##### Table of Contents



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 JUNE 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
    
    (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
 o þ




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##### 



REDHOOK ALE BREWERY, INCORPORATED
 FORM 10-Q
 For The Quarterly Period Ended June 30, 2006
 TABLE OF CONTENTS
  
 PagePART I. Financial InformationITEM 1. Financial StatementsBalance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Statements of Operations for the Three and Six Months Ended
June 30, 2006 and 2005
    
    
    4Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31ITEM 4. Controls and Procedures
    
    
    31PART II. Other InformationITEM 1. Legal Proceedings
    
    
    31ITEM 1A. Risk Factors
    
    
    31ITEM 2. Unregistered Sales of Equity Securities
    
    
    32ITEM 3. Defaults Upon Senior Securities
    
    
    32ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    32ITEM 5. Other Information
    
    
    32ITEM 6. Exhibits
    
    
    32EXHIBIT 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, INCORPORATED
 
 BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    7,103,809
    
    
    $
    6,435,609Accounts Receivable
    
    
    2,574,167
    
    
    
    1,297,404Trade Receivable from Craft Brands
    
    
    773,231
    
    
    
    698,272Inventories
    
    
    2,800,193
    
    
    
    3,027,720Deferred Income Tax Asset, Net
    
    
    258,279
    
    
    
    Other
    
    
    508,942
    
    
    
    502,667Total Current Assets
    
    
    14,018,621
    
    
    
    11,961,672Fixed Assets, Net
    
    
    59,562,816
    
    
    
    60,379,901Investment in Craft Brands
    
    
    360,835
    
    
    
    92,806Other Assets
    
    
    205,077
    
    
    
    143,326Total Assets
    
    $
    74,147,349
    
    
    $
    72,577,705LIABILITIES AND COMMON STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    2,880,171
    
    
    $
    1,990,627Trade Payable to Craft Brands
    
    
    524,855
    
    
    
    367,590Accrued Salaries, Wages and Payroll Taxes
    
    
    1,260,486
    
    
    
    1,259,823Refundable Deposits
    
    
    2,505,029
    
    
    
    2,440,796Other Accrued Expenses
    
    
    345,446
    
    
    
    211,200Current Portion of Long-Term Debt and Capital Lease
Obligations
    
    
    460,951
    
    
    
    459,245Total Current Liabilities
    
    
    7,976,938
    
    
    
    6,729,281Long-Term Debt and Capital Lease Obligations, Net of
Current Portion
    
    
    4,537,989
    
    
    
    4,751,920Deferred Income Taxes, Net
    
    
    1,204,674
    
    
    
    946,395Other Liabilities
    
    
    149,729
    
    
    
    123,542CommitmentsCommon Stockholders Equity:Common Stock, Par Value $0.005 per Share,
Authorized, 50,000,000
Shares; Issued and Outstanding, 8,257,539 Shares in
2006 and
8,222,609 Shares in 2005
    
    
    41,288
    
    
    
    41,113Additional Paid-In Capital
    
    
    68,920,488
    
    
    
    68,828,009Retained Earnings (Deficit)
    
    
    (8,683,757
    )
    
    
    (8,842,555
    )Total Common Stockholders Equity
    
    
    60,278,019
    
    
    
    60,026,567Total Liabilities and Common Stockholders Equity
    
    $
    74,147,349
    
    
    $
    72,577,705
  3




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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED
 
 STATEMENTS OF OPERATIONS
 Three
Months Ended June 30,
    
    

Six
Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    11,143,511
    
    
    $
    9,741,216
    
    
    $
    19,812,761
    
    
    $
    17,066,190Less Excise Taxes
    
    
    1,186,685
    
    
    
    982,424
    
    
    
    2,076,588
    
    
    
    1,734,851Net Sales
    
    
    9,956,826
    
    
    
    8,758,792
    
    
    
    17,736,173
    
    
    
    15,331,339Cost of Sales
    
    
    8,110,165
    
    
    
    7,277,051
    
    
    
    15,352,695
    
    
    
    13,325,340Gross Profit
    
    
    1,846,661
    
    
    
    1,481,741
    
    
    
    2,383,478
    
    
    
    2,005,999Selling, General and
Administrative Expenses
    
    
    1,799,664
    
    
    
    1,851,815
    
    
    
    3,513,470
    
    
    
    3,394,338Income from Equity Investment in
Craft Brands
    
    
    818,774
    
    
    
    691,304
    
    
    
    1,332,923
    
    
    
    950,998Operating Income (Loss)
    
    
    865,771
    
    
    
    321,230
    
    
    
    202,931
    
    
    
    (437,341
    )Interest Expense
    
    
    84,062
    
    
    
    65,595
    
    
    
    167,145
    
    
    
    126,914Other Income (Expense)  Net
    
    
    88,132
    
    
    
    35,536
    
    
    
    142,060
    
    
    
    64,338Income (Loss) before Income Taxes
    
    
    869,841
    
    
    
    291,171
    
    
    
    177,846
    
    
    
    (499,917
    )Income Tax Provision (Benefit)
    
    
    10,614
    
    
    
    8,000
    
    
    
    19,048
    
    
    
    (51,000
    )Net Income (Loss)
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    158,798
    
    
    $
    (448,917
    )Basic Earnings (Loss) per Share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.05
    )Diluted Earnings (Loss) per Share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.05
    )
 See Accompanying Notes to Financial Statements 4




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REDHOOK ALE BREWERY, INCORPORATED
 
 STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2006
    
    
    2005Operating ActivitiesNet Income (Loss)
    
    $
    158,798
    
    
    $
    (448,917
    )Adjustments to Reconcile Net Income (Loss) to Net CashProvided by (Used in) Operating Activities:Loos (Gain) on Disposition of Fixed Assets
    
    
    203
    
    
    
    (3,000
    )Depreciation and Amortization
    
    
    1,508,289
    
    
    
    1,462,867Income from Equity Investment in Craft Brands Less
Than (In Excess of) Cash Distributions
    
    
    (268,029
    )
    
    
    (148,262
    )Stock-Based Compensation
    
    
    53,760Deferred Income Taxes
    
    
    
    
    
    
    (70,000
    )Net Change in Operating Assets and Liabilities
    
    
    83,104
    
    
    
    (1,684,251
    )Net Cash Provided by (Used in) Operating Activities
    
    
    1,536,125
    
    
    
    (891,563
    )Investing ActivitiesExpenditures for Fixed Assets
    
    
    (671,085
    )
    
    
    (160,800
    )Other, net
    
    
    (6,188
    )
    
    
    Net Cash Used in Investing Activities
    
    
    (677,273
    )
    
    
    (160,800
    )Financing ActivitiesPrincipal Payments on Debt and Capital Lease Obligations
    
    
    (229,546
    )
    
    
    (225,000
    )Issuance of Common Stock
    
    
    38,894
    
    
    
    52,020Net Cash Used in Financing Activities
    
    
    (190,652
    )
    
    
    (172,980
    )Increase (Decrease) in Cash and Cash Equivalents
    
    
    668,200
    
    
    
    (1,225,343
    )Cash and Cash Equivalents:Beginning of Period
    
    
    6,435,609
    
    
    
    5,589,621End of Period
    
    $
    7,103,809
    
    
    $
    4,364,278
 See Accompanying Notes to Financial Statements 5




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REDHOOK ALE BREWERY, INCORPORATED
 
 NOTES TO FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    974,384
    
    
    $
    1,180,831Work in process
    
    
    825,856
    
    
    
    950,827Finished goods
    
    
    306,083
    
    
    
    262,618Promotional merchandise
    
    
    429,643
    
    
    
    372,073Packaging materials
    
    
    264,227
    
    
    
    261,371$
    2,800,193
    
    
    $
    3,027,720
  3. Craft Brands Alliance LLC
    6




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##### Table of Contents



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
   7




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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
      4. Refundable Deposits
  5. Common Stockholders Equity
  6. Earnings (Loss) per Share
 Earnings
per Share
 8




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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic earnings (loss) per share
computation:Numerator:Net income (loss)
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    158,798
    
    
    $
    (448,917
    )Numerator  income (loss) available
to common stockholders
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    158,798
    
    
    $
    (448,917
    )Denominator:Weighted average common shares
    
    
    8,241,602
    
    
    
    8,197,240
    
    
    
    8,233,713
    
    
    
    8,192,989Basic earnings (loss) per share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.05
    )Diluted earnings (loss) per share
computation:Numerator:Net income (loss)
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    158,798
    
    
    $
    (448,917
    )Numerator  income (loss) available
to common stockholders
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    158,798
    
    
    $
    (448,917
    )Denominator:Weighted average common shares
    
    
    8,241,602
    
    
    
    8,197,240
    
    
    
    8,233,713
    
    
    
    8,192,989Effect of dilutive securities:Stock options, net
    
    
    270,287
    
    
    
    255,603
    
    
    
    257,468
    
    
    
    Denominator for diluted earnings (loss)
per share
    
    
    8,511,889
    
    
    
    8,452,843
    
    
    
    8,491,181
    
    
    
    8,192,989Diluted earnings (loss) per share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.05
    )
 7. Stock-Based Compensation
  Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  9




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REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
  Share-Based Payment
  Accounting for
Stock-Based Compensation
 Three
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net income (loss), as reported
    
    $
    283,171
    
    
    $
    (448,917
    )Add: Stock-based employee compensation expense
as reported under APB 25
    
    
    
    
    
    
    Less: Stock-based employee compensation expense determined under
value based method for all options, net of related tax effects
    
    
    (27,270
    )
    
    
    (36,153
    )Pro forma net income (loss)
    
    $
    255,901
    
    
    $
    (485,070
    )Earnings (loss) per share:Basic  as reported
    
    $
    0.03
    
    
    $
    (0.05
    )Basic  pro forma
    
    $
    0.03
    
    
    $
    (0.06
    )Diluted  as reported
    
    $
    0.03
    
    
    $
    (0.05
    )Diluted  pro forma
    
    $
    0.03
    
    
    $
    (0.06
    )
   10




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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
    2006
    
    
    2005(Pro forma)Expected life of option
    
    0 days
    
    5 yrs.Risk-free interest rate
    
    
    4.7
    %
    
    
    3.88
    %Volatility of the Companys stock
    
    
    0.0
    %
    
    
    46.0
    %Dividend yield on the Companys stock
    
    
    0.0
    %
    
    
    0.0
    %
   20052006
    
    
    (Pro forma)Total 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
 11




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##### Table of Contents



REDHOOK ALE BREWERY, INCORPORATED
 NOTES TO FINANCIAL STATEMENTS (Continued)
   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
    
    
    (34,930
    )
    
    
    1.11Canceled
    
    
    (8,250
    )
    
    
    22.18Outstanding at June 30, 2006
    
    
    817,140
    
    
    $
    2.99
    
    
    
    4.61
    
    
    $
    564,000Exercisable at June 30, 2006
    
    
    817,140
    
    
    $
    2.99
    
    
    
    4.61
    
    
    $
    564,000
    Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    
    Outstanding
    
    
    Life (Yrs)
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    1.49
    
    
    to
    
    $
    1.82
    
    
    
    8,000
    
    
    
    4.39
    
    
    $
    1.65
    
    
    
    8,000
    
    
    $
    1.651.87
    
    
    to
    
    
    1.87
    
    
    
    341,890
    
    
    
    5.09
    
    
    
    1.87
    
    
    
    341,890
    
    
    
    1.872.02
    
    
    to
    
    
    2.02
    
    
    
    160,284
    
    
    
    6.16
    
    
    
    2.02
    
    
    
    160,284
    
    
    
    2.022.18
    
    
    to
    
    
    2.45
    
    
    
    36,666
    
    
    
    7.05
    
    
    
    2.37
    
    
    
    36,666
    
    
    
    2.373.15
    
    
    to
    
    
    3.15
    
    
    
    16,000
    
    
    
    8.90
    
    
    
    3.15
    
    
    
    16,000
    
    
    
    3.153.97
    
    
    to
    
    
    3.97
    
    
    
    168,700
    
    
    
    2.89
    
    
    
    3.97
    
    
    
    168,700
    
    
    
    3.975.73
    
    
    to
    
    
    5.73
    
    
    
    44,600
    
    
    
    1.89
    
    
    
    5.73
    
    
    
    44,600
    
    
    
    5.737.63
    
    
    to
    
    
    7.63
    
    
    
    24,000
    
    
    
    0.89
    
    
    
    7.63
    
    
    
    24,000
    
    
    
    7.6310.13
    
    
    to
    
    
    10.13
    
    
    
    13,000
    
    
    
    0.60
    
    
    
    10.13
    
    
    
    13,000
    
    
    
    10.1322.75
    
    
    to
    
    
    22.75
    
    
    
    4,000
    
    
    
    0.39
    
    
    
    22.75
    
    
    
    4,000
    
    
    
    22.75$
    1.49
    
    
    to
    
    $
    22.75
    
    
    
    817,140
    
    
    
    4.61
    
    
    $
    2.99
    
    
    
    817,140
    
    
    $
    2.99
  12




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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
    13




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Widmer Hefeweizen
  14




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##### Table of Contents



Results of Operations
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    
    111.9
    %
    
    
    111.2
    %
    
    
    111.7
    %
    
    
    111.3
    %Less Excise Taxes
    
    
    11.9
    
    
    
    11.2
    
    
    
    11.7
    
    
    
    11.3Net Sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of Sales
    
    
    81.5
    
    
    
    83.1
    
    
    
    86.6
    
    
    
    86.9Gross Profit
    
    
    18.5
    
    
    
    16.9
    
    
    
    13.4
    
    
    
    13.1Selling, General and Administrative Expenses
    
    
    18.1
    
    
    
    21.1
    
    
    
    19.8
    
    
    
    22.1Income from Equity Investment in Craft Brands
    
    
    8.2
    
    
    
    7.9
    
    
    
    7.5
    
    
    
    6.2Operating Income (Loss)
    
    
    8.6
    
    
    
    3.7
    
    
    
    1.1
    
    
    
    (2.8
    )Interest Expense
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.8Other Income (Expense)  Net
    
    
    0.9
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    0.4Income (Loss) before Income Taxes
    
    
    8.7
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    (3.2
    )Provision (Benefit) for Income Taxes
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (0.3
    )Net Income (Loss)
    
    
    8.6
    %
    
    
    3.2
    %
    
    
    0.9
    %
    
    
    (2.9
    )%
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
  Three Months EndedJune 30,
    
    
    Increase/
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeSales
    
    $
    11,143,511
    
    
    $
    9,741,216
    
    
    $
    1,402,295
    
    
    
    14.4
    %Less Excise Taxes
    
    
    1,186,685
    
    
    
    982,424
    
    
    
    204,261
    
    
    
    20.8Net Sales
    
    
    9,956,826
    
    
    
    8,758,792
    
    
    
    1,198,034
    
    
    
    13.7Cost of Sales
    
    
    8,110,165
    
    
    
    7,277,051
    
    
    
    833,114
    
    
    
    11.4Gross Profit
    
    
    1,846,661
    
    
    
    1,481,741
    
    
    
    364,920
    
    
    
    24.6Selling, General and Administrative Expenses
    
    
    1,799,664
    
    
    
    1,851,815
    
    
    
    (52,151
    )
    
    
    (2.8
    )Income from Equity Investment in Craft Brands
    
    
    818,774
    
    
    
    691,304
    
    
    
    127,470
    
    
    
    18.4Operating Income (Loss)
    
    
    865,771
    
    
    
    321,230
    
    
    
    544,541
    
    
    
    169.5Interest Expense
    
    
    84,062
    
    
    
    65,595
    
    
    
    18,467
    
    
    
    28.2Other Income (Expense)  Net
    
    
    88,132
    
    
    
    35,536
    
    
    
    52,596
    
    
    
    148.0Income (Loss) before Income Taxes
    
    
    869,841
    
    
    
    291,171
    
    
    
    578,670
    
    
    
    198.7Provision (Benefit) for Income Taxes
    
    
    10,614
    
    
    
    8,000
    
    
    
    2,614
    
    
    
    32.7Net Income (Loss)
    
    $
    859,227
    
    
    $
    283,171
    
    
    $
    576,056
    
    
    
    203.4
    %Beer Shipped (in barrels)
    
    
    76,000
    
    
    
    64,000
    
    
    
    12,000
    
    
    
    18.8
    %
 15




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##### Table of Contents



Sales.
 
    
    Improvement in overall pricing to Craft Brands resulted in a $21,000 increase in
sales in 2006;
    
    An increase in shipments in the western United States resulted in an $56,000
increase 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 $737,000 increase in sales in
2006;
    
    A increase in overall pricing in the midwest and eastern United States resulted in
a $17,000 increase in sales in 2006;
    
    An increase in shipments in the midwest and eastern United States resulted in a
$595,000 increase in sales in 2006; and
    
    Pub and other sales increased $38,000 in 2006.
 Shipments Widmer Hefeweizen
   Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen
 16




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##### Table of Contents



Widmer Hefeweizen
 Widmer Hefeweizen
   Pricing and Fees.
  17




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##### Table of Contents



st
   Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales.
 Widmer Hefeweizen Widmer Hefeweizen
 18




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##### Table of Contents



Selling, General and Administrative Expenses Share-Based Payment
 Income from Equity Investment in Craft Brands.
 Interest Expense.
 Other Income (Expense) Net
 Income Taxes.
 19




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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
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##### Table of Contents



Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
  Six Months EndedJune 30,
    
    
    Increase/
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeSales
    
    $
    19,812,761
    
    
    $
    17,066,190
    
    
    $
    2,746,571
    
    
    
    16.1
    %Less Excise Taxes
    
    
    2,076,588
    
    
    
    1,734,851
    
    
    
    341,737
    
    
    
    19.7Net Sales
    
    
    17,736,173
    
    
    
    15,331,339
    
    
    
    2,404,834
    
    
    
    15.7Cost of Sales
    
    
    15,352,695
    
    
    
    13,325,340
    
    
    
    2,027,355
    
    
    
    15.2Gross Profit
    
    
    2,383,478
    
    
    
    2,005,999
    
    
    
    377,479
    
    
    
    18.8Selling, General and Administrative Expenses
    
    
    3,513,470
    
    
    
    3,394,338
    
    
    
    119,132
    
    
    
    3.5Income from Equity Investment in Craft Brands
    
    
    1,332,923
    
    
    
    950,998
    
    
    
    381,925
    
    
    
    40.2Operating Income (Loss)
    
    
    202,931
    
    
    
    (437,341
    )
    
    
    640,272
    
    
    
    146.4Interest Expense
    
    
    167,145
    
    
    
    126,914
    
    
    
    40,231
    
    
    
    31.7Other Income (Expense)  Net
    
    
    142,060
    
    
    
    64,338
    
    
    
    77,722
    
    
    
    120.8Income (Loss) before Income Taxes
    
    
    177,846
    
    
    
    (499,917
    )
    
    
    677,763
    
    
    
    135.6Provision (Benefit) for Income Taxes
    
    
    19,048
    
    
    
    (51,000
    )
    
    
    70,048
    
    
    
    137.3Net Income (Loss)
    
    $
    158,798
    
    
    $
    (448,917
    )
    
    $
    607,715
    
    
    
    135.4
    %Beer Shipped (in barrels)
    
    
    134,100
    
    
    
    113,200
    
    
    
    20,900
    
    
    
    18.5
    %
 Sales.
 
    
    Improvement in overall pricing to Craft Brands resulted in a $116,000 increase in
sales in 2006;
    
    An increase in shipments in the western United States resulted in an $67,000
increase 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 $980,000 increase in sales in
2006;
    
    A decrease in overall pricing in the midwest and eastern United States resulted in
a $2,000 decrease in sales in 2006;
    
    An increase in shipments in the midwest and eastern United States resulted in a
$1,593,000 increase in sales in 2006; and
    
    Pub and other sales increased $70,000 in 2006.
 Shipments Widmer Hefeweizen
  21




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Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen Widmer Hefeweizen
 Widmer Hefeweizen
   22




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Pricing and Fees.
  st
   23




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Retail Operations and Other Sales
 Excise Taxes
 Cost of Sales.
  Widmer Hefeweizen Widmer Hefeweizen
  Selling, General and Administrative Expenses Share-Based Payment
 Income from Equity Investment in Craft Brands.
 24




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##### Table of Contents



Interest Expense.
 Other Income (Expense) Net
 Income Taxes.
 Craft Brands Alliance LLC
 The Equity Method of Accounting for Investments in Common Stock Exhibits and Financial Statement Schedules
  Sales.
 Cost of Sales.
 25




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##### Table of Contents



Selling, General and Administrative Expenses
 Net Income
 Liquidity and Capital Resources
      26




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Required by
    
    
    Quarter EndedTerm Loan
    
    
    June 30, 2006Capital Ratio
    
    Less than: 1.25:1
    
    
    0.23:1Working Capital
    
    Greater than: $1,900,000
    
    $
    6,041,683Fixed Charge Coverage Ratio
    
    Greater than: 1.15:1
    
    
    2.435:1
 Contractual Commitments.
 Year Ended December 31,(In thousands)2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalLong-term Debt (1)
    
    $
    459
    
    
    $
    459
    
    
    $
    459
    
    
    $
    459
    
    
    $
    453
    
    
    $
    2,925
    
    
    $
    5,214Operating Leases (2)
    
    
    265
    
    
    
    263
    
    
    
    263
    
    
    
    263
    
    
    
    272
    
    
    
    11,828
    
    
    
    13,154Malt and Hop
Commitments (3)
    
    
    1,894
    
    
    
    1,795
    
    
    
    667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,356Other Operating
Purchase Obligations
(4)
    
    
    235
    
    
    
    81
    
    
    
    74
    
    
    
    10
    
    
    
    4
    
    
    
    3
    
    
    
    407$
    2,853
    
    
    $
    2,598
    
    
    $
    1,463
    
    
    $
    732
    
    
    $
    729
    
    
    $
    14,756
    
    
    $
    23,131
 
 (1)
    
    Represents annual principal payments required on the Companys Term Loan and annual lease
payments (including portion of payments imputed as interest) on capital lease obligations.
Interest on the Term Loan accrues at LIBOR plus 1.75% and interest on capital leases are
calculated at the Companys incremental borrowing rate at the inception of each lease.
Monthly interest payments on the Term Loan are not reflected above. The termination of the
A-B Distribution Agreement for any reason would constitute an event of default under the
credit agreement and the bank may declare the entire outstanding loan balance immediately due
and payable.(2)
    
    Represents minimum aggregate future lease payments under noncancelable operating leases.(3)
    
    Represents purchase commitments to ensure that the Company has the necessary supply of
malted barley and specialty hops to meet future production requirements. Payments for malted
barley are made as deliveries are received. Hop contracts generally provide for payment upon
delivery of the product with the balance due on any unshipped product during the year
following the harvest year. The Company believes that, based upon its relationships with its
hop suppliers, the risk of non-delivery is low and that if non-delivery of its required
supply of hops were to occur, the Company would be able to purchase hops to support its
operations from other competitive sources. Malt and hop commitments in excess of 27




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##### Table of Contents



future
requirements, if any, will not materially affect the Companys financial condition or results
of operations.(4)
    
    Represents legally-binding production and operating purchase commitments. 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
 28




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##### Table of Contents



The Equity Method of Accounting for
Investments in Common Stock.
 Revenue Recognition.
 29




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 30




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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
  31




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##### Table of Contents



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
   Director
    
    Votes For
    
    Votes WithheldFrank H. Clement
    
    
    7,060,711
    
    
    
    272,044John W. Glick
    
    
    6,960,061
    
    
    
    272,044David R. Lord
    
    
    6,962,321
    
    
    
    272,044Michael Loughran
    
    
    6,985,771
    
    
    
    272,044John D. Rogers, Jr.
    
    
    6,958,521
    
    
    
    272,044Paul S. Shipman
    
    
    7,055,597
    
    
    
    272,044Anthony J. Short
    
    
    6,977,761
    
    
    
    272,044
  Votes For:  Votes Against  Abstain:
  
 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)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
 32




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SIGNATURES
  REDHOOK ALE BREWERY, INCORPORATED
 August 10, 2006
    BY: /s/ David J. MickelsonDavid J. MickelsonPresident and
Chief Financial Officer August 10, 2006
    BY: /s/ Jay T. CaldwellJay T. CaldwellController, Treasurer and
Principal Accounting Officer 33