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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Redhook Ale Brewery, Incorporated

(425) 483-3232

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Rights to Purchase Common Stock

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes o         No þ

     The aggregate market value of the Common Stock held by non-affiliates of the Registrant (based on the closing price of such stock, as reported by The Nasdaq National Market, on June 30, 2002) was $10,776,817.(1)

     The number of shares of the registrant’s Common Stock outstanding as of March 14, 2003, was 6,254,446.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s Proxy Statement relating to the registrant’s 2003 Annual Meeting of Stockholders to be held on May 20, 2003, are incorporated by reference into Part III of this Report.

Table of Contents

REDHOOK ALE BREWERY, INCORPORATED

FORM 10-K

TABLE OF CONTENTS

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PART I.

Item 1.     Business

      Redhook Ale Brewery, Incorporated (“Redhook” or the “Company”) is one of the leading brewers of craft beers in the United States and has been at the forefront of the domestic craft brewing segment since the Company’s formation in 1981. Redhook produces its specialty bottled and draft products in two technologically advanced, Company-owned breweries, one in the Seattle suburb of Woodinville, Washington (the “Woodinville Brewery”) and the other in Portsmouth, New Hampshire (the “Portsmouth Brewery”). By operating its own small-batch breweries, the Company believes it is better able to control the quantities, types and flavors of beer produced, while optimizing the quality and consistency of its products. Management believes that the Company’s significant production capacity is of high quality and that Redhook is the only domestic craft brewer that owns and operates substantial production facilities in both a western region and eastern region of the United States.

      The Company currently produces nine styles of beer, marketed under distinct brand names. The Company’s flagship brand is Redhook E.S.B., and its other principal products include Redhook India Pale Ale, Redhook Blonde Ale, Blackhook Porter, Redhook Hefe-weizen, Chinook Copper Ale, and its seasonal offerings Winterhook, Redhook Sunrye Ale and Redhook Nut Brown Ale. In addition to its principal products, the Company periodically develops and markets new products to test and measure consumer response to varying styles and flavors. The Company distributed its products through a network of third-party wholesale distributors and a long-term distribution alliance with Anheuser-Busch, Incorporated (“A-B”) (the “Distribution Alliance” or the “Alliance”) in 48 states as of December 31, 2002.

Industry Background

      The Company is a leader in the relatively small craft brewing segment of the U.S. brewing industry. Craft beers are distinguishable from other domestically produced beers by their fuller flavor and adherence to traditional European brewing styles. Although industry information for 2002 is not yet available, shipments of beer in the craft beer segment in 2000 and 2001 were approximately 3% of total beer shipped in the United States according to industry sources. Approximately 6.16 million barrels and 6.24 million barrels were shipped in the U.S. by the craft beer segment in 2000 and 2001, respectively, while total beer sold in the U.S., including imported beer, was approximately 199.2 million and 200.5 million barrels during the same years. The Company believes that the craft beer segment’s 2002 market share is substantially unchanged. While the segment’s volume growth has slowed significantly in recent years, the number of craft brewers in the U.S. has grown dramatically, from 627 at the end of 1994 to approximately 1,330 as of November 2002.

      In the early 1900s, the U.S. brewing industry was comprised of nearly 2,000 breweries, most of which were small operations that produced distinctive beers for local markets. Fewer than 1,000 of these breweries reopened following Prohibition. During the ensuing decades, the beer industry concentrated its resources on marketing less distinctive styles of beer (principally pale lagers and pilsners) for various reasons, including: to please the broadest possible segment of the population; to benefit from economies of scale; to facilitate mass production techniques; to lower costs and lighten flavor profiles through the use of more corn, rice and other adjuncts and less barley; to prolong shelf-life through the use of pasteurization processes; and to take advantage of mass-media advertising whereby the brewer could market a few major brand names on a national basis. At the same time the beer industry was narrowing its product offerings to compete more effectively, there was also extensive consolidation occurring in the industry. According to industry sources, the three largest domestic brewers accounted for approximately 81% of total beer shipped in the United States, including imports, in 2001.

      Annual per capita domestic beer consumption declined from the highs experienced in the early 1980s, a result of an elevated concern over health and safety issues, changing tastes, and affluence and consumption attitudes of a maturing generation of beer drinkers born after World War II. A growing number of consumers began to migrate away from the major domestic products toward a broader taste and variety in their malt beverages, mirroring similar trends in other beverage and cuisine categories. Foreign brewers initially benefited

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      By the latter half of the 1980s, a substantial new domestic industry segment had developed in response to the increasing consumer demand for specialty beers. Across the country, a proliferation of regional specialty brewers (annually selling more than 15,000 barrels but less than 2.0 million barrels of craft beer brewed at their own facilities), contract brewers (selling craft beer brewed by a third party to the contract brewer’s specifications), microbreweries (selling less than 15,000 barrels per year), and brewpubs (combination restaurant-breweries) emerged to form the craft beer industry. This new segment was able to deliver the fuller flavored products presented by the imported beers while still offering a fresher product and one that could appeal to local taste preferences. The strength of consumer demand has enabled certain craft brewers, such as the Company, to evolve from microbreweries into regional and national specialty brewers by constructing larger breweries while still adhering to the traditional European brewing methods that characterize the craft brewing segment. Other craft brewers have sought to take advantage of growing consumer demand and excess industry capacity by contract brewing at underutilized facilities.

      The growth that occurred in the last half of the 1980’s and early 1990’s in the craft beer segment has been slowed by the recent success of the larger specialty category in which the craft beer segment competes. Specialty beverages include imported beers, fuller-flavored products produced by national domestic brewers, and the newest segment of flavored alcohol beverages. Imported products from foreign brewers have enjoyed a resurgence in demand since the mid-1990’s. Certain national domestic brewers have also sought to appeal to this growing demand for craft beers by producing their own fuller-flavored products. Introductions of flavored alcohol beverages in 2001 and 2002 have delivered initial success. Industry sources generally believe that the consumers of flavored alcohol beverages correlate closely with the consumers of the import and craft beer products.

Business Strategy

      The Company’s principal business objective is to be the leading brewer of craft beers in the United States. Redhook seeks to achieve this objective by competing with high quality products that are marketed responsibly and sold through a world-class distribution system, resulting in further penetration of existing markets. The central elements of the Company’s business strategy include:

      Production of High-Quality Craft Beers. The Company is committed to the production of a variety of distinctive, flavorful craft beers. The Company brews its craft beers according to traditional European brewing styles and methods, using only high-quality ingredients and technologically advanced brewing equipment. The Company does not intend to compete directly in terms of production style, pricing or extensive mass-media advertising typical of large national brands.

      Control of Production in Company-Owned Breweries. The Company builds, owns and operates its own brewing facilities to optimize the quality and consistency of its products and to achieve the greatest control over its production costs. Management believes that its ability to engage in ongoing product innovation and to control product quality are critical competitive advantages. Accordingly, the Company does not hire third parties to perform contract brewing of any of its products.

      Production Economies through Technologically Advanced Equipment. The Company’s technologically advanced, highly automated breweries are designed to produce beer in small batches, while attaining production economies through automation rather than scale. The Company believes that its investment in technology enables it to optimize employee productivity, to contain operating costs, to produce innovative beer styles and tastes, and to achieve the production flexibility afforded by small-batch brewing, with minimal loss of efficiency and process reliability.

      Strategic Distribution Alliance with Industry Leader. In October 1994, the Company entered into a long-term distribution agreement with A-B, pursuant to which Redhook distributes its products in substantially all of its markets through A-B’s wholesale distribution network. A-B’s network consists of over

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      Operation of Regional Brewing Facilities. Management believes that, by locating its production facilities in proximity to the key regional markets it serves, the Company is able to enjoy distinct competitive advantages, including shortened delivery times to maximize product freshness, reduced shipping costs, established brand awareness of the Company’s products, and enhanced familiarity with local consumer tastes leading to the Company’s ability to offer select products appealing to those regional preferences. By pursuing this strategy, Redhook believes that it will be able to preserve its reputation and prestige as a regional craft brewer.

      Advertising and Promotion of Products. The Company promotes its products through advertising in select markets, a co-operative advertising and promotion program with its wholesalers, training and education of wholesalers and retailers, promotions at local festivals, venues, and pubs, and utilization of its own pubs. In 1999, after having never participated in any significant advertising programs, the Company began a brand investment program that significantly increased advertising and related costs. During 1999 and 2000, the Company primarily utilized radio, billboard and print advertising in select markets, while also participating, to a small degree, in co-operative advertising where the Company’s spending is matched dollar for dollar by the local distributor. In 2001, the Company allocated a larger share of its advertising spending to its co-operative advertising and promotion program. In 2002, the Company continued its co-operative advertising and promotion program while reducing even further those advertising expenditures where the Company funded the entire program. The Company also markets its products to distributors, retailers and consumers through a variety of specialized training and promotional methods. The Company actively trains its distributors and retailers in understanding the brewing process, the craft beer segment and Redhook products. Promotional methods include introducing Redhook products on draft in pubs and restaurants, using promotional items including tap handles, glassware and coasters, and participating in local festivals and sports venues to increase brand name recognition. In addition, the Company’s prominently located breweries feature pubs and retail outlets and offer guided tours to further increase consumer awareness of Redhook.

Products

      The Company produces a variety of styles of full-flavored craft beers using traditional European brewing methods. The Company brews its beers using only high-quality hops, malted barley, wheat, rye and other natural ingredients, and does not use any rice, corn, sugar, syrups or other adjuncts. The Company’s beers are marketed on the basis of freshness and distinctive flavor profiles. To help maintain full flavor, the Company’s products are not pasteurized. As a result, it is appropriate that they be kept cool so that oxidation and heat-induced aging will not adversely affect the original taste, and that they be distributed and served as soon as possible, generally within three months after packaging to maximize freshness and flavor. The Company distributes its products only in glass bottles and kegs, and its products are freshness dated for the benefit of consumers.

      The Company presently produces nine principal brands, each with its own distinctive combination of flavor, color and clarity:

      Redhook E.S.B. The Company’s flagship brand, Redhook E.S.B., which accounted for approximately 59% of the Company’s sales in 2002, is a full, rich, well-rounded, amber-colored ale with a sweet toasted malt flavor balanced by a pleasant floral liveliness derived from Tettnang hops.

      Redhook India Pale Ale. A premium English, pub-style bitter ale, Redhook IPA is pale and aggressively hopped, has a brassy color imparted by caramelized malt, an herbal aroma characteristic of Northwest Cascade hops, and a crisp finish.

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      Redhook Blonde Ale. A delicious, thirst-quenching golden ale. The combination of lightly roasted barley, subtle hops, and a touch of wheat creates perfectly balanced and distinctively drinkable ale. Formerly Redhook’s summer seasonal ale, Blonde Ale is now available year-round.

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

      Redhook Hefe-weizen. This wheat beer is unfiltered and named Hefe-weizen, which means “wheat beer with yeast.” Leaving the yeast in, instead of filtering it out, accentuates the wheat flavor and adds visual appeal and distinction.

      Chinook Copper Ale. Brewed in small batches exclusively for the Northwest, it is unfiltered so beer drinkers can enjoy the full flavor characteristics. Chinook Copper is appetizingly fruity with light maltiness and a very pleasant piney hint in the aroma. It has a beautiful opalescence from a small amount of yeast suspended in the beer.

      Winterhook. A rich, seasonal holiday ale formulated specially each year for cold-weather enjoyment, Winterhook typically is deep in color and rich in flavor, with complex flavors and a warm finish. Winterhook is available during fall and winter months.

      Redhook Sunrye Ale. Gently roasted barley, delicate hops and just a touch of rye combine for a very balanced beer. Slightly unfiltered to exude a pearl glow, Sunrye is the new member of the Redhook seasonal selection and is styled for warm weather refreshment. Sunrye will be available from April through September.

      Redhook Nut Brown Ale. A malty ale with a hint of sweetness in the finish. The combination of six barley malts and two hop varieties results in a surprisingly smooth, well-balanced dark beer. Nut Brown Ale is available during the late winter and early spring.

      In an effort to be responsive to varying consumer style and flavor preferences, the Company also periodically engages in the development and testing of new products. The Company believes that the continued success of craft brewers will be affected by their ability to be innovative and attentive to consumer desires for new and distinctive taste experiences while maintaining consistently high product quality. The Company’s technologically advanced breweries allow it to produce small-batch experimental ales within three weeks. Experimental products are periodically developed and typically produced in draft form only for on-premise test marketing at the Company’s pubs and selected retail sites. If the initial consumer reception of an experimental brew is sufficiently positive, then its taste and formula are refined, as necessary, and a new Redhook brand may be created. Redhook India Pale Ale, Redhook Nut Brown Ale, and Redhook Blonde Ale are examples of products that were developed in this manner.

      In January 2003, the Company entered into a licensing agreement with Widmer Brothers Brewing Company to produce and sell the Widmer Hefeweizen brand in states east of the Mississippi River. Brewing of this product, which began in February 2003, will be conducted at the Portsmouth Brewery under the supervision and assistance of Widmer’s brewing staff to insure their brand’s quality and matching taste profile. The term of this agreement is for five years, with an additional one-year automatic renewal unless either party elects to terminate the arrangement. The agreement may be terminated by either party at any time without cause pursuant to 150 days notice. The agreement may be terminated for cause by either party under certain conditions. During the term of this agreement, Redhook will not brew, advertise, market, or distribute any product that is labeled or advertised as a “Hefeweizen” or any similar product in the agreed upon eastern territory, once the existing Redhook Hefe-weizen business is transitioned to Widmer’s Hefeweizen. This transition may take up to one year. This agreement, for the Eastern United States only, is expected to increase capacity utilization and strengthen the Company’s product portfolio. The Company does not expect that it will have a material impact the Company’s sales or results of operations. In the Western United States, Redhook and Widmer Brothers Brewing Company remain competitors in the highly competitive craft beer market.

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Brewing Operations

      The Brewing Process. Beer is made primarily from four natural ingredients: malted grain, hops, yeast and water. The grain most commonly used in brewing is barley, owing to its distinctive germination characteristics that make it easy to ferment. The Company uses the finest barley malt, typically using strains of barley having two rows of grain in each ear. A wide variety of hops may be used to add seasoning to the brew; some varieties best confer bitterness, while others are chosen for their ability to impart distinctive aromas to the beer. Nearly all the yeasts used to induce or augment fermentation of beer are of the species Saccharomyces cerevisiae, which includes both the top-fermenting yeasts used in ale production and the bottom-fermenting yeasts associated with lagers.

      The brewing process begins when the malt supplier soaks the barley grain in water, thereby initiating germination, and then dries and cures the grain through kilning. This process, known as “malting,” breaks down complex carbohydrates and proteins so that they can be easily extracted. The malting process also imparts color and flavor characteristics to the grain. The cured grain, referred to as “malt,” is then sold to the brewery. At the brewery, various malts are cracked by milling, and mixed with warm water. This mixture, or “mash,” is heated and stirred in the mash tun, allowing the simple carbohydrates and proteins to be converted into fermentable sugars. Naturally occurring enzymes help facilitate this process. The mash is then strained and rinsed in the lauter tun to produce a residual liquid, high in fermentable sugars, called “wort,” which then flows into a brew kettle to be boiled, concentrated and clarified. Hops are added during the boil to impart bitterness, balance and aroma. The specific mixture of hops and the brewing time and temperature further affect the flavor of the beer. After the boil, the wort is strained and cooled before it is moved to a fermentation cellar, where specially cultured yeast is added to induce fermentation. During fermentation, the wort’s sugars are metabolized by the yeast cells, producing carbon dioxide and alcohol. Some of the carbon dioxide is recaptured and absorbed back into the beer, providing a natural source of carbonation. After fermentation, the beer is cooled for several days while the beer is clarified and full flavor develops. Filtration, the final step for a filtered beer, removes unwanted yeast. At this point, the beer is in its peak condition and ready for bottling or keg racking. The entire brewing process of ales, from mashing through filtration, is typically completed in 14 to 21 days, depending on the formulation and style of the product being brewed.

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      Brewing Equipment. The Company uses only technologically advanced and highly automated small-batch brewing equipment. The Woodinville Brewery employs a 100-barrel mash tun; lauter tun; wort receiver; wort kettle; whirlpool kettle; five 70,000-pound, one 35,000-pound and two 25,000-pound grain silos; two 100-barrel, fifty-four 200-barrel, and ten 600-barrel fermenters; and two 300-barrel and four 400-barrel bright tanks. The Portsmouth Brewery employs a 100-barrel mash tun; lauter tun; wort receiver; wort kettle; whirlpool kettle; three 70,000-pound and two 35,000-pound grain silos; nine 100-barrel and sixteen 400-barrel fermenters; two 200-barrel and two 400-barrel bright tanks; and an anaerobic waste-water treatment facility which completes the process cycle. During the first half of 2003, the Portsmouth Brewery will place in service two 200-barrel and two additional 400-barrel fermenters. Both breweries use advanced microfiltration technology, including a diatomaceous earth pad filter, which can extend product shelf life by eliminating unwanted yeast.

      Bottling and Kegging. The Company packages its craft beers in both bottles and kegs. Both of the Company’s breweries have fully automated, technologically advanced bottling and keg lines. The bottle filler at both breweries utilizes a carbon dioxide environment during bottling that is designed to ensure that minimal oxygen is dissolved in the beer, thereby extending product shelf life.

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

      Ingredients and Raw Materials. The Company currently purchases a significant portion of its malted barley from a single supplier and its premium-quality select hops, grown in the Pacific Northwest, from competitive sources. The Company periodically purchases small lots of European hops, which it uses to achieve a special hop character in certain of its beers. In order to ensure the supply of the hop varieties used in its products, the Company enters into supply contracts for its hop requirements. The Company anticipates that it will experience cost increases for certain raw materials in 2003, the most significant of which will be malted barley, as a result of a very poor 2002 worldwide harvest. Redhook believes that alternate sources of comparable quality malted barley and hops are available although there is no assurance that pricing would be competitive with current arrangements. The Company currently cultivates its own Saccharomyces cerevisiae yeast supply and maintains a separate, secure supply in-house. The Company has access to multiple competitive sources for packing materials, such as bottles, labels, six-pack carriers, crowns and shipping cases. The Company anticipates that its packaging costs may increase in 2003 as a result of an apparent increase in demand for glass.

Product Distribution

      Redhook’s products are available for sale directly to consumers in draft and bottles at restaurants, bars and liquor stores, as well as in bottles at supermarkets, warehouse clubs and convenience stores. Like substantially all craft brewers, the Company’s products are delivered to these retail outlets through a network of local distributors whose principal business is the distribution of beer and, in some cases, other alcoholic beverages, and who traditionally have local distribution relationships with one or more national beer brands. The Company, together with its distributors, markets its products to retail outlets and relies on its distributors to provide regular delivery to retailers, to maintain retail shelf space and to oversee timely rotation of inventory to ensure the freshness of its products. The Company also offers its products directly to consumers at the Company’s two on-premise retail establishments, the Forecasters Public House in Woodinville, Washington and the Cataqua Public House in Portsmouth, New Hampshire.

      In October 1994, the Company entered into the Distribution Alliance with A-B pursuant to which Redhook began distributing its products, for any new markets entered, exclusively through A-B’s wholesale distribution network. If the A-B distributor in the market does not agree to carry the Company’s products, the Company may select a non-A-B distributor for that territory. The exclusivity provisions of the A-B Distribution Agreement do not apply to territories where distribution arrangements with non-Alliance

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      Prior to establishing the Alliance with A-B, the Company distributed its products regionally through distributors, many of which were part of the A-B distribution network, in eight western states: Washington, California (northern), Oregon, Idaho, Montana, Wyoming, Colorado and Alaska. The Company’s most significant non-Alliance wholesaler is K&L Distributors, Inc., which although not part of the Alliance is a distributor in the A-B distribution network and responsible for distribution of the Company’s products in most of King County, Washington, including Seattle. K&L Distributors, Inc. accounted for approximately 13%, 14% and 16% of total sales in 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company had 19 non-Alliance distributors. The Company expects the percentage of sales represented by non-Alliance distributors to continue to decline as the Company expands its sales through the Alliance.

      A-B, whose products accounted for approximately 49.2% of total beer shipped by volume in the U.S., including imports, in 2002, distributes its products throughout the United States through a network of over 600 wholesale distributors, most of whom are geographically contiguous and independently owned and operated. The Company believes that the typical A-B distributor is financially stable and has both a long-standing presence and a substantial market share of beer sales in its territory.

      Redhook chose to align itself with A-B through the Alliance as an integral part of its growth strategy, and to provide access to quality distribution throughout the United States. Redhook was the first and is the largest independent craft brewer to have a formal distribution agreement with a major U.S. brewer. The Company believes that access to A-B’s distribution network enabled it to enter targeted new markets more rapidly and with more thorough penetration of the available customer base in the territory. The Distribution Alliance allowed the Company to retain control over the selection and timing of new market introductions. The Company believes that the existence of the Alliance, presentations by Redhook’s management at A-B’s distributor conventions, A-B communications about Redhook in printed distributor materials, and A-B-supported opportunities for Redhook to educate A-B distributors about its specialty products result in increased awareness of and demand for Redhook products among A-B’s distributors.

      Management believes that the Company’s competitors in the craft beer segment generally negotiate distribution relationships separately with distributors in each locality and, as a result, typically distribute through a variety of wholesalers representing differing national beer brands with uncoordinated territorial boundaries. Because A-B’s distributors are assigned territories that generally are contiguous, the Alliance enables the Company to reduce the gaps and overlaps in distribution coverage often experienced by the Company’s competitors.

      The Company’s products were distributed in 48 states at the end of 2002. In 2002, the Company shipped its products to 532 Alliance distribution points, accounting for approximately 71% of the Company’s sales volume. In addition, sales through wholesalers that are part of the A-B distribution network but that are not part of the Alliance accounted for an additional 24% of the Company’s sales volume in 2002.

      Under the Alliance, the Company is responsible for marketing its products to A-B’s distributors, as well as to retailers and consumers. The A-B distributors then place orders with the Company, through A-B, for Redhook products. The Company separately packages and ships the orders in refrigerated trucks to the A-B distribution center nearest to the distributor or, under certain circumstances, directly to the distributor. Generally, the Company sells its products to A-B at the same list prices the Company charges non-Alliance distributors in the respective markets, but it must pay A-B certain fees in connection with sales to A-B. Such fees are determined by a formula that effectively reduces the total gross profit margin earned on sales to A-B. However, management believes that the benefits of the Alliance, particularly the potential for increased sales volume, and efficiencies in delivery, state reporting and licensing, billing and collections created by the Alliance are significant to the Company’s business.

      Under the Alliance, the Company has granted A-B the first right to distribute Redhook products in the United States and Mexico, except in those territories already subject to distribution agreements with non-

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Sales and Marketing

      The Company promotes its products through a co-operative advertising and promotion program with its wholesalers; media advertising in select markets; training and education of wholesalers and retailers; promotions at local festivals, venues, and pubs; utilization of its two breweries; and price discounting.

      The Company has participated in advertising programs to varying degrees over the past five years. Prior to 1999, the Company engaged in very limited advertising to market its products. In order to increase brand awareness and capture a larger share of the fragmented craft beer market, the Company determined that a significant increase in spending on advertising and promotion was necessary. In 1999 and 2000, the Company primarily utilized radio, billboard and print advertising in key markets, while also participating to a smaller degree in a co-operative program with its distributors. In 2001 and 2002, the Company allocated a larger share of its advertising spending to this co-operative program whereby the Company’s spending is matched dollar for dollar by the distributor. The Company believes that the financial commitment as well as the distributor’s knowledge of the local market result in an advertising and promotion program that is targeted in a manner that will best promote Redhook. Expenditures for the co-op program and media advertising program totaled $2.6 million and $1.9 million in 2001 and 2002, respectively. This increased advertising spending has significantly increased the Company’s selling, general and administrative expense since 1998, leading to increased losses and a reduction in stockholders’ equity. The Company expects to continue to participate in the co-op advertising and promotion program and limited media advertising in select markets in 2003. Market and competitive considerations could require an increase in other promotional costs associated with developing existing and new markets.

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

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

      The Company’s breweries also play a significant role in increasing consumer awareness of the Company’s products and enhancing Redhook’s image as a craft brewer. Many visitors take tours at the Company’s breweries. Both of the Company’s breweries have a retail pub on-site where the Company’s products are

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      To further promote retail bottled product sales and in response to local competitive conditions, the Company regularly offers “post-offs,” or price discounts, to distributors in most of its markets. Distributors and retailers usually participate in the cost of these price discounts.

Seasonality

      Sales of the Company’s products are somewhat seasonal, with the first and fourth quarters historically being the slowest and the rest of the year showing stronger sales. The volume of sales may also be affected by weather conditions. Because of the seasonality of the Company’s business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Competition

      The Company competes in the highly competitive craft brewing market as well as in the much larger specialty beer market, which encompasses producers of import beers, major national brewers that have introduced fuller-flavored products, and large spirit companies and national brewers that have recently introduced flavored alcohol beverages. See “Industry Background.”

      Competition within the domestic craft beer segment and the specialty beer market is based on product quality, taste, consistency and freshness; ability to differentiate products; promotional methods and product support; transportation costs; distribution coverage; local appeal; and price.

      The craft beer segment is highly competitive due to the proliferation of small craft brewers, including contract brewers, and the increase in the number of products offered by such brewers. Because the number of participants and number of different products offered in this segment have increased significantly in recent years, the competition for bottled product placements and especially for draft beer placements has intensified. As the Company has expanded its distribution network outside the Pacific Northwest region, and as other craft brewers have expanded their distribution to the Pacific Northwest, Redhook has encountered increasing competition from microbreweries, from other regional specialty brewers such as Sierra Nevada Brewing Company and New Belgium Brewing Company, as well as from contract brewers such as Boston Beer Company. Although certain of these competitors distribute their products nationally and may have greater financial and other resources than the Company, management believes that the Company possesses certain competitive advantages, including its technologically advanced, Company-owned production facilities and distribution through the Alliance.

      A significant portion of the Company’s sales continues to be in the Pacific Northwest region, which the Company believes is one of the most competitive craft beer markets in the United States, both in terms of number of market participants and consumer awareness. Since 1997, the Company has experienced a decline in sales volume in Washington State, the Company’s largest market, of approximately 3.7%. As this market matures, the Company expects to face increased competition, both from increased product introductions and aggressive price promotions.

      In response to the growth of the craft beer segment, most of the major domestic brewers have introduced fuller-flavored beers. While these product offerings are intended to compete with craft beers, many of them are brewed according to methods used by the major national brewers. Although increased participation of the major national brewers increases competition for market share and can heighten price sensitivity within the craft beer segment, the Company believes that their participation will tend to increase advertising, distribution and consumer education and awareness of craft beers, and thus may contribute to further growth of this industry segment.

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      The Company also competes against producers of imported beers, such as Bass, Becks, Heineken, and Modelo (Corona). Most of these foreign brewers have significantly greater financial resources than the Company. Although imported beers currently account for a much greater share of the U.S. beer market than craft beers, the Company believes that craft brewers possess certain competitive advantages over some importers, including lower transportation and no importation costs, proximity to and familiarity with local consumers, a higher degree of product freshness, eligibility for lower federal excise taxes and absence of currency fluctuations.

      In 2001 and 2002, several major distilled spirits producers and national brewers introduced flavored alcohol beverages, also referred to as malternative beverages. These products, such as Smirnoff Ice, Sky Blue, Bacardi Silver and Mike’s Hard Lemonade, have initially demonstrated strong sales and appear to have experienced favorable results in drawing overlapping consumers away from imports and craft beers. While recent reports indicate that sales of some of these products appear to have leveled off or even declined slightly, flavored alcohol beverages, in general, continue to be supported by significant advertising spending. The producers of many of these products have significantly greater financial resources than the Company. The success of the flavored alcohol beverages will likely subject the Company to increased competition.

Regulation

      The Company’s business is highly regulated at federal, state and local levels. Various permits, licenses and approvals necessary to the Company’s brewery and pub operations and the sale of alcoholic beverages are required from various agencies, including the U.S. Treasury Department, Bureau of Alcohol, Tobacco and Firearms (the “BATF”); the United States Department of Agriculture; the United States Food and Drug Administration; state alcohol regulatory agencies in the states in which the Company sells its products; and state and local health, sanitation, safety, fire and environmental agencies. In addition, the beer industry is subject to substantial federal and state excise taxes, although the Company benefits from favorable treatment granted to brewers producing less than 2 million barrels per year.

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

     Alcoholic Beverage Regulation and Taxation

      Both of the Company’s breweries and pubs are subject to licensing and regulation by a number of governmental authorities. The Company operates its breweries under federal licensing requirements imposed by the BATF. The BATF requires the filing of a “Brewer’s Notice” upon the establishment of a commercial brewery. In addition, commercial brewers are required to file an amended Brewer’s Notice every time there is a material change in the brewing process or brewing equipment, change in the brewery’s location, change in the brewery’s management or a material change in the brewery’s ownership. The Company’s operations are subject to audit and inspection by the BATF at any time.

      In addition to the regulations imposed by the BATF, the Company’s breweries are subject to various regulations concerning retail sales, pub operations, deliveries and selling practices in states in which the Company sells its products. Failure of the Company to comply with applicable federal or state regulations could result in limitations on the Company’s ability to conduct its business. The BATF’s permits can be revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond premises, or to abide by federal alcoholic beverage production and distribution regulations, or if holders of 10% or more of the Company’s equity securities are found to be of questionable character. Permits from state regulatory agencies can be revoked for many of the same reasons.

      The U.S. federal government currently imposes an excise tax of $18 per barrel on beer sold for consumption in the United States. However, any brewer with production under 2 million barrels per year

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      In early 2003, a bill was introduced in Washington State to increase the excise tax paid on beer sales in Washington State, the Company’s largest market, by approximately 400%. Washington State regulations currently require beer taxes to be paid by Washington State distributors. If such a tax were enacted and if Washington State distributors were to pass the cost of this tax onto consumers in the form of higher pricing, it could negatively impact demand for the Company’s products, leading to decreased sales. If the Company were to determine that it was necessary to absorb all or a portion of the tax and consequently reduced the price charged to the distributor, it could have a negative impact on results of operations for the Company. The bill is currently being considered in the Committee on Finance of the Washington State House of Representatives.

     State and Federal Environmental Regulation

      The Company’s brewery operations are subject to environmental regulations and local permitting requirements and agreements regarding, among other things, air emissions, water discharges and the handling and disposal of wastes. While the Company has no reason to believe the operations of its facilities violate any such regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more stringent in the future, the Company could be adversely affected.

     Dram Shop Laws

      The serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server’s being held liable to third parties for injuries caused by the intoxicated customer. The Company’s pubs have addressed this concern by establishing early closing hours and regularly scheduled employee training. Large uninsured damage awards against the Company could adversely affect the Company’s financial condition.

Relationship with Anheuser-Busch, Incorporated

      In October 1994, the Company entered into the Alliance with A-B. The Alliance consists of a long-term national distribution agreement (the “A-B Distribution Agreement”) and an investment by A-B in the Company (the “A-B Investment Agreement”). The Alliance gives the Company access to A-B’s domestic network of over 600 wholesale distributors, while the Company maintains control over the production and marketing of its products. Pursuant to the A-B Investment Agreement, A-B invested approximately $30 million to purchase the Company’s Series B Preferred Stock (the “Series B Preferred Stock”) and common stock of the Company (“Common Stock”), including newly-issued shares concurrent with the Company’s initial public offering.

     A-B Distribution Agreement

      The A-B Distribution Agreement has a stated term of 20 years, but is subject to earlier termination

	(i)	by either party without cause on December 31, 2004;
	(ii)	by either party upon an uncured material breach by the other party of certain provisions of the Series B Preferred Stock, the A-B Investment Agreement, the A-B Distribution Agreement or certain related A-B investment documents, or upon the insolvency of the other party;

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	(iii)	by A-B upon

	(a)	acquisition by another large alcoholic beverage competitor of 10% or greater equity ownership of the Company and a seat on the Company’s Board of Directors; or
	(b)	a deterioration of the Company’s financial condition that results from a change in ownership of the Company and materially adversely affects its ability to perform under the A-B Distribution Agreement; or

	(iv)	by A-B following

	(a)	any action by the Company that in A-B’s sole determination damages the reputation or image of A-B or the brewing industry (for example, production of a high-alcohol beer, defamation of A-B or its products or contamination of the Company’s products, but not poor operating results, an unsuccessful product introduction or competition with A-B’s products);
	(b)	any acquisition of, agreement to acquire, or institution of a tender or exchange offer to acquire a percentage of the Company’s equity securities equal to or greater than that held by A-B;
	(c)	certain agreements pursuant to which the Company would merge into or consolidate with another corporation or sell substantially all of its assets or certain of its trademarks; or
	(d)	the failure to appoint a successor acceptable to A-B in the event Paul S. Shipman ceases to function as the Company’s Chief Executive Officer.

      The term “Extraordinary Termination” refers to the termination by A-B of the A-B Distribution Agreement for any of the reasons described under clause (iv) above.

      In the event that the A-B Distribution Agreement is terminated on or before December 31, 2004, under the circumstances described in (i), (iii) or (iv) above, or by A-B under the circumstances described in (ii) above, the terms of the Series B Preferred Stock held by A-B pursuant to the A-B Investment Agreement (see A-B Investment Agreement below) require the mandatory redemption of the Series B Preferred Stock on December 31, 2004, at a redemption price equal to $12.61 per share (approximately $16.3 million in the aggregate), plus an amount equal to accumulated and unpaid dividends thereon, if any. The terms of the Series B Preferred Stock further provide that, if at the time of the mandatory redemption the Company has insufficient legally available funds to redeem all shares of Series B Preferred Stock, then all funds that are legally available must be used to redeem Series B Preferred Stock. At any time thereafter when additional funds of the Company become legally available, such funds must be immediately used to redeem shares of Series B Preferred Stock. The Company would not be legally able to redeem shares of Series B Preferred Stock if, after giving effect to such redemption, the Company would not be able to pay its debts when due in the usual course of business or the Company’s total assets would be less than the sum of its total liabilities. Notice of intention to terminate the Distribution Agreement must be made by the party electing to do so no less than six months prior to the termination date.

      The termination of the A-B Distribution Agreement for any reason or the failure by the Company to perform any of its material obligations under the A-B Investment Agreement would also constitute an event of default under the Company’s bank credit agreement. Upon default, the bank may declare the entire outstanding term loan balance immediately due and payable. If the loan balance became due and payable, such payment would have seniority over the redemption of the Series B Preferred Stock. If this were to occur, it would be unlikely that the Company could satisfy its obligations under the term loan. In all events, unless additional capital were raised, the Company would not have sufficient liquidity to satisfy both its obligation under the term loan and its obligation to redeem the Series B Preferred Stock. The Company could seek to refinance its term loan with one or more banks or obtain additional equity capital, however, there can be no assurance the Company would be able to access additional capital to meet its needs or that such additional capital would be at commercially reasonable terms.

      If the A-B Distribution Agreement were terminated early as described above, it would be extremely difficult for the Company to rebuild its distribution network without a severe negative impact on the

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     A-B Investment Agreement

      Pursuant to the A-B Investment Agreement, A-B purchased 236,756 shares of Common Stock for $7.00 per share in October 1994 and 1,289,872 shares of Series B Preferred Stock for $12.61 per share in November 1994.

      A-B Preemptive Rights. Pursuant to the A-B Investment Agreement, A-B exercised its right in connection with the Company’s public offering in August 1995 to purchase 716,714 shares of Common Stock at $17.00 per share in order to maintain its 25% ownership percentage of the Common Stock on a Fully Diluted Basis (as defined below). A-B has no further preemptive rights.

      A-B Purchase and Transfer Restrictions. The A-B Investment Agreement provides that, to the extent A-B’s ownership exceeds 30% of the outstanding shares of Common Stock, calculated on a Fully Diluted Basis, as a result of a rights offering, A-B will, in certain circumstances, take steps to divest itself of such shares no later than the later of (i) one year from the date of such purchase or acquisition and (ii) the earliest period in which such shares may be sold pursuant to Rule 144 under the Securities Act of 1933, as amended.

      The A-B Investment Agreement imposes restrictions on A-B’s ability to transfer Series B Preferred Stock and Common Stock, including, subject to certain exceptions (including sales of less than 3% of the outstanding Common Stock, or sales pursuant to the exercise of registration rights), a limited right of first refusal in favor of the Company on proposed sales of Common Stock by A-B, an outright prohibition of sales by A-B of more than 12.5% of the Common Stock on a Fully Diluted Basis to any single person or group, or of any Common Stock to brewers of malt beverages, and a prohibition on any sale of Series B Preferred Stock prior to an Extraordinary Termination of the A-B Distribution Agreement.

      A-B Board Representation. Under the A-B Investment Agreement, A-B has the right to designate a number of nominees based on its percentage ownership, but not less than two, so long as A-B holds at least 20% of the Common Stock on a Fully Diluted Basis (which number will be rounded up to the next highest whole number if not a whole number). A-B’s percentage ownership on a “Fully Diluted Basis,” as defined in the A-B Investment Agreement is calculated based on the assumption that all outstanding shares of Series B Preferred Stock and other convertible securities are converted into Common Stock, that all outstanding warrants and stock options (other than stock options granted to officers, directors and employees under the Company’s option plans) have been exercised in full, and that all holdings of A-B and its affiliated companies are aggregated. Currently, there are no outstanding options or warrants that would be included in the calculation of outstanding shares on a Fully Diluted Basis. As of March 14, 2003, A-B owned 29.7% of the Company’s Common Stock on a Fully Diluted Basis, and therefore was entitled under the terms of the A-B Investment Agreement to designate 2 directors to the Company’s Board of Directors. The Company is obligated to use reasonable efforts to cause the election of the nominees designated by A-B. If the designees are not elected, the Company is obligated to take certain remedial measures, and A-B is entitled to elect the same number of directors by class voting under the terms of the Series B Preferred Stock. A-B also has a contractual right to have one of its Board designees sit on each committee of the Company’s Board of Directors.

      Covenants Binding the Company. The Company has agreed, pursuant to the A-B Investment Agreement, that it will not, without A-B’s consent, (i) enter into any acquisition or investment transaction involving an aggregate purchase price exceeding 50% of the book value of the Company’s assets prior to such

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      Certain of these covenants, as well as A-B’s contractual Board and committee representation rights, terminate upon the earliest of (i) a reduction in the ownership of A-B and its affiliates to less than the greater of (a) 610,000 shares of Common Stock (assuming conversion and exercise of all convertible securities, options and warrants and ignoring any stock split or other recapitalization) and (b) 7.5% of the Common Stock calculated on a Fully Diluted Basis; (ii) a purchase or acquisition of Common Stock by A-B that results in an increase in the ownership of A-B and its affiliates to more than 30% of the Common Stock calculated on a Fully Diluted Basis, if A-B does not indicate that it will divest itself of shares to reduce its ownership within a 10 day period; (iii) an Extraordinary Termination of the A-B Distribution Agreement; (iv) termination of the A-B Distribution Agreement by Redhook on the basis of an uncured breach by, or insolvency of, A-B; and (v) termination of the A-B Distribution Agreement by either party at the end of 2004 or the expiration thereof at the end of 2014.

Trademarks

      The Company has obtained U.S. trademark registrations for the marks and corresponding logo designs for Ballard Bitter, Blackhook, Redhook, Redhook ESB, Wheathook, Winterhook, Double Black Stout and Blueline. The Company has also obtained U.S. trademark registrations for Forecasters, Trolleyman, and Cataqua. The Redhook mark and certain other Company marks are also registered or pending in various foreign countries. The Company regards its Redhook and other trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any infringing uses that could materially affect its current business or any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company’s policy is to pursue registration of its marks in its markets whenever possible and to oppose vigorously any infringement of its marks.

Employees

      At December 31, 2002, the Company had 194 employees, including 57 in production, 79 in the pubs, 44 in sales and marketing, and 14 in administration. Of these, 45 in the pubs and 6 in sales and marketing were part-time employees. The Company believes its relations with its employees to be good.

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Item 2.     Properties

      The Company currently operates two technologically advanced, highly automated small-batch breweries, one in the Seattle suburb of Woodinville, Washington and the other in Portsmouth, New Hampshire. See Notes 4, 5 and 11 of the Notes to Financial Statements included elsewhere herein.

      The Woodinville Brewery. The Woodinville Brewery, located on approximately 22 acres (17 of which are developable) in Woodinville, Washington, a suburb of Seattle, is across the street from the Chateau Ste. Michelle Winery, next to the Columbia Winery and visible from a popular bicycle path. The Woodinville Brewery is comprised of an approximately 88,000 square-foot building, a 40,000 square-foot building and an outdoor tank farm. The two buildings house a 100-barrel brewhouse, fermentation cellars, filter rooms, grain storage silos, a bottling line, a keg filling line, dry storage, two coolers and loading docks. The brewery includes a retail merchandise outlet and the Forecasters Public House, a 4,000 square-foot family-oriented pub that seats 200 and features an outdoor beer garden that seats an additional 200. Additional entertainment facilities include a 4,000 square-foot special events room accommodating up to 250 people. The brewery also houses office space, a portion of which is occupied by the Company’s corporate office and the remainder of which is leased through March 2005. The brewery’s current production capacity is approximately 250,000 barrels per year under ideal brewing conditions. The Company purchased the land in 1993 and believes that its value has appreciated.

      The Portsmouth Brewery. The Portsmouth Brewery is located on approximately 23 acres in Portsmouth, New Hampshire. The land is subleased, the term of which expires in 2047, and contains two seven-year extension options. The Portsmouth Brewery is modeled after the Woodinville Brewery and is similarly equipped, but is larger in design, covering 125,000 square feet to accommodate all phases of the Company’s brewing operations under one roof. Also included is a retail merchandise outlet, the Cataqua Public House, a 4,000 square-foot family-oriented pub with an outdoor beer garden, and a special events room accommodating up to 250 people. Production began in late October 1996, with an initial brewing capacity of approximately 100,000 barrels per year. In 2002, additional brewing capacity was installed, bringing the current production capacity to 110,000 barrels per year. During the first half of 2003, the Company plans to further expand its fermentation capacity in order to accommodate anticipated growth, bringing the current production capacity to approximately 125,000 barrels per year. The Company plans to phase in additional brewing capacity as needed, up to the maximum designed production capacity of approximately 250,000 barrels per year under ideal brewing conditions.

Item 3.     Legal Proceedings

      The Company is involved from time to time in claims, proceedings and litigation arising in the normal course of business. The Company believes that, to the extent that it exists, any pending or threatened litigation involving the Company or its properties will not likely have a material adverse effect on the Company’s financial condition or results of operations.

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

      None.

Item 4A.     Executive Officers of the Company

      Mr. Shipman is one of the Company’s founders and has served as its President since September 1981, Chairman of the Board since November 1992, and Chief Executive Officer since June 1993. Prior to founding the Company, Mr. Shipman was a marketing analyst for the Chateau Ste. Michelle Winery from 1978 to 1981. Mr. Shipman received his Bachelor’s degree in English from Bucknell University in 1975 and his Master’s degree in Business Administration from the Darden Business School, University of Virginia, in 1978.

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      Mr. Mickelson was named Chief Financial Officer in August 2000 in addition to his position of Executive Vice President and Chief Operating Officer, which he has held since March 1995. From April 1994 to March 1995, he was the Company’s Vice President and General Manager. From July 1992 to December 1994, he served as its Chief Financial Officer, and was also named General Manager in January 1994. He served as the Company’s Controller from 1987 to July 1992, and additionally was elected Treasurer in 1989. From 1985 to 1987, he was the Controller for Certified Foods, Inc. and from 1981 to 1985 served as a loan officer with Barclays Bank PLC. Mr. Mickelson received his Bachelor’s degree in Business Administration from the University of Washington in 1981.

      Ms. Hinckley has served as Vice President, Marketing since August 2000, and from March 1995 to May 1996. From June 1996 to July 2000, Ms. Hinckley served as the Company’s Vice President, Sales and Marketing. She served as the Company’s Marketing Director from August 1992 to March 1995 and its Retail Tourism Manager from August 1988 to August 1992. From 1984 to 1988, she was the wine buyer for a Seattle-area specialty food and wine retailer, and from 1982 to 1984 she was the retail and tourism manager for Stevenot Winery. Ms. Hinckley received her Bachelor’s degree in Psychology from Suffolk University in 1974.

      Mr. Marquina joined the Company in August 2000 as Vice President, Sales. From 1993 to 2000, he was a principal of Coast Distributing Company, an A-B distributor in San Diego, California. From March 1979 to May 1993, Mr. Marquina held several management positions for A-B, including Division Manager So. California (1989-1993), Division Manager Northwest (1986-1989), Region Marketing Coordinator (1983-1986), Region Administrator (1981-1983), and District Manager (1979-1981). Mr. Marquina served as Product Manager from 1977 to 1979, and Regional Account Manager from 1976 to 1977, both with Armour Food Co. He received his Bachelor’s degree in Business Administration from the University of Oregon in 1976.

      Mr. Prial has served as Vice President, East Operations since November 2001. From 1996 to November 2001, Mr. Prial served as the General Manager of the Company’s Portsmouth Brewery. He served as the Company’s Southern California Field Sales Manager from August 1994 to March 1996. From April 1993 to April 1994, Mr. Prial served as Vice President of Sales for Brewski Brewing Company of Culver City, California. From 1979 to 1993, he served in various positions for Wisdom Import Sales Company in Irvine, California. From 1977 to 1979, Mr. Prial worked for the Miller Brewing Company as an Area Manager in the Pacific Northwest. He received his Bachelor’s degree in Management & Economics from Marietta College in Marietta, Ohio in 1977.

      Mr. Triplett has served as Vice President, Brewing since March 1995. From 1987 to March 1995, he was the Company’s Production Manager. He has worked in virtually every facet of production since joining the Company in 1985. Mr. Triplett has taken coursework at the Siebel Institute of Brewing and the University of California at Davis. He is a member of the Master Brewers Association of America, currently serving as Technical Director in the Northwest district, and a member of the American Society of Brewing Chemists. He received his Bachelor’s degree in Petroleum Engineering from the University of Wyoming in 1985.

      There is no family relationship between any directors or executive officers of the Company.

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PART II.

      The Company’s Common Stock trades on the Nasdaq National Market under the trading symbol HOOK. The table below sets forth, for the fiscal quarters indicated, the reported high and low sale prices of the Company’s Common Stock, as reported on the Nasdaq National Market.

      As of March 14, 2003, there were 844 common stockholders of record, although the Company believes that the number of beneficial owners of its Common Stock is substantially greater.

      The Company has not paid any dividends since 1994. The Company anticipates that for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of its business and the potential redemption of the Series B Preferred Stock, and that it will not pay cash dividends. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial condition of the Company and general business conditions. Payment of dividends is also restricted by terms of the Series B Preferred Stock. See Note 7 of the Notes to Financial Statements — Convertible Redeemable Preferred Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

      The following is a summary as of December 31, 2002 of all equity compensation plans of the Company that provide for the issuance of equity securities as compensation. See Note 8 of the Notes to Financial Statements — Common Stockholders’ Equity — for additional discussion.

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      The following selected financial data should be read in conjunction with the Company’s Financial Statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The selected statement of operations and balance sheet data for, and as of the end of, each of the five years in the period ended December 31, 2002, are derived from the financial statements of the Company. The operating data are derived from unaudited information maintained by the Company.

(1)	Represents a non-cash valuation provision to write down the production assets of the Fremont Brewery to an estimate of their net realizable value in 1998. The Company operated the Fremont Brewery as a brewing facility from 1989 until 1998. As of December 31, 1999, the Company had sold substantially all of the equipment for an amount approximately equal to its estimated net realizable value.

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(2)	Includes a gain of approximately $1.0 million for the year ended December 31, 2000, resulting from the July 2000 sale of a warehousing facility and land owned by the Company which was used as the keg filling, storage and shipping facility prior to the 1998 curtailment of the Fremont Brewery operations.
(3)	Based on the Company’s estimate of current production capacity of equipment, assuming ideal brewing conditions, installed as of the end of such period. Amounts do not reflect maximum designed production capacity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

      The following discussion and analysis should be read in conjunction with the Company’s Financial Statements and Notes thereto included herein. The discussion and analysis includes period-to-period 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

      Since its formation, the Company has focused its business activities on the brewing, marketing and selling of craft beers in the United States. For the year ended December 31, 2002, the Company had gross sales of $40,913,000, an increase of 2.0% from 2001. The Company’s sales consist predominantly of sales of beer to third-party distributors and A-B through the Distribution Alliance. In addition, the Company derives other revenues from sources including the sale of beer, food, apparel and other retail items in its brewery pubs.

      The Company’s sales volume (shipments) increased 1.3% to 225,900 barrels in 2002 as compared to 2001. Sales in the craft beer industry generally reflect a degree of seasonality, with the first and fourth quarters historically being the slowest and the rest of the year typically demonstrating stronger sales. The Company has historically operated with little or no backlog, and its ability to predict sales for future periods is limited.

      The Company’s sales are affected by several factors, including consumer demand, price discounting and competitive considerations. The Company competes in the highly competitive craft beer market as well as in the much larger specialty beer market. The craft beer segment is highly competitive due to the proliferation of small craft brewers, including contract brewers, and the increase in the number of products offered by such brewers. The specialty beer market encompasses producers of import beers, major national brewers that have introduced fuller-flavored products, and large spirit companies and national brewers that have recently introduced flavored alcohol beverages. Imported products from foreign brewers have enjoyed a resurgence in demand since the mid-1990’s. Certain national domestic brewers have also sought to appeal to the growing demand for craft beers by producing their own fuller-flavored products. Introductions of flavored alcohol beverages in 2001 and 2002 have delivered initial success. Industry sources generally believe that the consumers of flavored alcohol beverages correlate closely with consumers of import and craft beer products. Because the number of participants and number of different products offered in this segment have increased significantly in recent years, the competition for bottled product placements and especially for draft beer placements has intensified.

      The Company is required to pay federal excise taxes on sales of its beer. The excise tax burden on beer sales increases from $7 to $18 per barrel on annual sales over 60,000 barrels and thus, if sales volume increases, federal excise taxes would increase as a percentage of sales. Most states also collect an excise tax on the sale of beer. In early 2003, a bill was introduced in Washington State to increase the excise tax paid on beer sales in Washington State, the Company’s largest market, by approximately 400%. Washington State regulations currently require beer taxes to be paid by Washington State distributors. If such a tax were enacted and if Washington State distributors were to pass the cost of this tax onto consumers in the form of higher pricing, it could negatively impact demand for the Company’s products, leading to decreased sales. If the Company were to determine that it was necessary to absorb all or a portion of the tax and consequently reduced the price charged to the distributor, it could have a negative impact on results of operations of the

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      Under normal circumstances, the Company operates its brewing facilities up to six days per week with multiple shifts per day. The current production capacity, under ideal brewing conditions, is approximately 250,000 barrels per year at the Woodinville Brewery and 110,000 barrels per year at the Portsmouth Brewery. During the peak sales volume periods of 2002, production capacity at the Portsmouth Brewery was nearly fully utilized. In order to accommodate anticipated growth in the markets served by the Portsmouth Brewery, including growth resulting from sales of Widmer Hefeweizen, the Company plans to further expand fermentation capacity during the first half of 2003. This expansion will bring the current production capacity to approximately 125,000 barrels per year. Production capacity at the Portsmouth facility can be added in phases until the facility reaches its maximum designed production capacity of 250,000 barrels per year, under ideal brewing conditions. Such an increase would require additional capital expenditures, primarily for fermentation equipment, and production personnel. The decision to add capacity is affected by the availability of capital, construction constraints and anticipated sales in new and existing markets.

      The Company’s capacity utilization has a significant impact on gross profit. Generally, when facilities are operating at their maximum designed production capacities, profitability is favorably affected because fixed and semivariable operating costs, such as depreciation and production salaries, are spread over a larger sales base. Because current period production levels have been substantially below the Company’s current production capacity, gross margins have been negatively impacted. This negative impact could be reduced if actual production increases.

      In addition to capacity utilization, other factors that could affect cost of sales and gross margin include changes in freight charges, the availability and prices of raw materials and packaging materials, the mix between draft and bottled product sales, the sales mix of various bottled product packages, and fees related to the Distribution Alliance with A-B.

      In January 2003, the Company entered into a licensing agreement with Widmer Brothers Brewing Company to produce and sell the Widmer Hefeweizen brand in states east of the Mississippi River. Brewing of this product, which began in February 2003, will be conducted at the Portsmouth Brewery under the supervision and assistance of Widmer’s brewing staff to insure their brand’s quality and matching taste profile. The term of this agreement is for five years, with an additional one-year automatic renewal unless either party elects to terminate the arrangement. The agreement may be terminated by either party at any time without cause pursuant to 150 days notice. The agreement may be terminated for cause by either party under certain conditions. During the term of this agreement, Redhook will not brew, advertise, market, or distribute any product that is labeled or advertised as a “Hefeweizen” or any similar product in the agreed upon eastern territory, once the existing Redhook Hefe-weizen business is transitioned to Widmer’s Hefeweizen. This transition may take up to one year. This agreement, for the Eastern United States only, is expected to increase capacity utilization and strengthen the Company’s product portfolio. The Company does not expect that it will have a material impact the Company’s sales or results of operations. In the Western United States, Redhook and Widmer Brothers Brewing Company remain competitors in the highly competitive craft beer market.

      See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Considerations: Issues and Uncertainties.”

Critical Accounting Policies and Estimates

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

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      Income Taxes. The Company records federal and state income taxes in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 109, Accounting for Income Taxes. Deferred income taxes or tax benefits reflect the tax effect of temporary differences between the amounts of assets and liabilities for financial reporting purposes and amounts as measured for tax purposes. The Company will establish a valuation allowance if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The valuation allowance is reviewed and adjusted on a quarterly basis based on management’s assessment of the realizability of the deferred tax assets. As of December 31, 2002, the Company had approximately $11.2 million of deferred tax assets, comprised principally of federal net operating loss carryforwards (“NOLs”) that expire from 2012 through 2022 and state NOLs that expire through 2017. The realization of these assets is dependent upon estimates of future taxable income resulting from future reversals of existing taxable temporary differences, which have been recorded as deferred tax liabilities and exceed the deferred tax assets. During 2002, the Company established a valuation allowance of $271,000, thereby reducing the income tax benefit recorded in its statement of operations. The valuation allowance covers a portion of the Company’s deferred tax assets, specifically certain state net operating tax loss carryforwards, that may expire before the Company is able to utilize the tax benefit. To the extent that the Company is unable to generate adequate taxable income in the future, the Company may be required to cease recognition of additional tax benefits and to record a greater valuation allowance covering NOLs.

      Long-Lived Assets. The Company evaluates potential impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes procedures for review of recoverability and measurement of impairment, if necessary, of long-lived assets, goodwill and certain identifiable intangibles. When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future undiscounted cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations. Fixed assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. During 2002, the Company performed an analysis of its brewery assets to determine if an impairment might exist. The Company’s estimate of future undiscounted cash flows indicated that such carrying values were expected to be recovered. Nonetheless, it is possible that the estimate of future undiscounted cash flows may change in the future, resulting in the need to write down those assets to their fair value.

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Results of Operations

      The following table sets forth, for the periods indicated, certain items from the Company’s Statements of Operations expressed as a percentage of net sales.

      Sales. Total sales increased 2.0% to $40,913,000 in 2002, compared to $40,117,000 in 2001, attributable to a 1.3% increase in barrels sold and a 3.8% increase in other sales. Total sales volume in 2002 increased to 225,900 barrels from 223,100 barrels in 2001. A 3.8% decline in shipments in Washington State, the Company’s largest market, was the major factor leading to the nearly flat sales volume for the West Coast. The mix of package sales to draft sales generally affects overall revenue per barrel, with package product generating a higher revenue per barrel but also an increased cost of sales per barrel. The sales mix continued to migrate towards an increasing proportion of package sales in 2002, with 64.3% of 2002 total volume being package shipments versus 63.2% in 2001. Within package sales, the 12-pack package also increased to 34% of package sales from 30% in 2001. Sales other than wholesale beer sales, primarily retail pub revenues, totaled $4,455,000 in 2002, compared to $4,291,000 in 2001. At December 31, 2002 and 2001, the Company’s products were distributed in 48 states.

      Excise Taxes. Excise taxes increased to $3,465,000, or 9.3% of net sales in 2002, compared to $3,412,000, or 9.3% of net sales in 2001. In early 2003, a bill was introduced in Washington State to increase the excise tax paid on beer sales in Washington State, the Company’s largest market, by approximately 400%. Washington State regulations currently require beer taxes to be paid by Washington State distributors. If such a tax were enacted and if Washington State distributors were to pass the cost of this tax onto consumers in the form of higher pricing, it could negatively impact demand for the Company’s products, leading to decreased sales. If the Company were to determine that it was necessary to absorb all or a portion of the tax and consequently reduced the price charged to the distributor, it could have a negative impact on results of operations of the Company. The bill is currently being considered in the Committee on Finance of the Washington State House of Representatives.

      Cost of Sales. Cost of sales increased 3.2% to $27,597,000 in 2002, compared to $26,740,000 in 2001, due to higher sales volume, increased raw material and packaging costs, and a shift in product mix towards an increasing proportion of package sales, including 12-packs. Cost of sales, as a percentage of net sales, increased to 73.7% in 2002, compared to 72.9% in 2001. The utilization rate, based upon the breweries’ combined current production capacity, was 63.4% and 63.8% for the years ended December 31, 2002 and 2001, respectively. The Company anticipates that it will experience cost increases for certain raw materials in 2003, the most significant of which will be malted barley, as a result of a very poor 2002 worldwide harvest.

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      Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $10,909,000 in 2002, compared to $11,817,000 in 2001 due to a reduction in advertising and promotion expenses as well as sales salaries and incentives during 2002. The Company significantly reduced its use of media advertising, particularly print, radio and billboard, during 2002 and moderately reduced spending on its co-operative advertising and promotion program where desired results were not being achieved. Expenditures for the co-op program and media advertising program totaled $1.9 million and $2.6 million in 2002 and 2001, respectively. As a percentage of net sales, selling, general and administrative expenses were 29.1% and 32.2% for years ended December 31, 2002 and 2001, respectively.

      Interest Expense. Interest expense decreased to $230,000 in 2002, compared to $394,000 in 2001, reflecting the effect of lower outstanding debt and lower average interest rates.

      Other Income (Expense) — Net. Other income — net, decreased to income of $30,000 in 2002, compared to income of $249,000 in the 2001 period. The 2002 statement of operations reflects a $138,000 decline in interest income, resulting from lower average interest rates, and a $97,000 loss on the disposal of assets, most of which were disposed of in conjunction with the September consolidation of the Company’s corporate offices into the Woodinville Brewery.

      Income Taxes. The Company’s effective income tax rate was a 10.0% benefit in 2002, compared to a 34.0% benefit in 2001. During 2002, the Company established a $271,000 valuation allowance reducing the income tax benefit. The valuation allowance covers a portion of the Company’s deferred tax assets, specifically certain state net operating tax loss carryforwards, that may expire before the Company is able to utilize the tax benefit. The Company expects that it will not be able to record any tax benefit in 2003 or 2004 as it does not anticipate it will be able to generate adequate taxable income.

      Sales. Total sales increased 6.0% to $40,117,000 in 2001, compared to $37,837,000 in 2000, attributable to a 4.9% increase in barrels sold, an increase in average revenue per barrel, and a slight increase in other sales. Total sales volume in 2001 increased to 223,100 barrels from 212,600 barrels in 2000. A 1.9% decline in shipments in Washington State, the Company’s largest market, was the major factor leading to the nearly flat sales volume for the West Coast. The mix of package sales to draft sales generally affects overall revenue per barrel, with package product generating a higher revenue per barrel but also an increased cost of sales per barrel. The sales mix continued to migrate towards an increasing proportion of package sales in 2001, with 63.2% of 2001 total volume being package shipments versus 62.0% in 2000. Within package sales, the 12-pack package also increased to 30% of package sales from 26% in 2000. Sales other than wholesale beer sales, primarily retail pub revenues, totaled $4,291,000 in 2001, compared to $4,144,000 in 2000. At December 31, 2001 and 2000, the Company’s products were distributed in 48 states.

      Excise Taxes. Excise taxes decreased to $3,412,000, or 9.3% of net sales in 2001, compared to $3,425,000, or 10.0% of net sales in 2000. In September 2000, Washington State regulations were modified to require beer taxes previously paid by Washington State brewers to now be paid by Washington State distributors, the effect of which was to decrease sales prices charged distributors and decrease excise taxes. Accordingly, both sales and excise taxes decreased as a percentage of net sales in 2001.

      Cost of Sales. Cost of sales increased 8.8% to $26,740,000 in 2001, compared to $24,581,000 in 2000, due to higher sales volume, increased raw material costs, and a shift in product mix towards an increasing proportion of package sales, including 12-packs. Cost of sales, as a percentage of net sales, increased to 72.9% in 2001, compared to 71.4% in 2000. The utilization rate, based upon the breweries’ combined current production capacity, was 63.8% and 60.7% for the years ended December 31, 2001 and 2000, respectively.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $11,817,000 in 2001, compared to $11,747,000 in 2000 due to the addition of several new sales positions in key markets during the second half of 2000 and an increase in expenditures for the co-operative advertising and

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      Interest Expense. Interest expense decreased to $394,000 in 2001, compared to $594,000 in 2000, reflecting the effect of lower outstanding debt and lower average interest rates.

      Other Income (Expense) — Net. Other income — net, decreased to income of $249,000 in 2001, compared to income of $1,453,000 in the 2000 period. The 2000 period includes a gain of approximately $1.0 million resulting from the sale of a real estate parcel which was previously used as the Fremont Brewery keg filling, storage and shipping facility. 2001 interest income decreased due to lower average interest rates and lower average interest-bearing deposits.

      Income Taxes. The Company’s effective income tax rate was a 34.0% benefit in 2001, compared to a 31.1% benefit in 2000. The difference in the effective rates is primarily the result of a significantly lower pre-tax loss in 2000, relative to other components of the tax provision calculation, such as the exclusion of a portion of meals and entertainment expenses from tax return deductions.

Liquidity and Capital Resources

      The Company had $7,007,000 and $6,364,000 of cash and cash equivalents at December 31, 2002 and 2001, respectively. At December 31, 2002, the Company had working capital of $4,346,000. The Company’s long-term debt as a percentage of total capitalization (long-term debt, preferred stock and common stockholders’ equity) was 9.0% and 9.2% as of December 31, 2002 and 2001, respectively. Cash provided by operating activities totaling $3,098,000 in 2002 reflects lower deferred tax benefit as compared to 2001 attributable to a smaller pre-tax loss and the creation of a valuation allowance, as well as an increase in refundable deposits resulting from a greater portion of kegs, and in particular one-sixth barrels purchased by the Company in 2002, that had not yet been returned by wholesalers and retail establishments. Cash provided by operating activities totaling $471,000 in 2001 reflects the timing of the collections of accounts receivable in December 2000; the timing of payments of certain current liabilities in January 2001; and an increase in the finished goods inventory to normal levels following unusually low levels at December 31, 2000. All three factors resulted in significant uses of cash during 2001.

      The Company has a credit agreement with a bank under which a term loan (the “Term Loan”) and a $10 million revolving credit facility (the “Revolving Facility”) are provided. The Term Loan, which originated in June 1997 upon the conversion of a $9 million secured credit facility, had a five-year term with a 20-year amortization schedule. In June 2001, the credit agreement was amended to extend the maturity date on the Term Loan to June 5, 2007. In June 2002, the credit agreement was amended to extend the commitment period for the Revolving Facility to July 1, 2004. The Term Loan and the Revolving Facility are secured by substantially all of the Company’s assets. Through June 4, 2002, interest on the Term Loan accrued at a variable rate based on the London Inter Bank Offered Rate (“LIBOR”) plus 1.25%. Effective June 5, 2002, interest on the Term Loan accrued at LIBOR plus 1.75%. The interest rate on the Revolving Facility is the applicable LIBOR plus 1.00% to 2.00%, depending on the Company’s funded debt ratio. The Company has the option to fix the applicable interest rate for up to twelve months by selecting LIBOR for one- to twelve-month periods as a base. As of December 31, 2002, there was $6.525 million outstanding on the Term Loan, and the Company’s one-month LIBOR-based borrowing rate was 3.2%. As of December 31, 2002, there were no borrowings outstanding on the Revolving Facility. The termination of the A-B Distribution Agreement for any reason or the failure by the Company to perform any of its material obligations under the A-B Investment Agreement would constitute an event of default under the credit agreement and the bank may declare the entire outstanding loan balance immediately due and payable. If this were to occur, it would be unlikely that the Company could satisfy its obligations under the Term Loan. In all events, unless additional capital were raised, the Company would not have sufficient liquidity to satisfy both its obligation under the Term Loan and its obligation to redeem the Series B Preferred Stock under the A-B Investment Agreement. The Company could seek to refinance its Term Loan with one or more banks or obtain additional equity capital; however, there can be no assurance the Company would be able to access additional capital to meet its needs or that such additional capital would be at commercially reasonable terms.

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      In mid-November 2001, the bank notified the Company that, as of September 30, 2001, the Company was not in compliance with the Fixed Charge Coverage Ratio covenant as the ratio had been re-defined in the June 2001 amendment to the credit agreement. In December 2001, the credit agreement was again amended to address the following: to waive the September 30, 2001 covenant violation; to temporarily modify the time periods used to calculate the Fixed Charge Coverage Ratio; to modify the minimum Fixed Charge Coverage Ratio the Company must maintain; and to redefine Fixed Charge Coverage Ratio to comply with the bank’s revised internal guidelines. Under the December 2001 amendment, the Company must maintain a minimum Fixed Charge Coverage Ratio of 1.00:1 for all periods after December 31, 2001. Prior to the December 2001 amendment, the minimum Fixed Charge Coverage Ratio was 1.05:1. The Company’s failure to meet the minimum Fixed Charge Coverage Ratio of 1.05:1 as of September 30, 2001 was significantly affected by the results of the quarter ended December 31, 2000, which reduced the twelve-month “cash flow” calculation (as defined in the June 2001 amendment) by approximately $360,000. The shortening of the time periods used in the calculation of the ratio for the last quarter of 2001 and the first two quarters of 2002, as well as the lowering of the cash-flow component of the ratio to 1:00:1 from 1:05:1, reduce the likelihood that a violation of the covenant will occur again. However, if the Company were to report a significant net loss for one or more quarters within a time period used to calculate the ratio, the ratio would be negatively impacted which may cause the Company to not meet the covenant. Failure to meet the covenants required by the credit agreement is an event of default and, at its option, the Bank could deny a request for a waiver and declare the entire outstanding loan balance immediately due and payable. In such a case, the Company would seek to refinance the loan with one or more banks, potentially at less desirable terms. However, there can be no guarantee that additional financing would be available at commercially reasonable terms, if at all. The Company was in compliance with all covenants for the quarter ended December 31, 2001 and all quarters since then through December 31, 2002.

      The Company has required capital principally for the construction and development of its technologically advanced production facilities. To date, the Company has financed its capital requirements through cash flow from operations, bank borrowings and the sale of common and preferred stock. The Company expects to meet its future financing needs and working capital and capital expenditure requirements through cash on hand, operating cash flow and, to the extent required and available, bank borrowings and offerings of debt or equity securities. However, there cannot be any guarantee that any additional financing will be available when needed or at commercially reasonable terms.

      Capital expenditures for 2002 totaled $705,000. Capital expenditures for 2003 are expected to total approximately $1,175,000.

      Since May 2000, the Board of Directors has authorized the repurchase of 1.5 million shares of the Company’s outstanding shares of Common Stock. In May 2000, the Board of Directors initially authorized the repurchase of up to 500,000 shares. Three subsequent resolutions were passed by the Board of Directors authorizing the repurchase of additional shares: in January 2001 for an additional 250,000 shares, in November 2001 for an additional 250,000 shares, and in August 2002 for an additional 500,000 shares. As of December 31, 2002, a total of 1,362,000 shares of Common Stock had been purchased in the open market for an aggregate expenditure of $2,519,000. As of March 14, 2003, a total of 1,433,000 shares of Common Stock had been purchased in the open market for an aggregate expenditure of $2,684,000.

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      The Company has certain commitments, contingencies and uncertainties relating to its normal operations. As of December 31, 2002, contractual commitments associated with the Company’s long-term debt, convertible redeemable preferred stock, operating leases and hop purchase commitments are as follows:

(1)	Represents annual principal payments required on the Company’s Term Loan. Interest on the Term Loan accrues at LIBOR plus 1.75% to 2.25%, depending on the debt-to-tangible net worth ratio. Payment of accrued interest due monthly is not reflected above. The termination of the A-B Distribution Agreement for any reason or the failure by the Company to perform any of its material obligations under the A-B Investment Agreement 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)	In the event that the A-B Distribution Agreement is terminated on or before December 31, 2004, under circumstances described in Item 1 to this report (see Business — Relationship with Anheuser-Busch, Incorporated — A-B Distribution Agreement), the terms of the Series B Preferred Stock require the mandatory redemption of the Series B Preferred Stock on December 31, 2004, at a redemption price equal to $12.61 per share (approximately $16.3 million in the aggregate), plus an amount equal to accumulated and unpaid dividends thereon. If the A-B Distribution Agreement were terminated early as described above, distribution of the Company’s products would suffer significant disruption and would have a long-term material adverse effect on the Company’s sales and results of operations as well as on its financial position and cash flows from operations.
(3)	Represents minimum aggregate future lease payments under noncancelable operating leases.
(4)	Represents purchase commitments to ensure that the Company has the necessary supply of specialty hops to meet future production requirements. 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. Hop commitments in excess of future requirements, if any, will not materially affect its financial condition or results of operations.

Certain Considerations: Issues and Uncertainties

      The Company does not provide forecasts of future financial performance or sales volumes, although this Annual Report contains certain other types of forward-looking statements that involve risks and uncertainties. The Company may, in discussions of its future plans, objectives and expected performance in periodic reports filed by the Company with the Securities and Exchange Commission (or documents incorporated by reference therein) and in written and oral presentations made by the Company, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on assumptions that the Company believes are reasonable, but are by their nature inherently uncertain. In all cases, there can be no assurance that such assumptions will prove correct or that projected events will occur. Actual results could differ materially from those projected depending on a variety of factors, including, but not limited to, the successful execution of market development and other plans, and the availability of financing and the issues discussed below. While Company management is optimistic about the Company’s long-term prospects, the

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      Relationship with Anheuser-Busch, Incorporated. Most of the Company’s future sales are expected to be through the Distribution Alliance with A-B. See “Part 1, Item 1 — Business — Product Distribution, and Relationship With Anheuser-Busch, Incorporated” for a further description of the relationship with A-B. If the Distribution Alliance were to be terminated, or if the relationship between A-B and the Company were to deteriorate, distribution of the Company’s products would suffer significant disruption and would have a long-term severe negative impact on the Company’s sales and results of operations as it would be extremely difficult for the Company to rebuild its own distribution network. Further, in the event that the A-B Distribution Agreement is terminated on or before December 31, 2004, under circumstances described in Item 1 (see Business — Relationship with Anheuser-Busch, Incorporated — A-B Distribution Agreement), the terms of the Series B Preferred Stock held by A-B pursuant to the A-B Investment Agreement require the mandatory redemption of the Series B Preferred Stock on December 31, 2004, at a redemption price equal to $12.61 per share (approximately $16.3 million in the aggregate), plus an amount equal to accumulated and unpaid dividends thereon, if any. The terms of the Series B Preferred Stock further provide that, if at the time of the mandatory redemption the Company has insufficient legally available funds to redeem all shares of Series B Preferred Stock, then all funds that are legally available must be used to redeem Series B Preferred Stock. At any time thereafter when additional funds of the Company become legally available, such funds must be immediately used to redeem additional shares of Series B Preferred Stock. The Company would not be legally able to redeem shares of Series B Preferred Stock if, after giving effect to such redemption, the Company would not be able to pay its debts when due in the usual course of business or the Company’s total assets would be less than the sum of its total liabilities. Such a mandatory redemption could have a material adverse effect on the financial position and cash flows of the Company. While the Company believes that the benefits of the Distribution Alliance, in particular distribution and material cost efficiencies, offset costs associated with the Alliance, there can be no assurance that these costs will not have a negative impact on the Company’s profit margins in the future. Notice of intention to terminate the Distribution Agreement must be made by the party electing to do so no less than six months prior to the termination date.

      Effect of Competition on Future Sales. The domestic market in which the Company’s craft beers are sold is highly competitive due to the proliferation of small craft brewers, including contract brewers, the increase in the number of products offered by such brewers, increased competition from wine, spirits and imported beers, the introduction of fuller-flavored products by major national brewers and recent introductions of flavored alcohol beverages by large spirit companies and national brewers. While the Company’s sales volumes for 2000, 2001 and 2002 increased when compared to the corresponding prior year’s volumes, the Company did experience declining sales volumes ranging from 2.3% to 5.7% for the years 1997 through 1999. If the Company were to again experience negative sales trends, the Company’s future sales and results of operations would be adversely affected. The Company has historically operated with little or no backlog and, therefore, its ability to predict sales for future periods is limited.

      Sales Prices. Future prices the Company charges for its products may decrease from historical levels, depending on competitive factors in the Company’s various markets. The Company has participated in price promotions with its wholesalers and their retail customers in most of its markets. The number of markets in which the Company participates in price promotions and the frequency of such promotions may increase in the future.

      Variability of Gross Margin and Cost of Sales. The Company anticipates that its future gross margins will fluctuate and may decline as a result of many factors, including disproportionate depreciation and other fixed and semivariable operating costs, depending on the level of production at the Company’s breweries in relation to current production capacity. The Company’s high level of fixed and semivariable operating costs causes gross margin to be very sensitive to relatively small increases or decreases in sales volume. In addition, other factors that could affect cost of sales include changes in freight charges, the availability and prices of raw materials and packaging materials, the mix between draft and bottled product sales, the sales mix of various bottled product packages, and Federal or state excise taxes. The Company anticipates that it will experience cost increases in 2003 for malted barley, due to a poor 2002 worldwide barley harvest. The prices for the glass

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      Advertising and Promotional Costs. The Company has participated in advertising programs to varying degrees over the past five years. Prior to 1999, the Company engaged in very limited advertising to market its products. In order to increase brand awareness and capture a larger share of the fragmented craft beer market, the Company determined that a significant increase in spending on advertising and promotion was necessary. In 1999 and 2000, the Company primarily utilized radio, billboard and print advertising in key markets, while also participating to a smaller degree in a co-operative program with its distributors. In 2001 and 2002, the Company allocated a larger share of its advertising spending to this co-operative program whereby the Company’s spending is matched dollar for dollar by the distributor. Expenditures for the co-op program and media advertising program totaled $2.6 million and $1.9 million in 2001 and 2002, respectively. This increased advertising spending has significantly increased the Company’s selling, general and administrative expense since 1998, leading to increased losses and a reduction in stockholders’ equity. Market and competitive considerations could require an increase in other promotional costs associated with developing existing and new markets.

      Dependence on Third-Party Distributors. The Company also relies heavily on non-Alliance third-party distributors for the sale of its products to retailers. The Company’s most significant non-Alliance wholesaler, K&L Distributors, Inc., that although not part of the Alliance is a distributor in the A-B distribution network, accounted for approximately 13% of the Company’s sales in 2002. Substantially all of the remaining sales volume is through the Distribution Alliance to wholesalers that are part of the A-B distribution network, most of which are independent wholesalers. A disruption of wholesalers’ or A-B’s ability to distribute products efficiently due to any significant operational problems, such as wide-spread labor union strikes, the loss of K&L Distributors as a customer, or the termination of the Distribution Alliance could have a material adverse impact on the Company’s sales and results of operations.

      Customer Acceptance, Consumer Trends and Public Attitudes. If consumers were unwilling to accept the Company’s products or if general consumer trends caused a decrease in the demand for beer, including craft beer, it could adversely impact the Company’s sales and results of operations. If the flavored alcohol beverage market continues to grow, it could draw consumers away from the Company’s products and have an adverse effect of the Company’s sales and results of operations. Further, the alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over alcohol-related social problems, including drunk driving, underage drinking and health consequences from the misuse of alcohol. If beer consumption in general were to come into disfavor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental regulation, the Company’s sales and results of operations could be adversely affected.

      Effect of Sales Trends on Brewery Efficiency and Operations. The Company’s breweries have been operating at production levels substantially below their current and maximum designed capacities. Operating breweries at low capacity utilization rates negatively impacts gross margins and operating cash flows generated by the production facilities. In 1998, after performing an analysis of the Company’s current and future production capacity requirements, production at the Fremont Brewery was permanently curtailed and the assets were written down to an estimate of their net realizable value. The Company will continue to evaluate whether it expects to recover the costs of its two remaining production facilities over the course of their useful lives. If facts and circumstances indicate that the carrying value of these long-lived assets may be impaired, an evaluation of recoverability will be performed in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, by comparing the carrying value of the assets to projected future undiscounted cash flows in addition to other quantitative and qualitative analyses. If management believes that the carrying value of such assets may not be recoverable, the Company will recognize an impairment loss by a charge against current operations.

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      Income Tax Benefits. As of December 31, 2002, the Company had approximately $11.2 million of deferred tax assets, comprised principally of federal net operating loss carryforwards that expire from 2012 through 2022 and state NOLs that expire from 2002 through 2017. Federal NOLs, generally permitted to be carried forward no more than 20 years, and state NOLs, generally permitted to be carried forward five to 15 years, can be used to offset regular tax liabilities in future years. The realization of these assets is dependent upon estimates of future taxable income resulting from future reversals of existing taxable temporary differences, which have been recorded as deferred tax liabilities and exceed the deferred tax assets. During 2002, the Company established a valuation allowance of $271,000, thereby reducing the income tax benefit recorded in its statement of operations. The valuation allowance covers a portion of the Company’s deferred tax assets, specifically certain state net operating tax loss carryforwards, that may expire before the Company is able to utilize the tax benefit. To the extent that the Company is unable to generate adequate taxable income in the future, the Company may be required to cease recognition of additional tax benefits and to record a greater valuation allowance covering NOLs.

Recent Accounting Pronouncements

      In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement provides guidance on the recognition, measurement and reporting of certain costs related to exit or disposal activities and is effective for exit or disposal activities initiated after December 31, 2002. Adoption of SFAS 146 did not have an impact on the Company’s financial condition or results of operations.

      In January 2003, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. As the Company has not voluntarily adopted the SFAS No. 123 fair value method of accounting for stock-based employee compensation, the new transition alternatives of SFAS No. 148 did not have a material impact on the Company’s financial condition or results of operations.

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk

      The Company has assessed its vulnerability to certain market risks, including interest rate risk associated with financial instruments included in cash and cash equivalents and long-term debt. Due to the nature of these investments and the Company’s investment policies, the Company believes that the risk associated with interest rate fluctuations related to these financial instruments does not pose a material risk.

      The Company does not have any derivative financial instruments as of December 31, 2002.

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Item 8.     Financial Statements and Supplementary Data

REDHOOK ALE BREWERY, INCORPORATED

INDEX TO FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors

      We have audited the accompanying balance sheets of Redhook Ale Brewery, Incorporated as of December 31, 2002 and 2001, and the related statements of operations, common stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redhook Ale Brewery, Incorporated as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

Seattle, Washington

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REDHOOK ALE BREWERY, INCORPORATED

BALANCE SHEETS

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF OPERATIONS

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

See Accompanying Notes to Financial Statements

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REDHOOK ALE BREWERY, INCORPORATED

STATEMENTS OF CASH FLOWS