Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 12, 2008)
  • 10-Q (May 15, 2008)
  • 10-Q (Nov 14, 2007)
  • 10-Q (Aug 10, 2007)
  • 10-Q (May 15, 2007)
  • 10-Q (Nov 14, 2006)

 
8-K

 
Other

Pyramid Breweries 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
e10vq
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, 2007
     
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.
(Exact name of registrant as specified in its charter)
     
Washington   91-1258355
(State or other jurisdiction of   (I.R.S. Employer
incorporation 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)
 
     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 þ No o.
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o Accelerated filer o Non-accelerated filer þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Common stock, par value of $.01 per share: 9,173,108 shares of Common Stock outstanding as of August 3, 2007
 
 

 


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PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
TABLE OF CONTENTS
         
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 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

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PART I
Item 1 — FINANCIAL STATEMENTS
PYRAMID BREWERIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
                 
    June 30,     December 31,  
    2007     2006  
    (Unaudited)          
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 256     $ 227  
Accounts receivable, net of $20 allowance
    3,760       3,052  
Inventories
    2,010       1,877  
Prepaid expenses and other
    725       806  
Current assets held for sale
          86  
 
           
Total current assets
    6,751       6,048  
Fixed assets, net of accumulated depreciation of $18,647 and $17,588
    26,585       26,284  
Assets held for sale, long term
          432  
Intangibles, net
    95       118  
Escrow reserve
    799       765  
Other assets
    347       393  
 
           
Total assets
  $ 34,577     $ 34,040  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,891     $ 3,260  
Accrued expenses
    3,297       2,834  
Refundable deposits
    803       483  
Current portion of long-term financing
    105       105  
Current portion of capital lease obligation
    400       385  
Deferred rent – current
    125       122  
Liabilities held for sale
          78  
Other current liabilities
    209       201  
 
           
Total current liabilities
    6,830       7,468  
Long-term financing
    7,514       7,566  
Capital lease obligation
    283       505  
Deferred rent
    528       590  
Other liabilities
    326       433  
COMMITMENTS 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 — 9,173,000 and 8,946,000 at June 30, 2007 and December 31, 2006, respectively
    92       89  
Additional paid-in capital
    37,597       37,408  
Accumulated deficit
    (18,593 )     (20,019 )
 
           
Total stockholders’ equity
    19,096       17,478  
 
           
Total liabilities and stockholders’ equity
  $ 34,577     $ 34,040  
 
           
The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)
                                 
    Three Month Period Ended     Six Month Period Ended  
    June 30,     June 30,  
    2007     2006     2007     2006  
Gross sales
  $ 13,750     $ 14,576     $ 24,905     $ 26,083  
Less excise taxes
    941       836       1,732       1,487  
 
                       
Net sales
    12,809       13,740       23,173       24,596  
Cost of sales
    9,051       10,128       17,149       18,504  
 
                       
Gross margin
    3,758       3,612       6,024       6,092  
Selling, general and administrative expenses
    3,575       3,489       6,974       6,419  
Gain on sale of net assets (Note 2)
                2,436        
 
                       
Operating income (loss)
    183       123       1,486       (327 )
Other expense, net
    (27 )     (95 )     (57 )     (146 )
 
                       
Income (loss) before income taxes
    156       28       1,429       (473 )
Provision for income taxes
                (3 )     (4 )
 
                       
Net income (loss)
  $ 156     $ 28     $ 1,426     $ (477 )
 
                       
Basic and diluted net earnings (loss) per share
  $ 0.02     $     $ 0.16     $ (0.05 )
Weighted average basic shares outstanding
    8,984,000       8,816,000       8,973,000       8,813,000  
Weighted average diluted shares outstanding
    9,196,000       8,943,000       9,197,000       8,813,000  
The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
                 
    Six Month Period Ended  
    June 30,  
    2007     2006  
OPERATING ACTIVITIES:
               
Net income (loss)
  $ 1,426     $ (477 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    1,109       1,240  
Stock-based compensation expense
    124       212  
Loss on disposal of equipment
          7  
Gain on sale of net assets
    (2,436 )      
Deferred rent
    (58 )     (38 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (709 )     (843 )
Inventories
    (133 )     (371 )
Prepaid expenses and other
    224       (136 )
Accounts payable and accrued expenses
    (1,131 )     654  
Refundable deposits
    321       119  
 
           
Net cash (used in) provided by operating activities
    (1,263 )     367  
INVESTING ACTIVITIES:
               
Acquisition of fixed assets
    (1,360 )     (564 )
Proceeds from sale of net assets
    2,942        
 
           
Net cash provided by (used in) investing activities
    1,582       (564 )
FINANCING ACTIVITIES:
               
Payments on capital lease obligation
    (207 )     (71 )
Payments on TTB excise tax obligation
    (99 )      
Payments on long-term financing
    (52 )     (49 )
Proceeds from exercise of stock options and stock issuance through the employee stock purchase plan
    68       17  
 
           
Net cash used in financing activities
    (290 )     (103 )
Increase (decrease) in cash and cash equivalents
    29       (300 )
Cash and cash equivalents at beginning of period
    227       416  
 
           
Cash and cash equivalents at end of period
  $ 256     $ 116  
 
           
The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
     The Company
     Pyramid Breweries Inc. (“Pyramid” or the “Company”), a Washington corporation, was incorporated in 1984 and is engaged in the brewing, marketing and selling of craft beers. Until the end of 2006, we also produced a line of premium sodas which we now produce under contract to a third party (Note 2). We own two alehouse restaurants adjacent to our full production breweries under the Pyramid Alehouse and MacTarnahan’s Taproom brand names in Berkeley, California and Portland, Oregon, respectively, and three alehouse restaurants in Walnut Creek and Sacramento, California and Seattle, Washington. We sell our products through a network of selected independent distributors and alehouses located primarily in Washington, Oregon and California. As of June 30, 2007, our products were distributed in approximately 35 states within the U.S. Our core Pyramid brand family includes Hefe Weizen and Apricot Weizen beers and our non-core beer brands include MacTarnahan’s along with smaller product lines reported under the Allied Brand designation.
     Basis of Presentation
     The accompanying condensed consolidated balance sheet as of December 31, 2006, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2007, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
     Basis of Consolidation
     The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: PBC Acquisition, LLC and Pyramid Gilman Street Property, LLC. Intercompany transactions and balances are eliminated in consolidation.
     Impairment of Long-lived Assets
     We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on quoted fair market values.
     Inventories
     Inventories are stated at the lower of cost or market. Cost is determined 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. We regularly review our inventories for the presence of excess and obsolete inventory using criteria such as age, quality, seasonal demand forecasts and branding changes, and write-off or adjust the inventory to carrying value.

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     Revenue Recognition
     We recognize revenue from the sale of wholesale beer and contract manufactured soda products at the time of shipment, when the title to products passes to the customer in accordance with distributor sales agreements and collectibility is probable. Our revenue from our alehouses is comprised of food, beverage and merchandise, and is recognized at the time of sale.
     We do not have standard terms that permit return of product. However, occasionally products are destroyed by distributors or us for quality reasons such as expiration of product. The costs for product returns are recorded in cost of sales in the Condensed Consolidated Statements of Operations and revenue is reduced at the value of the original sales price in the period that the product is returned.
     We report revenues under the contract manufacturing arrangements with the Kemper Company (Note 2) on a net basis pursuant to the guidance prescribed in Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue as a Principal versus Net as an Agent, as we are an agent.
     Excise Taxes
     The federal government levies 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 presented in the Condensed Consolidated Statement of Operations, gross sales represent billed to customer activities. Excise taxes are taxes paid by us to state and federal government agencies. Net sales represent revenues to us net of applicable state and federal excise taxes.
     Net Earnings (Loss) Per Share
     Basic net earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares of stock outstanding and assumes the vesting of other dilutive securities including employee stock options and awards.
     The following represents the reconciliation of basic net earnings (loss) per share and diluted net earnings (loss) per share (in thousands, except per share amounts):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2007     2006     2007     2006  
    (in thousands except per share data)  
Net income (loss)
  $ 156     $ 28     $ 1,426     $ (477 )
Shares:
                               
Weighted average basic shares outstanding
    8,984       8,816       8,973       8,813  
Dilutive effect of employee stock options and awards
    212       127       224        
 
                       
Weighted average diluted shares outstanding
    9,196       8,943       9,197       8,813  
 
                       
Basic and diluted net earnings (loss) per share
  $ 0.02     $ 0.00     $ 0.16     $ (0.05 )
 
                       
     The following shares attributable to outstanding stock options were excluded from the calculation of dilutive earnings (loss) per share because their inclusion would have been anti-dilutive:
                                 
    Three Months   Six Months
    Ended June 30,   Ended June 30,
    2007   2006   2007   2006
    (in thousands)
Shares excluded from calculation of dilutive net earnings (loss) per share
          188             615  

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     Liquidity
     As of June 30, 2007, cash and cash equivalents and accounts receivable were $4.0 million. Our working capital, which was slightly negative at $79,000, was impacted by the proceeds received in connection with the sale of the Thomas Kemper brand and related net assets and liabilities (“TK Soda Assets”) and capital investment in our brewery infrastructure.
     Net cash used in operating activities was approximately $1.3 million for the six months ended June 30, 2007, compared to net cash provided by operating activities of approximately $367,000 for the same period last year. Excluding the effects of the non-cash gain related to the sale of the TK Soda Assets, the increase in net cash used in operating activities is primarily attributed to the reduction in accounts payable during the first six months of 2007. Additionally, increases in selling and marketing expenses due to brand building and expansion efforts contributed to the increase in net cash used in operating activities.
     The beverage segment operates with relatively short accounts receivable terms and the alehouse segment operates essentially as a cash business, as such we typically tend to collect within 30 days of a sale or immediately upon sale. Therefore, we generally do not require significant cash on hand to meet operating needs.
     In January 2007, we completed the sale of the TK Soda Assets to The Kemper Company (Note 2). Under the terms of the transaction, we received $3.1 million, $158,000 of which is held in escrow, for TK Soda Assets, including the brand and intellectual property, soda kegs, vehicles and point of sale materials. The transaction includes a five-year supply agreement under which we will continue to manufacture Thomas Kemper Soda products for The Kemper Company at our breweries in Portland, Oregon and Berkeley, California. Through this transaction, we are further increasing our strategic focus on our beer business and are making a number of capital investments in our brewing infrastructure in the coming year. This includes investments in new kegs and fermentation tanks to handle additional growth, and improvements to our packaging processes to enhance production efficiencies.
     We believe that our cash flow from operating activities, tighter management of capital spending and cash management in combination with various financing options, including the line of credit and capital asset leasing, should provide adequate working capital to meet our needs. Additionally, we believe that the cash provided from the sale of the TK Soda Assets will improve our liquidity while allowing us to make these capital investments. However, it is possible that our operations will not provide sufficient cash flow to meet our operating and investing needs and that the cash infusion from the sale of the TK Soda Assets may be insufficient to meet our capital investment requirements, which would require us to seek additional capital from other sources and which may not be available to us on attractive terms or at all.
     We also plan to focus on initiatives to further improve operating results which include driving sales volume growth of our core brand family to deliver revenue growth and judicious use of marketing investment in programs which deliver positive returns.
     Recently Issued Accounting Pronouncements
     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us as of the beginning of our 2008 fiscal year. We are currently assessing the potential impact that the adoption of SFAS No. 157 will have on our financial position, results of operations and cash flows.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115. The Statement permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. This statement is effective for us as of the beginning of our 2008 fiscal year. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact on the financial statements.

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     Reclassification
     Certain reclassifications have been made to prior year balances to conform to current year presentation.
2. Thomas Kemper Soda Transaction
     On January 2, 2007, we entered into an Asset Purchase Agreement (“Purchase Agreement”) with The Kemper Company (“Kemper”), a new company formed by Adventure Funds, a Portland-based equity investment fund, pursuant to which we agreed to sell the TK Soda Assets to Kemper (the “Sale”). Pursuant to the Purchase Agreement, Kemper paid $3.1 million, $158,000 of which is currently held in escrow, in exchange for the TK Soda Assets, including the brand and other intellectual property, kegs, vehicles and point of sale materials. We recorded a gain of $2.4 million, which represented the difference between the proceeds from the sale of the net assets and liabilities held for sale, net of transaction costs and adjustments of $224,000.
     In connection with the Sale, the Company and Kemper also entered into an Exclusive Soda Production and Supply Agreement (“Supply Agreement”), on January 2, 2007, pursuant to which we will manufacture Thomas Kemper Soda products for Kemper to specifications mutually agreed upon by both parties. The Supply Agreement appoints us as the exclusive manufacturer of existing Thomas Kemper Soda products in a territory comprised of 14 states in the West and Southwest, including Washington, Oregon, California and Texas. To the extent the parties so agree, our appointment may be expanded to cover additional territories and/or new soda products. The Supply Agreement has an initial term of five years, which may be terminated earlier by either party as a result of the other party’s material breach or bankruptcy, or by Kemper beginning in 2009, provided that Kemper makes certain early termination payments to us. Unless earlier terminated, the Supply Agreement will automatically extend beyond the initial five year term and then may be terminated by either party with six months written notification. Under the Supply Agreement, Kemper will pay us a tolling fee for all products manufactured by us under the Supply Agreement, comprised of manufacturing costs plus a profit component, and reimburse us for shipping costs. The tolling fee may be adjusted annually to reflect any increases or decreases in our costs of manufacturing the products.
     As a result of our significant continuing involvement in manufacturing of Thomas Kemper Soda under the Supply Agreement, the Sale does not qualify for presentation as a discontinued operation.
3. Stock-Based Compensation
     Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method which requires the application of the accounting standard as of January 1, 2006 for: (a) compensation cost for stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, and (b) compensation cost for stock options granted subsequent to January 1, 2006, based on the grant date fair value under SFAS 123(R). SFAS 123(R) also requires us to estimate future forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. We use the Black-Scholes valuation model for estimating the grant-date fair value of awards.
     Stock Option Plans
     In May 2007 and 2006, each non-employee director was granted 5,000 non-qualified stock options under the Non-Employee Director Stock Option Plan in conjunction with service provided to the Company. The grant date fair value of $52,000 and $36,000, respectively was estimated using the Black-Scholes option-pricing model with the following assumptions:
                 
    2007   2006
Expected life
  6 yrs   6 yrs
Risk free interest rate
    4.8 %     4.9 %
Expected volatility
    42 %     51 %
Expected dividend yield
    0 %     0 %
     Restricted Stock Awards
     Effective January 1, 2007, restricted stock awards for 187,000 shares were granted to certain executive officers and employees, as approved by the Compensation Committee, with a weighted average grant date fair value of $3.07. Of these restricted stock award

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grants, 164,000 shares are time-based and vest in even increments over five years beginning one year from the grant date. Compensation cost associated with the time-based awards is recognized on a straight-line basis over the requisite service period which is approximately six years.
     The performance-based awards are contingent on corporate performance and were granted effective January 1, 2007 after the 2006 annual performance goal had been met and vest one year from the grant date. Compensation cost associated with these performance grants is recognized when it is probable that the performance targets will be met and accordingly, all expense associated with these awards was recorded in 2006.
     Under an Employment Separation Agreement, 4,000 shares of time-based and 4,000 shares of performance-based restricted stock awards vested immediately.
     Employee Stock Purchase Plan
     In May 2003, we adopted and our shareholders approved, an Employee Stock Purchase Plan (the “Purchase Plan”) which allowed eligible employees to acquire shares of common stock of the Company at a discount. A total of 500,000 shares of common stock were available under the Purchase Plan. We terminated the Purchase Plan in January 2007.
     There were 3,155 and 9,060 shares issued to employees under the Purchase Plan and the weighted average estimated fair value of these purchase rights was $2.13 and $1.92 for the six months ended June 30, 2007 and 2006, respectively.
     Stock-based Compensation Expense and Proceeds
     In the three months and six months ended June 30, 2007, we recognized $67,000 and $104,000 in stock-based compensation expense for stock options, restricted stock awards, and employee stock plan purchases. In the three months and six months ended June 30, 2006, we recognized $182,000 and $212,000 respectively, in stock-based compensation expense for stock options, restricted stock awards, and employee stock plan purchases.
     As of June 30, 2007, the total estimated unrecognized compensation cost related to stock options was approximately $2,000 expected to be recognized over a weighted average remaining period of 1.3 years. As of June 30, 2007, the total estimated unrecognized compensation cost related to restricted stock awards was approximately $416,000 which is expected to be recognized over a weighted average remaining period of 4.8 years.
     In the three and six months ended June 30, 2007, we received $22,000 and $61,000, respectively in cash proceeds from stock option exercises. There were no stock options exercised for the three and six months ended June 30, 2006.
4. Inventories
     Inventories consist of the following (in thousands):
                 
    June 30,     December 31,  
    2007     2006  
Raw materials
  $ 855     $ 825  
Work in process
    259       226  
Finished goods
    896       826  
 
           
 
  $ 2,010     $ 1,877  
 
           
     Raw materials primarily include ingredients, flavorings and packaging. Work in process includes beer held in fermentation prior to the filtration and packaging processes. Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale.
5. Line of Credit
     We have a $2.5 million line of credit agreement with our bank, which we modified in March 2007 to extend the maturity date to March 31, 2008 from the previous maturity of June 30, 2007. A portion of the line of credit, $345,000, has been reserved to support the standby letter of credit for the keg lease agreement (Note 6). Based on the terms of the agreement, the availability to borrow on the

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line is 75% of eligible accounts receivable. The interest rate charged on the amounts outstanding is prime plus 0.5%, fully floating, with a 0.8% commitment fee. We granted the bank security interest in our property and assets as well as the proceeds and the products of the collateral, namely cash, accounts receivable, inventory and fixed assets. We have also agreed to adhere to certain financial performance covenants with a bank consent restriction on the payment of future dividends and must limit capital expenditures to $3.25 million. We were in compliance with these covenants as of June 30, 2007.
6. Capital Lease
     In February 2006, we entered into a non-cancelable lease agreement for the lease of up to 14,500 new kegs and we purchased the maximum amount of kegs allowed under the lease agreement for $1.2 million in debt payable over a 30-month period. We are required by the terms of the lease agreement to furnish a standby letter of credit in the amount of $345,000 which reduces the amount available on our $2.5 million line of credit.
7. Litigation and Contingencies
     In June 2005, Sound Beverages, a former distributor of ours, filed a suit in King County Superior Court against us. The suit alleged that we had violated Washington’s Wholesale Distributor/Supplier Equity Act, RCW 19.126, by unreasonably withholding consent to the transfer of distribution rights to Columbia Distribution. We contend that we were within our rights to reasonably withhold consent, and are contesting this matter including the $450,000 in damages claimed by Sound Beverages. This matter is in the arbitration stage. Management believes that the ultimate outcome to us will not have a material adverse impact on our financial condition or results of operations.
     In addition to the matter discussed above, we are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We do not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on our financial position or results of operations.
8. Segment Information
     Our management has identified two primary operating segments, beverage operations and alehouses, which are organized around differences in products and services and are managed separately because each business requires different production, management and marketing strategies. Beverage operations include the production and sale of our beverage products including both beer and soda which effective in 2007 soda is contract manufactured for Kemper. The alehouse segment consists of five alehouses which market and sell the full line of our beer products as well as food and certain merchandise.
     The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). We evaluate performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. We record intersegment sales at cost. The “Other” category 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 accounts receivable, inventory, goodwill and fixed assets specific to a segment. In conjunction with the sale of the TK Soda Assets on January 2, 2007, we no longer have goodwill.

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     Segment information for the periods ended June 30, 2007 and 2006 is as follows (in thousands):
                                 
    Beverage            
    Operations   Alehouse   Other   Total
Quarter ended June 30, 2007
                               
Gross revenues from external customers
  $ 9,336     $ 4,414     $     $ 13,750  
Net revenues from external customers
    8,395       4,414             12,809  
Intersegment revenues
    142             (142 )      
Operating income (loss)
    1,548       407       (1,772 )     183  
Capital expenditures
    834       83       56       973  
Total assets
    21,139       4,712       8,726       34,577  
Quarter ended June 30, 2006
                               
Gross revenues from external customers
  $ 10,575     $ 4,001     $     $ 14,576  
Net revenues from external customers
    9,739       4,001             13,740  
Intersegment revenues
    131             (131 )      
Operating income (loss)
    1,840       379       (2,096 )     123  
Capital expenditures
    632       26       8       666  
Total assets
    21,636       5,376       8,411       35,423  
Six months ended June 30, 2007
                               
Gross revenues from external customers
  $ 17,127       7,778             24,905  
Net revenues from external customers
    15,395       7,778             23,173  
Intersegment revenues
    250             (250 )      
Operating income (loss)
    4,850       332       (3,696 )     1,486  
Capital expenditures
    1,084       190       86       1,360  
Total assets
    21,139       4,712       8,726       34,577  
Six months ended June 30, 2006
                               
Gross revenues from external customers
  $ 18,726     $ 7,357     $     $ 26,083  
Net revenues from external customers
    17,239       7,357             24,596  
Intersegment revenues
    260             (260 )      
Operating income (loss)
    3,053       350       (3,730 )     (327 )
Capital expenditures
    1,685       26       8       1,719  
Total assets
    21,636       5,376       8,411       35,423  

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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. Some factors, which could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A of Part I, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended March 30, 2007 as filed with the Securities and Exchange Commission (SEC). 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. We assume no obligation to update the forward-looking statements for such factors.
Overview
     We are engaged in the brewing, marketing and selling of craft beers under the Pyramid and MacTarnahan’s labels. Until the end of 2006, we also produced a line of gourmet sodas under the Thomas Kemper Soda Company label which we sold in January 2007 as more fully discussed below.
     We operate two alehouse restaurants adjacent to our full production breweries under the Pyramid Alehouse and MacTarnahan Taproom brand names in Berkeley, California and Portland, Oregon, respectively, and three alehouse restaurants located in Walnut Creek and Sacramento, California and Seattle, Washington. As of June 30, 2007, our products were distributed in approximately 35 states within the U.S. through a network of selected independent distributors and brokers.
     On January 2, 2007, we completed the sale of the Thomas Kemper Soda brand and related net assets and liabilities (“TK Soda Assets”) to The Kemper Company (“Kemper”). Under the terms of the transactions, we received $3.1 million for the TK Soda Assets, which include the brand and intellectual property, soda kegs, vehicles and point of sale materials. The transaction includes a five-year supply agreement (“Supply Agreement”) under which we will continue to manufacture Thomas Kemper Soda products for Kemper at our breweries in Portland, Oregon and Berkeley, California. Through this transaction, we are further increasing our strategic focus on our beer business and are making a number of investments in our brewing infrastructure in the coming year. This includes investments in new kegs and fermentation tanks to handle additional growth, and improvements to our packaging processes to enhance production efficiencies.

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Results of Operations
     The following table sets forth, for the periods indicated, certain selected unaudited operating data, expressed as a percentage of net sales.
SELECTED UNAUDITED OPERATING DATA
                                 
    Three Month Period Ended June 30,  
    (in thousands, except barrel & per share amounts)  
            % of             % of  
    2007     Net Sales     2006     Net Sales  
Gross sales
  $ 13,750             $ 14,576          
Less excise taxes
    941               836          
 
                       
Net sales
    12,809       100.0       13,740       100.0  
Cost of sales
    9,051       70.7       10,128       73.7  
 
                       
Gross margin
    3,758       29.3       3,612       26.3  
Selling, general and administrative expenses
    3,575       27.9       3,489       25.4  
 
                       
Operating income
    183       1.4       123       0.9  
Other expense, net
    (27 )     (0.2 )     (95 )     (0.7 )
 
                       
Income before income taxes
    156       1.2       28       0.2  
Provision for income taxes
                       
 
                       
Net income
  $ 156       1.2     $ 28       0.2  
 
                       
Basic and diluted net earnings per share
  $ 0.02             $ 0.00          
 
                           
Operating data (in barrels):
                               
Beer shipped
    52,800               51,900          
Soda shipped
    11,600               13,900          
 
                           
Total shipped
    64,400               65,800          
 
                           
Annual production capacity
    265,000               265,000          
 
                           
                                 
    Six Month Period Ended June 30,  
    (in thousands, except barrel & per share amounts)  
            % of             % of  
    2007     Net Sales     2006     Net Sales  
Gross sales
  $ 24,905             $ 26,083          
Less excise taxes
    1,732               1,487          
 
                       
Net sales
    23,173       100.0       24,596       100.0  
Cost of sales
    17,149       74.0       18,504       75.2  
 
                       
Gross margin
    6,024       26.0       6,092       24.8  
Selling, general and administrative expenses
    6,974       30.1       6,419       26.1  
Gain on sale of net assets
    2,436       10.5              
 
                       
Operating income (loss)
    1,486       6.4       (327 )     (1.3 )
Other expense, net
    (57 )     (0.2 )     (146 )     (0.6 )
 
                       
Income (loss) before income taxes
    1,429       6.2       (473 )     (1.9 )
Provision for income taxes
    (3 )           (4 )      
 
                       
Net income (loss)
  $ 1,426       6.2     $ (477 )     (1.9 )
 
                       
Basic and diluted net earnings (loss) per share
  $ 0.16             $ (0.05 )        
 
                           
Operating data (in barrels):
                               
Beer shipped
    97,500               94,500          
Soda shipped
    20,400               21,900          
 
                           
Total shipped
    117,900               116,400          
 
                           
Annual production capacity
    265,000               265,000          
 
                           
QUARTER ENDED JUNE 30, 2007 COMPARED TO QUARTER ENDED JUNE 30, 2006
     Gross Sales. Gross sales decreased 5.7%, or $826,000, to $13.8 million in the quarter ended June 30, 2007, from $14.6 million in the same quarter in 2006, driven primarily by wholesale beverage segment sales which decreased 11.7%, or $1.2 million, to $9.3 million in the second quarter. The decrease was primarily attributable to the fact that beginning in 2007, we now contract manufacture

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Thomas Kemper Soda as an agent, and as such, we record the revenues and cost of sales as a net amount in gross sales. Additionally, under the new Supply Agreement, we realize a reduced contractual sales rate as a contact manufacturer. Total beverage shipments decreased 2.1% to 64,400 barrels and of the total beverage shipments, beer shipments increased by 1.7% to 52,800 barrels in the quarter from 51,900 barrels in the same period in 2006, primarily due to increased Pyramid brand shipments. Pyramid brand shipments increased 7.5% to 47,300 barrels for the quarter, driven by Pyramid Hefe Weizen, our top selling product, which was up 6.1% in shipment volume for the quarter. The increase in beer shipments was offset by a decline in shipments of Thomas Kemper soda of 2,300 barrels to 11,600 barrels for the quarter ended June 30, 2007. Alehouse sales increased 10.3% to $4.4 million in the first quarter of 2007 and showed growth in all locations, including double digit sales growth in our Seattle and Walnut Creek locations.
     Excise Taxes. Excise taxes were 10.1% and 7.9%, respectively, of gross beverage sales for the quarters ended June 30, 2007 and 2006. Per beer barrel shipped, excise taxes in the second quarter of 2007 increased to $18.77 per beer barrel as compared to $16.87 per beer barrel in the same period in 2006. Federal taxes paid on beer shipments are determined by the level of shipments. For the first 60,000 barrels of production the federal excise tax rate for “small brewers” like Pyramid is $7 per barrel resulting in incremental volume being taxed at an $18 per beer barrel rate. State taxes per barrel vary on a state by state basis. The increase in excise taxes on a per beer barrel basis is related primarily to the agreement reached with the federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) during the third quarter of 2006, thereby recognizing us as the brewer of record at the Portland brewery facility.
     Gross Margin. Gross margin for the quarter ended June 30, 2007 increased 4.0% to $3.8 million from $3.6 million as compared to the same period in 2006, primarily as a result of a shift in our beer product mix to some of our higher margined brands in the beverage division offset by decreased soda margins primarily due to reduced contractual sales rate on Thomas Kemper Soda products under the new Supply Agreement with Kemper.
                                                 
    Three Month Period Ended June 30,  
    (in thousands)  
            % of             % of              
            Segment             Segment              
Gross Margin   2007     Net Sales     2006     Net Sales     $ Change     % Change  
Beverage Division
  $ 3,351       39.9 %   $ 3,233       33.2 %   $ 118       3.6 %
Alehouse Division
    407       9.2 %     379       9.5 %     28       7.4 %
 
                                   
Total
  $ 3,758       29.3 %   $ 3,612       26.3 %   $ 146       4.0 %
 
                                   
     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 2.5%, or $86,000, to $3.6 million for the quarter ended June 30, 2007, from $3.5 million in the same period in 2006. The additional expense was primarily attributable to an increase in selling and marketing expenses of $510,000 comprised of a $410,000 increase in selling expenses primarily due to increases in personnel and expansion efforts to $1.8 million, or 21.5% of net beverage segment sales, compared to $1.4 million, or 14.3% of net beverage segment sales in the same period in 2006, and a $100,000 increase in marketing expenses to $588,000 primarily due to increased personnel and advertising costs. Additionally, general and administrative expenses for the quarter ended June 30, 2007 decreased by $424,000, to $1.2 million, due primarily to a decrease in CEO transition costs of $373,000.
     Other Expense, Net. Other expense, net, decreased to $27,000 of expense in the second quarter of 2007 from $95,000 of expense in the second quarter of 2006, primarily attributable to a decrease in interest expense associated with our capital lease and a decrease in other miscellaneous income.
     Income Taxes. As of June 30, 2007, we had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. Realization of the deferred tax assets is dependent on our ability to generate future U.S. taxable income. We do not believe that our net deferred assets meet the “more likely than not” realization criteria and accordingly, a full valuation allowance has been established. We will continue to evaluate the ability to realize the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.
     Net Income. We reported net income of $156,000 for the quarter ended June 30, 2007 compared to a net income of $28,000 in the same quarter of 2006. The net income for the quarter ended June 30, 2007 is primarily due to decreases in cost of sales as a result of product mix in the beverage division.

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     SIX MONTH PERIOD ENDED JUNE 30, 2007 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2006
     Gross Sales. Gross sales decreased 4.5%, or $1.2 million, to $24.9 million for the six months ended June 30, 2007, from $26.1 million in the same period in 2006 driven primarily by wholesale beverage segment sales which decreased 8.5%, or $1.6 million, to $17.1 million for the six months ended June 30, 2007. The decrease was primarily attributed to the fact that beginning in 2007, we now contract manufacture Thomas Kemper Soda products as an agent, and as such, we record the revenues and cost of sales as a net amount in gross sales. Additionally, under the new Supply Agreement, we realize a reduced contractual sales rate as a contract manufacturer. Total beverage shipments increased by 1.3% to 117,900 barrels and of the total beverage shipments, beer shipments increased 3.2% to 97,500 barrels in the six months ended June 30, 2007 from 94,500 barrels in the same period in 2006, primarily due to increased Pyramid beer brand shipments. Pyramid brand shipments increased 7.9% to 85,700 barrels in the six months ended June 30, 2007, driven by Pyramid Hefe Weizen, our top selling product, which was up 8.1% in shipment volume for the period. The increase in beer shipments was offset by a decline in shipments of Thomas Kemper Soda of 1,500 barrels to 20,400 barrels for the six months ended June 30, 2007. Alehouse sales increased 28.2% to $7.8 million for the first six months of 2007 and showed growth in four locations including double digit sales growth in our Seattle location.
     Excise Taxes. Excise taxes were 10.1% and 7.9% respectively, of gross beverage sales for the six months ended June 30, 2007 and 2006. Per beer barrel shipped, excise taxes in the first half of the year in 2007 increased to $18.63 per beer barrel as compared to $16.46 per beer barrel in the same period in 2006. Federal taxes paid on beer shipments are determined by the level of shipments. For the first 60,000 barrels of production the federal excise tax rate for “small brewers” like Pyramid is $7 per barrel resulting in incremental volume being taxed at an $18 per beer barrel rate. State taxes per barrel vary on a state by state basis. The increase in excise taxes on a beer barrel basis is related primarily to the agreement reached with the TTB during the third quarter of 2006, thereby recognizing us as the brewer of record at the Portland brewing facility.
     Gross Margin. Gross margin for the six months ended June 30, 2007 decreased 1.1% to $6.0 million from $6.1 million as compared to the same period in 2006, primarily as a result of decreased soda margins primarily due to reduced contractual sales rate on Thomas Kemper Soda products under the new Supply Agreement with Kemper offset by a shift in our beer product mix to some of our higher margined brands in the beverage division.
                                                 
    Six Month Period Ended June 30,  
    (in thousands)  
            % of             % of              
            Segment             Segment              
Gross Margin   2007     Net Sales     2006     Net Sales     $ Change     % Change  
Beverage Division
  $ 5,692       37.0 %   $ 5,741       33.3 %   $ (49 )     (0.9 )%
Alehouse Division
    332       4.3 %     351       4.8 %     (19 )     (5.4 )%
 
                                   
Total
  $ 6,024       26.0 %   $ 6,092       24.8 %   $ (68 )     (1.1 )%
 
                                   
     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 8.6%, or $555,000, to $7.0 million for the six months ended June 30, 2007 from $6.4 million in the same period in 2006. The additional expense was primarily attributable to an increase in selling and marketing expenses of $873,000, comprised of a $590,000 increase in selling expenses primarily due to increases in personnel and expansion efforts to $3.3 million, or 21.3% of net beverage segment sales, compared to $2.7 million, or 15.6% of net beverage segment sales in the same period in 2006 and a $283,000 increase in marketing expenses to $1.2 million, primarily due to brand building efforts for our Pyramid and MacTarnahan’s brands including increased personnel and other advertising and sponsorship costs. General and administrative expenses for the six months ended June 30, 2007 decreased by $318,000, to $2.5 million, due primarily to a decrease in CEO transition costs of $373,000 and decreases in professional fees attributed to higher legal costs in the prior year due to the TTB audit and the related contract manufacturing agreements with the Portland Brewing Company, offset by increases in public company costs associated primarily with our compliance efforts with Sarbanes-Oxley Act of 2002 and increases in salary and benefits due to an increase in personnel.
     Other Expense, Net. Other expense, net, decreased to $57,000 in the first six months of 2007 from $146,000 in the first six months of 2006, primarily attributable to a decrease in interest expense associated with our capital lease.

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     Income Taxes. As of June 30, 2007, we had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. Realization of the deferred tax assets is dependent on our ability to generate future U.S. taxable income. We do not believe that our net deferred assets meet the “more likely than not” realization criteria and accordingly, a full valuation allowance has been established. We will continue to evaluate the ability to realize the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.
     Net Income (Loss). We reported net income of $1.4 million for the six months ended June 30, 2007 compared to a net loss of $477,000 in the same period of 2006. The net income for the six months ended June 30, 2007 is primarily due to the gain recognized on the sale of the TK Soda Assets.
Liquidity and Capital Resources and Commitments
     We had a $256,000 and $227,000 balance of cash and cash equivalents and a $3.8 million and $3.1 million accounts receivable balance at June 30, 2007 and December 31, 2006, respectively. At June 30, 2007, our working capital was slightly negative at $79,000 compared to negative $1.4 million at December 31, 2006. Our working capital was impacted positively by the proceeds received in connection with the sale of the TK Soda Assets, offset by the capital investment in our brewery infrastructure.
     Net cash used in operating activities for the six months ended June 30, 2007 was $1.3 million, compared to net cash provided by operating activities of $367,000 for the six months ended June 30, 2006. Excluding the effects of the non-cash gain related to the sale of the TK Soda Assets, the increase in net cash used in operating activities is primarily attributed to the reduction in accounts payable during the first six months of 2007. Additionally, increases in selling and marketing expenses due to brand building and expansion efforts attributed to the increase in net cash used in operating activities.
     Net cash provided by investing activities totaled approximately $1.6 million for the six months ended June 30, 2007 compared to net cash used of $564,000 for the same period of the prior year. The increase in cash provided by investing activities primarily reflects the cash we received in conjunction with the sale of TK Assets offset by capital asset purchases in the first six months of 2007, as compared to the same period in 2006.
     Net cash used in financing activities totaled approximately $290,000 during the six months ended June 30, 2007, compared to net cash used of approximately $103,000 for the same period during 2006. The increase was primarily due to payments made on our capital lease obligation and our TTB excise tax obligation during the first six months of 2007.
     In March 2007, we renegotiated our line of credit agreement with our bank which makes available through March 31, 2008, a $2.5 million line of credit. A portion of the line of credit, $345,000, has been reserved to support the standby letter of credit for the keg lease agreement (Note 6 to the condensed consolidated financial statements). Any borrowings are subject to an interest rate of prime plus 0.5%, fully floating, with a 0.8% commitment fee. Under the terms of the agreement, we must limit capital expenditures to $3.25 million in 2007 and adhere to certain financial performance covenants with a restriction on the payment of future dividends.
     The beverage segment operates with relatively short accounts receivable terms and the alehouse segment operates essentially as a cash business, as such we typically tend to collect within 30 days of a sale or immediately upon sale. Therefore, we generally do not require significant cash on hand to meet operating needs.
     In January 2007, we completed the sale of the TK Soda Assets to The Kemper Company. Through this transaction, we are further increasing our strategic focus on our beer business and are making a number of capital investments in our brewing infrastructure including investments in new kegs, the addition of a small-batch brewing facility in the Seattle Alehouse, and improvements to enhance production efficiencies in our breweries to reduce costs and improve margins.
     We believe that our cash flow from operating activities, tighter management of capital spending and cash management in combination with various financing options, including the line of credit and capital asset leasing, will provide adequate working capital to meet our needs. Additionally, we believe that the cash provided from the sale of the TK Soda Assets will improve our liquidity while allowing us to make capital investments. However, it is possible that our operations will not provide sufficient cash flow to meet our operating and investing needs and that the cash infusion from the sale of the TK Soda Assets may be insufficient to meet our capital investment requirements, which would require us to seek additional capital from other sources and which may not be available to us on attractive terms or at all.

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Contingencies
     In June 2005, Sound Beverages, a former distributor of ours, filed a suit in King County Superior Court against us. The suit alleged that we had violated Washington’s Wholesale Distributor/Supplier Equity Act, RCW 19.126, by unreasonably withholding consent to the transfer of distribution rights to Columbia Distribution. We contend that we were within our rights to reasonably withhold consent, and are contesting this matter including the $450,000 in damages claimed by Sound Beverages which we believe is substantially less. This matter is in the arbitration stage. Management believes that the ultimate outcome to us will not have a material adverse impact on our financial condition or results of operations.
     In addition to the matter discussed above, we are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We do not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on our financial position or results of operations.
Critical Accounting Policies
     See the information concerning our critical accounting policies included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 as filed with the SEC. There have been no significant changes in our critical accounting policies during the six months ended June 30, 2007.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
     We currently do not hold derivative instruments or engage in hedging activities, nor have we engaged in such activities in the past. Also, we did not have any outstanding variable rate debt as of June 30, 2007 due to the fact that we did not have an outstanding balance on the line credit. Further, we do not enter into significant transactions denominated in foreign currency. Accordingly, our 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.
ITEM 4. Controls and Procedures
Procedures
     Procedures
     (a) Evaluation of disclosure controls and procedure
     We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer and Vice President of Finance, have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
     (b) Changes in internal controls
     There were no significant changes in the Company’s internal control over financial reporting during the three months ended June 30, 2007 in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
ITEM 1A. Risk Factors
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Our annual meeting of shareholders was held on May 23, 2007. At the annual meeting, the shareholders elected two directors to hold office until the annual meeting of shareholders in 2009, and two directors to hold office until the annual meeting of shareholders in 2010. The vote was as follows:
                 
    Number
    of Shares
    For   Withheld
Term Expiring in 2009
               
Jurgen Auerbach
    8,573,304       50,074  
David Rostov
    8,565,829       57,549  
 
               
Term Expiring in 2010
               
Kurt Dammeier
    8,571,904       51,474  
Helen Rockey
    8,567,854       55,524  
     In addition, shareholders ratified the appointment of Moss Adams LLP. The vote was as follows:
                         
    Number
    of Shares
    For   Against   Abstain
Ratify
                       
Moss Adams LLP
    8,591,450       16,001       15,927  
     There were no broker non-votes.
ITEM 6. EXHIBITS
     
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 Officer
 
   
31.2
  Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Michael R. O’Brien, Chief Financial Officer & Vice President of Finance
 
   
32.1
  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 Officer
 
   
32.2
  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: Michael R. O’Brien, Chief Financial Officer & Vice President of Finance

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SIGNATURE
     Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  PYRAMID BREWERIES INC.
 
 
  By:   /s/ SCOTT S. BARNUM    
    Scott S. Barnum   
    President and Chief Executive Officer   
 
     
  By:   /s/ MICHAEL R. O’BRIEN    
    Michael R. O’Brien   
    Chief Financial Officer and Vice President of Finance
(Principal Financial Officer)
 
 
 
DATE: August 10, 2007

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