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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 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
 
 REDHOOK ALE BREWERY, INCORPORATED
  Washington
    
    91-1141254(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 14300 NE 145thStreet, Suite 210Woodinville, Washington
    
    98072-9045(Address of principal executive offices)
    
    (Zip Code)
 (425) 483-3232
 þ o
  o o þ
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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED
 FORM 10-Q
 For The Quarterly Period Ended March 31, 2006
 TABLE OF CONTENTS
 PagePART I. Financial InformationITEM 1. Financial StatementsBalance Sheets as of March 31, 2006 and December 31, 2005
    
    
    3Statements of Operations for the Three Months Ended March 31, 2006 and 2005
    
    
    4Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21ITEM 4. Controls and Procedures
    
    
    21PART II. Other InformationITEM 1. Legal Proceedings
    
    
    21ITEM 1A. Risk Factors
    
    
    21ITEM 2. Unregistered Sales of Equity Securities
    
    
    22ITEM 3. Defaults Upon Senior Securities
    
    
    22ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    22ITEM 5. Other Information
    
    
    22ITEM 6. Exhibits
    
    
    22EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I.
 
 ITEM 1. Financial Statements
 REDHOOK ALE BREWERY, INCORPORATED
 
 BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    5,711,205
    
    
    $
    6,435,609Accounts Receivable
    
    
    2,024,371
    
    
    
    1,297,404Trade Receivable from Craft Brands
    
    
    723,799
    
    
    
    698,272Inventories
    
    
    3,072,533
    
    
    
    3,027,720Deferred Income Tax Asset, Net
    
    
    256,006
    
    
    
    Other
    
    
    560,684
    
    
    
    502,667Total Current Assets
    
    
    12,348,598
    
    
    
    11,961,672Fixed Assets, Net
    
    
    59,963,027
    
    
    
    60,379,901Investment in Craft Brands
    
    
    207,064
    
    
    
    92,806Other Assets
    
    
    165,080
    
    
    
    143,326Total Assets
    
    $
    72,683,769
    
    
    $
    72,577,705LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    2,418,835
    
    
    $
    1,990,627Trade Payable to Craft Brands
    
    
    423,684
    
    
    
    367,590Accrued Salaries, Wages and Payroll Taxes
    
    
    1,058,647
    
    
    
    1,259,823Refundable Deposits
    
    
    2,545,823
    
    
    
    2,440,796Other Accrued Expenses
    
    
    463,691
    
    
    
    211,200Current Portion of Long-Term Debt and Capital Lease
Obligations
    
    
    457,792
    
    
    
    459,245Total Current Liabilities
    
    
    7,368,472
    
    
    
    6,729,281Long-Term Debt and Capital Lease Obligations, Net of
Current Portion
    
    
    4,638,982
    
    
    
    4,751,920Deferred Income Taxes, Net
    
    
    1,202,401
    
    
    
    946,395Other Liabilities
    
    
    136,635
    
    
    
    123,542CommitmentsCommon Stockholders Equity:Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 8,228,339 Shares in
2006 and
8,222,609 Shares in 2005
    
    
    41,142
    
    
    
    41,113Additional Paid-In Capital
    
    
    68,839,121
    
    
    
    68,828,009Retained Earnings (Deficit)
    
    
    (9,542,984
    )
    
    
    (8,842,555
    )Total Common Stockholders Equity
    
    
    59,337,279
    
    
    
    60,026,567Total Liabilities and Common Stockholders Equity
    
    $
    72,683,769
    
    
    $
    72,577,705
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REDHOOK ALE BREWERY, INCORPORATED
 
 STATEMENTS OF OPERATIONS
  Three Months Ended March 31,2006
    
    
    2005Sales
    
    $
    8,669,250
    
    
    $
    7,324,974Less Excise Taxes
    
    
    889,903
    
    
    
    752,427Net Sales
    
    
    7,779,347
    
    
    
    6,572,547Cost of Sales
    
    
    7,242,530
    
    
    
    6,048,289Gross Profit
    
    
    536,817
    
    
    
    524,258Selling, General and Administrative Expenses
    
    
    1,713,806
    
    
    
    1,542,523Income from Equity Investment in Craft Brands
    
    
    514,149
    
    
    
    259,694Operating Income (Loss)
    
    
    (662,840
    )
    
    
    (758,571
    )Interest Expense
    
    
    83,083
    
    
    
    61,319Other Income (Expense)  Net
    
    
    53,928
    
    
    
    28,802Income (Loss) before Income Taxes
    
    
    (691,995
    )
    
    
    (791,088
    )Income Tax Provision (Benefit)
    
    
    8,434
    
    
    
    (59,000
    )Net Income (Loss)
    
    $
    (700,429
    )
    
    $
    (732,088
    )Basic Earnings (Loss) per Share
    
    $
    (0.09
    )
    
    $
    (0.09
    )Diluted Earnings (Loss) per Share
    
    $
    (0.09
    )
    
    $
    (0.09
    )
  4




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REDHOOK ALE BREWERY, INCORPORATED
 
 STATEMENTS OF CASH FLOWS
  Three Months Ended March 31,2006
    
    
    2005Operating ActivitiesNet Income (Loss)
    
    $
    (700,429
    )
    
    $
    (732,088
    )Adjustments to Reconcile Net Income (Loss) to Net
Cash Used in Operating Activities:Depreciation and Amortization
    
    
    763,642
    
    
    
    730,342Income from Equity Investment in Craft Brands
Less Than (In Excess of) Cash Distributions
    
    
    (114,258
    )
    
    
    300,620Deferred Income Taxes
    
    
    
    
    
    
    (70,000
    )Net Change in Operating Assets and Liabilities
    
    
    (224,841
    )
    
    
    (622,601
    )Net Cash Used in Operating Activities
    
    
    (275,886
    )
    
    
    (393,727
    )Investing ActivitiesExpenditures for Fixed Assets
    
    
    (345,268
    )
    
    
    (14,245
    )Net Cash Used in Investing Activities
    
    
    (345,268
    )
    
    
    (14,245
    )Financing ActivitiesPrincipal Payments on Debt and Capital Lease
Obligations
    
    
    (114,391
    )
    
    
    (112,500
    )Issuance of Common Stock
    
    
    11,141
    
    
    
    1,276Net Cash Used in Financing Activities
    
    
    (103,250
    )
    
    
    (111,224
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    (724,404
    )
    
    
    (519,196
    )Cash and Cash Equivalents:Beginning of Period
    
    
    6,435,609
    
    
    
    5,589,621End of Period
    
    $
    5,711,205
    
    
    $
    5,070,425
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REDHOOK ALE BREWERY, INCORPORATED
 
 NOTES TO FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    1,111,371
    
    
    $
    1,180,831Work in process
    
    
    942,844
    
    
    
    950,827Finished goods
    
    
    391,339
    
    
    
    262,618Promotional merchandise
    
    
    343,913
    
    
    
    372,073Packaging materials
    
    
    283,066
    
    
    
    261,371$
    3,072,533
    
    
    $
    3,027,720
  3. Craft Brands Alliance LLC
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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
     Consolidation of Variable
Interest Entities  an Interpretation of ARB No. 51 The Equity Method of Accounting
for Investments in Common Stock
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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
     4. Common Stockholders Equity
  5. Earnings (Loss) per Share
 Earnings
per Share
  Three Months EndedMarch 31,2006
    
    
    2005Net income (loss)
    
    $
    (700,429
    )
    
    $
    (732,088
    )Weighted average common shares
    
    
    8,225,737
    
    
    
    8,188,691Basic and diluted earnings (loss) per share
    
    $
    (0.09
    )
    
    $
    (0.09
    )
 6. Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for Stock-Based
Compensation
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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
   Three MonthsEndedMarch 31, 2005Net income (loss), as reported
    
    $
    (732,088
    )Add: Stock-based employee compensation expense
as reported under APB 25
    
    
    Less: Stock-based employee compensation expense
determined under fair value based method for
all options, net of related tax effects
    
    
    (11,308
    )Pro forma net income (loss)
    
    $
    (743,396
    )Earnings (loss) per share:Basic  as reported
    
    $
    (0.09
    )Basic  pro forma
    
    $
    (0.09
    )Diluted  as reported
    
    $
    (0.09
    )Diluted  pro forma
    
    $
    (0.09
    )
 Share-Based Payment
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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 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 for the year ended December 31, 2005, 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 Redhook Ale Brewery, Incorporated (the Company or Redhook)
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 for the fiscal year ended December 31, 2005. 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.
 Overview
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Widmer Hefeweizen
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Critical Accounting Policies and Estimates
  Income Taxes. Accounting for Income Taxes
 Long-Lived Assets. Accounting for the Impairment or Disposal of Long-Lived Assets
 Investment in Craft Brands Alliance LLC. Consolidation of
Variable Interest Entities  an Interpretation of ARB No. 51
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The Equity Method of Accounting for
Investments in Common Stock.
 Revenue Recognition.
 Results of Operations
  Three Months EndedMarch 31,2006
    
    2005Sales
    
    
    111.4
    %
    
    
    111.4
    %Less Excise Taxes
    
    
    11.4
    
    
    
    11.4Net Sales
    
    
    100.0
    
    
    
    100.0Cost of Sales
    
    
    93.1
    
    
    
    92.0Gross Profit
    
    
    6.9
    
    
    
    8.0Selling, General and Administrative Expenses
    
    
    22.0
    
    
    
    23.5Income from Equity Investment in Craft Brands
    
    
    6.6
    
    
    
    4.0Operating Income (Loss)
    
    
    (8.5
    )
    
    
    (11.5
    )Interest Expense
    
    
    1.1
    
    
    
    0.9Other Income (Expense)  Net
    
    
    0.7
    
    
    
    0.4Income (Loss) before Income Taxes
    
    
    (8.9
    )
    
    
    (12.0
    )Provision (Benefit) for Income Taxes
    
    
    0.1
    
    
    
    (0.9
    )Net Income (Loss)
    
    
    (9.0
    )%
    
    
    (11.1
    )%
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Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
  Three Months EndedMarch 31,
    
    
    Increase/
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeSales
    
    $
    8,669,250
    
    
    $
    7,324,974
    
    
    $
    1,344,276
    
    
    
    18.4
    %Less Excise Taxes
    
    
    889,903
    
    
    
    752,427
    
    
    
    137,476
    
    
    
    18.3Net Sales
    
    
    7,779,347
    
    
    
    6,572,547
    
    
    
    1,206,800
    
    
    
    18.4Cost of Sales
    
    
    7,242,530
    
    
    
    6,048,289
    
    
    
    1,194,241
    
    
    
    19.7Gross Profit
    
    
    536,817
    
    
    
    524,258
    
    
    
    12,559
    
    
    
    2.4Selling, General and Administrative Expenses
    
    
    1,713,806
    
    
    
    1,542,523
    
    
    
    171,283
    
    
    
    11.1Income from Equity Investment in Craft Brands
    
    
    514,149
    
    
    
    259,694
    
    
    
    254,455
    
    
    
    98.0Operating Income (Loss)
    
    
    (662,840
    )
    
    
    (758,571
    )
    
    
    95,731
    
    
    
    12.6Interest Expense
    
    
    83,083
    
    
    
    61,319
    
    
    
    21,764
    
    
    
    35.5Other Income (Expense)  Net
    
    
    53,928
    
    
    
    28,802
    
    
    
    25,126
    
    
    
    87.2Income (Loss) before Income Taxes
    
    
    (691,995
    )
    
    
    (791,088
    )
    
    
    99,093
    
    
    
    12.5Provision (Benefit) for Income Taxes
    
    
    8,434
    
    
    
    (59,000
    )
    
    
    67,434
    
    
    
    114.3Net Income (Loss)
    
    $
    (700,429
    )
    
    $
    (732,088
    )
    
    $
    31,659
    
    
    
    4.3
    %Beer Shipped (in barrels)
    
    
    58,000
    
    
    
    49,200
    
    
    
    8,800
    
    
    
    17.9
    %
 Sales.
 
    
    Improvement in overall pricing to Craft Brands resulted in a $94,000 increase in sales in 2006;
    
    An increase in shipments in the western United States resulted in an $13,000 increase in sales in 2006;
    
    An increase in shipments of beer brewed on a contract basis as well as pricing of
these shipments contributed a $244,000 increase in sales in 2006;
    
    A decline in overall pricing in the midwest and eastern United States resulted in a
$12,000 decrease in sales in 2006;
    
    An increase in shipments in the midwest and eastern United States resulted in a
$993,000 increase in sales in 2006; and
    
    Pub and other sales increased $33,000 in 2006.
 Shipments
  14




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Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen
   Pricing and Fees.
 15




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Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales.
 16




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Widmer Hefeweizen Widmer Hefeweizen
 Selling, General and Administrative Expenses
 Income from Equity Investment in Craft Brands.
 Interest Expense.
 Other Income (Expense) Net
 Income Taxes.
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Craft Brands Alliance LLC
 The Equity Method of Accounting for Investments in Common Stock Exhibits and Financial Statement Schedules
  Sales.
 Cost of Sales.
 Selling, General and Administrative Expenses
 Net Income
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Liquidity and Capital Resources
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Required by
    
    
    Quarter EndedTerm Loan
    
    
    March 31, 2006Capital Ratio
    
    Less than: 1.25:1
    
    
    0.22:1Working Capital
    
    Greater than: $1,900,000
    
    $
    4,980,126Fixed Charge Coverage Ratio
    
    Greater than: 1.15:1
    
    
    1.700:1
 Recent Accounting Pronouncements
 Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
   
 ITEM 4. Controls and Procedures
     
 PART II. Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  21




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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  10.1
    
    Licensing Agreement dated as of February 3, 2003 between
Registrant and Widmer Brothers Brewing Company *31.1
    
    Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act Rule 13a-14(a)31.2
    
    Certification of Chief Financial Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act Rule 13a-14(a)32.1
    
    Certification of Chief Executive Officer of Redhook Ale
Brewery, Incorporated pursuant to Exchange Act 13a-14(b) and 18
U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer of Redhook Ale
Brewery, Incorporated pursuant to Exchange Act 13a-14(b) and 18
U.S.C. Section 1350
 
 *  Confidential treatment has been requested for portions of this document. 22




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SIGNATURES
  REDHOOK ALE BREWERY, INCORPORATED
 May 15, 2006
    
    BY: /s/ David J. MickelsonDavid J. MickelsonPresident andChief Financial OfficerMay 15, 2006
    
    BY: /s/ Anne M. MuellerAnne M. MuellerController andPrincipal Accounting Officer
 23