    
    
    
    43,862,511
    
    
    
    27,307,237Gross profit
    
    
    6,621,084
    
    
    
    1,417,956
    
    
    
    7,755,139
    
    
    
    4,209,959Selling, general and administrative expenses
    
    
    7,632,298
    
    
    
    2,151,417
    
    
    
    11,984,659
    
    
    
    6,161,655Merger-related expenses
    
    
    474,025
    
    
    
    278,404
    
    
    
    1,642,680
    
    
    
    448,335Income from equity investment in Craft Brands
    
    
    
    
    
    
    562,210
    
    
    
    1,390,404
    
    
    
    2,210,336Operating loss
    
    
    (1,485,239
    )
    
    
    (449,655
    )
    
    
    (4,481,796
    )
    
    
    (189,695
    )Income from equity investments in Kona and FSB
    
    
    1,449
    
    
    
    
    
    
    
    1,449
    
    
    
    Interest expense
    
    
    446,871
    
    
    
    80,875
    
    
    
    452,075
    
    
    
    246,093Other income, net
    
    
    40,271
    
    
    
    120,589
    
    
    
    97,364
    
    
    
    404,996Loss before income taxes
    
    
    (1,890,390
    )
    
    
    (409,941
    )
    
    
    (4,835,058
    )
    
    
    (30,792
    )Income tax provision (benefit)
    
    
    (641,974
    )
    
    
    (121,373
    )
    
    
    (1,658,425
    )
    
    
    49,252Net loss
    
    $
    (1,248,416
    )
    
    $
    (288,568
    )
    
    $
    (3,176,633
    )
    
    $
    (80,044
    )Basic and diluted loss per share
    
    $
    (0.07
    )
    
    $
    (0.03
    )
    
    $
    (0.28
    )
    
    $
    (0.01
    )
 The accompanying notes are an integral part of these financial statements.
 4




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
  STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 30,2008
    
    
    2007Operating ActivitiesNet loss
    
    $
    (3,176,633
    )
    
    $
    (80,044
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    3,235,688
    
    
    
    2,133,764Stock-based compensation
    
    
    19,608
    
    
    
    169,400Allowance for doubtful accounts receivable
    
    
    (31,235
    )
    
    
    Reserve for obsolete inventories
    
    
    139,714
    
    
    
    Amortization of inventory step up adjustment
    
    
    225,981
    
    
    
    Undistributed earnings of equity investments
    
    
    74,820
    
    
    
    11,687Deferred income taxes
    
    
    (1,877,861
    )
    
    
    11,728Loss (gain) on disposition of fixed assets
    
    
    23,802
    
    
    
    (2,757
    )Mark to market on financial derivatives
    
    
    (18,118
    )
    
    
    Amortization of premium on promissory notes
    
    
    (15,804
    )
    
    
    Changes in operating assets and liabilities, net of effects of acquisition of Widmer
    
    
    (691,930
    )
    
    
    (159,295
    )Net cash provided by (used in) operating activities
    
    
    (2,091,968
    )
    
    
    2,084,483Investing ActivitiesExpenditures for fixed assets
    
    
    (5,545,768
    )
    
    
    (1,092,385
    )Proceeds from disposition of fixed assets
    
    
    381,780
    
    
    
    357,597Cash acquired in acquisition of Widmer, net
    
    
    2,336,104
    
    
    
    Net cash used in investing activities
    
    
    (2,827,884
    )
    
    
    (734,788
    )Financing ActivitiesPrincipal payments on debt and capital lease obligations
    
    
    (303,984
    )
    
    
    (348,316
    )Net repayments under revolving line of credit
    
    
    (500,000
    )
    
    
    Issuance of common stock
    
    
    474,778
    
    
    
    157,410Amounts paid for debt issue costs
    
    
    (25,000
    )
    
    
    Net cash used in financing activities
    
    
    (354,206
    )
    
    
    (190,906
    )Increase (decrease) in cash and cash equivalents
    
    
    (5,274,058
    )
    
    
    1,158,789Cash and cash equivalents:Beginning of period
    
    
    5,526,843
    
    
    
    9,435,073End of period
    
    $
    252,785
    
    
    $
    10,593,862Supplemental DisclosuresNon-cash transactions:Net assets of Widmer acquired in exchange for issuance of
common stock and assumption of debt (see Note 2)
    
    $
    82,346,274
    
    
    $
    
 The accompanying notes are an integral part of these financial statements.
 5




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CRAFT BREWERS ALLIANCE, INC.
 
 NOTES TO FINANCIAL STATEMENTS
  1. Basis of Presentation
   2. Merger with Widmer
     Merger-Related Costs
  6




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Business Combinations ( )
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Merger-related expenses
reflected in statements of operations
    
    $
    474,025
    
    
    $
    278,404
    
    
    $
    1,642,680
    
    
    $
    448,335Merger-related costs
reflected in balance sheets
    
    
    128,293
    
    
    
    
    
    
    
    662,950
    
    
    
    $
    602,318
    
    
    $
    278,404
    
    
    $
    2,305,630
    
    
    $
    448,335
  Accounting for Costs Associated with Exit or
Disposal Activities
 Accounting for the Acquisition of Widmer
 Goodwill and Intangible Assets
   Fair value of Common Stock issued
    
    $
    52,677,538Interest-bearing debt assumed
    
    
    29,668,736Total purchase price
    
    $
    82,346,274
  7




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
  Widmer assets acquired and liabilities assumed:Current assets
    
    $
    18,887,135Income tax receivable
    
    
    1,490,760Property, equipment and leasehold improvements
    
    
    45,125,562Equity investments
    
    
    6,600,000Trade name and trademarks
    
    
    16,300,000Intangible assets  recipes, distributor agreements, and non-compete agreements
    
    
    3,000,000Favorable contracts
    
    
    642,831Total assets acquired
    
    
    92,046,288Current liabilities
    
    
    (19,821,539
    )Fair value of derivative financial instrument
    
    
    (185,611
    )Premium on promissory notes payable
    
    
    (685,525
    )Deferred income tax liability, net and other noncurrent liabilities
    
    
    (10,392,110
    )Total liabilities assumed
    
    
    (31,084,785
    )Net assets acquired
    
    
    60,961,503Excess of purchase price over net assets acquired
    
    
    21,384,771Plus adjustments to Company assets and liabilities:Incremental direct merger costs incurred by the Company
    
    
    816,661Elimination of valuation allowance for deferred tax assets
    
    
    (1,059,000
    )Elimination of receivables and payables due to/from Widmer and Craft Brands
    
    
    623,203Elimination of investment in Craft Brands
    
    
    339,323720,187Goodwill recorded
    
    $
    22,104,958
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Pro Forma Results of Operations
  
    
    the three-month period ended September 30, 2007 as if the Merger had been completed on
July 1, 2007;
    
    the nine-month period ended September 30, 2008 as if the Merger had been completed on
January 1, 2008; and
    
    the nine-month period ended September 30, 2007 as if the Merger had been completed on
January 1, 2007.
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Reported
    
    Pro forma
    
    Pro forma
    
    Pro formaNet sales
    
    $
    31,467,000
    
    
    $
    26,801,000
    
    
    $
    89,510,000
    
    
    $
    76,565,000Income (Loss) before income taxes
    
    $
    (1,890,000
    )
    
    $
    (606,000
    )
    
    $
    (5,898,000
    )
    
    $
    641,000Net income (loss)
    
    $
    (1,248,000
    )
    
    $
    (398,000
    )
    
    $
    (3,875,000
    )
    
    $
    421,000Basic
earnings (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.23
    )
    
    $
    0.03Diluted
earnings (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.23
    )
    
    $
    0.02
  3. Significant Accounting Policies
 Cash and Cash Equivalents
  Accounts Receivable
  9




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Inventories
    Investment in Subsidiaries
 Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51 The
Equity Method of Accounting for Investments in Common Stock
   Property, equipment and leasehold improvements
   10




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Buildings
    
    31 - 40 yearsBrewery equipment
    
    10 - 25 yearsFurniture, fixtures and other equipment
    
    2 - 10 yearsVehicles
    
    5 yearsLeasehold improvements
    
    Useful life or term of lease, whichever less
 Goodwill and other intangible assets
    Accounting for the Impairment or Disposal of
Long-Lived Assets
  Trade name and trademarks
    
    IndefiniteRecipes
    
    IndefiniteDistributor agreements
    
    15 yearsNon-compete agreements
    
    3 years
 Refundable Deposits on Kegs
   11




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
  Fair value of financial instruments
  Accounting for Derivative Instruments
and Hedging Activities
 Comprehensive income
 Reporting Comprehensive
Income,
 Revenue recognition
    Excise Taxes
  12




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
  Shipping and Handling Costs
  Income Taxes
 Accounting
for Income Taxes .
  Advertising Expenses
   Segment Information
 Disclosures about Segments of an Enterprise and Related Information
 Stock-Based Compensation
 Share-Based Payment
 Earnings (Loss) per Share
 Earnings per Share
 13




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 Use of estimates
  4. Inventories
  September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    2,981,870
    
    
    $
    537,695Packaging materials
    
    
    1,765,581
    
    
    
    487,210Work in process
    
    
    1,335,167
    
    
    
    922,157Finished goods, net
    
    
    1,460,812
    
    
    
    510,461Promotional merchandise, net
    
    
    1,005,795
    
    
    
    469,995Pub food, beverages and supplies
    
    
    79,893
    
    
    
    $
    8,629,118
    
    
    $
    2,927,518
  5. Other Current Assets
  September 30,
    
    
    December 31,2008
    
    
    2007Deposits paid to keg lessor
    
    $
    3,230,130
    
    
    $
    655,800Merger-related costs (see Note 2)
    
    
    
    
    
    
    153,711Prepaid employee benefits
    
    
    82,114
    
    
    
    Prepaid insurance
    
    
    124,995
    
    
    
    201,175Other
    
    
    265,298
    
    
    
    32,348$
    3,702,537
    
    
    $
    1,043,034
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 6. Property, Equipment and Leasehold Improvements
  September 30,
    
    
    December 31,2008
    
    
    2007Brewery equipment
    
    $
    73,536,690
    
    
    $
    47,081,696Buildings
    
    
    50,922,492
    
    
    
    35,846,181Land and improvements
    
    
    7,572,908
    
    
    
    4,604,130Furniture, fixtures and other equipment
    
    
    4,166,917
    
    
    
    2,337,551Leasehold improvements
    
    
    2,747,801
    
    
    
    1,879Vehicles
    
    
    84,020
    
    
    
    81,730Construction in progress
    
    
    1,093,841
    
    
    
    314,363140,124,669
    
    
    
    90,267,530Less accumulated depreciation and amortization
    
    
    37,428,595
    
    
    
    34,405,233$
    102,696,074
    
    
    $
    55,862,297
 7. Equity Investments
  September 30,
    
    
    December 31,2008
    
    
    2007Fulton Street Brewery, LLC (FSB)
    
    $
    5,375,499
    
    
    $
    Kona Brewery LLC (Kona)
    
    
    1,225,950
    
    
    
    Craft Brands Alliance LLC (Craft Brands)
    
    
    
    
    
    
    415,592$
    6,601,449
    
    
    $
    415,592
 FSB
  Kona
  Craft Brands
  15




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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
       Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales to Craft Brands
    
    $
    
    
    
    $
    3,579,747
    
    
    $
    6,913,596
    
    
    $
    10,548,320
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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 8. Intangible and Other Assets
  September 30,
    
    
    December 31,2008
    
    
    2007Trademarks and loan fees
    
    $
    16,702,903
    
    
    $
    377,903Distributor agreements
    
    
    2,200,000
    
    
    
    Recipes
    
    
    700,000
    
    
    
    Non-compete agreements
    
    
    100,000
    
    
    
    Favorable contracts
    
    
    642,831
    
    
    
    Promotional merchandise
    
    
    65,638
    
    
    
    98,58120,411,372
    
    
    
    476,484Less accumulated amortization
    
    
    529,501
    
    
    
    368,995$
    19,881,871
    
    
    $
    107,489
  September 30,
    
    
    December 31,2008
    
    
    2007Trademarks and loan fees
    
    $
    371,177
    
    
    $
    368,995Distributor agreements
    
    
    36,706
    
    
    
    Non-compete agreements
    
    
    8,326
    
    
    
    Favorable contracts
    
    
    113,292
    
    
    
    $
    529,501
    
    
    $
    368,995
  Estimated Amortization Expense to be recorded in succeeding periods2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013Trademarks and loan
fees
    
    $
    1,143
    
    
    $
    4,452
    
    
    $
    4,094
    
    
    $
    3,978
    
    
    $
    3,848
    
    
    $
    3,269Distributor agreements
    
    
    36,666
    
    
    
    146,664
    
    
    
    146,664
    
    
    
    146,664
    
    
    
    146,664
    
    
    
    146,664Non-compete agreements
    
    
    8,334
    
    
    
    33,336
    
    
    
    33,336
    
    
    
    16,668
    
    
    
    
    
    
    
    Favorable contracts
    
    
    113,301
    
    
    
    277,998
    
    
    
    104,334
    
    
    
    27,504
    
    
    
    4,992
    
    
    
    1,410$
    159,444
    
    
    $
    462,450
    
    
    $
    288,428
    
    
    $
    194,814
    
    
    $
    155,504
    
    
    $
    151,343
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CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 9. Debt and Capital Lease Obligations
  September 30,
    
    
    December 31,2008
    
    
    2007Term loan payable to bank, due July 1, 2018
    
    $
    13,449,895
    
    
    $
    Line of credit payable to bank, due July 1, 2013
    
    
    8,000,000
    
    
    
    Promissory notes payable to individual lenders, all due July 1, 2015
    
    
    600,000
    
    
    
    Premium on promissory notes
    
    
    669,721
    
    
    
    Capital lease obligations on equipment
    
    
    6,861,473
    
    
    
    46,61629,581,089
    
    
    
    46,616Less current portion, term loan
    
    
    346,901
    
    
    
    Less current portion, capital leases
    
    
    1,026,915
    
    
    
    15,498Less total current portion
    
    
    1,373,816
    
    
    
    15,498Long-term portion
    
    $
    28,207,273
    
    
    $
    31,118
      18




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
   th
   Financial Covenants Required by Modification Agreement
 Minimum EBITDA, as definedFor the quarter ending December 31, 2008
    
    $
    875,000For the quarter ending March 31, 2009
    
    $
    850,000For the quarter ending June 30, 2009
    
    $
    2,300,000For the quarter ending September 30,
2009 and thereafter
    
    Does not applyAsset Coverage RatioFor the quarter ending December 31, 2008
and thereafter
    
    
    1.50 to 1Capital ExpendituresTo spend or incur
obligations less
than the following:For the quarter ending December 31, 2008
    
    $
    2,250,000For the quarter ending March 31, 2009 (1)
    
    $
    1,350,000For the quarter ending June 30, 2009 (1)
    
    $
    550,000For the quarter ending September 30,
2009 and thereafter
    
    Does not apply
 
 (1)
    -
    Provides for carryover spending of any amount not used in the prior
quarter     19




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
      Required Principal PaymentsLine of
    
    Term
    
    Capital LeaseCredit
    
    Loan
    
    Obligations
    
    TotalSucceeding periods:2008
    
    $
    
    
    
    $
    103,202
    
    
    $
    249,155
    
    
    $
    352,3572009
    
    
    
    
    
    
    350,722
    
    
    
    1,038,171
    
    
    
    1,388,8932010
    
    
    
    
    
    
    373,904
    
    
    
    1,101,845
    
    
    
    1,475,7492011
    
    
    
    
    
    
    396,475
    
    
    
    1,168,039
    
    
    
    1,564,5142012
    
    
    
    
    
    
    420,761
    
    
    
    1,243,144
    
    
    
    1,663,9052013
    
    
    8,000,000
    
    
    
    451,179
    
    
    
    1,327,165
    
    
    
    9,778,344
 10. Derivative Financial Instruments
   20




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
    Fair Value Measurements
 Fair Value Measurements Effective Date of FASB
Statement No. 157
  Level 1:
    
    Observable inputs (unadjusted) in active markets for identical assets and
liabilities;Level 2:
    
    Inputs other than quoted prices included within Level 1 that are either directly or
indirectly observable for the asset or liability, including quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in inactive markets and inputs other than quoted prices that are observable for
the asset or liability;Level 3:
    
    Unobservable inputs for the asset or liability, including situations where there is
little, if any, market activity or data for the asset or liability.
  Fair Value Hierarchy AssessmentLevel 1
    
    Level 2
    
    Level 3
    
    TotalDerivative financial instruments 
interest rate swaps
    
    $
    
    
    
    $
    448,384
    
    
    $
    
    
    
    $
    448,384
 21




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 11. Common Stockholders Equity
 Issuance of Common Stock
 Stock-Based Compensation Expense
 Stock-Based Compensation Expense
   Stock Plans
     22




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
  Stock-Based Compensation Expense
 Issuance of Common Stock
  Stock Option Plan Activity
  Weighted
    
    WeightedAverage
    
    AverageShares
    
    Exercise
    
    RemainingSubject to
    
    Price per
    
    Contractual
    
    AggregateOptions
    
    Share
    
    Life (Yrs)
    
    Intrinsic ValueOutstanding at January 1, 2008
    
    
    689,140
    
    
    $
    2.57
    
    
    
    3.33
    
    
    $
    2,809,485Granted
    
    
    Exercised
    
    
    (227,750
    )Canceled
    
    
    (30,600
    )Outstanding at September 30, 2008
    
    
    430,790
    
    
    $
    2.61
    
    
    
    2.62
    
    
    $
    484,035Exercisable at September 30, 2008
    
    
    430,790
    
    
    $
    2.61
    
    
    
    2.62
    
    
    $
    484,035
   Average
    
    WeightedNumber
    
    Remaining
    
    AverageOutstanding
    
    Contractual Life
    
    ExerciseRange of Exercise Prices
    
    
    
    & Exercisable
    
    (Yrs)
    
    Price$
    1.485
    
    
    to
    
    $
    1.865
    
    
    
    
    
    177,540
    
    
    
    2.81
    
    
    $
    1.855$
    1.866
    
    
    to
    
    $
    3.150
    
    
    
    
    
    121,800
    
    
    
    4.47
    
    
    $
    2.243$
    3.151
    
    
    to
    
    $
    3.969
    
    
    
    
    
    131,450
    
    
    
    0.64
    
    
    $
    3.969$
    1.485
    
    
    to
    
    $
    3.969
    
    
    
    
    
    430,790
    
    
    
    2.62
    
    
    $
    2.610
 23




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 12. Earnings (Loss) per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator for basic and diluted net loss per share:Net loss
    
    $
    (1,248,416
    )
    
    $
    (288,568
    )
    
    $
    (3,176,633
    )
    
    $
    (80,044
    )Denominator for basic net loss per share:Weighted average common shares outstanding
    
    
    16,851,627
    
    
    
    8,349,976
    
    
    
    11,220,233
    
    
    
    8,323,764Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.03
    )
    
    $
    (0.28
    )
    
    $
    (0.01
    )
  13. Comprehensive Loss
  Three Months Ended September
    
    
    Nine Months Ended September 30,30,
    
    
    30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,248,416
    )
    
    $
    (288,568
    )
    
    $
    (3,176,633
    )
    
    $
    (80,044
    )Other comprehensive loss:Unrealized losses
on derivative
financial
instruments
    
    
    (260,891
    )
    
    
    
    
    
    
    (260,891
    )
    
    
    Total comprehensive loss
    
    $
    (1,509,307
    )
    
    $
    (288,568
    )
    
    $
    (3,437,524
    )
    
    $
    (80,044
    )
 24




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##### Table of Contents



CRAFT BREWERS ALLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
 14. Income Taxes
  September 30,
    
    
    December 31,2008
    
    
    2007Deferred tax liabilities:Fixed assets: tax-over-book
depreciation
    
    $
    11,245,655
    
    
    $
    9,058,807Intangible assets
    
    
    7,258,435
    
    
    
    Other
    
    
    645,341
    
    
    
    19,149,431
    
    
    
    9,058,807Deferred tax assets:NOL and AMT credit carryforwards
    
    
    9,836,477
    
    
    
    8,781,504Other
    
    
    838,251
    
    
    
    518,558Valuation allowance
    
    
    
    
    
    
    (1,059,322
    )10,674,728
    
    
    
    8,240,740Net deferred tax liability
    
    $
    8,474,703
    
    
    $
    818,067As Presented on the Balance Sheet:Long-term deferred income tax liability, net
    
    $
    9,960,416
    
    
    $
    1,762,428Current deferred income tax asset, net
    
    
    1,485,713
    
    
    
    944,361Net deferred tax liability
    
    $
    8,474,703
    
    
    $
    818,067
    25




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words
believe, expect, intend, estimate, anticipate, project, will and similar expressions
or their negatives identify forward-looking statements, which generally are not historical in
nature. These statements are based upon assumptions and projections that Craft Brewers Alliance,
Inc. (formerly Redhook Ale Brewery, Incorporated) (the Company) believes are reasonable, but are
by their nature inherently uncertain. Many possible events or factors could affect the Companys
future financial results and performance, and could cause actual results or performance to differ
materially from those expressed, including those risks and uncertainties described in Part I, Item
1A. Risk Factors in the Companys Annual Report on Form 10-K , as amended, for the year ended
December 31, 2007, and those described from time to time in the Companys future reports filed with
the Securities and Exchange Commission. Caution should be taken not to place undue reliance on
these forward-looking statements, which speak only as of the date of this quarterly report.
 The following discussion and analysis should be read in conjunction with the Financial
Statements and Notes thereto of the Company included herein, as well as the audited Financial
Statements and Notes and Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in the Companys Annual Report on Form 10-K , as amended, for the fiscal year
ended December 31, 2007. The discussion and analysis includes period-to-period comparisons of the
Companys financial results. Although period-to-period comparisons may be helpful in understanding
the Companys financial results, the Company believes that they should not be relied upon as an
accurate indicator of future performance. In addition, as discussed in more detail below, the
comparability of periods is significantly affected by the July 1, 2008 merger of Widmer Brothers
Brewing Company with and into the Company.
 Merger with Widmer Brothers Brewing Company
   Overview
   26




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##### Table of Contents



The Equity Method of Accounting for Investments in Common Stock
 Widmer Hefeweizen
    27




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##### Table of Contents




    
    Brewhouse capacity, fermentation capacity, and packaging capacity;
    
    A normal production year;
    
    The product mix and product cycle times; and
    
    Brewing losses and packaging losses.
    As of July 1, 2008AnnualAnnual
    
    MaximumWorking
    
    DesignedCapacity
    
    Capacity(in barrels)Oregon Brewery
    
    
    377,000
    
    
    
    491,000Washington Brewery
    
    
    230,000
    
    
    
    230,000New Hampshire Brewery
    
    
    146,700
    
    
    
    231,000753,700
    
    
    
    952,000
  28




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##### Table of Contents



Redhook Brand  Trend
 Redhook IPA Long
Hammer IPA
  Widmer Brand  Trend
 Widmer
Hefeweizen Widmer
Hefeweizen
 Kona Brand  Trend
  29




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    
    106.5
    %
    
    
    111.6
    %
    
    
    108.4
    %
    
    
    112.3
    %Less excise taxes
    
    
    6.5
    
    
    
    11.6
    
    
    
    8.4
    
    
    
    12.3Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    79.0
    
    
    
    87.2
    
    
    
    85.0
    
    
    
    86.6Gross profit
    
    
    21.0
    
    
    
    12.8
    
    
    
    15.0
    
    
    
    13.4Selling, general and
administrative expenses
    
    
    24.3
    
    
    
    19.4
    
    
    
    23.2
    
    
    
    19.6Merger-related expenses
    
    
    1.5
    
    
    
    2.5
    
    
    
    3.2
    
    
    
    1.4Income from equity investment
in Craft Brands
    
    
    
    
    
    
    5.1
    
    
    
    2.7
    
    
    
    7.0Operating loss
    
    
    (4.8
    )
    
    
    (4.0
    )
    
    
    (8.7
    )
    
    
    (0.6
    )Income from equity
investments in Kona & FSB
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    1.3
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.8Other income, net
    
    
    0.1
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    1.3Loss before income taxes
    
    
    (6.0
    )
    
    
    (3.7
    )
    
    
    (9.4
    )
    
    
    (0.1
    )Income tax provision (benefit)
    
    
    (2.0
    )
    
    
    (1.1
    )
    
    
    (3.2
    )
    
    
    0.2Net loss
    
    
    (4.0)
    %
    
    
    (2.6)
    %
    
    
    (6.2)
    %
    
    
    (0.3)
    %
 30




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##### Table of Contents



Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
  Three Months EndedSeptember 30,
    
    
    Increase /
    
    
    %2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeSales
    
    $
    33,498,577
    
    
    $
    12,357,004
    
    
    $
    21,141,573
    
    
    
    171.1
    %Less excise taxes
    
    
    2,031,390
    
    
    
    1,285,374
    
    
    
    746,016
    
    
    
    58.0Net sales
    
    
    31,467,187
    
    
    
    11,071,630
    
    
    
    20,395,557
    
    
    
    184.2Cost of sales
    
    
    24,846,103
    
    
    
    9,653,674
    
    
    
    15,192,429
    
    
    
    157.4Gross profit
    
    
    6,621,084
    
    
    
    1,417,956
    
    
    
    5,203,128
    
    
    
    366.9Selling, general and administrative
expenses
    
    
    7,632,298
    
    
    
    2,151,417
    
    
    
    5,480,881
    
    
    
    254.8Merger-related expenses
    
    
    474,025
    
    
    
    278,404
    
    
    
    195,621
    
    
    
    70.3Income from equity investment
in Craft Brands
    
    
    
    
    
    
    562,210
    
    
    
    (562,210
    )
    
    
    100.0Operating loss
    
    
    (1,485,239
    )
    
    
    (449,655
    )
    
    
    (1,035,584
    )
    
    
    230.3Income from equity investments in Kona and FSB
    
    
    1,449
    
    
    
    
    
    
    
    1,449
    
    
    
    Interest expense
    
    
    446,871
    
    
    
    80,875
    
    
    
    365,996
    
    
    
    452.5Other income, net
    
    
    40,271
    
    
    
    120,589
    
    
    
    (80,318
    )
    
    
    66.6Loss before income taxes
    
    
    (1,890,390
    )
    
    
    (409,941
    )
    
    
    (1,480,449
    )
    
    
    361.1Income tax provision (benefit)
    
    
    (641,974
    )
    
    
    (121,373
    )
    
    
    (520,601
    )
    
    
    428.9Net loss
    
    $
    (1,248,416
    )
    
    $
    (288,568
    )
    
    $
    (959,848
    )
    
    
    332.6
    %
  Three Months EndedSeptember 30,
    
    
    Increase /
    
    
    %2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeA-B
    
    $
    27,247,393
    
    
    $
    4,831,622
    
    
    $
    22,415,771
    
    
    
    463.9
    %Craft Brands
    
    
    
    
    
    
    3,579,747
    
    
    
    (3,579,747
    )
    
    
    (100.0
    )Contract brewing
    
    
    
    
    
    
    1,776,899
    
    
    
    (1,776,899
    )
    
    
    (100.0
    )Alternating proprietorship
    
    
    3,362,477
    
    
    
    
    
    
    
    3,362,477
    
    
    
    Pubs and other (1)
    
    
    2,888,707
    
    
    
    2,168,736
    
    
    
    719,971
    
    
    
    33.2Total sales
    
    $
    33,498,577
    
    
    $
    12,357,004
    
    
    $
    21,141,573
    
    
    
    171.1
    %
 
 (1)
    
    Other includes international, non-wholesalers and other Sales .
 
    
    An 85% increase in overall shipments, driven by shipments of Widmer-branded products
acquired in the Merger and shipments of Kona-branded products pursuant to a distribution
arrangement with Kona;
    
    An increase in overall pricing, driven by the sale of all wholesale beer to A-B at
wholesaler pricing levels;
    
    The elimination of shipments to Craft Brands and shipments of beer brewed on a contract
basis, both of which were at prices that were substantially below wholesale prices;
 31




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##### Table of Contents




    
    Additional revenue generated by the alternating proprietorship arrangement with Kona, an
arrangement performed by Widmer prior to the Merger;
    
    An increase of 33% in pub and other sales, primarily driven by the addition of a third pub
pursuant to the Merger.
 Shipments  Brand
 Three Months Ended September 30,2008
    
    2007Draft
    
    Bottle
    
    Total
    
    Draft
    
    Bottle
    
    Total
    
    Increase /
    
    %Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    (Decrease)
    
    ChangeRedhook brand
    
    
    15,800
    
    
    
    34,600
    
    
    
    50,400
    
    
    
    17,500
    
    
    
    35,500
    
    
    
    53,000
    
    
    
    (2,600
    )
    
    
    (4.9
    )%Widmer brand (1)
    
    
    40,700
    
    
    
    29,300
    
    
    
    70,000
    
    
    
    14,800
    
    
    
    12,200
    
    
    
    27,000
    
    
    
    43,000
    
    
    
    159.3Kona brand
    
    
    11,100
    
    
    
    16,300
    
    
    
    27,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,400
    
    
    
    Total shipped
    
    
    67,600
    
    
    
    80,200
    
    
    
    147,800
    
    
    
    32,300
    
    
    
    47,700
    
    
    
    80,000
    
    
    
    67,800
    
    
    
    84.8
    %
 
 (1)
    
    Shipments of Widmer-branded product in 2007 represent only those products brewed and shipped
by the Company and do not include Widmer-branded products shipped by Widmer or Craft Brands. These
shipments were made in connection with a licensing agreement and contract brewing arrangements with
Widmer.  Widmer
Hefeweizen Widmer Hefeweizen Widmer Hefeweizen
  32




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##### Table of Contents



Shipments  Customer
 Three Months Ended September 30,2008
    
    2007Draft
    
    Bottle
    
    Total
    
    Draft
    
    Bottle
    
    Total
    
    Increase /
    
    %Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    (Decrease)
    
    ChangeA-B
    
    
    64,800
    
    
    
    79,400
    
    
    
    144,200
    
    
    
    12,000
    
    
    
    15,900
    
    
    
    27,900
    
    
    
    116,300
    
    
    
    416.8
    %Craft Brands
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,400
    
    
    
    21,900
    
    
    
    31,300
    
    
    
    (31,300
    )
    
    
    (100.0
    )Contract brewing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,600
    
    
    
    9,500
    
    
    
    19,100
    
    
    
    (19,100
    )
    
    
    (100.0
    )Pubs and other (1)
    
    
    2,700
    
    
    
    900
    
    
    
    3,600
    
    
    
    1,300
    
    
    
    400
    
    
    
    1,700
    
    
    
    1,900
    
    
    
    111.8Total shipped
    
    
    67,500
    
    
    
    80,300
    
    
    
    147,800
    
    
    
    32,300
    
    
    
    47,700
    
    
    
    80,000
    
    
    
    67,800
    
    
    
    84.8
    %
 
 (1)
    
    International, non-wholesalers, pubs and other  Pricing and Fees
    Alternating Proprietorship
 33




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##### Table of Contents



Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales .
 Widmer Hefeweizen
      34




---



##### Table of Contents



Merger-related expenses Business Combinations
 Accounting for Costs Associated with Exit or
Disposal Activities
 Selling, General and Administrative Expenses
 
    
    Prior to July 1, 2008, selling, general and administrative expense in the Companys
statement of operations reflected the sales and marketing efforts only for the midwest and
eastern U.S. because Craft Brands performed these functions for the western U.S. In the third
quarter of 2008, all promotion, marketing and sales efforts for the entire U.S. for Redhook-,
Widmer- and Kona-branded products are reflected in the Companys statement of operations.
    
    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 the 2008 third
quarter include salaries and related administrative costs for both offices.
  35




---



##### Table of Contents



Income from Equity Investment in Craft Brands .
 Income from Equity Investments in Kona and FSB .
 Interest Expense.
 Other Income, net
 Income Taxes .
  36




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##### Table of Contents



Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
  Nine Months EndedSeptember 30,
    
    
    Increase /2008
    
    
    2007
    
    
    (Decrease)
    
    
    % ChangeSales
    
    $
    55,937,193
    
    
    $
    35,383,514
    
    
    $
    20,553,679
    
    
    
    58.1
    %Less excise taxes
    
    
    4,319,543
    
    
    
    3,866,318
    
    
    
    453,225
    
    
    
    11.7Net sales
    
    
    51,617,650
    
    
    
    31,517,196
    
    
    
    20,100,454
    
    
    
    63.8Cost of sales
    
    
    43,862,511
    
    
    
    27,307,237
    
    
    
    16,555,274
    
    
    
    60.6Gross profit
    
    
    7,755,139
    
    
    
    4,209,959
    
    
    
    3,545,180
    
    
    
    84.2Selling, general and administrative expenses
    
    
    11,984,659
    
    
    
    6,161,655
    
    
    
    5,823,004
    
    
    
    94.5Merger-related expenses
    
    
    1,642,680
    
    
    
    448,335
    
    
    
    1,194,345
    
    
    
    266.4Income from
equity investment in Craft Brands
    
    
    1,390,404
    
    
    
    2,210,336
    
    
    
    (819,932
    )
    
    
    37.1Operating loss
    
    
    (4,481,796
    )
    
    
    (189,695
    )
    
    
    (4,292,101
    )
    
    
    2,262.6Income from
equity investments in Kona and FSB
    
    
    1,449
    
    
    
    
    
    
    
    1,449
    
    
    
    Interest expense
    
    
    452,075
    
    
    
    246,093
    
    
    
    205,982
    
    
    
    83.7Other income, net
    
    
    97,364
    
    
    
    404,996
    
    
    
    (307,632
    )
    
    
    76.0Loss before income taxes
    
    
    (4,835,058
    )
    
    
    (30,792
    )
    
    
    (4,804,266
    )
    
    
    15,602.6Income tax provision (benefit)
    
    
    (1,658,425
    )
    
    
    49,252
    
    
    
    (1,707,677
    )
    
    
    3,467.7Net loss
    
    $
    (3,176,633
    )
    
    $
    (80,044
    )
    
    $
    (3,096,589
    )
    
    
    3,868.8
    %
  Nine Months EndedSeptember 30,
    
    
    Increase /2008
    
    
    2007
    
    
    (Decrease)
    
    
    % ChangeA-B
    
    $
    36,774,399
    
    
    $
    14,394,768
    
    
    $
    22,379,631
    
    
    
    155.5
    %Craft Brands
    
    
    6,913,596
    
    
    
    10,548,320
    
    
    
    (3,634,724
    )
    
    
    (34.5
    )Contract brewing
    
    
    2,956,468
    
    
    
    5,491,428
    
    
    
    (2,534,960
    )
    
    
    (46.2
    )Alternating proprietorship
    
    
    3,362,477
    
    
    
    
    
    
    
    3,362,477
    
    
    
    Pubs and other (1)
    
    
    5,930,253
    
    
    
    4,948,998
    
    
    
    981,255
    
    
    
    19.8Total sales
    
    $
    55,937,193
    
    
    $
    35,383,514
    
    
    $
    20,553,679
    
    
    
    58.1
    %
 
 (1)
    
    Other includes international, non-wholesalers and other Sales .
 
    
    An 21% increase in overall shipments, driven by third quarter 2008 shipments of
Widmer-branded products acquired in the Merger and third quarter 2008 shipments of
Kona-branded products pursuant to a distribution arrangement with Kona;
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##### Table of Contents




    
    An increase in overall pricing, driven by the sale of all wholesale beer to A-B at
wholesaler pricing levels beginning in the third quarter of 2008 as compared to prior periods
in which shipments to Craft Brands and shipments of beer brewed on a contract basis were at
prices that were substantially below wholesale prices;
    
    Additional revenue generated by the alternating proprietorship arrangement with Kona, an
arrangement performed by Widmer prior to the Merger;
    
    An increase of 19.8% in pub and other sales, primarily driven by the third quarter 2008
addition of a third pub pursuant to the Merger.
 Shipments  Brand
 Nine Months Ended September 30,2008
    
    2007Draft
    
    Bottle
    
    Total
    
    Draft
    
    Bottle
    
    Total
    
    Increase /
    
    %Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    (Decrease)
    
    ChangeRedhook brand
    
    
    48,200
    
    
    
    103,300
    
    
    
    151,500
    
    
    
    51,500
    
    
    
    104,800
    
    
    
    156,300
    
    
    
    (4,800
    )
    
    
    (3.1
    )%Widmer brand (1)
    
    
    65,200
    
    
    
    48,300
    
    
    
    113,500
    
    
    
    52,600
    
    
    
    32,200
    
    
    
    84,800
    
    
    
    28,700
    
    
    
    33.8Kona brand
    
    
    11,100
    
    
    
    16,300
    
    
    
    27,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,400
    
    
    
    Total shipped
    
    
    124,500
    
    
    
    167,900
    
    
    
    292,400
    
    
    
    104,100
    
    
    
    137,000
    
    
    
    241,100
    
    
    
    51,300
    
    
    
    21.3
    %
 
 (1)
    
    Shipments of Widmer-branded product in 2007 represent only those products brewed and shipped
by the Company and do not include
Widmer-branded products shipped by Widmer or Craft Brands. These shipments were made in
connection with a licensing agreement and
contract brewing arrangements with Widmer.  Widmer Hefeweizen Widmer Hefeweizen
   38




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Shipments  Customer
 Nine Months Ended September 30,2008
    
    2007Draft
    
    Bottle
    
    Total
    
    Draft
    
    Bottle
    
    Total
    
    Increase /
    
    %Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    Shipments
    
    (Decrease)
    
    ChangeA-B
    
    
    87,000
    
    
    
    109,900
    
    
    
    196,900
    
    
    
    35,700
    
    
    
    47,000
    
    
    
    82,700
    
    
    
    114,200
    
    
    
    138.1
    %Craft Brands
    
    
    16,300
    
    
    
    41,800
    
    
    
    58,100
    
    
    
    27,900
    
    
    
    64,800
    
    
    
    92,700
    
    
    
    (34,600
    )
    
    
    (37.3
    )Contract brewing
    
    
    16,500
    
    
    
    14,500
    
    
    
    31,000
    
    
    
    37,400
    
    
    
    24,200
    
    
    
    61,600
    
    
    
    (30,600
    )
    
    
    (49.7
    )Pubs and other (1)
    
    
    4,700
    
    
    
    1,700
    
    
    
    6,400
    
    
    
    3,200
    
    
    
    900
    
    
    
    4,100
    
    
    
    2,300
    
    
    
    56.1Total shipped
    
    
    124,500
    
    
    
    167,900
    
    
    
    292,400
    
    
    
    104,200
    
    
    
    136,900
    
    
    
    241,100
    
    
    
    51,300
    
    
    
    21.3
    %
 
 (1)
    
    International, non-wholesalers, pubs and other  Pricing and Fees
  Alternating Proprietorship
 Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales .
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Widmer Hefeweizen
      Merger-related expenses
  Selling, General and Administrative Expenses
 
    
    Prior to July 1, 2008, selling, general and administrative expense in the Companys
statement of operations reflected the sales and marketing efforts only for the midwest and
eastern U.S. because Craft Brands performed these functions for the western U.S. In the third
quarter of 2008, all promotion, marketing and sales efforts for the
entire U.S. for Redhook-, Widmer- and Kona-branded products are reflected in the Companys
statement of operations.
 
    
    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
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##### Table of Contents



these functions was not complete until the end
of the third quarter of 2008, selling, general and administrative expenses for the 2008 third
quarter include salaries and related administrative costs for both offices.
 Income from Equity Investment in Craft Brands .
 Income
from Equity Investments in Kona and FSB.
 Interest Expense .
 Other Income, net
 Income Taxes .
  Liquidity and Capital Resources
    41




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th
  42




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Financial Covenants Required by Modification Agreement
 Minimum EBITDA, as definedFor the quarter ending December 31, 2008
    
    $
    875,000For the quarter ending March 31, 2009
    
    $
    850,000For the quarter ending June 30, 2009
    
    $
    2,300,000For the quarter ending September 30, 2009 and thereafter
    
    Does not applyAsset Coverage RatioFor the quarter ending December 31, 2008 and thereafter
    
    
    1.50 to 1Capital ExpendituresTo spend or incur obligations less than the following:For the quarter ending December 31, 2008
    
    $
    2,250,000For the quarter ending March 31, 2009 (1)
    
    $
    1,350,000For the quarter ending June 30, 2009 (1)
    
    $
    550,000For the quarter ending September 30, 2009 and thereafter
    
    Does not apply
 
 (1)
    
    - Provides for carryover spending of any amount not used in the prior quarter      43




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##### Table of Contents



Trend
   Critical Accounting Policies and Estimates
  Income Taxes . Accounting for Income Taxes
    Goodwill, other intangible assets and long-lived assets. Goodwill and Other Intangible Assets
  44




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Accounting for the Impairment or Disposal of
Long-Lived Assets
 Refundable Deposits on Kegs
  Revenue Recognition .
  45




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##### Table of Contents



Fair value of financial instruments .
 Accounting for Derivative Instruments
and Hedging Activities
 Recent Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115
 Accounting for Collaborative Arrangements
 Disclosures about Derivative Instruments and
Hedging Activities  An Amendment of FASB Statement No. 133
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##### Table of Contents



Determination of the
Useful Life of Intangible Assets Business
Combinations
 Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active Fair Value Measurement,
 47




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
   
 ITEM 4T. Controls and Procedures
 Disclosure Controls and Procedures
    Changes in Internal Control over Financial Reporting
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##### Table of Contents



PART II. Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  The market price of our common stock may decline as a result of the Merger.
 
    
    we do not achieve the perceived benefits of the Merger as rapidly or to the extent
anticipated by financial or industry analysts;
 
    
    the effect of the Merger on our business and prospects is not consistent with the
expectations of financial or industry analysts; or
 
    
    investors react negatively to the effect of the Merger on our business and prospects.
 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.
 Our shareholders may not realize a benefit from the Merger commensurate with the ownership
dilution they will experience in connection with the Merger.
 We may be unable to successfully integrate our operations and realize all of the anticipated
benefits of the Merger.
 
    
    implementing operational, financial and management controls, reporting systems and
procedures;
 
    
    coordinating geographically disparate organizations, systems and facilities;
 
    
    integrating personnel with diverse business backgrounds;
 
    
    integrating distinct corporate cultures;
 
    
    consolidating corporate and administrative functions;
 
    
    consolidating operations;
 
    
    retaining key employees; and
 
    
    preserving both companies collaboration, distribution and other important relationships.
 49




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##### Table of Contents



If we fail to implement and maintain proper and effective internal controls, our ability to
produce accurate financial statements could be impaired, which could adversely affect our business
and investors views of us.
 The integration of Widmer may result in significant expenses and accounting charges that
adversely affect our operating results.
 We are dependent upon the services of our key personnel.
 We are partially capitalized with long-term debt.
 We are dependent upon our continuing relationship with A-B.
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##### Table of Contents



Our agreements with A-B contain limitations on our ability to engage in or reject certain
transactions, including acquisitions and changes of control.
 
    
    issuance of equity securities;
 
    
    acquisition or sale of assets or stock;
 
    
    amendment of our articles of incorporation or bylaws;
 
    
    grant of board representation rights;
 
    
    entering into certain transactions with affiliates;
 
    
    distributing our products in the U.S. other than through A-B or as provided in the amended
distribution agreement with A-B;
 
    
    distributing or licensing the production of any malt beverage product in any country
outside of the U.S.; or
 
    
    voluntarily delisting or terminating our listing on the Nasdaq Stock Market.
   A-B has significant control and influence over us.
 We do not know what impact, if any, the combination of Anheuser-Busch and InBev will have on
our business.
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We are dependent on our distributors for the sale of our products.
 Increased competition could adversely affect sales and results of operations.
 Future price promotions to generate demand for our products may be unsuccessful.
 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.
 The craft beer business is seasonal in nature, and we are likely to experience fluctuations in
results of operations and financial condition.
 Changes in consumer preferences or public attitudes about our products could reduce demand.
 Our gross margin may fluctuate.
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##### Table of Contents



Operating breweries at production levels substantially below their current and maximum
designed capacities could negatively impact overall profit margins. Accounting for the Impairment or
Disposal of Long-Lived Assets
 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.
 An increase in excise taxes could adversely affect our financial condition or results of
operations.
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##### Table of Contents



Changes in state laws regarding distribution arrangements may adversely impact our operations.
 We may experience a shortage in kegs necessary to distribute draft beer.
 Our key raw materials may become significantly more costly and adequate supplies may be
difficult to secure.
 Loss of income tax benefits could negatively impact results of operations.
 Our relationships with Kona and FSB may not provide anticipated benefits.
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Our stock price may be volatile. T
 
    
    the entry into, or termination of, key agreements;
 
    
    the loss of key employees;
 
    
    the introduction of new products by our competitors;
 
    
    changes in estimates or recommendations by securities analysts, if any, who cover our
business;
 
    
    future sales of our common stock; and
 
    
    period-to-period fluctuations in our financial results.
  We do not anticipate paying cash dividends and, accordingly, shareholders must rely on stock
appreciation for any return on their investment in us.
 We may require additional capital in the future to finance construction or expansion of
production facilities, and financing may not be available on acceptable terms, if at all.
 
 ITEM 6. Exhibits
  10.1
    
    Loan Modification Agreement dated
November 14, 2008 to Loan Agreement dated July 1, 2008 between Craft
Brewers Alliance, Inc. and Bank of America, N.A.31.1
    
    Certification of Chief Executive Officer of Craft Brewers
Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)31.2
    
    Certification of Chief Financial Officer of Craft Brewers Alliance,
Inc. pursuant to Exchange Act Rule 13a-14(a)32.1
    
    Certification of Chief Executive Officer of Craft Brewers
Alliance, Inc. pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C.
Section 135032.2
    
    Certification of Chief Financial Officer of Craft Brewers Alliance,
Inc. pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section
1350
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SIGNATURES
  CRAFT BREWERS ALLIANCE, INC.November 14, 2008
    
    
    
    BY: /s/ Joseph K. OBrienJoseph K. OBrienController and Chief Accounting Officer
 56