##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (No Fee Required)
 For the transition period from       to       .
 Commission file number 0-27116
 PYRAMID BREWERIES INC.
  Washington
    
    91-1258355(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 91 South Royal Brougham Way,
Seattle, WA 98134  (Address of principal executive offices)
 (206) 682-8322  (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ




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##### Table of Contents



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations
Three Month Periods Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows
Three Month Periods Ended March 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18PART II
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    18Item 6.
    
    Exhibits
    
    
    19SIGNATURE
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I
 
 Item 1  FINANCIAL STATEMENTS
 PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    124
    
    
    $
    416Accounts receivable, net of $20 allowance
    
    
    2,492
    
    
    
    2,838Inventories
    
    
    2,397
    
    
    
    1,841Prepaid expenses and other
    
    
    612
    
    
    
    716Total current assets
    
    
    5,625
    
    
    
    5,811Fixed assets, net of accumulated depreciation of $16,888 and $16,294
    
    
    27,125
    
    
    
    26,666Other assets
    
    
    1,544
    
    
    
    1,426Total assets
    
    $
    34,294
    
    
    $
    33,903CURRENT LIABILITIES:Accounts payable
    
    $
    3,448
    
    
    $
    3,243Accrued expenses
    
    
    2,610
    
    
    
    2,770Refundable deposits
    
    
    576
    
    
    
    596Other current liabilities
    
    
    175
    
    
    
    174Total current liabilities
    
    
    6,809
    
    
    
    6,783Long-term financing, net of current
    
    
    8,522
    
    
    
    7,671Deferred rent, net of current
    
    
    519
    
    
    
    538COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value:Authorized shares  40,000,000Issued and outstanding shares  8,879,813 and 8,806,000 at March 31, 2006 and
December 31, 2005, respectively
    
    
    89
    
    
    
    88Additional paid-in capital
    
    
    37,060
    
    
    
    37,023Accumulated deficit
    
    
    (18,705
    )
    
    
    (18,200
    )Total stockholders equity
    
    
    18,444
    
    
    
    18,911Total liabilities and stockholders equity
    
    $
    34,294
    
    
    $
    33,903
  3




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PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in thousands, except per share amounts)
 Three Month Period EndedMarch 31,2006
    
    
    2005Gross sales
    
    $
    11,507
    
    
    $
    10,457Less excise taxes
    
    
    651
    
    
    
    557Net sales
    
    
    10,856
    
    
    
    9,900Cost of sales
    
    
    8,376
    
    
    
    8,396Gross margin
    
    
    2,480
    
    
    
    1,504Selling, general and administrative expenses
    
    
    2,930
    
    
    
    2,569Operating loss
    
    
    (450
    )
    
    
    (1,065
    )Other expense, net
    
    
    (51
    )
    
    
    (64
    )Loss before income taxes
    
    
    (501
    )
    
    
    (1,129
    )Provision for income taxes
    
    
    (4
    )
    
    
    (2
    )Net loss
    
    $
    (505
    )
    
    $
    (1,131
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.13
    )Weighted average basic and diluted shares outstanding
    
    
    8,880,000
    
    
    
    8,782,000
  4




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PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in thousands)
 Three Month Period EndedMarch 31,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (505
    )
    
    $
    (1,131
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    615
    
    
    
    673Stock-based compensation expense
    
    
    30
    
    
    
    16Deferred rent
    
    
    (19
    )
    
    
    (17
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    346
    
    
    
    (350
    )Inventories
    
    
    (557
    )
    
    
    (6
    )Prepaid expenses and other
    
    
    (34
    )
    
    
    39Accounts payable and accrued expenses
    
    
    45
    
    
    
    182Refundable deposits
    
    
    (20
    )
    
    
    (50
    )Net cash used in operating activities
    
    
    (99
    )
    
    
    (644
    )INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (175
    )
    
    
    (321
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    33Net cash used in investing activities
    
    
    (175
    )
    
    
    (288
    )FINANCING ACTIVITIES:Proceeds from exercise of stock options and stock issuance through the
employee stock purchase plan
    
    
    8
    
    
    
    11Net borrowings (cash paid) on line of credit
    
    
    
    
    
    
    1,125Payments on long-term financing
    
    
    (26
    )
    
    
    (11
    )Cash dividends paid
    
    
    
    
    
    
    (193
    )Net cash provided by (used in) financing activities
    
    
    (18
    )
    
    
    932Increase (decrease) in cash and cash equivalents
    
    
    (292
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    416
    
    
    
    Cash and cash equivalents at end of period
    
    $
    124
    
    
    $
    
  5




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PYRAMID BREWERIES INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Nature of Operations and Summary of Significant Accounting Policies
 The Company
  Basis of Presentation
  Basis of Consolidation
  Impairment
of Long-lived Assets
  Inventories
  6




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Revenue
Recognition
   Reporting Revenue as a Principal versus Net as an Agent,
 Excise
Taxes
   Net
Loss Per Share
  Recently
Issued Accounting Pronouncements
    7




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Liquidity
    2. Stock-Based Compensation
   8




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For the ThreeMonths EndedMarch 31, 2005Net loss as reported
    
    $
    (1,131
    )Add: Stock-based compensation cost as reported
    
    
    16Less: Stock-based compensation cost determined under the
fair value based method
    
    
    (34
    )Net loss as adjusted
    
    $
    (1,149
    )Basic and diluted net loss per share as reported
    
    $
    (0.13
    )Basic and diluted net loss per share as adjusted
    
    $
    (0.13
    )
 Stock Option Plans
     WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateShares
    
    
    Average
    
    
    Contractual
    
    
    Intrinsic(rounded)
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    636,000
    
    
    $
    2.47Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    (22,000
    )
    
    
    2.16Outstanding at March 31, 2006
    
    
    614,000
    
    
    $
    2.49
    
    
    
    7.0
    
    
    $
    86,100Exercisable at March 31, 2006
    
    
    552,000
    
    
    $
    2.52
    
    
    
    7.0
    
    
    $
    76,700
  9




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WeightedAverageShares
    
    
    Grant Date(rounded)
    
    
    Fair ValueNonvested at December 31, 2005
    
    
    97,000
    
    
    $
    2.17Granted
    
    
    
    
    
    
    Vested
    
    
    (17,000
    )
    
    
    2.17Canceled/Forfeited
    
    
    (19,000
    )
    
    
    2.09Nonvested at March 31, 2006
    
    
    61,000
    
    
    $
    2.19
  Restricted Stock Awards
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateShares
    
    
    Grant Date
    
    
    Remaining
    
    
    Intrinsic(rounded)
    
    
    Fair Value
    
    
    Contractual Term
    
    
    ValueNonvested at December 31, 2005
    
    
    175,000
    
    
    $
    2.36Granted
    
    
    35,000
    
    
    
    2.55Vested
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2006
    
    
    210,000
    
    
    $
    2.39
    
    
    
    5.0
    
    
    $
    502,000
  Employee Stock Purchase Plan
   10




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3. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    834
    
    
    $
    741Work in process
    
    
    205
    
    
    
    123Finished goods
    
    
    1,358
    
    
    
    977Total inventories
    
    $
    2,397
    
    
    $
    1,841
  4. Line of Credit
  5. Capital Lease
  6. Litigation and Contingencies
    11




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7. Segment Information
    BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended March 31, 2006Gross revenues from external customers
    
    $
    8,151
    
    
    $
    3,356
    
    
    $
    
    
    
    $
    11,507Net revenues from external customers
    
    
    7,500
    
    
    
    3,356
    
    
    
    
    
    
    
    10,856Intersegment revenues
    
    
    129
    
    
    
    
    
    
    
    (129
    )
    
    
    Operating income (loss)
    
    
    1,213
    
    
    
    (29
    )
    
    
    (1,689
    )
    
    
    (505
    )Capital expenditures
    
    
    1,053
    
    
    
    
    
    
    
    
    
    
    
    1,053Total assets
    
    
    20,630
    
    
    
    5,339
    
    
    
    8,325
    
    
    
    34,294Quarter ended March 31, 2005Gross revenues from external customers
    
    $
    7,103
    
    
    $
    3,354
    
    
    $
    
    
    
    $
    10,457Net revenues from external customers
    
    
    6,546
    
    
    
    3,354
    
    
    
    
    
    
    
    9,900Intersegment revenues
    
    
    131
    
    
    
    
    
    
    
    (131
    )
    
    
    Operating income (loss)
    
    
    354
    
    
    
    (60
    )
    
    
    (1,425
    )
    
    
    (1,131
    )Capital expenditures operating
    
    
    142
    
    
    
    94
    
    
    
    30
    
    
    
    266Total assets
    
    
    20,864
    
    
    
    6,179
    
    
    
    7,889
    
    
    
    34,932
 12




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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
  Results of Operations
  13




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SELECTED UNAUDITED OPERATING DATA
 Three Months Ended March 31,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2006
    
    
    Net Sales
    
    
    2005
    
    
    Net SalesGross sales
    
    $
    11,507
    
    
    
    
    
    
    $
    10,457Less excise taxes
    
    
    651
    
    
    
    
    
    
    
    557Net sales
    
    
    10,856
    
    
    
    100.0
    
    
    
    9,900
    
    
    
    100.0Cost of sales
    
    
    8,376
    
    
    
    77.2
    
    
    
    8,396
    
    
    
    84.8Gross margin
    
    
    2,480
    
    
    
    22.8
    
    
    
    1,504
    
    
    
    15.2Selling, general and administrative expenses
    
    
    2,930
    
    
    
    27.0
    
    
    
    2,569
    
    
    
    25.9Operating loss
    
    
    (450
    )
    
    
    (4.2
    )
    
    
    (1,065
    )
    
    
    (10.7
    )Other expense, net
    
    
    (51
    )
    
    
    (0.5
    )
    
    
    (64
    )
    
    
    (0.7
    )Loss before income taxes
    
    
    (501
    )
    
    
    (4.7
    )
    
    
    (1,129
    )
    
    
    (11.4
    )Provision for income taxes
    
    
    (4
    )
    
    
    
    
    
    
    (2
    )
    
    
    Net loss
    
    $
    (505
    )
    
    
    (4.7
    )
    
    $
    (1,131
    )
    
    
    (11.4
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    
    
    
    
    $
    (0.13
    )Operating data (in barrels):Beer shipped
    
    
    42,700
    
    
    
    
    
    
    
    37,000Soda shipped
    
    
    7,900
    
    
    
    
    
    
    
    9,700Total shipped
    
    
    50,600
    
    
    
    
    
    
    
    46,700Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    334,000
 QUARTER ENDED MARCH 31, 2006 COMPARED TO QUARTER ENDED MARCH 31, 2005
 Gross Sales.
 Excise Taxes.
 Gross Margin
 14




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Three Month Period Ended March 31,(in thousands)% of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2006
    
    
    Net Sales
    
    
    2005
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    2,509
    
    
    
    33.4
    %
    
    $
    1,564
    
    
    
    23.9
    %
    
    $
    945
    
    
    
    60.4
    %Alehouse Division
    
    
    (29
    )
    
    
    (0.9
    )%
    
    
    (60
    )
    
    
    (1.8
    %)
    
    
    31
    
    
    
    (51.7
    )%Total
    
    $
    2,480
    
    
    
    22.8
    %
    
    $
    1,504
    
    
    
    15.2
    %
    
    $
    976
    
    
    
    64.9
    %
 Selling, General and Administrative Expenses
 Other Expense, net
 Income Taxes
 Net loss
 Liquidity and Capital Resources and Commitments
      15




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Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1 - 3 Years
    
    
    3 - 5 Years
    
    
    5 YearsOperating leases
    
    $
    5,293
    
    
    
    990
    
    
    
    1,778
    
    
    
    1,341
    
    
    
    1,184Capital leases
    
    $
    878
    
    
    
       263
    
    
    
    615Note payable(1)
    
    $
    7,745
    
    
    
    100
    
    
    
    218
    
    
    
    246
    
    
    
    7,181
 
 (1)
    
    The amounts are principal only payments as stated in securitized financing arrangement for the Berkeley Facility purchase.   Contingencies
  16




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Critical Accounting Policies
  
    
    Stock-based CompensationWe account
for stock-based compensation in accordance
with the fair value recognition provisions
of SFAS No. 123R. We use the Black-Scholes
option-pricing method, which requires the
input of subjective assumptions. These
assumptions include estimating the length
of time employees will retain their vested
stock options before exercising them
(expected term), the estimated volatility
of our common stock price over the expected
term and the number of options that will
ultimately not complete their vesting
requirements (forfeitures) and, ultimately,
the expense that will be recognized over
the life of the options for only the
portion of options expected to vest.
Therefore, we applied an estimated
forfeiture rate that we derived from
historical employee termination behavior.
If the actual number of forfeitures differs
from our estimates, additional adjustments
to compensation expense may be required in
future periods. Additionally, the risk-free
interest rate used in the Black-Scholes
valuation method is based on the implied
yield currently available in U.S. Treasury
securities at maturity with an equivalent
term. We have not provided for a dividend assumption in the
Black-Scholes valuation method for grants subsequent to February 2005
as we ceased paying any
dividends in early 2005 and currently do not expect to declare or pay
dividends in the future. Changes in the
subjective assumptions can materially
affect the fair value estimate of
stock-based compensation and consequently,
the related expense recognized on the
consolidated statements of income.
  17




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
 Procedures
 Procedures
 (a) Evaluation of disclosure controls and procedure
   (b) Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  18




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ITEM 6. EXHIBITS
 31.1
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: John J. Lennon,
President and Chief Executive Officer31.2
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Jason W. Rees, Vice
President of Finance and Chief Accounting Officer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002: John J. Lennon, President and Chief Executive Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002: Jason W. Rees, Vice President of Finance and Chief
Accounting Officer
 19




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SIGNATURE
  PYRAMID BREWERIES INC.By :              /s/ JOHN LENNONJohn LennonPresident and Chief Executive Officer By :                 /s/ JASON W. REESJason W. ReesVice
President of Finance and Chief Accounting Officer

        (Principal Financial Officer)  20