##### 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, 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 000-27116
 
 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 JUNE 30, 2008
TABLE OF CONTENTS
 PagePART
IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets   June 30, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations  Three and Six Month Periods Ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Six Month Periods Ended June 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 4. Controls and Procedures
    
    
    17PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURES
    
    
    20EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I
 
 Item 1
 FINANCIAL STATEMENTS
 
 PYRAMID BREWERIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    628
    
    
    $
    201Accounts receivable, net of $20 allowance
    
    
    4,647
    
    
    
    3,334Inventories
    
    
    2,326
    
    
    
    2,177Prepaid expenses and other
    
    
    414
    
    
    
    818Total current assets
    
    
    8,015
    
    
    
    6,530Fixed assets, net of accumulated depreciation of $18,728 and $18,597
    
    
    26,582
    
    
    
    25,996Assets held for sale, long term
    
    
    95
    
    
    
    55Intangibles, net
    
    
    49
    
    
    
    72Escrow reserve
    
    
    819
    
    
    
    813Other assets
    
    
    413
    
    
    
    410Total assets
    
    $
    35,973
    
    
    $
    33,876LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,321
    
    
    $
    3,409Accrued expenses
    
    
    5,353
    
    
    
    2,583Refundable deposits
    
    
    1,491
    
    
    
    1,225Line of Credit
    
    
    
    
    
    
    241Current portion of long-term financing
    
    
    114
    
    
    
    110Current portion of capital lease obligation
    
    
    1,026
    
    
    
    468Deferred rent  current
    
    
    129
    
    
    
    127Other current liabilities
    
    
    317
    
    
    
    308Total current liabilities
    
    
    10,751
    
    
    
    8,471Long-term financing
    
    
    7,398
    
    
    
    7,456Capital lease obligation
    
    
    1,606
    
    
    
    Deferred rent
    
    
    399
    
    
    
    464Other liabilities
    
    
    100
    
    
    
    215COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value:Authorized shares  40,000,000
Issued and outstanding shares  9,160,000 and 9,174,000 at June
30, 2008 and December 31, 2007, respectively
    
    
    92
    
    
    
    92Additional paid-in capital
    
    
    37,720
    
    
    
    37,685Accumulated deficit
    
    
    (22,093
    )
    
    
    (20,507
    )Total stockholders equity
    
    
    15,719
    
    
    
    17,270Total liabilities and stockholders equity
    
    $
    35,973
    
    
    $
    33,876
  3




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##### 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross sales
    
    $
    15,454
    
    
    $
    13,535
    
    
    $
    27,169
    
    
    $
    24,515Less excise taxes
    
    
    1,042
    
    
    
    941
    
    
    
    1,836
    
    
    
    1,732Net sales
    
    
    14,412
    
    
    
    12,594
    
    
    
    25,333
    
    
    
    22,783Cost of sales
    
    
    10,045
    
    
    
    8,836
    
    
    
    18,422
    
    
    
    16,759Gross margin
    
    
    4,367
    
    
    
    3,758
    
    
    
    6,911
    
    
    
    6,024Selling, general and administrative expenses
    
    
    3,648
    
    
    
    3,575
    
    
    
    8,119
    
    
    
    6,974Gain on sale of net assets (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,436Operating income (loss)
    
    
    719
    
    
    
    183
    
    
    
    (1,208
    )
    
    
    1,486Other expense, net
    
    
    (247
    )
    
    
    (27
    )
    
    
    (376
    )
    
    
    (57
    )Income (loss) before income taxes
    
    
    472
    
    
    
    156
    
    
    
    (1,584
    )
    
    
    1,429Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (3
    )Net income (loss)
    
    $
    472
    
    
    $
    156
    
    
    $
    (1,586
    )
    
    $
    1,426Basic and diluted net earnings (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.17
    )
    
    $
    0.16Weighted average basic shares outstanding
    
    
    9,057,000
    
    
    
    8,984,000
    
    
    
    9,077,000
    
    
    
    8,973,000Weighted average diluted shares outstanding
    
    
    9,085,000
    
    
    
    9,196,000
    
    
    
    9,077,000
    
    
    
    9,197,000
  4




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PYRAMID BREWERIES INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Six Month Period EndedJune 30,2008
    
    
    2007OPERATING ACTIVITIES:Net (loss) income
    
    $
    (1,586
    )
    
    $
    1,426Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,130
    
    
    
    1,109Stock-based compensation expense
    
    
    25
    
    
    
    124Loss on disposal of equipment
    
    
    17
    
    
    
    Gain on sale of net assets
    
    
    
    
    
    
    (2,436
    )Deferred rent
    
    
    (63
    )
    
    
    (58
    )Accrued mediation settlement
    
    
    1,123
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,313
    )
    
    
    (709
    )Inventories
    
    
    (149
    )
    
    
    (133
    )Prepaid expenses and other
    
    
    345
    
    
    
    224Accounts payable and accrued expenses
    
    
    585
    
    
    
    (1,131
    )Refundable deposits
    
    
    266
    
    
    
    321Net cash provided by (used in) operating activities
    
    
    380
    
    
    
    (1,263
    )INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (86
    )
    
    
    (1,360
    )Proceeds from sale of net assets
    
    
    
    
    
    
    2,942Net cash (used in) provided by investing activities
    
    
    (86
    )
    
    
    1,582FINANCING ACTIVITIES:Proceeds from capital lease obligation
    
    
    746
    
    
    
    Payments on capital lease obligation
    
    
    (223
    )
    
    
    (207
    )Payments on TTB excise tax obligation
    
    
    (106
    )
    
    
    (99
    )Payments on long-term financing
    
    
    (54
    )
    
    
    (52
    )Net payments on line of credit
    
    
    (241
    )
    
    
    Proceeds from exercise of stock options and stock issuance through the employee stock purchase
plan
    
    
    11
    
    
    
    68Net cash provided by (used in) financing activities
    
    
    133
    
    
    
    (290
    )Increase in cash and cash equivalents
    
    
    427
    
    
    
    29Cash and cash equivalents at beginning of period
    
    
    201
    
    
    
    227Cash and cash equivalents at end of period
    
    $
    628
    
    
    $
    256
  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 Earnings (Loss) Per Share
   Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands except per share data)Net income (loss)
    
    $
    472
    
    
    $
    156
    
    
    $
    (1,586
    )
    
    $
    1,426Shares:Weighted average basic shares outstanding
    
    
    9,057
    
    
    
    8,984
    
    
    
    9,077
    
    
    
    8,973Dilutive effect of employee stock options and awards
    
    
    28
    
    
    
    212
    
    
    
    
    
    
    
    224Weighted average diluted shares outstanding
    
    
    9,085
    
    
    
    9,196
    
    
    
    9,077
    
    
    
    9,197Basic and diluted net earnings (loss) per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.17
    )
    
    $
    0.16
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2008
    
    2007
    
    2008
    
    2007(in thousands)Shares excluded
from calculation of
dilutive net
earnings (loss) per
share
    
    
    363
    
    
    
    
    
    
    
    663
    
    
    
    
 7




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##### Table of Contents



Liquidity
   
    
    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
   8




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##### Table of Contents



3. Merger with Independent Brewers United Inc.
    4. Stock-Based Compensation
 Share-Based Payment (Revised 2004)
    2008
    
    2007Expected life
    
    0.2 yrs
    
    6 yrsRisk free interest rate
    
    
    1.9
    %
    
    
    4.8
    %Expected volatility
    
    
    113
    %
    
    
    42
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  9




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##### Table of Contents



Employee Stock Purchase Plan
    5. Inventories
  June 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    881
    
    
    $
    829Work in process
    
    
    381
    
    
    
    289Finished goods
    
    
    1,064
    
    
    
    1,059$
    2,326
    
    
    $
    2,177
  6. Line of Credit
  7. Capital Lease
  8. Litigation and Contingencies
  10




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9. Segment Information
  ).
 11




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##### Table of Contents



BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended June 30, 2008Gross sales from external customers
    
    $
    11,153
    
    
    $
    4,301
    
    
    $
    
    
    
    $
    15,454Net sales from external customers
    
    
    10,111
    
    
    
    4,301
    
    
    
    
    
    
    
    14,412Intersegment revenues
    
    
    177
    
    
    
    (177
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    2,161
    
    
    
    491
    
    
    
    (1,933
    )
    
    
    719Capital expenditures
    
    
    21
    
    
    
    9
    
    
    
    30
    
    
    
    60Total assets
    
    
    22,886
    
    
    
    4,050
    
    
    
    9,037
    
    
    
    35,973Quarter ended June 30, 2007Gross sales from external customers
    
    $
    9,336
    
    
    $
    4,199
    
    
    $
    
    
    
    $
    13,535Net sales from external customers
    
    
    8,395
    
    
    
    4,199
    
    
    
    
    
    
    
    12,594Intersegment revenues
    
    
    142
    
    
    
    (142
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    1,548
    
    
    
    407
    
    
    
    (1,772
    )
    
    
    183Capital expenditures
    
    
    834
    
    
    
    83
    
    
    
    56
    
    
    
    973Total assets
    
    
    21,139
    
    
    
    4,712
    
    
    
    8,726
    
    
    
    34,577Six months ended June 30, 2008Gross sales from external customers
    
    $
    19,505
    
    
    
    7,664
    
    
    
    
    
    
    
    27,169Net sales from external customers
    
    
    17,669
    
    
    
    7,664
    
    
    
    
    
    
    
    25,333Intersegment revenues
    
    
    285
    
    
    
    (285
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,205
    
    
    
    346
    
    
    
    (4,759
    )
    
    
    (1,208
    )Capital expenditures
    
    
    1,675
    
    
    
    14
    
    
    
    37
    
    
    
    1,726Total assets
    
    
    22,886
    
    
    
    4,050
    
    
    
    9,037
    
    
    
    35,973Six months ended June 30, 2007Gross sales from external customers
    
    $
    17,127
    
    
    
    7,388
    
    
    
    
    
    
    
    24,515Net sales from external customers
    
    
    15,395
    
    
    
    7,388
    
    
    
    
    
    
    
    22,783Intersegment revenues
    
    
    250
    
    
    
    (250
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    4,850
    
    
    
    332
    
    
    
    (3,696
    )
    
    
    1,486Capital expenditures
    
    
    1,084
    
    
    
    190
    
    
    
    86
    
    
    
    1,360Total assets
    
    
    21,139
    
    
    
    4,712
    
    
    
    8,726
    
    
    
    34,577
 10. Subsequent Events
   12




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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
   13




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Results of Operations
 QUARTER ENDED JUNE 30, 2008 COMPARED TO QUARTER ENDED JUNE 30, 2007
 Gross Sales.
 Excise Taxes.
 Gross Margin
  % of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    3,876
    
    
    
    38.3
    %
    
    $
    3,351
    
    
    
    39.9
    %
    
    $
    525
    
    
    
    15.7
    %Alehouse Division
    
    
    491
    
    
    
    11.4
    %
    
    
    407
    
    
    
    9.7
    %
    
    
    84
    
    
    
    20.6
    %Total
    
    $
    4,367
    
    
    
    30.3
    %
    
    $
    3,758
    
    
    
    29.8
    %
    
    $
    609
    
    
    
    16.2
    %
 Selling, General and Administrative Expenses
 Other Expense, Net
 Income Taxes
 14




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##### Table of Contents



Net Income
 SIX MONTH PERIOD ENDED JUNE 30, 2008 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2007
 Gross Sales.
 Excise Taxes.
 Gross Margin
  % of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2008
    
    
    Net Sales
    
    
    2007
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    6,565
    
    
    
    37.2
    %
    
    $
    5,692
    
    
    
    37.0
    %
    
    $
    873
    
    
    
    15.3
    %Alehouse Division
    
    
    346
    
    
    
    4.5
    %
    
    
    332
    
    
    
    4.5
    %
    
    
    14
    
    
    
    4.2
    %Total
    
    $
    6,911
    
    
    
    27.3
    %
    
    $
    6,024
    
    
    
    26.4
    %
    
    $
    887
    
    
    
    14.7
    %
 Selling, General and Administrative Expenses
 Gain on Sale
 Other Expense, Net
 Income Taxes
 15




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##### Table of Contents



Net (Loss)Income.
 Liquidity and Capital Resources and Commitments
        
    
    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.
 16




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Contractual Obligations
  Contingencies
   Critical Accounting Policies
  
 ITEM 4. Controls and Procedures
 Procedures
 Procedures
 (a) Evaluation of disclosure controls and procedure
  17




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##### Table of Contents



(b) Changes in internal controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Numberof SharesFor
    
    WithheldTerm Expiring in 2011George Hancock
    
    
    6,172,470
    
    
    
    1,457,856Scott Barnum
    
    
    6,170,596
    
    
    
    1,459,730
  Numberof SharesFor
    
    Against
    
    AbstainRatifyMoss Adams LLP
    
    
    7,188,216
    
    
    
    116,924
    
    
    
    325,186
  
 ITEM 6. EXHIBITS
 10.1
    
    Employment Separation Agreement between the Company and Scott Barnum dated August 5, 2008.
 18




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##### Table of Contents



10.2
    
    Employment Separation Agreement between the Company and Michael OBrien dated August 5, 2008.31.1
    
    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: R. Martin Kelly, 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: Eric G. Peterson, Chief
Financial Officer & Treasurer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: R. Martin Kelly, 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: Eric G. Peterson, Chief Financial Officer & Treasurer
 19




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##### Table of Contents



SIGNATURE
  PYRAMID BREWERIES INC.By:
    /s/ R. MARTIN KELLYR. Martin KellyChief Executive OfficerBy:
    /s/ ERIC G. PETERSONEric G. PetersonChief Financial Officer and Treasurer(Principal Financial Officer)  20