Pyramid Breweries 10-K 2005
Documents found in this filing:
WASHINGTON, D.C. 20549
COMMISSION FILE NUMBER 0-27116
PYRAMID BREWERIES INC.
(exact name of registrant as specified in its charter)
91 South Royal Brougham Way, Seattle, WA 98134
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrants most recently completed second quarter, June 30, 2004, was $19,534,067.
The number of shares outstanding of the registrants common stock as of March 18, 2005, was 8,781,840.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. Such definitive Proxy Statement or an amendment to this Report providing the information required by Part II of this Report shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Pyramid Breweries Inc. (also referred to as the Company, we or our) is filing this Amendment No. 1 to its Form 10-K for the fiscal year ended December 31, 2004 (the Form 10-K), originally filed with the Securities and Exchange Commission on March 31, 2005, for the sole purpose of (a) correcting certain information in the Report of Independent Registered Public Accounting Firm by KPMG LLP dated January 23, 2004 in Item 8 of Part II, and (b) including the signature block of KPMG LLP in Exhibit 23.2, the Consent of KPMG LLP dated March 31, 2005, which information and signature were unintentionally omitted by the Companys third party filing agent. The Company is also updating the signature page and Exhibits 31.1, 31.2, 31.3, 32.1, 32.2 and 32.3.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of both Item 8 of Part II and Item 15 of Item IV, as amended, is set forth below. The remainder of the Form 10-K is unchanged and is not reproduced in this Amendment No. 1. This Amendment No. 1 speaks as of the original filing date of the Form 10-K and reflects only the changes discussed above. No other information included in the Form 10-K, including the Companys financial statements and the footnotes thereto, has been modified or updated in any way.
TABLE OF CONTENTS
Item 8 Financial Statements and Supplementary Data
Report of Independent Registered Accounting Firm
To the Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheet of Pyramid Breweries, Inc. and subsidiary as of December 31, 2004, and the related statements of operations, stockholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2004 financial statements referred to above present fairly, in all material respects, the financial position of Pyramid Breweries, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
Report of Independent Registered Public Accounting Firm
The Board of Directors
We have audited the accompanying consolidated balance sheet of Pyramid Breweries Inc. as of December 31, 2003, and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pyramid Breweries Inc. as of December 31, 2003, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2003 in conformity with U.S. generally accepted accounting principles.
PYRAMID BREWERIES INC.
See accompanying notes to consolidated financial statements.
PYRAMID BREWERIES INC.
See accompanying notes to consolidated financial statements.
PYRAMID BREWERIES INC.
See accompanying notes to consolidated financial statements.
PYRAMID BREWERIES INC.
See accompanying notes to consolidated financial statements.
PYRAMID BREWERIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Significant Accounting Policies
Pyramid Breweries Inc. (the Company), a Washington corporation, was incorporated in 1984 and is engaged in the brewing, marketing and selling of craft beers and sodas. The Company operates breweries and restaurants in Seattle, Washington, Portland, Oregon and Berkeley, Walnut Creek, and Sacramento California. The Company sells its products through a network of selected independent distributors primarily in Washington, Oregon and California under the Pyramid, MacTarnahans and Thomas Kemper brands. The Company also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label.
In March 1995, the Company opened the Seattle, Washington Brewery near downtown Seattle. This brewery and 340-seat alehouse has an estimated annual production capacity of 50,000 barrels as of December 31, 2004.
In December 1995, the Company sold 2,000,000 shares of common stock in an initial public offering (the Offering). Net proceeds from the Offering amounted to approximately $34,156,000 and have been used to fund the Companys growth and expansion plans.
In February 1997, the Company opened the Berkeley Brewery in Berkeley, California. This brewery and 350-seat alehouse has an estimated annual beer production capacity of 150,000 barrels as of December 31, 2004.
In March 1997, the Company acquired substantially all of the operating assets and assumed certain liabilities of the Thomas Kemper Soda Company. This acquisition expanded the Companys product line to include a range of premium soft drinks, including root beer and cream soda.
In May 2002, the Company opened the Walnut Creek Alehouse and Brewery in Walnut Creek, California. The alehouse has seating for 275 plus an outdoor patio seating area and an estimated annual brewing capacity of 2,600 barrels as of December 31, 2004.
In July 2003, the Company opened the Sacramento Alehouse and Brewery in Sacramento, California. The alehouse has seating for 295 plus an outdoor patio seating area and an estimated annual brewing capacity of 1,600 barrels as of December 31, 2004.
In July 2004, the Company purchased the Berkeley Brewery and Alehouse facility located at 901 Gilman Street, Berkeley, California for $7,200,000 through a short-term financing arrangement with Sugar Mountain Capital. Previously, the Company had leased this facility. The Companys lease obligations terminated with its purchase of the facility. In January 2005, the Company entered into a long-term $7,850,000 securitized financing arrangement with Morgan Stanley Mortgage Capital Inc., for the purpose of refinancing the Companys existing $7,200,000 short term note with Sugar Mountain Capital, LLC. As a requirement of the refinance the Company established a wholly owned subsidiary as a single purpose entity, named Pyramid Gilman Street Property, LLC to act as the legal owner of the property.
In August 2004, the Company acquired Portland Taproom and Brewery in Portland, Oregon. The Taproom has seating for 150 plus an outdoor patio seating area and an estimated annual brewing capacity of 130,000 barrels as of December 31, 2004. In association with the asset acquisition the Company established a new entity, PBC Acquisition LLC, for the express purpose of acquiring certain assets from Portland Brewing Company. The assets of this entity are consolidated into the Companys condensed consolidated financial statements for financial reporting purposes.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries that are wholly-owned. All intercompany and intracompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with multiple financial institutions.
The Companys investments have primarily been comprised of fixed rate certificates of deposit and taxable variable rate notes with maturity dates of less than one year. Investments are custodied with major financial institutions. The specific identification method is
used to determine the cost basis of investments sold or matured. At December 31, 2004 the Company did not hold any short-term investments. At December 31, 2003, substantially all of the Companys short-term investments were classified as available for sale. These investments were recorded on the balance sheet at fair value. During the years ended December 31, 2004, 2003 and 2002 the Company realized cash proceeds, net of purchases, on the sales and maturities of short-term investments in the amount of $492,000, $2,750,000 and $1,900,000, respectively. There were no unrealized or realized gains or losses during the years ended December 31, 2004, 2003 and 2002.
Fair Value of Financial Instruments
As of December 31, 2004 and 2003, the carrying amounts for cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values due to the short-term maturity of these instruments.
The Companys accounts receivable balance includes balances from trade sales and other miscellaneous receivables. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company determines the allowance for doubtful accounts based on historical write-off experience. Account balances that are deemed uncollectible, are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis and market represents the lower of replacement cost or estimated net realizable value. The Company adjusts its inventory carrying values downward to market values based on the existence of excess and obsolete inventories determined primarily by seasonal demand forecasts and branding changes.
The following table represents the company valuation account not included in other specific schedules.
Fixed assets are stated at cost less accumulated depreciation and amortization. Significant additions and improvements are capitalized. Repairs and maintenance are expensed as incurred. Upon disposition of fixed assets, gains and losses are recorded in the statements of operations. Depreciation is provided using the straight-line method over lives ranging from three to 39 years. Leasehold improvements are amortized under the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the lease.
Returnable containers (primarily kegs) are capitalized at cost, depreciated over the estimated useful life of five to ten years, and are included in fixed assets. Refundable deposits represent the Companys liability for deposits charged to customers for returnable containers. Estimated useful lives are as follows:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Companys evaluation is based on an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less the estimated costs to sell. Long-lived assets are written down to their estimated net fair value calculated using a discounted future cash flow analysis in the event of an impairment. Beginning in the fiscal year 2002, the Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If circumstances related to the Companys long-lived assets change, the Companys valuation of the long-lived assets could materially change.
The Company accounts for preopening costs related to new restaurants in accordance with Statement of Position 98-5, Recording the Cost of Start-Up Activities and accordingly, there were no unamortized preopening costs at December 31, 2004 and 2003. All preopening costs are expensed as incurred.
Website Design Costs
Website design costs related to developing, programming, and customizing applications of the Companys website, www.PyramidBrew.com, are capitalized in other assets and amortized over a two-year period. Net unamortized website design costs totaled approximately $0 and $25,000 at December 31, 2004 and 2003, respectively. Amortization of website design costs totaled approximately $25,000, $27,000 and $49,000 respectively, for the years ended December 31, 2004, 2003 and 2002. Website design costs relating to developing, programming and customizing applications are capitalized and amortized in accordance with Emerging Issues Task Force (EITF) 00-2, Accounting for Website Development Costs. Costs of operating and maintaining the website are expensed as incurred.
The excess of cost over fair value of the net assets of businesses acquired was capitalized as goodwill and amortized on a straight-line basis over 10 years, prior to the 2002 fiscal year. Accumulated amortization at December 31, 2004 and 2003 was approximately $388,000 and relates entirely to the Companys previous acquisition of Thomas Kemper Soda. The goodwill is included in the Beverage Operations segment.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Effective January 1, 2002, the Company adopted SFAS No. 142. The Company would recognize an impairment charge for the amount by which the carrying amount of an identified reporting units goodwill exceeds its fair value. Based on the transitional impairment test and the annual impairment tests performed, there was no impairment of goodwill during the years ended December 31, 2004, 2003 and 2002. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
In August 2004, the Company purchased the trademarks of Portland Brewing Company. The trademarks were assigned a value of $228,000 based on an independent appraisal. The trademarks are being amortized over a five year life and the amortization expense is included in the Beverage Operations segment. The Company will expense approximately $45,000 per year until the year 2009 at which time the trademarks will be fully amortized. For the five months of amortization recorded in 2004 $19,000 of expense was recognized.
The Company recognizes revenue from the sale of wholesale beer and soda products at the time of shipment, when the title of the Companys products passes to the customer in accordance with distributor sales agreements and collectibility is probable. The Companys revenue from its alehouses are comprised of food, beverage and merchandise, and are recognized at the time of sale.
Outside of unusual circumstances, if product is returned, it is generally for failure to meet the Companys quality standards, not as a result of customer actions. Products that do not meet our high quality standards are returned to the Company by its distributors and is destroyed. We do not have standard terms that permit return of product. We record the costs for product returns in cost of goods sold in the Consolidated Statements of Income each period. We reduce revenue at the value of the original sales price in the period that the product is returned.
Shipping and Handling Costs
Shipping and handling amounts paid to the Company by customers are included in gross sales. The actual costs of shipping and handling paid by the Company are included in cost of sales.
The federal government and all of the states levy excise taxes on alcoholic beverages, including beer. For brewers producing no more than 2.0 million barrels of beer per calendar year, the federal excise tax is $7.00 per barrel on the first 60,000 barrels of beer
removed for consumption or sale during a calendar year, and $18.00 per barrel for each barrel in excess of 60,000. Individual states also impose excise taxes on alcoholic beverages in varying amounts, which have also been subject to change.
As represented on the statement of operations, gross sales of the Company represents billed to customer activities. Excise taxes are taxes paid by the Company to state and federal government agencies. Net sales represent revenues to the Company net of applicable state and federal excise taxes.
Cost of Goods Sold
Our cost of goods sold includes costs for the manufacture of beverage products and the costs of operating the alehouses. Cost of goods for the beverage segment include beer and soda raw materials, packaging materials, manufacturing costs, plant administrative support and overheads, and freight costs. Cost of goods for the alehouse segment include food raw ingredients, labor for food preparation and service costs, and alehouse administrative support and overheads.
Advertising costs are expensed as incurred. Total advertising expense was approximately $319,000, $228,000 and $252,000 in 2004, 2003 and 2002, respectively.
The Company engages in cooperative advertising programs and buy-down programs with resellers. The expenditures associated with buy down programs are included as an offset in gross sales. The costs of cooperative advertising programs are included in the selling, general and administrative expenses category. The costs of cooperative advertising amounts for the years ended December 31, 2004, 2003 and 2002 totaled approximately $90,000, $89,000 and $76,000, respectively. EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), addresses the timing, recognition and classification in the income statement of certain promotional costs paid to a retailer or wholesaler by a vendor in connection with the sale of the vendors products or promotion of sales of the vendors products by the retailer or wholesaler. The Company adopted EITF 01-9 in the first quarter of the fiscal year 2002. The advertising costs meet the requirements of EITF 01-9 to be included in expenses rather than as an offset to revenues and therefore, the adoption of EITF 01-9 did not have an effect on the results of operations of the Company.
Other Income, net
Other income, net consists of interest income, parking fee income and other non-operating income and expenses. Other Income, net, is comprised of:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Realization of the deferred tax assets is dependent on the Companys ability to generate future U.S. taxable income. Management has established a valuation allowance for the portion of the deferred tax assets that do not meet the recognition criteria of SFAS No. 109, Accounting for Income Taxes. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and amount of a valuation allowance.
Earnings Per Share
Basic (loss) earnings per share is computed by dividing net (loss) income available by the weighted average number of common shareholders outstanding during the period, excluding shares subject to repurchase. Diluted (loss) income per share was computed by dividing net income by the weighted average number of common shares of stock outstanding plus additional common shares that would be outstanding from in-the-money options. The net effect of stock options has not been included in the calculation of diluted net loss per share as the effect is antidilutive. Options, with an exercise price below market price, to purchase approximately 525,000 shares of common stock were outstanding during the full year ended December 31, 2004, but were not included in the computation of loss per share because their effects are antidilutive.
Options to purchase approximately 1,035,000 and 758,000 shares of common stock were outstanding during the full year ended December 31, 2004 and 2003, respectively, but were not included in the computations of net loss per share because their effects are antidilutive.
The following represents a reconciliation from basic earnings per share to diluted earnings per share:
Stock Based Compensation
At December 31, 2004, the Company has stock-based compensation plans which are described more fully in Note 17. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the fair value of options issued under the Employee and Director Plans (the Plans) except as described in Note 5 and except that the Company is committed to granting 175,000 shares of restricted stock, and an additional 175,000 shares if certain performance criteria are met, to its CEO over a six year period as per the terms of his employment agreement. The Company has recorded $56,000 in stock based compensation for the twelve month period ended December 31, 2004 related to these grants. Had compensation cost been recognized based on the fair value at the date of grant for options awarded under the Plans, the pro forma amounts of the Companys net loss and net loss per share for the years ended December 31, 2004, 2003 and 2002, would have been as follows:
The fair value of options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: 2004 risk-free interest rates ranging from 1.71% to 3.67%, 2003 risk-free interest rates ranging from 2.95% to 3.98% and
a 2002 risk-free rate of 4.76%; 2004 expected future dividends of $0.00, 2003 and 2002 expected future dividends $0.176 per share; all other assumptions are consistent over the years presented, expected option lives of seven years; expected volatility of 51%. The weighted-average fair value of options granted during the years 2004, 2003 and 2002 was $0.69, $0.83 and $0.63, respectively. The effect of applying SFAS No. 123 for providing pro-forma disclosures is not indicative of future results.
Quantitative and Qualitative Disclosures about Market Risk
The Company has not and does not currently have any intention to hold any derivative instruments or engage in hedging activities. Also, the Company does not have any outstanding variable rate debt and does not enter into significant transactions denominated in foreign currency. The Companys direct exposure to risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk sensitive instruments is not material.
At times, the Company maintains an investment portfolio of various holdings, types and maturities. These securities are generally classified as available for sale and, consequently, are recorded on the balance sheets at fair value. At any time, a rise or decrease in interest rates could have a material impact on interest earnings of the investment portfolio. The Company currently does not hedge interest rate exposures.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) which were previously classified as equity. Adoption of the interpretation did not have a material impact on the Companys financial position or results of operations.
In November 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of Statement 151 will have a material effect on its consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Company intends to implement the provisions of SFAS No. 123R in the third quarter 2005.
During the year ended December 31, 2004, as a result of the acquisition of the Portland Brewing Company assets, the Companys cash flow from operations was insufficient to cover all investment activities incurred during the year. Management has announced several initiatives designed to improve operating results and production efficiencies in the Companys operations. These initiatives include 1) consolidating the majority of the Companys Seattle brewery production into the recently acquired Portland brewery in order to meet rising demand for its Pyramid branded products and to reduce production costs; 2) reductions in non-critical and redundant overhead costs throughout the Company; 3) elimination of unprofitable and low volume products to help streamline production; and 4) seeking major contract brewing arrangements with third parties for the purpose of increasing the utilization of the Companys breweries. Management believes that these initiatives will have a meaningful and positive impact on the Companys future performance. The Company expects to implement these initiatives throughout 2005 with the majority of the changes being completed by mid-year. The impact of these changes along with the cessation of the dividend are expected to improve the Companys performance and cash position in the second half of the 2005.
Overall, the Company operating activities, investing activities and financing activities used cash of $1,558,000 for the year ended December 31, 2004 as compared to cash provided of $962,000 for the year ended December 31, 2003.
As of December 31, 2004 the Company had no cash and a working capital deficit of $2,167,000. Because the Beverage Segment of the Company operates with short accounts receivable terms and the Alehouse Segment operates as a cash business the Company typically tends to collect within 30 days of a sale or immediately upon sale and therefore does not require a significant cash on hand balance to meet operating needs. The first quarter of the calendar year does tend to be the slowest season of the company, followed by a strong season during the second quarter. As a result of seasonality, cash during the first quarter is needed to build inventory levels in preparation for second quarter sales activities. Company expects that the initiative to improve operating results, the cash provided by operating activities and the funds available through the Companys line of credit will provide adequate cash to meet the Company operating needs. However, it is possible that some or all of the Companys cash requirements may not be met by these activities which may require the Company to seek additional capital from other sources, which may or may not be available to the Company.
3. Portland Brewing Company Asset Acquisition
On July 31, 2004, the Company completed its purchase of certain Portland Brewing Company assets. Per the asset purchase agreement, Pyramid Breweries Inc. acquired Portland Brewing Companys brewery and alehouse for total consideration including transaction costs of approximately $4.5 million, consisting of a combination of assumed liabilities, cash and Pyramid common stock. The terms of the transaction also include a 5-year earn out which may result in additional payments to Portland Brewing Company based on sales of Portland Brewing brands during the earn-out period. In addition to the purchase price, the Company incurred an estimated $388,000 in transaction costs, including consulting fees and amounts relating to legal and accounting charges. The results of operations of the acquired assets of Portland Brewing Company since July 31, 2004 to December 31, 2004 are included in Pyramids statement of operations for the full year ended December 31, 2004.
The assets acquired from Portland Brewing Company, including the alehouse and brewery assets, were acquired because of their strategic fit within the existing Pyramid operations. The Portland Taproom provides a venue for Portland area residents to sample Company products, the Portland brewery provides a production facility in the mature Oregon craft beer markets. The acquisition is intended to bring together two pivotal players in the craft brewing industry and position the Company for growth across all businesses, including beer, soda and restaurants as well as strengthening its position in the key West Coast markets.
The acquisition was accounted for as a business combination under SFAS 141 Business Combinations. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. 445,434 shares valued at $3.26 per share were issued in conjunction with the asset purchase.
The following unaudited pro forma information represents the results of operations for Pyramid Breweries Inc. and Portland Brewing Company for the twelve month period ended December 31, 2004 and 2003, as if the asset purchase had been consummated as of January 1, 2004 and January 1, 2003, respectively. This pro forma information does not purport to be indicative of what may occur in the future:
The following represents the allocation of the purchase price to the acquired assets of Portland Brewing Company.
Net tangible assets consists of cash, accounts receivable, inventories, property plant and equipment and other assets. Portland Brewing Companys current assets, property, plant and equipment assets and liabilities assumed were adjusted based on the fair value of those assets acquired and liabilities assumed.
Net intangible assets consist of product brands and trademarks and were valued based on an independent appraisal of the Portland Brewing Company assets acquired by the Company.
Inventories consist of the following:
Raw materials primarily include ingredients, flavorings and packaging. Work in process includes beer held in fermentation prior to the filtration and packaging process. Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale.
5. Fixed Assets
Fixed assets consist of the following:
Total depreciation and amortization expense was approximately $2,544,000, $2,365,000 and $2,111,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
6. Note Receivable Related Party
In June 2001, the Company issued a $787,000 full recourse note to Martin Kelly, the Companys Chief Executive Officer (CEO) in connection with the exercise of options for 387,400 shares of the Companys common stock. In addition, the Company issued a $115,000 full recourse note to Mr. Kelly to fund his payment of taxes on the exercise of the options. The notes were due on the earlier of June 30, 2011 or upon the sale of the stock and had an annual interest rate of 5.6%. A total of 135,100 of those shares were unrestricted, except for being pledged as collateral for the notes, and the remaining 252,300 shares were due to become unrestricted by December 2004.
On February 26, 2004 the Company announced that Mr. Kelly was stepping down as CEO. Mr. Kellys last official day was March 10th, 2004. Per the full recourse note agreement dated June 2001 with Mr. Kelly, upon termination he had the right to require the Company to buy-back the 387,400 shares collateralizing the promissory notes and pay any balances owed under the notes, with any net cash balance made payable to Mr. Kelly. On April 9, 2004, Mr. Kelly exercised his right and the Company repurchased the 387,400 shares at a five day average market price of $3.18 per share. The total sales value of $1,233,000 was applied to the notes payable in the amount of $843,000, to interest balances in the amount of $25,000 and the balance of $365,000 was paid to Mr. Kelly. This arrangement was accounted for as a variable equity-based compensation arrangement. For the years ended December 31, 2004 and 2003 the Company recorded approximately $10,000 and $88,000, respectively, in compensation expense.
7. Walnut Creek
In October 2001, the Company purchased assets of an alehouse in Walnut Creek, California for $268,000. In addition, the Company assumed the sublease of the location. The purchase was made by a $205,000 cash payment and the balance was financed through an $80,000 non-interest bearing note due in four annual equal payments beginning October 2002. The note payable was recorded using a 10% discount rate. As of December 31, 2004 and 2003, a net balance of approximately $20,000 and $36,000 remained payable on the note.
8. Line of Credit
The Company has a $2 million line of credit agreement with its bank. In February 2005, the Company modified its line of credit with its bank from 75% of accounts receivable to 80%, temporarily increasing the availability of funds during the first half of the year ending June 30, 2005. Under the revised terms of this agreement, the interest rate charged on the amounts outstanding has increased to prime plus 2% and a fee of 1/2 percent has been charged by the Bank. The Company has also agreed to adhere to certain financial performance covenants and future dividends payments are subject to the Banks prior approval. The line of credit revolves through December 31, 2005. The line of credit expires December 31, 2005.
On January 27th, 2005, the Company announced that it has entered into a long-term $7,850,000 securitized financing arrangement with Morgan Stanley Mortgage Capital Inc., for the purpose of refinancing the Companys existing $7,200,000 short term note with Sugar Mountain Capital, LLC. The Company was required, as a term of the financing, to establish a wholly owned subsidiary as a single purpose entity, named Pyramid Gilman Street Property, LLC (the Subsidiary), to act as the legal owner of the property. The Subsidiary subsequently entered into a long-term promissory note, dated January 27, 2005, which has been secured by a deed of trust against the Companys Berkeley, California Brewery and Alehouse facility. The terms of the long-term financing, include monthly payments of principal and interest for a period of ten years, interest charged at an annual rate of 5.77%, and a loan amortization period of thirty years. The promissory note is assumable and it generally does not allow for prepayments of principal other than through the regularly scheduled monthly payments. The loan is guaranteed by Pyramid Breweries Inc. and the Company intends to consolidate the financial statements of the Subsidiary into the Companys financial reports and filings. Other important terms of the financing include the requirement to place $500,000 of the proceeds of the loan in an interest bearing restricted reserve account and to deposit an additional $10,000 per month into an additional restricted reserve account until the balance of the second reserve account is at least $750,000. Additionally, the Company and its Subsidiary are required to create and fund a replacement reserve account for the purpose of funding capital repairs and replacements to the subject property. The replacement reserve account is funded by monthly payments of $1,729 until the total amount of the replacement reserve is at least $62,500. At December 31, 2004, future minimum rental payments are as follows:
10. Accrued Expenses
Accrued expenses consist of the following:
11. Income Taxes
The (provision) benefit for income taxes included in the statements of operations consists of the following:
The (provision) benefit for income taxes differed from the amount obtained by applying the federal statutory income tax rate to (loss) income before income taxes, as follows:
Deferred income tax assets and liabilities are included in the balance sheet at December 31, 2004 and 2003, as follows:
At December 31, 2004, the Company had operating loss carryforwards for federal income tax purposes of approximately $10,190,000, which are available to offset future federal taxable income through 2023 and begin to expire in 2017. During 2004, 2003 and 2002 the valuation allowance against deferred tax assets increased by approximately $1,072,000 increased by approximately $371,000, decreased by approximately $221,000, respectively. The Company does not believe that its net deferred tax assets meet the more likely than not realization criteria of SFAS No. 109. Accordingly, a valuation allowance has been established, to the extent deferred tax assets exceed deferred tax liabilities.
12. Operating Leases
The Company leases its office, warehouse and plant facilities under operating leases in Seattle, Washington, Portland, Oregon and Walnut Creek and Sacramento, California. Leases at December 31, 2004 were:
These lease agreements contain provisions for free rent periods, scheduled rent increases and tenant improvement reimbursements. Accordingly, the Company has recorded deferred rent liabilities of approximately $690,000 and $1,768,000 at December 31, 2004 and 2003, respectively, representing the pro rata rent which would have been due if equal payments had been required under the lease terms. In July 2004, the Company purchased the Berkeley land and building which had a deferred rent liability balance of approximately $945,000. With the acquisition of the facility the deferred rent liability was recorded as a contra fixed asset and is being amortized over the life of the facility. During 2003 the Company received an 800,000 tenant improvement incentive related to the construction costs incurred in the build-out of the Sacramento Alehouse facility. The $800,000 cash receipt was recorded as a deferred rent liability and will be amortized over the life of the lease. The Company also leases storage and distribution facilities under month-to-month lease agreements.
At December 31, 2004, future minimum rental payments are as follows:
Total rent expense was approximately $1,211,000, $1,027,000 and $908,000 in 2004, 2003 and 2002, respectively.
13. Commitments and Contingencies
The Company is involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Companys financial position or results of operations.
14. Cash Dividend
The Board of Directors announced on November 3, 2004, the declaration of a $0.022 per common share dividend payable on January 14, 2005 to shareholders of record on December 31, 2004. The cash dividends declared in November 2004 totaled approximately $193,000 for all common stock outstanding as of the dates of record. During the years ended December 31, 2004, 2003 and 2002, the Company paid approximately $1,137,000, $1,502,000, and $1,469,000, or $0.11, $0.176 and $0.176 per common share, of cash dividends, respectively.
On February 9, 2005, the Company also announced that its Board of Directors has determined to cease paying dividends at this time in order to reinvest the Companys positive cash flow back into the business. Any future declaration of dividends will depend, among other things, on the Companys results of operations, capital requirements and financial condition, and on such other factors as the Companys Board of Directors may in its discretion consider relevant.
15. Stock Buyback Plan
On December 15, 1999, the Board of Directors authorized a stock buyback plan to repurchase up to $2,000,000 of the Companys outstanding common stock on the open market. No shares were repurchased during 2004, 2003 and 2002.
16. Major Customers and Financial Instruments
Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables, short-term investments and interest-bearing deposits. The Companys short-term investments, when held, consist primarily of fixed rate certificates of deposit and taxable auction variable rate notes with 28 day reset periods. As of December 31, 2004 the Company did not hold any short-term investments. The Companys interest-bearing deposits are placed with major financial institutions. Wholesale distributors account for substantially all accounts receivable; therefore, this concentration of risk is limited due to the number of distributors, their geographic dispersion and state laws regulating the financial affairs of distributors of alcoholic beverages.
During the years ended December 31, 2004, 2003 and 2002, one customer comprised approximately 21%, 18% and 21% of the Companys revenue, respectively. Accounts receivable at December 31, 2004 and 2003 include approximately $428,000 and $228,000, respectively, due from this customer.
As of December 31, 2004 and 2003, the carrying amounts for cash and cash equivalents, short term investments, notes receivable and notes payable approximate their fair values.
17. Segment Information
The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and reports segment information in the same format as reviewed by the Companys management (the Management Approach), which is organized around differences in products and services.
Products and Services
The Companys reportable segments include beverage operations and alehouses. Beverage operations include the production and sale of Pyramid ales and lagers, MacTarnahans beers, Thomas Kemper beers and Thomas Kemper soda products. The alehouse segment consists of five full-service alehouses, which market and sell the full line of the Companys beer and soda products as well as food and certain merchandise.
Factors used to identify reportable segments
The Companys reportable segments are strategic business units that offer distinct and different products and services. These segments are managed separately because each business requires different production, management and marketing strategies.
Measurement of segment profit and segment assets
The accounting policies of the segments are the same as those described in the summary of critical accounting policies included in the notes to the financial statements. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. The Company records intersegment sales at cost.
Segment profit and segment assets are as follows:
Other consists of interest income, general and administrative expenses, corporate office assets and other reconciling items that are not allocated to segments for internal management reporting purposes. Total assets include all assets except for accounts receivable, inventory, goodwill and fixed assets specific to a segment.
18. Employee Benefit Plans
In May 2003, the Company adopted and its shareholders approved, an Employee Stock Purchase Plan (the 2003 Purchase Plan) which allows eligible employees to acquire shares of common stock of the Company at a discount. Eligible employees may contribute up to 10% of their base earnings toward the quarterly purchase of the Companys common stock. The employees purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the quarterly offering period. A total of 500,000 shares of common stock are available under the 2003 Purchase Plan. Generally, all of the Companys officers and employees who have been employed by the Company for at least six months and who are regularly scheduled to work more than twenty hours per week are eligible to participate in the 2003 Purchase Plan. The 2003 Purchase Plan will generally operate in successive three month periods, or offering periods, commencing on each January 1, April 1, July 1 and October 1 of each year and end on the next March 31, June 31, September 31 and December 31, respectively, occurring thereafter. The 2003 Purchase Plan expires February 5, 2013. There were 21,802 and 11,016 shares issued under the 2003 Purchase Plan during 2004 and 2003 at a weighted-average price of approximately $2.21 and $2.45 per share, respectively. Under the previous employee stock purchase plan,
which expired, there were 29,356 shares issued during 2002 at a weighted-average price of approximately $1.90 per share. Fair value assumptions of the Employee Stock Purchase Plan are based on the same assumptions used in the stock option plans.
Employee Stock Option Plans
In May 2004, the Company adopted and its shareholders approved, the 2004 Equity Incentive Plan (the 2004 Plan) which replaced the 1995 Employee Stock Option Plan. The 2004 Plan provides for a broader variety of equity awards, and includes updated provisions relating to performance goals, among other things. Up to 1,564,000 shares of common stock have been reserved under the 2004 Plan. The purpose of the 2004 Plan is to attract, retain and motivate employees, officers and directors of the Company and its affiliates by providing them the opportunity to acquire a proprietary interest in the Company and to link their interest and efforts to the long-term interests of the Company shareholders. The 2004 Plan is administered by the Board of Directors or the Compensation Committee of the Companys Board of Directors. Each member of the committee is a non-employee director as defined for purposes of Section 16 of the Securities Exchange Act of 1934, and an outside director as defined for purposes of Section 162(m). The committee has the authority to administer the plan, including, among other things, the power to select individuals to whom awards are granted, to determine the types of awards and the number of shares subject to each award, to set the terms, conditions and provisions of such awards, to cancel or suspend awards and to establish procedures pursuant to which the payment of any such awards may be deferred. A total of 350,000 shares have been reserved under the 2004 Plan.
The Companys Non-Employee Director Stock Option Plan (the Director Plan) provides for the granting of stock options covering 5,000 shares of common stock to be made automatically on the date of each annual meeting of stockholders to each non-employee director of the Company, so long as shares of common stock remain available under the Director Plan. A total of 250,000 shares have been reserved under the Director Plan. As of December 31, 2004, 135,000 options were available for future grants. Each outstanding option granted under this plan has a term of 10 years from the date of grant and vests immediately.
Information with respect to the Plans follows:
Information about options outstanding at December 31, 2004 follows:
The Company had options exercisable of 554,000, with a weighted-average exercise price of $2.69 and options exercisable of 401,000, with a weighted-average exercise price of $3.00 as of December 31, 2003 and 2002, respectively.
Employee 401(k) Plan
The Company has a 401(k) plan for all eligible employees. Employees who are at least age 21 become eligible to participate following the first plan quarter in which they perform at least 250 hours of service. Employees can elect to contribute up to 50% of their eligible compensation to the 401(k) plan subject to Internal Revenue Services limitations. The Company generally matches employee contributions (that do not exceed 6% of the employees compensation) at the rate of 50%. The Company may also make additional discretionary contributions. The Companys matching contributions for the years ended December 31, 2004, 2003 and 2002, totaled approximately $90,000, $80,000 and $77,000, respectively.
19. Shareholder Rights Plan
In June 1999, the Board of Directors adopted a shareholder rights agreement (the Rights Agreement) and declared a distribution of one preferred share purchase right (a Right). Under certain conditions, each Right may be exercised to purchase a unit equal to 1/1000 of a share of Series RP Preferred Stock at a purchase price of $12.00 (the Purchase Price), subject to adjustment. The rights are evidenced by our common stock certificates and automatically trade with our common stock. The rights are not exercisable unless a person or group acquires, or commences (or announces an intention to commence) a tender or exchange offer to acquire 20% or more of our common stock without the approval of our Board of Directors. If a person or group acquires more than 20% of the then outstanding shares of common stock, each Right will entitle its holder (other than such acquiring person or group) to receive, on exercise, common stock (or, in certain circumstances, other Pyramid securities) having a value equal to two times the then-applicable Purchase Price of the Right. In addition, if we are thereafter acquired in a merger or other business combination transaction, each
Right will entitle its holder to purchase that number of the acquiring companys common shares having a market value of twice the Rights exercise price. We will be entitled to redeem the Rights at $0.001 per Right at any time prior to the earlier of the expiration of the Rights in June 2009 or the time that a person has acquired a 20% position.
20. Subsequent Events
On January 27th, 2005, the Company announced that it has entered into a long-term $7,850,000 securitized financing arrangement with Morgan Stanley Mortgage Capital Inc., for the purpose of refinancing the Companys existing $7,200,000 short term note with Sugar Mountain Capital, LLC. The Company was required, as a term of the financing, to establish a wholly owned subsidiary as a single purpose entity, named Pyramid Gilman Street Property, LLC (the Subsidiary), to act as the legal owner of the property. The Subsidiary subsequently entered into a long-term promissory note, dated January 27, 2005, which has been secured by a deed of trust against the Companys Berkeley, California Brewery and Alehouse facility.
The Board of Directors announced on February 11th, 2005 the decision to cease paying dividends in order to reinvest the Companys positive cash flow back into the business. This decision was taken in order to fund additional sales growth with the money previously earmarked for dividends which the Board believes will ultimately deliver superior shareholder value. The Board also remains committed to evaluating other opportunities for investment that may provide a more optimal use for such cash flow and will maximize value to the shareholders.
In February the Company modified its bank line of credit with its bank, temporarily increasing the availability of funds during the first half of the year ending June 30, 2005. Under the revised terms of this agreement, the interest rate charged on the amounts outstanding has increased to prime plus 2% and a fee of 1/2 percent has been charged by the Bank. The Company has also agreed to adhere to certain financial performance covenants and future dividends payments are subject to the Banks prior approval.
21. Interim Financial Data (Unaudited)
The following table presents the results of operations for each of the four quarters in 2004 and 2003. This quarterly information is unaudited, has been prepared on the same basis as the annual financial information and, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. A variety of factors may lead to significant fluctuations in the Companys quarterly results of operations, including timing of new product introduction, seasonality of demand, any decrease in the demand for craft beers and general economic conditions. As a result, the Companys results of operations for any quarter are not necessarily indicative of results for any future period.
Item 15 Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report are as follows:
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number, which follows the description of the exhibit, indicates the document to which cross reference is made. See the end of this exhibit index for a listing of cross-referenced documents.