##### 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 JUNE 30, 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)
 
 R £
  £ £ R
 £ R




---



##### 



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 30, 2006
TABLE OF CONTENTS
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations Three and Six Month Periods Ended June 30,
2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows Six Month Periods Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II
    
    OTHER INFORMATIONItem 1A.
    
    Risk Factors
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 6.
    
    Exhibits
    
    
    24SIGNATURE
    
    
    25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I
 
 Item 1  FINANCIAL STATEMENTS
 PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    116
    
    
    $
    416Accounts receivable, net of $20 allowance
    
    
    3,681
    
    
    
    2,838Inventories
    
    
    2,212
    
    
    
    1,841Prepaid expenses and other
    
    
    642
    
    
    
    716Total current assets
    
    
    6,651
    
    
    
    5,811Fixed assets, net of accumulated depreciation of $17,480 and $16,294
    
    
    27,145
    
    
    
    26,666Other assets
    
    
    1,627
    
    
    
    1,426Total assets
    
    $
    35,423
    
    
    $
    33,903CURRENT LIABILITIES:Accounts payable
    
    $
    2,831
    
    
    $
    3,243Accrued expenses
    
    
    3,836
    
    
    
    2,770Refundable deposits
    
    
    715
    
    
    
    596Other current liabilities
    
    
    645
    
    
    
    174Total current liabilities
    
    
    8,027
    
    
    
    6,783Long-term financing, net of current
    
    
    8,234
    
    
    
    7,671Deferred rent, net of current
    
    
    500
    
    
    
    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  8,923,687 and 8,805,737 at
June 30, 2006 and December 31, 2005, respectively
    
    
    89
    
    
    
    88Additional paid-in capital
    
    
    37,251
    
    
    
    37,023Accumulated deficit
    
    
    (18,678
    )
    
    
    (18,200
    )Total stockholders equity
    
    
    18,662
    
    
    
    18,911Total liabilities and stockholders equity
    
    $
    35,423
    
    
    $
    33,903
  3




---



##### Table of Contents



PYRAMID BREWERIES INC
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in thousands, except share data)
 Three Month Period Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross sales
    
    $
    14,576
    
    
    $
    13,713
    
    
    $
    26,083
    
    
    $
    24,170Less excise taxes
    
    
    836
    
    
    
    693
    
    
    
    1,487
    
    
    
    1,250Net sales
    
    
    13,740
    
    
    
    13,020
    
    
    
    24,596
    
    
    
    22,920Cost of sales
    
    
    10,128
    
    
    
    10,025
    
    
    
    18,504
    
    
    
    18,420Gross margin
    
    
    3,612
    
    
    
    2,995
    
    
    
    6,092
    
    
    
    4,500Selling, general and administrative expenses
    
    
    3,489
    
    
    
    2,820
    
    
    
    6,419
    
    
    
    5,389Operating income (loss)
    
    
    123
    
    
    
    175
    
    
    
    (327
    )
    
    
    (889
    )Other expense, net
    
    
    (95
    )
    
    
    (7
    )
    
    
    (146
    )
    
    
    (71
    )Income (loss) before income taxes
    
    
    28
    
    
    
    168
    
    
    
    (473
    )
    
    
    (960
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (3
    )Net income (loss)
    
    $
    28
    
    
    $
    168
    
    
    $
    (477
    )
    
    $
    (963
    )Basic and diluted net earnings (loss) per share
    
    $
    
    
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    (0.11
    )Weighted average basic shares outstanding
    
    
    8,816,000
    
    
    
    8,790,000
    
    
    
    8,813,000
    
    
    
    8,786,000Weighted average diluted shares outstanding
    
    
    8,943,000
    
    
    
    9,141,000
    
    
    
    8,813,000
    
    
    
    8,786,000
  4




---



##### Table of Contents



PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(in thousands)
 Six Month Period EndedJune 30,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (477
    )
    
    $
    (963
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,240
    
    
    
    1,370Stock-based compensation expense
    
    
    212
    
    
    
    32Loss on write-off of equipment
    
    
    7
    
    
    
    Deferred rent
    
    
    (38
    )
    
    
    (34
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (843
    )
    
    
    (1,223
    )Inventories
    
    
    (371
    )
    
    
    92Prepaid expenses and other
    
    
    (136
    )
    
    
    39Accounts payable and accrued expenses
    
    
    654
    
    
    
    1,161Refundable deposits
    
    
    119
    
    
    
    174Net cash provided by operating activities
    
    
    367
    
    
    
    648INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (564
    )
    
    
    (633
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    33Net cash used in investing activities
    
    
    (564
    )
    
    
    (600
    )FINANCING ACTIVITIES:Payments on long-term financing
    
    
    (120
    )
    
    
    (32
    )Proceeds from exercise of stock options and stock issuance through the employee
stock purchase plan
    
    
    17
    
    
    
    23Net borrowings on line of credit
    
    
    
    
    
    
    154Cash dividends paid
    
    
    
    
    
    
    (193
    )Net cash used in financing activities
    
    
    (103
    )
    
    
    (48
    )Decrease in cash and cash equivalents
    
    
    (300
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    416
    
    
    
    Cash and cash equivalents at end of period
    
    $
    116
    
    
    $
    
  5




---



##### Table of Contents



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




---



##### Table of Contents



Revenue Recognition
    Excise Taxes
   Net Earnings (Loss) Per Share
  Three Months
Ended June 30,
    
    
    Six Months
Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands except
per share data)Net income (loss)
    
    $
    28
    
    
    $
    168
    
    
    $
    (477
    )
    
    $
    (963
    )Shares:Weighted average basic shares outstanding
    
    
    8,816
    
    
    
    8,790
    
    
    
    8,813
    
    
    
    8,786Dilutive effect of employee stock options and awards
    
    
    127
    
    
    
    351
    
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    8,943
    
    
    
    9,141
    
    
    
    8,813
    
    
    
    8,786Basic earnings (loss) per share
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    (0.11
    )Diluted earnings (loss) per share
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    (0.05
    )
    
    $
    (0.11
    )
 7




---



##### Table of Contents



Three Months
Ended June 30,
    
    
    Six Months
Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Shares excluded from calculation of dilutive earnings (loss) per share
    
    
    188
    
    
    
    430
    
    
    
    615
    
    
    
    704
 Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
 Liquidity
    2. Stock-Based Compensation
  8




---



##### Table of Contents



For the Three
    
    
    For the SixMonths Ended
    
    
    Months EndedJune 30, 2005
    
    
    June 30, 2005Net income (loss) as reported
    
    $
    168
    
    
    $
    (963
    )Add: Stock-based compensation cost as reported
    
    
    16
    
    
    
    32Less: Stock-based compensation cost determined under the fair value based method
    
    
    (26
    )
    
    
    (60
    )Net income (loss) as adjusted
    
    $
    158
    
    
    $
    (991
    )Basic and diluted net earnings (loss) per share as reported
    
    $
    0.02
    
    
    $
    (0.11
    )Basic and diluted net earnings (loss) per share as adjusted
    
    $
    0.02
    
    
    $
    (0.11
    )
 Stock Option Plans
    9




---



##### Table of Contents



Six months EndedJune 302006
    
    2005Expected life
    
    6 yrs
    
    5 yrsRisk free interest rate
    
    
    4.9
    %
    
    
    3.9
    %Expected volatility
    
    
    51
    %
    
    
    51
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateShares
    
    
    Average
    
    
    Contractual
    
    
    Intrinsic(rounded)
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    641,000
    
    
    $
    2.47Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    (22,500
    )
    
    
    2.16Outstanding at March 31, 2006
    
    
    618,500
    
    
    $
    2.48
    
    
    
    5.5
    
    
    $
    87,000Granted
    
    
    25,000
    
    
    $
    2.57Exercised
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    (29,000
    )
    
    
    6.63Outstanding at June 30,2006
    
    
    614,500
    
    
    $
    2.29
    
    
    
    5.7
    
    
    $
    263,100Exercisable at June 30, 2006
    
    
    560,100
    
    
    $
    2.30
    
    
    
    5.4
    
    
    $
    235,100
   WeightedAverageShares
    
    
    Grant Date(rounded)
    
    
    Fair ValueNonvested balance at December 31, 2005
    
    
    96,900
    
    
    $
    2.17Granted
    
    
    
    
    
    
    Vested
    
    
    (15,900
    )
    
    
    2.17Forfeited
    
    
    (19,500
    )
    
    
    2.09Nonvested balance at March 31, 2006
    
    
    61,500
    
    
    $
    2.19Granted
    
    
    25,000
    
    
    
    2.57Vested
    
    
    (32,100
    )
    
    
    2.51Forfeited
    
    
    
    
    
    
    Nonvested balance at June 30, 2006
    
    
    54,400
    
    
    $
    2.18
  Restricted Stock Awards
   10




---



##### Table of Contents



Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateShares
    
    
    Grant Date
    
    
    Remaining
    
    
    Intrinsic(rounded)
    
    
    Fair Value
    
    
    Contractual Term
    
    
    ValueNonvested balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $Granted
    
    
    70,000
    
    
    
    2.55Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested balance at March 31, 2006
    
    
    70,000
    
    
    $
    2.55
    
    
    
    0.9
    
    
    $
    178,500Granted
    
    
    35,000
    
    
    
    2.68Vested
    
    
    (105,000
    )
    
    
    2.59Forfeited
    
    
    Nonvested balance at June 30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
  Employee Stock Purchase Plan
   3. Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    898
    
    
    $
    741Work in process
    
    
    209
    
    
    
    123Finished goods
    
    
    1,105
    
    
    
    977Total inventories
    
    $
    2,212
    
    
    $
    1,841
  4. Line of Credit
  11




---



##### Table of Contents



5. Capital Lease
  6. Litigation and Contingencies
     12




---



##### Table of Contents



13




---



##### Table of Contents



7. Segment Information
    BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended June 30, 2006Gross revenues from external customers
    
    $
    10,575
    
    
    $
    4,001
    
    
    $
    
    
    
    $
    14,576Net revenues from external customers
    
    
    9,739
    
    
    
    4,001
    
    
    
    
    
    
    
    13,740Intersegment revenues
    
    
    131
    
    
    
    
    
    
    
    (131
    )
    
    
    Operating income (loss)
    
    
    1,840
    
    
    
    379
    
    
    
    (2,096
    )
    
    
    123Capital expenditures
    
    
    632
    
    
    
    26
    
    
    
    8
    
    
    
    666Total assets
    
    
    21,636
    
    
    
    5,376
    
    
    
    8,411
    
    
    
    35,423Quarter ended June 30, 2005Gross revenues from external customers
    
    $
    9,589
    
    
    $
    4,124
    
    
    $
    
    
    
    $
    13,713Net revenues from external customers
    
    
    8,896
    
    
    
    4,124
    
    
    
    
    
    
    
    13,020Intersegment revenues
    
    
    172
    
    
    
    
    
    
    
    (172
    )
    
    
    Operating income (loss)
    
    
    1,444
    
    
    
    294
    
    
    
    (1,563
    )
    
    
    175Capital expenditures
    
    
    271
    
    
    
    33
    
    
    
    8
    
    
    
    312Total assets
    
    
    20,983
    
    
    
    6,286
    
    
    
    8,018
    
    
    
    35,287Six months ended June 30, 2006Gross revenues from external customers
    
    $
    18,726
    
    
    
    7,357
    
    
    
    
    
    
    
    26,083Net revenues from external customers
    
    
    17,239
    
    
    
    7,357
    
    
    
    
    
    
    
    24,596Intersegment revenues
    
    
    260
    
    
    
    
    
    
    
    (260
    )
    
    
    Operating income (loss)
    
    
    3,053
    
    
    
    350
    
    
    
    (3,730
    )
    
    
    (327
    )Capital expenditures
    
    
    1,685
    
    
    
    26
    
    
    
    8
    
    
    
    1,719Total assets
    
    
    21,636
    
    
    
    5,376
    
    
    
    8,411
    
    
    
    35,423Six months ended June 30, 2005Gross revenues from external customers
    
    $
    16,692
    
    
    $
    7,478
    
    
    $
    
    
    
    $
    24,170Net revenues from external customers
    
    
    15,442
    
    
    
    7,478
    
    
    
    
    
    
    
    22,920Intersegment revenues
    
    
    303
    
    
    
    
    
    
    
    (303
    )
    
    
    Operating income (loss)
    
    
    1,799
    
    
    
    233
    
    
    
    (2,921
    )
    
    
    (889
    )Capital expenditures
    
    
    410
    
    
    
    138
    
    
    
    30
    
    
    
    578Total assets
    
    
    20,983
    
    
    
    6,286
    
    
    
    8,018
    
    
    
    35,287
 14




---



##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
  Results of Operations
  SELECTED UNAUDITED OPERATING DATA
 Three Months Ended June 30,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2006
    
    
    Net Sales
    
    
    2005
    
    
    Net SalesGross sales
    
    $
    14,576
    
    
    
    
    
    
    $
    13,713Less excise taxes
    
    
    836
    
    
    
    
    
    
    
    693Net sales
    
    
    13,740
    
    
    
    100.0
    
    
    
    13,020
    
    
    
    100.0Cost of sales
    
    
    10,128
    
    
    
    73.7
    
    
    
    10,025
    
    
    
    77.0Gross margin
    
    
    3,612
    
    
    
    26.3
    
    
    
    2,995
    
    
    
    23.0Selling, general and administrative expenses
    
    
    3,489
    
    
    
    25.4
    
    
    
    2,820
    
    
    
    21.7Operating income
    
    
    123
    
    
    
    0.9
    
    
    
    175
    
    
    
    1.3Other expense, net
    
    
    (95
    )
    
    
    (0.7
    )
    
    
    (7
    )
    
    
    (0.1
    )Income before income taxes
    
    
    28
    
    
    
    0.2
    
    
    
    168
    
    
    
    1.2Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    28
    
    
    
    0.2
    
    
    $
    168
    
    
    
    1.2Basic and diluted net earnings per share
    
    $
    0.00
    
    
    
    
    
    
    $
    0.02Operating data (in barrels):Beer shipped
    
    
    51,900
    
    
    
    
    
    
    
    50,100Soda shipped
    
    
    13,900
    
    
    
    
    
    
    
    13,700Total shipped
    
    
    65,800
    
    
    
    
    
    
    
    63,800Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    334,000
 15




---



##### Table of Contents



Six Month Period Ended June 30,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2006
    
    
    Net Sales
    
    
    2005
    
    
    Net SalesGross sales
    
    $
    26,083
    
    
    
    
    
    
    $
    24,170Less excise taxes
    
    
    1,487
    
    
    
    
    
    
    
    1,250Net sales
    
    
    24,596
    
    
    
    100.0
    
    
    
    22,920
    
    
    
    100.0Cost of sales
    
    
    18,504
    
    
    
    75.2
    
    
    
    18,420
    
    
    
    80.4Gross margin
    
    
    6,092
    
    
    
    24.8
    
    
    
    4,500
    
    
    
    19.6Selling, general and administrative expenses
    
    
    6,419
    
    
    
    26.1
    
    
    
    5,389
    
    
    
    23.5Operating loss
    
    
    (327
    )
    
    
    (1.3
    )
    
    
    (889
    )
    
    
    (3.9
    )Other expense, net
    
    
    (146
    )
    
    
    (0.6
    )
    
    
    (71
    )
    
    
    (0.3
    )Loss before income taxes
    
    
    (473
    )
    
    
    (1.9
    )
    
    
    (960
    )
    
    
    (4.2
    )Provision for income taxes
    
    
    (4
    )
    
    
    
    
    
    
    (3
    )
    
    
    Net loss
    
    $
    (477
    )
    
    
    (1.9
    )
    
    $
    (963
    )
    
    
    (4.2
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    
    
    
    
    $
    (0.11
    )Operating data (in barrels):Beer shipped
    
    
    94,500
    
    
    
    
    
    
    
    87,100Soda shipped
    
    
    21,900
    
    
    
    
    
    
    
    23,400Total shipped
    
    
    116,400
    
    
    
    
    
    
    
    110,500Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    334,000
 QUARTER ENDED JUNE 30, 2006 COMPARED TO QUARTER ENDED JUNE 30, 2005
 Gross Sales.
 Excise Taxes.
 Gross Margin
 16




---



##### Table of Contents



Three Month Period Ended June 30,(in thousands)% of
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    SegmentGross Margin
    
    2006
    
    Net Sales
    
    2005
    
    Net Sales
    
    $ Change
    
    % ChangeBeverage Division
    
    $
    3,233
    
    
    
    33.2
    %
    
    $
    2,701
    
    
    
    30.4
    %
    
    $
    532
    
    
    
    19.7
    %Alehouse Division
    
    
    379
    
    
    
    9.5
    %
    
    
    294
    
    
    
    7.1
    %
    
    
    85
    
    
    
    28.9
    %Total
    
    $
    3,612
    
    
    
    26.3
    %
    
    $
    2,995
    
    
    
    23.0
    %
    
    $
    617
    
    
    
    20.6
    %
 Selling, General and Administrative Expenses
 Other Expense, net
 Income Taxes
 Net loss
 SIX
MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2005
 Gross Sales.
 Excise Taxes.
 17




---



##### Table of Contents



Gross Margin
 Six Month Period Ended June 30,(in thousands)% of
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    SegmentGross Margin
    
    2006
    
    Net Sales
    
    2005
    
    Net Sales
    
    $ Change
    
    % ChangeBeverage Division
    
    $
    5,742
    
    
    
    33.3
    %
    
    $
    4,266
    
    
    
    27.6
    %
    
    $
    1,476
    
    
    
    34.6
    %Alehouse Division
    
    
    350
    
    
    
    4.8
    %
    
    
    234
    
    
    
    3.1
    %
    
    
    116
    
    
    
    49.6
    %Total
    
    $
    6,092
    
    
    
    24.8
    %
    
    $
    4,500
    
    
    
    19.6
    %
    
    $
    1,592
    
    
    
    35.4
    %
 Selling, General and Administrative Expenses
 Other Expense, net
 Income Taxes
 Net loss
 Liquidity and Capital Resources and Commitments
  18




---



##### Table of Contents



Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsOperating leases
    
    $
    5,441
    
    
    
    1,275
    
    
    
    2,104
    
    
    
    1,257
    
    
    
    805Capital leases
    
    $
    1,083
    
    
    
    470
    
    
    
    613
    
    
    
    
    
    
    
    Note payable(1)
    
    $
    7,721
    
    
    
    100
    
    
    
    221
    
    
    
    250
    
    
    
    7,150
 
 (1)
    
    The amounts are principal only payments as stated in securitized financing arrangement for
the Berkeley Facility purchase. 19




---



##### Table of Contents



Contingencies
     20




---



##### Table of Contents



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
beginning in 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.
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
 Procedures
 Procedures
 (a) Evaluation of disclosure controls and procedure
  21




---



##### Table of Contents



(b) Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1A. Risk Factors
  TTB Audit.
   22




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Numberof SharesFor
    
    
    WithheldTerm Expiring in 2009Lee Andrews
    
    
    8,141,869
    
    
    
    65,518Scott Svenson
    
    
    8,141,869
    
    
    
    65,518
   Numberof SharesFor
    
    
    Against
    
    
    AbstainRatifyMoss Adams LLP
    
    
    8,171,769
    
    
    
    8,769
    
    
    
    26,849
 23




---



##### Table of Contents



ITEM 6. EXHIBITS
 10.1
    
    Summary of annual base salaries and 2006 Executive Committee bonus
program (incorporated by reference to the first paragraph under Item
1.01 of Pyramids Current Report on Form 8-K filed May 11, 2006)*10.2
    
    2006 Officer Incentive Compensation Plan Policy (incorporated by
reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.3
    
    Compensation Revision between Pyramid and John Lennon (incorporated
by reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.4
    
    Employment Agreement between Pyramid and Jason Rees (incorporated by
reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.5
    
    Employment Agreement between Pyramid and Gary McGrath (incorporated
by reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.6
    
    Employment Agreement between Pyramid and Mark House (incorporated by
reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.7
    
    Employment Agreement between Pyramid and Patrick Coll (incorporated
by reference to Pyramids Current Report on Form 8-K filed May 11,
2006)*10.8
    
    Summary of compensation package for Scott Barnum (incorporated by
reference to the third paragraph under Item 5.02 of Pyramids Current
Report on Form 8-K filed July 7, 2006)*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: 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: 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: 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: Jason W. Rees, Vice
President of Finance and Chief Accounting Officer
 
 *
    
    Management contract or compensatory plan or arrangement 24




---



##### Table of Contents



SIGNATURE
  PYRAMID BREWERIES INC.By:
    /s/ SCOTT BARNUMScott BarnumPresident and Chief Executive OfficerBy:
    /s/ JASON W. REESJason W. ReesVice President of Finance and Chief Accounting Officer
(Principal Financial Officer)  25