##### 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, 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)14300 NE 145thStreet, Suite 210
Woodinville, Washington
(Address of principal executive offices)
    
    98072-9045
(Zip Code)
 (425) 483-3232
 þ o
  o o þ
 o þ




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##### 



REDHOOK ALE BREWERY, INCORPORATED
FORM 10-Q
For The Quarterly Period Ended September 30, 2006
 TABLE OF CONTENTS
 PagePART I.
    
    Financial InformationITEM 1.
    
    Financial StatementsBalance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Statements of Operations for the Three and Nine Months Ended
September 30, 2006 and 2005
    
    
    4Statements of Cash Flows for the Nine Months Ended September
30, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27ITEM 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    Other InformationITEM 1.
    
    Legal Proceedings
    
    
    27ITEM 1A.
    
    Risk Factors
    
    
    27ITEM 2.
    
    Unregistered Sales of Equity Securities
    
    
    27ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    27ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5.
    
    Other Information
    
    
    27ITEM 6.
    
    Exhibits
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I.
 
 ITEM 1. Financial Statements
 REDHOOK ALE BREWERY, INCOPORATED
 
 BALANCE SHEETS
 SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    8,759,725
    
    
    $
    6,435,609Accounts Receivable
    
    
    2,172,251
    
    
    
    1,297,404Trade Receivable from Craft Brands
    
    
    526,698
    
    
    
    698,272Inventories
    
    
    2,903,931
    
    
    
    3,027,720Deferred Income Tax Asset, Net
    
    
    340,960
    
    
    
    Other
    
    
    410,800
    
    
    
    502,667Total Current Assets
    
    
    15,114,365
    
    
    
    11,961,672Fixed Assets, Net
    
    
    58,977,346
    
    
    
    60,379,901Investment in Craft Brands
    
    
    174,188
    
    
    
    92,806Other Assets
    
    
    260,635
    
    
    
    143,326Total Assets
    
    $
    74,526,534
    
    
    $
    72,577,705LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    2,534,486
    
    
    $
    1,990,627Trade Payable to Craft Brands
    
    
    380,609
    
    
    
    367,590Accrued Salaries, Wages and Payroll Taxes
    
    
    1,442,158
    
    
    
    1,259,823Refundable Deposits
    
    
    2,666,242
    
    
    
    2,440,796Other Accrued Expenses
    
    
    274,149
    
    
    
    211,200Current Portion of Long-Term Debt and Capital Lease Obligations
    
    
    464,439
    
    
    
    459,245Total Current Liabilities
    
    
    7,762,083
    
    
    
    6,729,281Long-Term Debt and Capital Lease Obligations, Net of Current Portion
    
    
    4,437,860
    
    
    
    4,751,920Deferred Income Taxes, Net
    
    
    1,505,600
    
    
    
    946,395Other Liabilities
    
    
    162,822
    
    
    
    123,542Common Stockholders Equity:Common Stock, Par Value $0.005 per Share, Authorized, 50,000,000
Shares; Issued and Outstanding, 8,264,989 Shares in 2006 and
8,222,609 Shares in 2005
    
    
    41,325
    
    
    
    41,113Additional Paid-In Capital
    
    
    68,936,740
    
    
    
    68,828,009Retained Earnings (Deficit)
    
    
    (8,319,896
    )
    
    
    (8,842,555
    )Total Common Stockholders Equity
    
    
    60,658,169
    
    
    
    60,026,567Total Liabilities and Common Stockholders Equity
    
    $
    74,526,534
    
    
    $
    72,577,705
  3




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##### Table of Contents



REDHOOK ALE BREWERY, INCOPORATED
 
 STATEMENTS OF OPERATIONS
 PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
 (UNAUDITED)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    10,813,132
    
    
    $
    9,497,771
    
    
    $
    30,625,893
    
    
    $
    26,563,961Less Excise Taxes
    
    
    1,169,670
    
    
    
    946,680
    
    
    
    3,246,259
    
    
    
    2,681,531Net Sales
    
    
    9,643,462
    
    
    
    8,551,091
    
    
    
    27,379,634
    
    
    
    23,882,430Cost of Sales
    
    
    8,011,838
    
    
    
    7,429,086
    
    
    
    23,364,532
    
    
    
    20,754,426Gross Profit
    
    
    1,631,624
    
    
    
    1,122,005
    
    
    
    4,015,102
    
    
    
    3,128,004Selling, General and Administrative Expenses
    
    
    1,776,501
    
    
    
    1,905,135
    
    
    
    5,289,971
    
    
    
    5,299,473Income from Equity Investment in Craft
Brands
    
    
    743,245
    
    
    
    673,606
    
    
    
    2,076,168
    
    
    
    1,624,604Operating Income (Loss)
    
    
    598,368
    
    
    
    (109,524
    )
    
    
    801,299
    
    
    
    (546,865
    )Interest Expense
    
    
    92,094
    
    
    
    71,882
    
    
    
    259,239
    
    
    
    198,796Other Income, net
    
    
    56,783
    
    
    
    20,555
    
    
    
    198,844
    
    
    
    84,893Income (Loss) before Income Taxes
    
    
    563,057
    
    
    
    (160,851
    )
    
    
    740,904
    
    
    
    (660,768
    )Income Tax Provision (Benefit)
    
    
    199,197
    
    
    
    9,578
    
    
    
    218,245
    
    
    
    (41,422
    )Net Income (Loss)
    
    $
    363,860
    
    
    $
    (170,429
    )
    
    $
    522,659
    
    
    $
    (619,346
    )Basic Earnings (Loss) per Share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    (0.08
    )Diluted Earnings (Loss) per Share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    (0.08
    )
  4




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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED
 
 STATEMENTS OF OPERATIONS
 PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
 (UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005Operating ActivitiesNet Income (Loss)
    
    $
    522,659
    
    
    $
    (619,346
    )Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities:Loss (Gain) on Disposition of Fixed Assets
    
    
    
    
    
    
    14,879Depreciation and Amortization
    
    
    2,256,996
    
    
    
    2,194,505Income from Equity Investment in Craft Brands
In Excess of Cash Distributions
    
    
    (81,382
    )
    
    
    (19,755
    )Stock-Based Compensation
    
    
    53,760
    
    
    
    Deferred Income Taxes
    
    
    218,245
    
    
    
    (70,000
    )Net Change in Operating Assets and Liabilities
    
    
    455,790
    
    
    
    (1,083,101
    )Net Cash Provided by Operating Activities
    
    
    3,426,068
    
    
    
    417,182Investing ActivitiesExpenditures for Fixed Assets
    
    
    (811,868
    )
    
    
    (415,731
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    4,961Net Cash Used in Investing Activities
    
    
    (811,868
    )
    
    
    (410,770
    )Financing ActivitiesPrincipal Payments on Debt and Capital Lease Obligations.
    
    
    (345,267
    )
    
    
    (337,500
    )Issuance of Common Stock .
    
    
    55,183
    
    
    
    62,760Net Cash Used in Financing Activities
    
    
    (290,084
    )
    
    
    (274,740
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,324,116
    
    
    
    (268,328
    )Cash and Cash Equivalents:Beginning of Period
    
    
    6,435,609
    
    
    
    5,589,621End of Period
    
    $
    8,759,725
    
    
    $
    5,321,293
  5




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##### Table of Contents



1. Basis of Presentation
  2. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    748,532
    
    
    $
    1,180,831Work in process
    
    
    905,934
    
    
    
    950,827Finished goods
    
    
    296,649
    
    
    
    262,618Promotional merchandise
    
    
    536,769
    
    
    
    372,073Packaging materials
    
    
    416,047
    
    
    
    261,371$
    2,903,931
    
    
    $
    3,027,720
  3. Craft Brands Alliance LLC
     6




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##### Table of Contents



Consolidation of Variable
Interest Entities  an Interpretation of ARB No. 51 The Equity Method of Accounting for
Investments in Common Stock
       7




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##### Table of Contents



4. Refundable Deposits
  5. Common Stockholders Equity
  6. Earnings (Loss) per Share
 Earnings per
Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator for basic and diluted net income per share 
net income
    
    $
    363,860
    
    
    $
    (170,429
    )
    
    $
    522,659
    
    
    $
    (619,346
    )Denominator for basic net income per share 
weighted average common shares outstanding
    
    
    8,260,167
    
    
    
    8,216,971
    
    
    
    8,242,628
    
    
    
    8,201,071Dilutive effect of stock options on weighted average
common shares
    
    
    267,011
    
    
    
    
    
    
    
    260,974
    
    
    
    Denominator for diluted net income per share
    
    
    8,527,178
    
    
    
    8,216,971
    
    
    
    8,503,602
    
    
    
    8,201,071Basic net income per share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    (0.08
    )Diluted net income per share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    (0.08
    )
 7. Stock-Based Compensation
  Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 8




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##### Table of Contents



Share-Based Payment
  Accounting for
Stock-Based Compensation
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income as reported
    
    $
    (170,429
    )
    
    $
    (619,346
    )Add:Stock compensation as reported under APB 25
    
    
    
    
    
    
    Less:Stock-based employee compensation expense
determined under the fair value based method for
all options, net of related tax effects
    
    
    (36,595
    )
    
    
    (70,110
    )Pro forma net income
    
    $
    (207,024
    )
    
    $
    (689,456
    )Net income per shareBasicAs reported
    
    $
    (0.02
    )
    
    $
    (0.08
    )Proforma
    
    $
    (0.03
    )
    
    $
    (0.08
    )DilutedAs reported
    
    $
    (0.02
    )
    
    $
    (0.08
    )Proforma
    
    $
    (0.03
    )
    
    $
    (0.08
    )
   9




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##### Table of Contents



2006
    
    2005Expected life (years)
   

    0 days
    

   5 yrs.Risk-free interest rate
    
    
    4.70
    %
    
    
    3.88
    %Expected volatility rate
    
    
    0.00
    %
    
    
    46.0
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.0
    %
   2006
    
    2005Total number of options granted
    
    
    14,000
    
    
    
    16,000Estimated fair value of each option granted
    
    $
    3.84
    
    
    $
    1.24Total estimated fair value of all options granted
    
    $
    54,000
    
    
    $
    20,000
  Weighted
    
    WeightedAverage
    
    AverageShares
    
    Exercise
    
    Remaining
    
    AggregateSubject to
    
    Price per
    
    Contractual
    
    IntrinsicOptions
    
    Share
    
    Life
    
    ValueOutstanding at December 31, 2005
    
    
    846,320
    
    
    $
    3.15
    
    
    
    5.08
    
    
    $
    17,000Granted
    
    
    14,000
    
    
    $
    0.01Exercised
    
    
    (42,380
    )
    
    $
    1.30Canceled
    
    
    (8,550
    )
    
    $
    21.54Outstanding at September 30, 2006
    
    
    809,390
    
    
    $
    3.00
    
    
    
    4.34
    
    
    $
    805,000Exercisable at September 30, 2006
    
    
    809,390
    
    
    $
    3.00
    
    
    
    4.34
    
    
    $
    805,000
   10




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##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Weighted
    
    
    
    
    
    AverageRemaining
    
    Average
    
    
    
    
    
    ExerciseRange of Exercise
    
    Number of
    
    Contratual
    
    Exercise Price
    
    Number
    
    Price perPrice
    
    Outstanding
    
    Life (Years)
    
    per Share
    
    Exercisable
    
    Share$1.485 to $1.865
    
    
    348,790
    
    
    
    4.83
    
    
    $
    1.860
    
    
    
    348,790
    
    
    $
    1.8601.866 to 2.019
    
    
    159,034
    
    
    
    5.91
    
    
    
    2.019
    
    
    
    159,034
    
    
    
    2.0192.020 to 2.180
    
    
    8,000
    
    
    
    6.64
    
    
    
    2.180
    
    
    
    8,000
    
    
    
    2.1802.181 to 3.150
    
    
    39,566
    
    
    
    7.66
    
    
    
    2.728
    
    
    
    39,566
    
    
    
    2.7283.151 to 3.969
    
    
    168,400
    
    
    
    2.64
    
    
    
    3.969
    
    
    
    168,400
    
    
    
    3.9693.970 to 5.730
    
    
    44,600
    
    
    
    1.64
    
    
    
    5.730
    
    
    
    44,600
    
    
    
    5.7305.731 to 7.625
    
    
    24,000
    
    
    
    0.64
    
    
    
    7.625
    
    
    
    24,000
    
    
    
    7.6257.626 to 10.125
    
    
    13,000
    
    
    
    0.35
    
    
    
    10.125
    
    
    
    13,000
    
    
    
    10.12510.126 to 22.750
    
    
    4,000
    
    
    
    0.14
    
    
    
    22.750
    
    
    
    4,000
    
    
    
    22.750$1.485 to $22.750
    
    
    809,390
    
    
    
    4.34
    
    
    $
    2.996
    
    
    
    809,390
    
    
    $
    2.996
  11




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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 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
    12




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Widmer Hefeweizen
  13




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Sales
    
    
    112.1
    %
    
    
    111.1
    %
    
    
    111.9
    %
    
    
    111.2
    %Less Excise Taxes
    
    
    12.1
    %
    
    
    11.1
    %
    
    
    11.9
    %
    
    
    11.2
    %Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    83.1
    %
    
    
    86.9
    %
    
    
    85.3
    %
    
    
    86.9
    %Gross Profit
    
    
    16.9
    %
    
    
    13.1
    %
    
    
    14.7
    %
    
    
    13.1
    %Selling, General and Administrative Expenses
    
    
    18.4
    %
    
    
    22.3
    %
    
    
    19.4
    %
    
    
    22.2
    %Income from Equity Investment in Craft
Brands
    
    
    7.7
    %
    
    
    7.9
    %
    
    
    7.6
    %
    
    
    6.8
    %Operating Income (Loss)
    
    
    6.2
    %
    
    
    -1.3
    %
    
    
    2.9
    %
    
    
    -2.3
    %Interest Expense
    
    
    1.0
    %
    
    
    0.8
    %
    
    
    0.9
    %
    
    
    0.8
    %Other Income, net
    
    
    0.7
    %
    
    
    0.2
    %
    
    
    0.7
    %
    
    
    0.4
    %Income (Loss) before Income Taxes
    
    
    5.9
    %
    
    
    -1.9
    %
    
    
    2.7
    %
    
    
    -2.8
    %Income Tax Provision (Benefit)
    
    
    2.1
    %
    
    
    0.1
    %
    
    
    0.8
    %
    
    
    -0.2
    %Net Income (Loss)
    
    
    3.8
    %
    
    
    -2.0
    %
    
    
    1.9
    %
    
    
    -2.6
    %
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
  Increase /Three Months Ended September 30,
    
    
    (Decrease)
    
    
    % Change2006
    
    
    2005Sales
    
    $
    10,813,132
    
    
    $
    9,497,771
    
    
    $
    1,315,361
    
    
    
    14
    %Less Excise Taxes
    
    
    1,169,670
    
    
    
    946,680
    
    
    
    222,990
    
    
    
    24
    %Net Sales
    
    
    9,643,462
    
    
    
    8,551,091
    
    
    
    1,092,371
    
    
    
    13
    %Cost of Sales
    
    
    8,011,838
    
    
    
    7,429,086
    
    
    
    582,752
    
    
    
    8
    %Gross Profit
    
    
    1,631,624
    
    
    
    1,122,005
    
    
    
    509,619
    
    
    
    45
    %Selling, General and Administrative Expenses
    
    
    1,776,501
    
    
    
    1,905,135
    
    
    
    (128,634
    )
    
    
    7
    %Income from Equity Investment in Craft
Brands
    
    
    743,245
    
    
    
    673,606
    
    
    
    69,639
    
    
    
    10
    %Operating Income (Loss)
    
    
    598,368
    
    
    
    (109,524
    )
    
    
    707,892
    
    
    
    646
    %Interest Expense
    
    
    92,094
    
    
    
    71,882
    
    
    
    20,212
    
    
    
    28
    %Other Income, net
    
    
    56,783
    
    
    
    20,555
    
    
    
    36,228
    
    
    
    176
    %Income (Loss) before Income Taxes
    
    
    563,057
    
    
    
    (160,851
    )
    
    
    723,908
    
    
    
    450
    %Income Tax Provision
    
    
    199,197
    
    
    
    9,578
    
    
    
    189,619
    
    
    
    1980
    %Net Income (Loss)
    
    $
    363,860
    
    
    $
    (170,429
    )
    
    $
    534,289
    
    
    
    313
    %Basic Earnings (Loss) per Share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    
    320
    %Diluted Earnings (Loss) per Share
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    
    313
    %
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##### Table of Contents



Sales.
 
    
    An increase in overall pricing and shipments in the midwest and eastern United
States resulted in a $915,000 increase in sales in 2006;
    
    A decrease in overall pricing and shipments in the western United States (not
including beer brewed on a contract basis) resulted in a $379,000 decrease in sales in
2006;
    
    An increase in shipments of beer brewed on a contract basis, partially offset by a
decrease in pricing of these shipments, contributed a $706,000 increase in sales in
2006; and
    
    Pub and other sales increased $73,000 in 2006.
 Shipments
 Increase /Three Months Ended September 30,
    
    (Decrease)
    
    % Change2006
    
    2005Draft Shipped
    
    Bottles Shipped
    
    Total Shipped
    
    Draft Shipped
    
    Bottles Shipped
    
    Total ShippedA-B and Non-wholesalers
    
    
    11,900
    
    
    
    15,300
    
    
    
    27,200
    
    
    
    11,100
    
    
    
    11,900
    
    
    
    23,000
    
    
    
    4,200
    
    
    
    18
    %CBA
    
    
    9,600
    
    
    
    21,000
    
    
    
    30,600
    
    
    
    11,300
    
    
    
    22,500
    
    
    
    33,800
    
    
    
    (3,200
    )
    
    
    -9
    %Contract Brewing
    
    
    13,800
    
    
    
    
    
    
    
    13,800
    
    
    
    3,400
    
    
    
    
    
    
    
    3,400
    
    
    
    10,400
    
    
    
    306
    %Pubs and Other
    
    
    1,100
    
    
    
    200
    
    
    
    1,300
    
    
    
    1,200
    
    
    
    200
    
    
    
    1,400
    
    
    
    (100
    )
    
    
    -7
    %Total Shipped
    
    
    36,400
    
    
    
    36,500
    
    
    
    72,900
    
    
    
    27,000
    
    
    
    34,600
    
    
    
    61,600
    
    
    
    11,300
    
    
    
    18
    %
 Widmer Hefeweizen
  Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmers
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Widmer Hefeweizen Widmer Hefeweizen Widmer Hefewiezen
 Widmer Hefeweizen
   Pricing and Fees.
  st
  16




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Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales.
 Widmer Hefeweizen Widmer Hefeweizen
  Selling, General and Administrative Expenses
 Income from Equity Investment in Craft Brands.
 Interest Expense.
 Other Income, net
 Income Taxes.
 17




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##### Table of Contents



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
 Outlook
 Widmer Hefeweizen Widmer Hefeweizen
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##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
  Increase /Nine Months Ended September 30,
    
    
    (Decrease)
    
    
    % Change2006
    
    
    2005Sales
    
    $
    30,625,893
    
    
    $
    26,563,961
    
    
    $
    4,061,932
    
    
    
    15
    %Less Excise Taxes
    
    
    3,246,259
    
    
    
    2,681,531
    
    
    
    564,728
    
    
    
    21
    %Net Sales
    
    
    27,379,634
    
    
    
    23,882,430
    
    
    
    3,497,204
    
    
    
    15
    %Cost of Sales
    
    
    23,364,532
    
    
    
    20,754,426
    
    
    
    2,610,106
    
    
    
    13
    %Gross Profit
    
    
    4,015,102
    
    
    
    3,128,004
    
    
    
    887,098
    
    
    
    28
    %Selling, General and Administrative Expenses
    
    
    5,289,971
    
    
    
    5,299,473
    
    
    
    (9,502
    )
    
    
    0
    %Income from Equity Investment in Craft
Brands
    
    
    2,076,168
    
    
    
    1,624,604
    
    
    
    451,564
    
    
    
    28
    %Operating Income (Loss)
    
    
    801,299
    
    
    
    (546,865
    )
    
    
    1,348,164
    
    
    
    247
    %Interest Expense
    
    
    259,239
    
    
    
    198,796
    
    
    
    60,443
    
    
    
    30
    %Other Income, net
    
    
    198,844
    
    
    
    84,893
    
    
    
    113,951
    
    
    
    134
    %Income (Loss) before Income Taxes
    
    
    740,904
    
    
    
    (660,768
    )
    
    
    1,401,672
    
    
    
    212
    %Income Tax Provision (Benefit)
    
    
    218,245
    
    
    
    (41,422
    )
    
    
    259,667
    
    
    
    627
    %Net Income (Loss)
    
    $
    522,659
    
    
    $
    (619,346
    )
    
    $
    1,142,005
    
    
    
    184
    %Basic Earnings (Loss) per Share
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    0.14
    
    
    
    179
    %Diluted Earnings (Loss) per Share
    
    $
    0.06
    
    
    $
    (0.08
    )
    
    $
    0.14
    
    
    
    177
    %
 Sales.
 
    
    An increase in overall pricing and shipments in the midwest and eastern United
States resulted in a $2,667,000 increase in sales in 2006;
    
    A decrease in overall pricing and shipments in the western United States (not
including beer brewed on a contract basis) resulted in a $343,700 decrease in sales in
2006;
    
    An increase in shipments of beer brewed on a contract basis, partially offset by a
decrease in pricing of these shipments, contributed to a $1,596,300 increase in sales
in 2006; and
    
    Pub and other sales increased $142,400 in 2006.
 Shipments
 Increase /Nine Months Ended September 30,
    
    (Decrease)
    
    % Change2006
    
    2005Draft Shipped
    
    Bottles Shipped
    
    Total Shipped
    
    Draft Shipped
    
    Bottles Shipped
    
    Total ShippedA-B and Non-wholesalers
    
    
    35,200
    
    
    
    43,200
    
    
    
    78,400
    
    
    
    30,800
    
    
    
    34,400
    
    
    
    65,200
    
    
    
    13,200
    
    
    
    20
    %CBA
    
    
    29,000
    
    
    
    65,700
    
    
    
    94,700
    
    
    
    31,300
    
    
    
    66,100
    
    
    
    97,400
    
    
    
    (2,700
    )
    
    
    -3
    %Contract Brewing
    
    
    30,600
    
    
    
    
    
    
    
    30,600
    
    
    
    8,700
    
    
    
    
    
    
    
    8,700
    
    
    
    21,900
    
    
    
    252
    %Pubs and Other
    
    
    2,700
    
    
    
    600
    
    
    
    3,300
    
    
    
    2,700
    
    
    
    800
    
    
    
    3,500
    
    
    
    (200
    )
    
    
    -6
    %Total Shipped
    
    
    97,500
    
    
    
    109,500
    
    
    
    207,000
    
    
    
    73,500
    
    
    
    101,300
    
    
    
    174,800
    
    
    
    32,200
    
    
    
    18
    %
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##### Table of Contents



Widmer Hefeweizen
  Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmer Hefewiezen
 Widmer Hefeweizen
   20




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Pricing and Fees.
  st
   Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales.
 21




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##### Table of Contents



Widmer Hefeweizen Widmer Hefeweizen
  Selling, General and Administrative Expenses Share-Based Payment
 Income from Equity Investment in Craft Brands.
 Interest Expense.
 Other Income,net
 Income Taxes.
 Craft Brands Alliance LLC
 The Equity Method of Accounting for Investments in Common Stock
 22




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##### Table of Contents



Exhibits and Financial Statement Schedules
  Sales.
 Cost of Sales.
 Selling, General and Administrative Expenses
 Net Income
 Liquidity and Capital Resources
    23




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##### Table of Contents



Quarter EndedRequired by Term Loan
    
    September 30, 2006Capital Ratio
    
    Less than: 1.25:1
    
    0.23:1Working Capital
    
    Greater than: $1,900,000
    
    $7,352,283Fixed Charge Coverage Ratio
    
    Greater than: 1.15:1
    
    3.445:1
 Critical Accounting Policies and Estimates
  Income Taxes. Accounting for Income Taxes
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##### Table of Contents



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 The Equity Method of Accounting for Investments in Common Stock.
 Revenue Recognition.
 Recent Accounting Pronouncements
 Share-Based Payment
 25




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##### Table of Contents



Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes
in Interim Financial Statements
      26




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##### Table of Contents



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
  
 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
  31.1
    
    Certification of Chief Executive Officer of Redhook Ale Brewery,
Incorporated pursuant to Exchange Act Rule 13a-14(a)
 27




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##### Table of Contents



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
 28




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##### Table of Contents



SIGNATURES
  REDHOOK ALE BREWERY, INCORPORATEDNovember 10, 2006
    BY:
    /s/ David J. MickelsonDavid J. MickelsonPresident and
Chief Financial OfficerNovember 10, 2006
    BY:
    /s/ Jay T. CaldwellJay T. CaldwellController, Treasurer and
Principal Accounting Officer 29