UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| FOR THE QUARTER ENDED SEPTEMBER 30, 2003 |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| (No Fee Required) |
For the transition period from to .
Commission file number 0-27116
PYRAMID BREWERIES INC.
| Washington | 91-1258355 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
91 South Royal Brougham Way,
Seattle, WA 98134
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 682-8322
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 [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Common stock, par value of $.01 per share: 8,558,073 shares of Common Stock outstanding as of September 30, 2003
1
PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
| Page | ||||
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements (Unaudited) | |||
|
Balance Sheets September 30, 2003 and December 31, 2002 |
3 | |||
|
Statements of Operations Three Month and Nine Month Periods Ended September 30, 2003 and 2002 |
4 | |||
|
Statements of Cash Flows Nine Month Periods Ended September 30, 2003 and 2002 |
5 | |||
| Notes to Financial Statements | 6 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 15 | ||
| Item 4. | Controls and Procedures | 15 | ||
| PART II | OTHER INFORMATION | |||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
| SIGNATURE | 17 |
2
PART I
Item 1 — FINANCIAL STATEMENTS
PYRAMID BREWERIES INC.
BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
CURRENT ASSETS: |
||||||||||
Cash and cash equivalents |
$ | 1,353,000 | $ | 596,000 | ||||||
Short term investments |
1,042,000 | 2,750,000 | ||||||||
Accounts receivable, net |
1,927,000 | 1,944,000 | ||||||||
Inventories |
1,810,000 | 1,590,000 | ||||||||
Prepaid expenses and other |
777,000 | 626,000 | ||||||||
Total current assets |
6,909,000 | 7,506,000 | ||||||||
Long term investments |
300,000 | 492,000 | ||||||||
Note receivable related party |
84,000 | 94,000 | ||||||||
Fixed assets, net |
22,003,000 | 20,682,000 | ||||||||
Goodwill |
415,000 | 415,000 | ||||||||
Other assets |
86,000 | 106,000 | ||||||||
Total assets |
$ | 29,797,000 | $ | 29,295,000 | ||||||
CURRENT LIABILITIES: |
||||||||||
Accounts payable |
$ | 1,604,000 | $ | 952,000 | ||||||
Accrued expenses |
2,093,000 | 1,747,000 | ||||||||
Refundable deposits |
511,000 | 506,000 | ||||||||
Note payable-current |
20,000 | 20,000 | ||||||||
Deferred rent - current |
199,000 | 124,000 | ||||||||
Dividends payable |
376,000 | 374,000 | ||||||||
Total current liabilities |
4,803,000 | 3,723,000 | ||||||||
Note payable, net of current |
34,000 | 31,000 | ||||||||
Deferred rent, net of current |
1,619,000 | 1,005,000 | ||||||||
Total liabilities |
6,456,000 | 4,759,000 | ||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||
Preferred stock, 10,000,000 shares authorized, none issued |
— | — | ||||||||
Common stock, $.01 par value; 40,000,000 shares authorized,
8,558,000 and 8,504,000 shares issued and outstanding |
86,000 | 85,000 | ||||||||
Additional paid-in capital |
36,182,000 | 36,041,000 | ||||||||
Note receivable - related party |
(770,000 | ) | (782,000 | ) | ||||||
Deferred stock-based compensation |
(32,000 | ) | (47,000 | ) | ||||||
Accumulated deficit |
(12,125,000 | ) | (10,761,000 | ) | ||||||
Total stockholders’ equity |
23,341,000 | 24,536,000 | ||||||||
Total liabilities and stockholders’ equity |
$ | 29,797,000 | $ | 29,295,000 | ||||||
The accompanying notes are an integral part of these statements.
3
PYRAMID BREWERIES INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Gross sales |
$ | 10,765,000 | $ | 9,871,000 | $ | 27,624,000 | $ | 26,882,000 | ||||||||
Less excise taxes |
493,000 | 463,000 | 1,327,000 | 1,277,000 | ||||||||||||
Net sales |
10,272,000 | 9,408,000 | 26,297,000 | 25,605,000 | ||||||||||||
Cost of sales |
8,082,000 | 6,947,000 | 20,451,000 | 19,105,000 | ||||||||||||
Gross margin |
2,190,000 | 2,461,000 | 5,846,000 | 6,500,000 | ||||||||||||
Selling, general and administrative expenses |
2,264,000 | 2,135,000 | 6,348,000 | 6,529,000 | ||||||||||||
Operating income (loss) |
(74,000 | ) | 326,000 | (502,000 | ) | (29,000 | ) | |||||||||
Other income, net |
118,000 | 137,000 | 268,000 | 318,000 | ||||||||||||
Income (loss) before income taxes |
44,000 | 463,000 | (234,000 | ) | 289,000 | |||||||||||
Provision for income taxes |
— | — | (2,000 | ) | — | |||||||||||
Net income (loss) |
$ | 44,000 | $ | 463,000 | $ | (236,000 | ) | $ | 289,000 | |||||||
Basic and diluted net income (loss) per share |
$ | 0.01 | $ | 0.06 | $ | (0.03 | ) | $ | 0.04 | |||||||
Weighted average basic shares outstanding |
8,456,000 | 8,235,000 | 8,439,000 | 8,173,000 | ||||||||||||
Weighted average diluted shares outstanding |
8,655,000 | 8,294,000 | 8,439,000 | 8,234,000 | ||||||||||||
Cash dividend declared per share |
$ | 0.044 | $ | 0.044 | $ | 0.132 | $ | 0.132 | ||||||||
The accompanying notes are an integral part of these statements.
4
PYRAMID BREWERIES INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||||
| 2003 | 2002 | |||||||||
OPERATING ACTIVITIES: |
||||||||||
Net income (loss) |
$ | (236,000 | ) | $ | 289,000 | |||||
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
||||||||||
Depreciation and amortization |
1,767,000 | 1,650,000 | ||||||||
Stock-based compensation expense |
40,000 | 50,000 | ||||||||
Interest expense |
3,000 | 6,000 | ||||||||
Loss on sales of fixed assets |
1,000 | — | ||||||||
Deferred rent |
689,000 | (93,000 | ) | |||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
17,000 | (197,000 | ) | |||||||
Inventories |
(220,000 | ) | (377,000 | ) | ||||||
Prepaid expenses and other |
(148,000 | ) | (191,000 | ) | ||||||
Accounts payable and accrued expenses |
998,000 | 972,000 | ||||||||
Refundable deposits |
15,000 | (18,000 | ) | |||||||
Net cash provided by operating activities |
2,926,000 | 2,091,000 | ||||||||
INVESTING ACTIVITIES: |
||||||||||
Purchases of short-term investments |
(2,455,000 | ) | (2,573,000 | ) | ||||||
Proceeds from the sale and maturities of short-term
investments |
4,355,000 | 3,823,000 | ||||||||
Acquisitions of fixed assets |
(3,082,000 | ) | (1,694,000 | ) | ||||||
Proceeds from sales of fixed assets |
— | 11,000 | ||||||||
Net cash used in investing activities |
(1,182,000 | ) | (433,000 | ) | ||||||
FINANCING ACTIVITIES: |
||||||||||
Proceeds from the sale of common stock and option exercises |
117,000 | 177,000 | ||||||||
Note receivable |
22,000 | 11,000 | ||||||||
Cash dividends paid |
(1,126,000 | ) | (1,099,000 | ) | ||||||
Net cash used in financing activities |
(987,000 | ) | (911,000 | ) | ||||||
Increase in cash and cash equivalents |
757,000 | 747,000 | ||||||||
Cash and cash equivalents at beginning of period |
596,000 | 425,000 | ||||||||
Cash and cash equivalents at end of period |
$ | 1,353,000 | $ | 1,172,000 | ||||||
The accompanying notes are an integral part of these statements.
5
PYRAMID BREWERIES INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
Pyramid Breweries Inc. (the “Company”), a Washington corporation, is engaged in the brewing, marketing and selling of craft beers and premium sodas and in restaurant operations. The Company operates breweries in Seattle, Washington, Berkeley, California, Walnut Creek, California and recently constructed a fourth alehouse and brewery in Sacramento, California which opened July 3, 2003. The Company sells its beer through a network of selected independent distributors and alehouse locations primarily in Washington, Oregon and California under the Pyramid brand and, to a lesser extent, the Thomas Kemper brand. Pyramid also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label. As of September 30, 2003, the Company’s products were distributed in 32 states and Canada. The Company also operates four restaurants adjacent to its breweries under the Pyramid Alehouse brand name.
The accompanying condensed financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements contain all material adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair presentation of the Company’s 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. For a presentation including all disclosures required by generally accepted accounting principles, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002, included in the Annual Report on Form 10-K.
Stock Based Compensation
At September 30, 2003, the Company has stock-based compensation plans which are described more fully in Note 15 of the 2002 Annual report. 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 Statement of Financial Accounting Standards (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 4. 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 Company’s net income (loss) and net income (loss) per share for the periods ended September 30, 2003 and 2002, would have been as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income (loss) as reported |
$ | 44,000 | $ | 463,000 | $ | (236,000 | ) | $ | 289,000 | |||||||
Add: Stock-based compensation cost as reported |
(24,000 | ) | 4,000 | 40,000 | 50,000 | |||||||||||
Less: Stock-based compensation cost determined under the
fair value based method |
(41,000 | ) | (86,000 | ) | (167,000 | ) | (234,000 | ) | ||||||||
Net income (loss) pro forma |
$ | (21,000 | ) | $ | 381,000 | $ | (363,000 | ) | $ | 105,000 | ||||||
Basic and diluted net income (loss) per share as reported |
$ | 0.01 | $ | 0.06 | $ | (0.03 | ) | $ | 0.04 | |||||||
Basic and diluted net income (loss) per share pro forma |
$ | (0.00 | ) | $ | 0.05 | $ | (0.04 | ) | $ | 0.01 | ||||||
The fair value of options granted in the third quarter ended September 30, 2003 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.18%; expected option lives of seven years; expected volatility of 51%; and expected future dividends of 5.95%. The fair value of options granted in the third quarter ended September 30, 2002 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.34%; expected option lives of seven years; expected volatility of 51%; and expected future dividends of 7.5%.
The fair value of options granted in the nine month period ended September 30, 2003 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rates ranging from 3.18% to 5.13%; expected option lives of seven years; expected volatility of 51% to 52%; and expected future dividends.
6
Revenue Recognition
The Company recognizes revenue from the sale of wholesale beer and soda products at the time of shipment, when the title of the Company’s products passes to the customer, in accordance with distributor sales agreements and collectibility is probable. The Company’s revenue from its alehouses are comprised of food, beverage and merchandise, recognized at the time of sale.
2. INVENTORIES:
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Raw materials |
$ | 797,000 | $ | 821,000 | ||||
Work in process |
178,000 | 162,000 | ||||||
Finished goods |
835,000 | 607,000 | ||||||
| $ | 1,810,000 | $ | 1,590,000 | |||||
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. Inventory levels experience fluctuations in carrying levels based on seasonality.
3. FIXED ASSETS:
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Brewery and retail equipment |
$ | 16,410,000 | $ | 15,120,000 | ||||
Furniture and fixtures |
997,000 | 916,000 | ||||||
Leasehold improvements |
17,576,000 | 15,525,000 | ||||||
Construction in progress |
101,000 | 609,000 | ||||||
| 35,084,000 | 32,170,000 | |||||||
Less: accumulated depreciation |
(13,081,000 | ) | (11,488,000 | ) | ||||
| $ | 22,003,000 | $ | 20,682,000 | |||||
4. NOTE RECEIVABLE RELATED PARTY
In June 2001, the Company issued a $787,000 full recourse note to the Company’s Chief Executive Officer (CEO) in exchange for the exercise of options for 387,400 shares of the Company’s common stock. In addition, the Company issued a $115,000 full recourse note to the CEO to fund his payment of taxes on the exercise of the options. The notes are due on the earlier of June 30, 2011 or upon the sale of the stock and bear 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 loans, and the remaining 252,300 shares become unrestricted by December 2004. Compensation expense on the shares are accounted for under the variable accounting method until the shares become unrestricted. During the quarter and nine month periods ended September 30, 2003, the Company recorded a $25,000 expense reversal and $35,000 in compensation expense, respectively, in connection with this equity arrangement, which is included in selling, general and administrative expenses.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Salaries, wages and related accruals |
$ | 948,000 | $ | 963,000 | ||||
Barrel taxes |
246,000 | 118,000 | ||||||
Other accruals |
899,000 | 666,000 | ||||||
| $ | 2,093,000 | $ | 1,747,000 | |||||
7
6. OTHER INCOME, NET
Other income, net consists of interest income and parking fee income, and other insignificant non-operating income and expenses.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Interest income |
$ | 16,000 | $ | 26,000 | $ | 54,000 | $ | 81,000 | ||||||||
Interest expense |
(1,000 | ) | (2,000 | ) | (4,000 | ) | (6,000 | ) | ||||||||
Parking income |
91,000 | 101,000 | 183,000 | 208,000 | ||||||||||||
Loss on sale of assets |
— | — | (1,000 | ) | — | |||||||||||
Other income |
12,000 | 12,000 | 36,000 | 35,000 | ||||||||||||
Other income, net |
$ | 118,000 | $ | 137,000 | $ | 268,000 | $ | 318,000 | ||||||||
7. EARNINGS PER SHARE
Basic earnings (loss) per share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period, excluding shares subject to repurchase. Diluted earnings per share was computed by dividing net income by the weighted average number of shares of common stock outstanding plus additional common shares that would be outstanding from in-the-money stock options upon application of the treasury stock method. The effect of stock options has not been included in the calculation of diluted net loss per share as the effect is antidilutive. Options to purchase approximately 188,000 shares of common stock were outstanding as of September 30, 2003, but were not included in the nine month computation of EPS because their effects are antidilutive.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Earnings: |
||||||||||||||||||
Net income (loss) |
$ | 44,000 | $ | 463,000 | $ | (236,000 | ) | $ | 289,000 | |||||||||
Shares: |
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