Pyramid Breweries Inc. Reports Double Digit Volume Growth in Third Quarter

Business Wire, Nov 11, 2006

SEATTLE -- Pyramid Breweries Inc. ("the Company") (NASDAQ:PMID), today announced results for the third quarter ended September 30, 2006. Gross sales for the quarter were $15.8 million, representing a 10% increase over gross sales for the third quarter of 2005. This growth resulted primarily from increased shipment volume of 16% in the core Pyramid brand family, comprised mainly of Hefe Weizen and Apricot Weizen beers. The volume jump, excluding the one-time impact of the $700,000 excise tax assessment from the federal Alcohol and Tobacco Tax and Trade Bureau ("TTB") in the third quarter of 2006 and the $415,000 gain on the sale of the brewery equipment in the third quarter of 2005, contributed to a $1.1 million, or 37% improvement in pro forma gross margin. Net income for the quarter was $130,000, or $0.01 per diluted share, compared to $439,000 or $0.05 per diluted share a year ago. Excluding the impact of the $700,000 TTB excise tax assessment and the $415,000 gain on the sale of the brewery equipment, net income on a pro forma basis for the quarter was $830,000 compared to pro forma net income of $24,000 for the third quarter in 2005.

"Our Pyramid brand family volume increase of 16% for the third quarter compared to the third quarter a year ago, and 21% volume growth year-to-date over the last year is especially encouraging since we exceeded a very strong year in 2005," stated Scott Barnum, CEO. "With the TTB settlement behind us, we are eager to build on the momentum generated by our consumers' preference for our award winning beers".

Financial Highlights - Third Quarter 2006 Compared to Third Quarter 2005:

Beverage Division:

* Gross sales increased 15% to $11.6 million.

* Operating income, including selling expense, decreased 8% to $1.5 million.

* Shipments for the quarter increased 9% to 70,000 barrels.

* Pyramid brand family shipments were up 16% to 44,000 barrels.

* Other non-core beer brand shipments were down 20% to 8,800 barrels. The Company eliminated a number of underperforming product styles, primarily relating to MacTarnahan's and non-core beer brands, which accounted for over 1,100 barrels in the third quarter of 2005, or 56% of the non-core brand shipment decrease.

* Soda shipments increased 11% to 14,700 barrels.

Alehouse Division:

* Gross sales decreased 1% to $4.1 million.

* Gross Margin increased 33% to $407,000. The Seattle and Walnut Creek alehouses contributed to the increase in gross margin offset by declines at the Berkeley, Portland and Sacramento alehouses due to fewer guest visits.

Cash and cash equivalents and accounts receivable: Cash and cash equivalents and accounts receivable totaled $4.0 million as of September 30, 2006, an increase of $759,000 from December 31, 2005.

Significant Events:

As previously reported by the Company in its Current Reports on Form 8-K filed with the SEC on February 17, 2006, July 21, 2006, and October 4, 2006 and in its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2006 and June 30, 2006, certain federal excise tax returns and related operations of the Company were recently audited by the TTB. The TTB audit was completed in the second quarter of 2006, and the TTB's findings were presented to the Company. Among other things, the TTB reviewed the Company's contract brewing arrangement with Portland Brewing Company ("Portland Brewing"). At the conclusion of the audit, the TTB asserted that the Company, not Portland Brewing, had legal control of the Portland brewery facility for purposes of the federal excise tax laws and consequently had underpaid federal excise taxes on beer produced at that facility during the period January 1, 2005 through May 31, 2006. The TTB also concluded that since Portland Brewing was not the legal brewer at the Portland brewery facility, it had overpaid federal excise taxes on beer produced at the facility. Based on its findings in the audit, the TTB issued the Company a notice of proposed assessment asserting that the Company owed a total of approximately $2.1 million in excise taxes and interest for that period, which did not take into account the approximately $1 million in excise taxes paid by Portland Brewing on beer produced at the Portland brewery facility during the same period.

Since receiving the notice of proposed assessment, the Company has engaged in discussions with the TTB relating to a possible compromise of the assessment and also voluntarily began to pay federal excise taxes on beer produced at the Portland brewery facility as if the Company were the legal brewer at that facility (i.e., at a higher average rate per barrel). As a result of its discussions with the TTB, the Company has reached a preliminary agreement with the TTB that it will pay $700,000 to resolve all issues arising from the audit, including the federal tax assessment for the period at issue, which includes a credit for the excise taxes previously paid by Portland Brewing for the period at issue due to Portland Brewing's waiver of its right to receive a refund of those excise tax payments. Under the terms of the preliminary agreement, the Company will be obligated to make an initial payment of $50,000, and the balance will be payable in monthly installments of principal and interest for a period of three years, at a variable interest rate that is currently estimated at 8%. The Company anticipates this preliminary agreement will be finalized once the TTB has issued the Company a final assessment and the Company makes an offer in compromise to settle on the terms described herein.