##### 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, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to            .
 Commission file number 0-27116
 
 Pyramid Breweries Inc.
  Washington
(State or other jurisdiction of 
incorporation or organization)
    
    91-1258355
(I.R.S. Employer
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
  Large
accelerated
filer oAccelerated
filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets   March 31, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations  Three Month Periods Ended March 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Three Month Periods Ended March 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 4. Controls and Procedures
    
    
    15PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 6. Exhibits
    
    
    16SIGNATURES
    
    
    17EXHIBIT 10.1EXHIBIT 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 share data)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    411
    
    
    $
    201Accounts receivable, net of $20 allowance
    
    
    3,216
    
    
    
    3,334Inventories
    
    
    2,376
    
    
    
    2,177Prepaid expenses and other
    
    
    685
    
    
    
    818Total current assets
    
    
    6,688
    
    
    
    6,530Fixed assets, net of accumulated depreciation of $18,182 and $18,597
    
    
    27,067
    
    
    
    25,996Assets held for sale, long-term
    
    
    95
    
    
    
    55Intangibles, net
    
    
    61
    
    
    
    72Escrow reserve
    
    
    820
    
    
    
    813Other assets
    
    
    224
    
    
    
    410Total assets
    
    $
    34,955
    
    
    $
    33,876LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    3,346
    
    
    $
    3,409Accrued expenses
    
    
    3,810
    
    
    
    2,583Refundable deposits
    
    
    1,294
    
    
    
    1,225Line of credit
    
    
    
    
    
    
    241Current portion of long-term financing
    
    
    113
    
    
    
    110Current portion of capital lease obligation
    
    
    1,117
    
    
    
    468Deferred rent  current
    
    
    128
    
    
    
    127Other current liabilities
    
    
    312
    
    
    
    308Total current liabilities
    
    
    10,120
    
    
    
    8,471Long-term financing
    
    
    7,426
    
    
    
    7,456Capital lease obligation
    
    
    1,623
    
    
    
    Deferred rent
    
    
    432
    
    
    
    464Other liabilities
    
    
    158
    
    
    
    215COMMITMENTS 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  9,155,000 and 9,174,000 at
March 31, 2008 and December 31, 2007, respectively
    
    
    92
    
    
    
    92Additional paid-in capital
    
    
    37,669
    
    
    
    37,685Accumulated deficit
    
    
    (22,565
    )
    
    
    (20,507
    )Total stockholders equity
    
    
    15,196
    
    
    
    17,270Total liabilities and stockholders equity
    
    $
    34,955
    
    
    $
    33,876
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PYRAMID BREWERIES INC
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)
 Three Month Period EndedMarch 31,2008
    
    
    2007Gross sales
    
    $
    11,715
    
    
    $
    10,980Less excise taxes
    
    
    794
    
    
    
    791Net sales
    
    
    10,921
    
    
    
    10,189Cost of sales
    
    
    8,377
    
    
    
    7,923Gross margin
    
    
    2,544
    
    
    
    2,266Selling, general and administrative expenses
    
    
    (4,471
    )
    
    
    (3,399
    )Gain on sale of net assets (Note 2)
    
    
    
    
    
    
    2,436Operating (loss) income
    
    
    (1,927
    )
    
    
    1,303Other expense, net
    
    
    (129
    )
    
    
    (30
    )(Loss) income before income taxes
    
    
    (2,056
    )
    
    
    1,273Provision for income taxes
    
    
    (2
    )
    
    
    (3
    )Net (loss) income
    
    $
    (2,058
    )
    
    $
    1,270Basic and diluted net (loss) earnings per share
    
    $
    (0.22
    )
    
    $
    0.14Weighted average basic shares outstanding
    
    
    9,155,000
    
    
    
    8,961,000Weighted average diluted shares outstanding
    
    
    9,155,000
    
    
    
    9,197,000
  4




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PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Three Month Period EndedMarch 31,2008
    
    
    2007OPERATING ACTIVITIES:Net (loss) income
    
    $
    (2,058
    )
    
    $
    1,270Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization
    
    
    557
    
    
    
    577Stock-based compensation expense
    
    
    (15
    )
    
    
    37Gain on sale of net assets
    
    
    
    
    
    
    (2,436
    )Loss on sale or disposal of fixed assets
    
    
    17
    
    
    
    Deferred rent
    
    
    (31
    )
    
    
    (31
    )Accrued mediation settlement
    
    
    1,123
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    118
    
    
    
    (103
    )Inventories
    
    
    (199
    )
    
    
    (66
    )Prepaid expenses and other
    
    
    289
    
    
    
    29Accounts payable and accrued expenses
    
    
    56
    
    
    
    (1,490
    )Refundable deposits
    
    
    69
    
    
    
    Net cash used in operating activities
    
    
    (74
    )
    
    
    (2,213
    )INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (26
    )
    
    
    (387
    )Proceeds from sale of net assets
    
    
    
    
    
    
    3,100Net cash (used in) provided by investing activities
    
    
    (26
    )
    
    
    2,713FINANCING ACTIVITIES:Proceeds from capital lease obligation
    
    
    741
    
    
    
    Payments on capital lease obligation
    
    
    (110
    )
    
    
    (102
    )Payments on TTB excise tax obligation
    
    
    (53
    )
    
    
    (49
    )Payments on long-term financing
    
    
    (27
    )
    
    
    (27
    )Net payments on line of credit
    
    
    (241
    )
    
    
    Proceeds from exercise of stock options and stock issuance through the employee
stock purchase plan
    
    
    
    
    
    
    46Net cash provided by (used in) financing activities
    
    
    310
    
    
    
    (132
    )Increase in cash and cash equivalents
    
    
    210
    
    
    
    368Cash and cash equivalents at beginning of period
    
    
    201
    
    
    
    227Cash and cash equivalents at end of period
    
    $
    411
    
    
    $
    595
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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
  Revenue Recognition
  6




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Reporting Revenue as a Principal versus Net as an Agent
 Excise Taxes
   Net (Loss) Earnings Per Share
   Three MonthsEnded March 31,2008
    
    
    2007Net (loss) income
    
    $
    (2,058
    )
    
    $
    1,270Shares:Weighted average basic shares outstanding
    
    
    9,155
    
    
    
    8,961Dilutive effect of employee stock options and awards
    
    
    
    
    
    
    236Weighted average diluted shares outstanding
    
    
    9,155
    
    
    
    9,197Basic net (loss) earnings per share
    
    $
    (0.22
    )
    
    $
    0.14Diluted net (loss) earnings per share
    
    $
    (0.22
    )
    
    $
    0.14
  Three MonthsEnded March 31,2008
    
    2007(in thousands)Shares excluded from calculation of dilutive net (loss) earnings per share
    
    
    638
    
    
    
    
 Liquidity
  7




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
    
    A significant pricing increase on beer across all brands/packages for the retail market
and on food/beer in our Alehouses,
    
    A major expense reduction initiative projected to reduce our 2008 expenses that included
targeted staff reductions affecting approximately 10% of our salaried workforce,
    
    A delay in our Eastern expansion to be even more focused on our core Western markets,
    
    Investment in a new bottling line filler in our Berkeley brewery, which will generate
significant efficiencies, and
    
    Securing critical raw materials availability and pricing over the next several years.
   Recently Issued Accounting Pronouncements
 Business Combinations
 Reclassification
  2. Thomas Kemper Soda Transaction
   3. Stock-Based Compensation
 Share-Based Payment (Revised 2004)
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Employee Stock Purchase Plan
    4. Inventories
  March 31,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    775
    
    
    $
    829Work in process
    
    
    386
    
    
    
    289Finished goods
    
    
    1,215
    
    
    
    1,059$
    2,376
    
    
    $
    2,177
  5. Line of Credit
  6. Capital Lease
  9




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7. Litigation and Contingencies
   8. Segment Information
  ).
  BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended March 31, 2008Gross sales from external customers
    
    $
    8,352
    
    
    $
    3,363
    
    
    $
    
    
    
    $
    11,715Net sales from external customers
    
    
    7,589
    
    
    
    3,332
    
    
    
    
    
    
    
    10,921Intersegment sales
    
    
    144
    
    
    
    (144
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    1,037
    
    
    
    (176
    )
    
    
    (2,788
    )
    
    
    (1,927
    )Capital expenditures
    
    
    1,653
    
    
    
    5
    
    
    
    8
    
    
    
    1,666Total assets
    
    
    21,836
    
    
    
    4,215
    
    
    
    8,904
    
    
    
    34,955Quarter ended March 31, 2007Gross sales from external customers
    
    $
    7,791
    
    
    $
    3,189
    
    
    $
    
    
    
    $
    10,980Net sales from external customers
    
    
    7,000
    
    
    
    3,189
    
    
    
    
    
    
    
    10,189Intersegment sales
    
    
    108
    
    
    
    (108
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,302
    
    
    
    (75
    )
    
    
    (1,924
    )
    
    
    1,303Capital expenditures
    
    
    250
    
    
    
    107
    
    
    
    30
    
    
    
    387Total assets
    
    
    19,919
    
    
    
    4,845
    
    
    
    9,076
    
    
    
    33,840
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9. Subsequent Events
      11




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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 This report contains forward-looking statements within the meaning of the federal securities
laws. All statements that do not concern historical facts are forward-looking statements concerning
future performance, developments or events, concerning potential sales, restaurant expansion,
production capacity, pending agreements with third parties and any other guidance on future
periods, constitute forward-looking statements. These statements may be identified by the use of
forward-looking terminology such as anticipate, believe, continue, could, estimate,
expect, intend, may, might, plan, potential, predict, should, or will, or the
negative thereof, or comparable terminology. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking statements are only predictions and
involve known and unknown risks and uncertainties, many of which are beyond our control and which
could cause actual results or outcomes to differ materially from our stated expectations. Any
forward-looking statements are made only as of the date hereof. We do not intend to update any such
statements or to publicly announce the results of any revisions to any such statements to reflect
future events or developments, except as may be required by law. Our actual future results could
differ materially from those projected in the forward-looking statements.
 Some important factors that could cause our actual results or outcomes to differ materially
from those discussed in forward-looking statements include:
 
    
    increased competition from craft and imported beer producers as well as from national
brewers with greater financial resources and more extensive distribution networks than
ours,
    
    reductions in distribution options through our independent distributors,
    
    increased competition from national restaurant chains with greater financial resources
and greater economies of scale,
    
    inability of Pyramid to achieve anticipated cost reductions,
    
    changes in and compliance with governmental policies and regulations with respect to our
products, including the adoption by the TTB of more restrictive application of the excise
tax rules,
    
    competitive pressures that cause decreases in the selling prices of our products,
    
    declines in our operating margins due to the impact of increasing raw material, fuel
costs and other factors,
    
    seasonal fluctuations due to higher sales during the summer months,
    
    acquisitions or divestitures that may adversely affect our financial condition, and
    
    the failure by us to perform under any of our agreements.
 Overview
  Results of Operations
 Quarter Ended March 31, 2008 Compared to Quarter Ended March 31, 2007
 Gross Sales.
 12




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Excise Taxes.
 Gross Margin
  % of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    2,720
    
    
    
    35.8
    %
    
    $
    2,341
    
    
    
    33.4
    %
    
    $
    379
    
    
    
    16.2
    %Alehouse Division
    
    
    (176
    )
    
    
    (5.3
    )%
    
    
    (75
    )
    
    
    (2.4
    )%
    
    
    (101
    )
    
    
    (134.7
    )%Total
    
    $
    2,544
    
    
    
    23.3
    %
    
    $
    2,266
    
    
    
    22.2
    %
    
    $
    278
    
    
    
    12.3
    %
 Selling, General and Administrative Expenses
 Gain on Sale
 Other Expense, Net
 Income Taxes
 Net (Loss) Income
 Liquidity and Capital Resources and Commitments
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
    
    A significant pricing increase on beer across all brands/packages for the retail market
and on food/beer in our Alehouses,
    
    A major expense reduction initiative projected to reduce our 2008 expenses that included
targeted staff reductions affecting approximately 10% of our salaried workforce,
    
    A delay in our Eastern expansion to be even more focused on our core Western markets,
    
    Investment in a new bottling line filler in our Berkeley brewery, which will generate
significant efficiencies, and
    
    Securing critical raw materials availability and pricing over the next several years.
   Contractual Obligations
  14




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Contingencies
   Critical Accounting Policies
  
 ITEM 4. Controls and Procedures
 Procedures
 Procedures
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  15




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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Stock Repurchases
  Approximate DollarTotal Number of
    
    
    Value of SharesShares Purchased as
    
    
    that May Yet BeTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Purchased Under theShares Purchased
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Plans or ProgramsPeriod
    
    (1)
    
    
    per Share
    
    
    Programs (2)
    
    
    (in millions)January 1  31, 2008
    
    
    11,862
    
    
    $
    2.28
    
    
    
    11,862
    
    
    $
    1.1February 1  29, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1March 1   31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1Total
    
    
    11,862
    
    
    $
    2.28
    
    
    
    11,862
    
    
    $
    1.1
 
 (1)
    
    In January 2008, we withheld 11,862 shares to pay taxes due upon vesting of restricted
stock.(2)
    
    In December 1999, the Board of Directors authorized a stock buyback plan to repurchase up
to $2.0 million of our outstanding common stock on the open market. Stock purchases are at the
discretion of management and depend, among other things, on our results of operations, capital
requirements and financial condition, and on such other factors as our management may consider
relevant. At March 31, 2008, approximately $1.1 million of our outstanding common stock was
available from board authorizations to repurchase. 
 ITEM 6. EXHIBITS
 10.1
    
    Employment Agreement between the Company and Paul Curhan dated March 31, 200831.1
    
    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: Scott S. Barnum, 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: Michael R. OBrien, Chief
Financial Officer & Vice President of Finance32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Scott S. Barnum, 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: Michael R. OBrien, Chief Financial Officer & Vice President of
Finance
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SIGNATURE
  PYRAMID BREWERIES INC.By:
    /s/ SCOTT S. BARNUMScott BarnumPresident and Chief Executive Officer By:

/s/ MICHAEL R. OBRIENMichael R. OBrienChief Financial Officer and Vice President of Finance
(Principal Financial Officer)  17




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EXHIBIT INDEX
 10.1
    
    Employment Agreement between the Company and Paul Curhan dated March 31, 200831.1
    
    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: Scott S. Barnum, 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: Michael R. OBrien, Chief
Financial Officer & Vice President of Finance32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Scott S. Barnum, 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: Michael R. OBrien, Chief Financial Officer & Vice President of
Finance
 18