##### 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 SEPTEMBER 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)
 
 þ o
  o o þ
 o þ




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##### 



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine Month Periods Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine Month Periods Ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART IIOTHER INFORMATIONItem 1A. Risk Factors
    
    
    22Item 6. Exhibits
    
    
    24SIGNATURE
    
    
    25EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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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)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    203
    
    
    $
    416Accounts receivable, net of $20 allowance
    
    
    3,810
    
    
    
    2,838Inventories
    
    
    2,362
    
    
    
    1,841Prepaid expenses and other
    
    
    761
    
    
    
    716Total current assets
    
    
    7,136
    
    
    
    5,811Fixed assets, net of accumulated depreciation of $18,075 and $16,294
    
    
    26,711
    
    
    
    26,666Other assets
    
    
    1,790
    
    
    
    1,426Total assets
    
    $
    35,637
    
    
    $
    33,903CURRENT LIABILITIES:Accounts payable
    
    $
    2,146
    
    
    $
    3,243Accrued Expenses
    
    
    4,132
    
    
    
    2,770Refundable deposits
    
    
    605
    
    
    
    596Other current liabilities
    
    
    766
    
    
    
    174Total current liabilities
    
    
    7,649
    
    
    
    6,783Long-term financing, net of current
    
    
    8,181
    
    
    
    7,671Deferred rent, net of current
    
    
    482
    
    
    
    538Other liabilities
    
    
    502
    
    
    
    COMMITMENTS 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  8,925,273 and 8,805,737 at
September 30, 2006 and December 31, 2005, respectively
    
    
    89
    
    
    
    88Additional paid-in capital
    
    
    37,282
    
    
    
    37,023Accumulated deficit
    
    
    (18,548
    )
    
    
    (18,200
    )Total stockholders equity
    
    
    18,823
    
    
    
    18,911Total liabilities and stockholders equity
    
    $
    35,637
    
    
    $
    33,903
  3




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PYRAMID BREWERIES INC
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in thousands, except share data)
 Three Month Period Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross sales
    
    $
    15,777
    
    
    $
    14,284
    
    
    $
    41,859
    
    
    $
    38,454Less excise taxes
    
    
    1,675
    
    
    
    758
    
    
    
    3,162
    
    
    
    2,007Net sales
    
    
    14,102
    
    
    
    13,526
    
    
    
    38,697
    
    
    
    36,447Cost of sales
    
    
    10,769
    
    
    
    10,172
    
    
    
    29,276
    
    
    
    28,593Gross margin
    
    
    3,333
    
    
    
    3,354
    
    
    
    9,421
    
    
    
    7,854Selling, general and administrative expenses
    
    
    3,230
    
    
    
    2,910
    
    
    
    9,649
    
    
    
    8,299Operating income (loss)
    
    
    103
    
    
    
    444
    
    
    
    (228
    )
    
    
    (445
    )Other income (expense), net
    
    
    28
    
    
    
    (4
    )
    
    
    (114
    )
    
    
    (75
    )Income (loss) before income taxes
    
    
    131
    
    
    
    440
    
    
    
    (342
    )
    
    
    (520
    )Provision for income taxes
    
    
    (1
    )
    
    
    (1
    )
    
    
    (6
    )
    
    
    (4
    )Net income (loss)
    
    $
    130
    
    
    $
    439
    
    
    $
    (348
    )
    
    $
    (524
    )Basic and diluted net earnings (loss) per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.04
    )
    
    $
    (0.06
    )Weighted average basic shares outstanding
    
    
    8,925,000
    
    
    
    8,799,000
    
    
    
    8,851,000
    
    
    
    8,790,000Weighted average diluted shares outstanding
    
    
    8,981,000
    
    
    
    9,156,000
    
    
    
    8,851,000
    
    
    
    8,790,000
  4




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PYRAMID BREWERIES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Nine Month Period EndedSeptember 30,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (348
    )
    
    $
    (524
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,817
    
    
    
    2,050Stock-based compensation expense
    
    
    240
    
    
    
    48Loss (gain) on sale of equipment
    
    
    7
    
    
    
    (415
    )Deferred rent
    
    
    (56
    )
    
    
    (51
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,042
    )
    
    
    (1,168
    )Inventories
    
    
    (522
    )
    
    
    203Prepaid expenses and other
    
    
    (328
    )
    
    
    (69
    )Accounts payable and accrued expenses
    
    
    265
    
    
    
    453Current liabilities
    
    
    198
    
    
    
    Refundable deposits
    
    
    9
    
    
    
    116Other liabilities
    
    
    502
    
    
    
    Net cash provided by operating activities
    
    
    742
    
    
    
    643INVESTING ACTIVITIES:Acquisition of fixed assets
    
    
    (725
    )
    
    
    (815
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    783Net cash used in investing activities
    
    
    (725
    )
    
    
    (32
    )FINANCING ACTIVITIES:Payments on long-term financing
    
    
    (250
    )
    
    
    (55
    )Proceeds from exercise of stock options and stock issuance through the
employee stock purchase plan
    
    
    20
    
    
    
    37Net borrowings on line of credit
    
    
    
    
    
    
    (400
    )Cash dividends paid
    
    
    
    
    
    
    (193
    )Net cash used in financing activities
    
    
    (230
    )
    
    
    (611
    )Decrease in cash and cash equivalents
    
    
    (213
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    416
    
    
    
    Cash and cash equivalents at end of period
    
    $
    203
    
    
    $
    
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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 Earnings (Loss) Per Share
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands except per share data)Net income (loss)
    
    $
    130
    
    
    $
    439
    
    
    $
    (348
    )
    
    $
    (524
    )Shares:Weighted average basic shares outstanding
    
    
    8,925
    
    
    
    8,799
    
    
    
    8,851
    
    
    
    8,790Dilutive effect of employee stock options and awards
    
    
    56
    
    
    
    357
    
    
    
    
    
    
    
    Weighted average diluted shares outstanding
    
    
    8,981
    
    
    
    9,156
    
    
    
    8,851
    
    
    
    8,790Basic net earnings (loss) per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.04
    )
    
    $
    (0.06
    )Diluted net earnings (loss) per share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.04
    )
    
    $
    (0.06
    )
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    
    2006
    
    2005(in thousands)Shares
excluded from
calculation of
dilutive net
earnings (loss) per
share
    
    
    207
    
    
    
    385
    
    
    
    
    567
    
    
    736
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Recently Issued Accounting Pronouncements
 Considering the Effects of Prior Year Misstatements when Quantifying
Current Year Misstatements.
 Fair
Value Measurements,
 Accounting for Uncertainty in
Income Taxesan Interpretation of FASB Statement No. 109
 Liquidity
 Capital Lease
  Litigation and Contingencies
  Reclassification
  2. Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to
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Employees
 Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation Transition and Disclosure
  For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss) as reported
    
    $
    439
    
    
    $
    (524
    )Add: Stock-based compensation cost as reported
    
    
    16
    
    
    
    48Less: Stock-based compensation cost determined under the fair value based method
    
    
    (23
    )
    
    
    (83
    )Net income (loss) as adjusted
    
    $
    432
    
    
    $
    (559
    )Basic and diluted net earnings (loss) per share as reported
    
    $
    0.05
    
    
    $
    (0.06
    )Basic and diluted net earnings (loss) per share as adjusted
    
    $
    0.05
    
    
    $
    (0.06
    )
 Stock Option Plans
    9




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Nine months EndedSeptember 30,2006
    
    2005Expected life
    
    6.2
    yrs
    
    5.0-5.2
    yrsRisk-free interest rate
    
    
    4.9
    %
    
    
    3.9-4.3
    %Expected volatility
    
    
    51.3
    %
    
    
    29.0%-51.0
    %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
    
    
    $
    263,100Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    (47,200
    )
    
    
    2.14Outstanding at September 30, 2006
    
    
    567,300
    
    
    $
    2.30
    
    
    
    4.9
    
    
    $
    157,356Exercisable at September 30, 2006
    
    
    560,332
    
    
    $
    2.30
    
    
    
    4.9
    
    
    $
    156,123
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WeightedAverageShares
    
    
    Grant Date(rounded)
    
    
    Fair ValueNonvested balance at December 31, 2005
    
    
    96,900
    
    
    $
    0.81Granted
    
    
    
    
    
    
    Vested
    
    
    (15,900
    )
    
    
    0.67Forfeited
    
    
    (19,500
    )
    
    
    0.42Nonvested balance at March 31, 2006
    
    
    61,500
    
    
    $
    0.97Granted
    
    
    25,000
    
    
    
    1.43Vested
    
    
    (32,100
    )
    
    
    1.33Forfeited
    
    
    
    
    
    
    Nonvested balance at June 30, 2006
    
    
    54,400
    
    
    $
    0.96Granted
    
    
    
    
    
    
    Vested
    
    
    (5,300
    )
    
    
    0.99Forfeited
    
    
    (42,200
    )
    
    
    0.97Nonvested balance at September 30, 2006
    
    
    6,900
    
    
    $
    0.91
  Restricted Stock Awards
    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
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested balance September 30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 11




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Employee Stock Purchase Plan
   3. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    956
    
    
    $
    741Work in process
    
    
    249
    
    
    
    123Finished goods
    
    
    1,157
    
    
    
    977Total inventories
    
    $
    2,362
    
    
    $
    1,841
  4. Line of Credit
 Capital Lease
 5. Capital Lease
  6. Litigation and Contingencies
   12




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7. Segment Information
 Disclosures about Segments of an Enterprise and
Related Information
 Nature of Operations and Summary of Significant
Accounting Policies
 13




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BeverageOperations
    
    Alehouse
    
    Other
    
    TotalQuarter ended September 30, 2006Gross revenues from external customers
    
    $
    11,632
    
    
    $
    4,145
    
    
    $
    
    
    
    $
    15,777Net revenues from external customers
    
    
    9,957
    
    
    
    4,145
    
    
    
    
    
    
    
    14,102Intersegment revenues
    
    
    152
    
    
    
    
    
    
    
    (152
    )
    
    
    Operating income (loss)
    
    
    1,514
    
    
    
    407
    
    
    
    (1,818
    )
    
    
    103Capital expenditures
    
    
    139
    
    
    
    23
    
    
    
    
    
    
    
    162Total assets
    
    
    21,700
    
    
    
    5,173
    
    
    
    8,764
    
    
    
    35,637Quarter ended September 30, 2005Gross revenues from external customers
    
    $
    10,102
    
    
    $
    4,182
    
    
    $
    
    
    
    $
    14,284Net revenues from external customers
    
    
    9,344
    
    
    
    4,182
    
    
    
    
    
    
    
    13,526Intersegment revenues
    
    
    167
    
    
    
    
    
    
    
    (167
    )
    
    
    Operating income (loss)
    
    
    1,643
    
    
    
    307
    
    
    
    (1,506
    )
    
    
    444Capital expenditures
    
    
    101
    
    
    
    30
    
    
    
    30
    
    
    
    161Total assets
    
    
    20,635
    
    
    
    5,794
    
    
    
    7,948
    
    
    
    34,377Nine months ended September 30, 2006Gross revenues from external customers
    
    $
    30,357
    
    
    
    11,502
    
    
    
    
    
    
    
    41,859Net revenues from external customers
    
    
    27,195
    
    
    
    11,502
    
    
    
    
    
    
    
    38,697Intersegment revenues
    
    
    411
    
    
    
    
    
    
    
    (411
    )
    
    
    Operating income (loss)
    
    
    4,564
    
    
    
    757
    
    
    
    (5,549
    )
    
    
    (228
    )Capital expenditures
    
    
    1,824
    
    
    
    49
    
    
    
    7
    
    
    
    1,880Total assets
    
    
    21,700
    
    
    
    5,173
    
    
    
    8,764
    
    
    
    35,637Nine months ended September 30, 2005Gross revenues from external customers
    
    $
    26,794
    
    
    $
    11,660
    
    
    $
    
    
    
    $
    38,454Net revenues from external customers
    
    
    24,787
    
    
    
    11,660
    
    
    
    
    
    
    
    36,447Intersegment revenues
    
    
    470
    
    
    
    
    
    
    
    (470
    )
    
    
    Operating income (loss)
    
    
    3,442
    
    
    
    540
    
    
    
    (4,427
    )
    
    
    (445
    )Capital expenditures
    
    
    514
    
    
    
    157
    
    
    
    69
    
    
    
    740Total assets
    
    
    20,635
    
    
    
    5,794
    
    
    
    7,948
    
    
    
    34,377
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
  14




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Results of Operations
  SELECTED UNAUDITED OPERATING DATA
 Three Months Ended September 30,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2006
    
    
    Net Sales
    
    
    2005
    
    
    Net SalesGross sales
    
    $
    15,777
    
    
    
    
    
    
    $
    14,284Less excise taxes
    
    
    1,675
    
    
    
    
    
    
    
    758Net sales
    
    
    14,102
    
    
    
    100.0
    
    
    
    13,526
    
    
    
    100.0Cost of sales
    
    
    10,769
    
    
    
    76.4
    
    
    
    10,172
    
    
    
    75.2Gross margin
    
    
    3,333
    
    
    
    23.6
    
    
    
    3,354
    
    
    
    24.8Selling, general and administrative expenses
    
    
    3,230
    
    
    
    22.9
    
    
    
    2,910
    
    
    
    21.5Operating income
    
    
    103
    
    
    
    0.7
    
    
    
    444
    
    
    
    3.3Other income (expense), net
    
    
    28
    
    
    
    0.2
    
    
    
    (4
    )
    
    
    0.0Income before income taxes
    
    
    131
    
    
    
    0.9
    
    
    
    440
    
    
    
    3.3Provision for income taxes
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Net income
    
    $
    130
    
    
    
    0.9
    
    
    $
    439
    
    
    
    3.3Basic and diluted net earnings per share
    
    $
    0.01
    
    
    
    
    
    
    $
    0.05Operating data (in barrels):Beer shipped
    
    
    55,300
    
    
    
    
    
    
    
    51,200Soda shipped
    
    
    14,700
    
    
    
    
    
    
    
    13,300Total shipped
    
    
    70,000
    
    
    
    
    
    
    
    64,500Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    250,000
 15




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Nine Month Period Ended September 30,(in thousands, except barrel & per share amounts)% of
    
    
    
    
    
    
    % of2006
    
    
    Net Sales
    
    
    2005
    
    
    Net SalesGross sales
    
    $
    41,859
    
    
    
    
    
    
    $
    38,454Less excise taxes
    
    
    3,162
    
    
    
    
    
    
    
    2,007Net sales
    
    
    38,697
    
    
    
    100.0
    
    
    
    36,447
    
    
    
    100.0Cost of sales
    
    
    29,276
    
    
    
    75.7
    
    
    
    28,593
    
    
    
    78.5Gross margin
    
    
    9,421
    
    
    
    24.3
    
    
    
    7,854
    
    
    
    21.5Selling, general and administrative expenses
    
    
    9,649
    
    
    
    24.9
    
    
    
    8,299
    
    
    
    22.7Operating loss
    
    
    (228
    )
    
    
    (0.6
    )
    
    
    (445
    )
    
    
    (1.2
    )Other expense, net
    
    
    (114
    )
    
    
    (0.3
    )
    
    
    (75
    )
    
    
    (0.2
    )Loss before income taxes
    
    
    (342
    )
    
    
    (0.9
    )
    
    
    (520
    )
    
    
    (1.4
    )Provision for income taxes
    
    
    (6
    )
    
    
    
    
    
    
    (4
    )
    
    
    Net loss
    
    $
    (348
    )
    
    
    (0.9
    )
    
    $
    (524
    )
    
    
    (1.4
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.06
    )Operating data (in barrels):Beer shipped
    
    
    149,900
    
    
    
    
    
    
    
    138,400Soda shipped
    
    
    36,600
    
    
    
    
    
    
    
    36,700Total shipped
    
    
    186,500
    
    
    
    
    
    
    
    175,100Annual production capacity
    
    
    265,000
    
    
    
    
    
    
    
    250,000
 QUARTER ENDED SEPTEMBER 30, 2006 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2005
 Gross Sales.
 Excise Taxes. Litigation and Contingencies
 Gross Margin
 16




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##### Table of Contents



Three Month Period Ended September 30,(in thousands)% of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2006
    
    
    Net Sales
    
    
    2005
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    2,926
    
    
    
    29.4
    %
    
    $
    3,047
    
    
    
    32.6
    %
    
    $
    (121
    )
    
    
    (4.0
    )%Alehouse Division
    
    
    407
    
    
    
    9.8
    %
    
    
    307
    
    
    
    7.3
    %
    
    
    100
    
    
    
    32.6
    %Total
    
    $
    3,333
    
    
    
    23.6
    %
    
    $
    3,354
    
    
    
    24.8
    %
    
    $
    (21
    )
    
    
    (0.6
    )%
 Selling, General and Administrative Expenses
 Other
Income (Expense), Net
 Income Taxes
 Net Income
 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005
 Gross Sales.
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##### Table of Contents



Excise Taxes. Litigation and Contingencies
 Gross Margin
 Nine Month Period Ended September 30,(in thousands)% of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    SegmentGross Margin
    
    2006
    
    
    Net Sales
    
    
    2005
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Division
    
    $
    8,664
    
    
    
    31.9
    %
    
    $
    7,314
    
    
    
    29.5
    %
    
    $
    1,350
    
    
    
    18.5
    %Alehouse Division
    
    
    757
    
    
    
    6.6
    %
    
    
    540
    
    
    
    4.6
    %
    
    
    217
    
    
    
    40.2
    %Total
    
    $
    9,421
    
    
    
    24.3
    %
    
    $
    7,854
    
    
    
    21.5
    %
    
    $
    1,567
    
    
    
    20.0
    %
 Selling, General and Administrative Expenses
 Other Expense, Net
 Income Taxes
 Net loss
 18




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##### Table of Contents



Liquidity and Capital Resources and Commitments
       Litigation and Contingencies
    19




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##### Table of Contents



Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1 - 3 Years
    
    3 - 5 Years
    
    5 YearsOperating leases-(1)
    
    $
    5,301
    
    
    
    1,264
    
    
    
    2,066
    
    
    
    1,305
    
    
    
    666Capital leases-(2)
    
    $
    977
    
    
    
    389
    
    
    
    588
    
    
    
    
    
    
    
    Note payable-(3)
    
    $
    7,697
    
    
    
    103
    
    
    
    225
    
    
    
    254
    
    
    
    7,115TTB excise tax assessment-(4)
    
    $
    700
    
    
    
    198
    
    
    
    441
    
    
    
    61
    
    
    
    
 
 (1)
    
    We have obligations in the form of revenue sharing provisions in certain alehouse lease
agreements, based on the excess of the
percentage of revenue over the minimum lease payment. For the quarters ended September 30,
2006 and 2005, there were no
amounts owed under revenue sharing agreements.(2)
    
    During the second quarter of 2006, we completed the acquisition of new kegs under our capital
lease agreement (see Note 5, Capital Lease) with the purchase of 4,100 kegs. We incurred an
additional $322,000 in debt for a total of $1.2 million, payable over a 30-month period.(3)
    
    The amounts are principal only payments as stated in securitized financing arrangement for the
Berkeley Facility purchase.(4)
    
    We reached a preliminary agreement with the TTB during the third quarter of 2006 (see Note 6,
Litigation and Contingencies) for a total amount of $700,000, payable in monthly installments for a
period of three years.  Contingencies
   Litigation and Contingencies
 20




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##### 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 123(R). 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.
 Stock-based Compensation
 21




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 Litigation and
Contingencies
 
 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
  TTB Audit.
 22




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##### Table of Contents



Litigation and Contingencies
   23




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##### Table of Contents



ITEM 6. EXHIBITS
 10.1
    
    Employment agreement between the
Registrant and Michael OBrienü*.10.2
    
    Summary of termination of Portland Brewing Agreements (incorporated
by reference to Pyramids Current Report on Form 8-K filed October 4,
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: Michael 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 OBrien,
Chief Financial Officer & Vice President of Finance
 
 ü
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement 24




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##### Table of Contents



SIGNATURE
  PYRAMID BREWERIES INC.By:
    
    /s/ SCOTT BARNUMScott BarnumPresident and Chief Executive OfficerBy:
    
    /s/ MICHAEL OBRIENMichael OBrienChief Financial Officer and Vice President of Finance(Principal Financial Officer)DATE: November 13, 2006
 25