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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-K/A   (MARK ONE) þ
    
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934FOR THE YEAR ENDED DECEMBER
31, 2004
 o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934FOR THE TRANSITION PERIOD
FROM_________TO_________.
 COMMISSION FILE NUMBER 0-27116   PYRAMID BREWERIES INC.  Washington
(State or other jurisdiction of
incorporation or organization)
    
    91-1258355
(IRS Employer
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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share   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 registrants 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 registrants most recently completed second quarter, June 30, 2004,
was $19,534,067. The number of shares outstanding of the registrants common stock as of March 18, 2005, was
8,781,840. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Companys 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.




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EXPLANATORY NOTE 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 Companys 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 Companys financial statements
and the footnotes thereto, has been modified or updated in any way. 2




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TABLE OF CONTENTS  PART IIItem 8  Financial Statements and Supplementary DataPART IVItem 15  Exhibits, Financial Statement SchedulesSIGNATURESEXHIBIT INDEXEXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.3    Table of Contents  
 PART II 
 Item 8  Financial Statements and Supplementary Data Report of Independent Registered Accounting Firm To the Board of Directors and Stockholders
Pyramid Breweries, Inc. 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
Companys 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. /s/ Moss Adams LLP Seattle, Washington
February 2, 2005 3




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Report of Independent Registered Public Accounting Firm The Board of Directors
Pyramid Breweries Inc.: 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 Companys 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. /s/ KPMG LLP Seattle, Washington,
January 23, 2004 4




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PYRAMID BREWERIES INC.
CONSOLIDATED BALANCE SHEETS December 31,(in thousands)2004
    
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    1,558Short-term investments
    
    
    
    
    
    
    492Accounts receivable, net of $32 and $20 allowance
    
    
    2,191
    
    
    
    1,281Inventories
    
    
    2,129
    
    
    
    1,654Prepaid expenses and other
    
    
    324
    
    
    
    756Total current assets
    
    
    4,644
    
    
    
    5,741Note receivable  related party
    
    
    
    
    
    
    81Fixed assets, net
    
    
    28,859
    
    
    
    21,406Goodwill
    
    
    415
    
    
    
    415Intangibles
    
    
    209
    
    
    
    Other
    
    
    189
    
    
    
    141Total assets
    
    $
    34,316
    
    
    $
    27,784LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    2,776
    
    
    $
    1,349Accrued expenses
    
    
    2,682
    
    
    
    1,562Refundable deposits
    
    
    582
    
    
    
    487Line of credit
    
    
    400
    
    
    
    Current portion of long-term financing
    
    
    83
    
    
    
    Note payable  current
    
    
    20
    
    
    
    20Deferred rent  current
    
    
    75
    
    
    
    199Dividends payable
    
    
    193
    
    
    
    379Total current liabilities
    
    
    6,811
    
    
    
    3,996Note payable, net of current
    
    
    
    
    
    
    16Long-term financing, net of current
    
    
    7,117
    
    
    
    Deferred rent, net of current
    
    
    615
    
    
    
    1,569Total liabilities
    
    $
    14,543
    
    
    $
    5,581COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none
issued
    
    
    
    
    
    
    Common
stock, $.01 par value; 40,000,000 shares
authorized, 8,776,000 and 8,620,000 shares issued
and outstanding
    
    
    88
    
    
    
    86Additional paid-in capital
    
    
    37,214
    
    
    
    36,374Note receivable  related party
    
    
    
    
    
    
    (764
    )Deferred stock-based compensation
    
    
    (384
    )
    
    
    (27
    )Accumulated deficit
    
    
    (17,145
    )
    
    
    (13,466
    )Total stockholders equity
    
    
    19,773
    
    
    
    22,203Total liabilities and stockholders equity
    
    $
    34,316
    
    
    $
    27,784
 See accompanying notes to consolidated financial statements. 5




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PYRAMID BREWERIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) Years Ended December 31,2004
    
    
    2003
    
    
    2002Gross sales
    
    $
    42,176
    
    
    $
    36,378
    
    
    $
    35,523Less excise taxes
    
    
    2,092
    
    
    
    1,753
    
    
    
    1,711Net sales
    
    
    40,084
    
    
    
    34,625
    
    
    
    33,812Cost of sales
    
    
    32,293
    
    
    
    27,640
    
    
    
    25,360Gross margin
    

    
    7,791
    
    
    
    6,985
    
    
    
    8,452Selling, general and administrative expenses
    
    
    10,550
    
    
    
    8,492
    
    
    
    8,678Operating loss
    
    
    (2,759
    )
    
    
    (1,507
    )
    
    
    (226
    )Other income, net
    
    
    34
    
    
    
    312
    
    
    
    380(Loss) income before income taxes
    
    
    (2,725
    )
    
    
    (1,195
    )
    
    
    154(Provision) benefit for income taxes
    
    
    (4
    )
    
    
    (3
    )
    
    
    98Net (loss) income
    
    $
    (2,729
    )
    
    $
    (1,198
    )
    
    $
    252Basic and diluted net (loss) income per share
    
    $
    (0.32
    )
    
    $
    (0.14
    )
    
    $
    0.03Weighted average basic shares outstanding
    
    
    8,578,000
    
    
    
    8,452,000
    
    
    
    8,203,000Weighted average diluted shares outstanding
    
    
    8,578,000
    
    
    
    8,452,000
    
    
    
    8,243,000Cash dividends declared per share
    
    $
    0.088
    
    
    $
    0.176
    
    
    $
    0.176
 See accompanying notes to consolidated financial statements. 6




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PYRAMID BREWERIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands) Note
    
    
    DeferredAdditional
    
    
    Receivable-
    
    
    Stock-Based
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Related-
    
    
    Compen-
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Party
    
    
    sation
    
    
    Deficit
    
    
    EquityBalance, December 31, 2001
    
    
    8,300
    
    
    $
    83
    
    
    $
    35,649
    
    
    $
    (787
    )
    
    $
    (186
    )
    
    $
    (9,536
    )
    
    $
    25,223Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    252Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,477
    )
    
    
    (1,477
    )Shares issued
    
    
    35
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Exercised stock options
    
    
    169
    
    
    
    2
    
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    317Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    145Note repayment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Balance, December 31, 2002
    
    
    8,504
    
    
    $
    85
    
    
    $
    36,041
    
    
    $
    (782
    )
    
    $
    (47
    )
    
    $
    (10,761
    )
    
    $
    24,536Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,198
    )
    
    
    (1,198
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,507
    )
    
    
    (1,507
    )Shares issued
    
    
    25
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Exercised stock options
    
    
    91
    
    
    
    1
    
    
    
    203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    92Note repayment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Balance, December 31, 2003
    
    
    8,620
    
    
    $
    86
    
    
    $
    36,374
    
    
    $
    (764
    )
    
    $
    (27
    )
    
    $
    (13,466
    )
    
    $
    22,203Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,729
    )
    
    
    (2,729
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (950
    )
    
    
    (950
    )Shares issued
    
    
    472
    
    
    
    5
    
    
    
    1,530
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,535Exercised stock options
    
    
    71
    
    
    
    1
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    (357
    )
    
    
    
    
    
    
    19Note repayment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    
    
    
    
    764Shares repurchased and retired
    
    
    (387
    )
    
    
    (4
    )
    
    
    (1,229
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,233
    )Balance, December 31, 2004
    
    
    8,776
    
    
    $
    88
    
    
    $
    37,214
    
    
    $
    
    
    
    $
    (384
    )
    
    $
    (17,145
    )
    
    $
    19,773
 See accompanying notes to consolidated financial statements. 7




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PYRAMID BREWERIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,(in thousands)2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIES:Net (loss) income
    
    $
    (2,729
    )
    
    $
    (1,198
    )
    
    $
    252Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    2,668
    
    
    
    2,443
    
    
    
    2,202Stock-based compensation expense
    
    
    19
    
    
    
    92
    
    
    
    145Interest expense
    
    
    4
    
    
    
    5
    
    
    
    7Loss (gain) on sale of fixed assets
    
    
    10
    
    
    
    2
    
    
    
    (4
    )Deferred rent
    
    
    (133
    )
    
    
    639
    
    
    
    (124
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    69
    
    
    
    663
    
    
    
    (519
    )Inventories
    
    
    83
    
    
    
    (64
    )
    
    
    (412
    )Prepaid expenses and other
    
    
    94
    
    
    
    (192
    )
    
    
    (432
    )Accounts payable and accrued expenses
    
    
    1,243
    
    
    
    212
    
    
    
    549Refundable deposits
    
    
    (10
    )
    
    
    (19
    )
    
    
    (44
    )Net cash provided by operating activities
    
    
    1,318
    
    
    
    2,583
    
    
    
    1,620INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    
    
    
    
    (2,455
    )
    
    
    (5,044
    )Proceeds from the sale and maturities of short-term investments
    
    
    492
    
    
    
    5,205
    
    
    
    6,944Acquisitions of fixed assets
    
    
    (1,002
    )
    
    
    (3,142
    )
    
    
    (2,282
    )Proceeds from sale of fixed assets
    
    
    11
    
    
    
    
    
    
    
    16Acquisition of Portland Brewing Company Assets
    
    
    (1,416
    )
    
    
    
    
    
    
    Acquisition of Berkeley
    
    
    (195
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (2,110
    )
    
    
    (392
    )
    
    
    (366
    )FINANCING ACTIVITIES:Proceeds from sale of common stock and option exercises
    
    
    224
    
    
    
    262
    
    
    
    388Net borrowings (payments) on line of credit
    
    
    400
    
    
    
    
    
    
    
    Deferred financing fees
    
    
    (68
    )
    
    
    
    
    
    
    Notes receivable
    
    
    
    
    
    
    31
    
    
    
    18Repayment on note payable
    
    
    (20
    )
    
    
    (20
    )
    
    
    (20
    )Borrowings on short-term note payable to related party
    
    
    200
    
    
    
    
    
    
    
    Cash dividends paid
    
    
    (1,137
    )
    
    
    (1,502
    )
    
    
    (1,469
    )Shares repurchased and retired
    
    
    (365
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (766
    )
    
    
    (1,229
    )
    
    
    (1,083
    )Increase (decrease) in cash and cash equivalents
    
    
    (1,558
    )
    
    
    962
    
    
    
    171Cash and cash equivalents at beginning of year
    
    
    1,558
    
    
    
    596
    
    
    
    425Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    1,558
    
    
    $
    596SUPPLEMENTAL DATA:Interest paid
    
    $
    220
    
    
    $
    
    
    
    $
    Acquisition of Berkeley facility for debt
    
    
    7,000
    
    
    
    
    
    
    
    Stock issued for purchase of Portland Brewing Company assets
    
    
    1,474
    
    
    
    
    
    
    
    Notes receivable repaid through stock repurchase
    
    
    843
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements. 8




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PYRAMID BREWERIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations and Significant Accounting Policies The Company 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, MacTarnahans 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 Companys 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 Companys
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 Companys 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 Companys 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
Companys condensed consolidated financial statements for financial reporting purposes. Consolidation 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. Short-Term Investments The Companys 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 9




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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
Companys 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. Accounts Receivable The Companys accounts receivable balance includes balances from trade sales and other
miscellaneous receivables. The allowance for doubtful accounts is the Companys best estimate of
the amount of probable credit losses in the Companys 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 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. Valuation Account The following table represents the company valuation account not included in other specific
schedules. Charged toDecember 31,
    
    
    
    costs and
    
    
    
    Purchased as part
    
    
    
    
    
    
    
    
    DecemberDescription
    
    
    2003
    
    
    
    expenses
    
    
    
    of acquisition
    
    
    
    Deductions
    
    
    
    31, 2004Allowance for
doubtful accounts
    
    
    $
    20,000
    
    
    

    0
    
    
    
    
    12,000
    
    
    
    
    0
    
    
    
    $
    32,000
 Fixed Assets 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 Companys liability for deposits charged to customers for returnable containers. Estimated
useful lives are as follows: Buildings
    
    15 to 40 yearsBrewery and retail equipment
    
    5 to 25 yearsFurniture and fixtures
    
    3 to 5 yearsLeasehold improvements
    
    Shorter of lease term or life of 3 to 25 years
 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
Companys 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 Companys long-lived assets change, the Companys valuation of the
long-lived assets could materially change. 10




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Preopening Costs 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
Companys 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. Goodwill 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 Companys 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 units 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. Trademarks 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. 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, and are recognized at the time of sale. Outside of unusual circumstances, if product is returned, it is generally for failure to meet
the Companys 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. Excise Taxes 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 11




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##### Table of Contents



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 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
Vendors 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 vendors products or promotion of sales of the vendors 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: Year Ended December 31,(in thousands)2004
    
    
    2003
    
    
    2002Interest income
    
    $
    22
    
    
    $
    56
    
    
    $
    102Sublease Income
    
    
    90
    
    
    
    
    
    
    
    Interest expense
    
    
    (224
    )
    
    
    (5
    )
    
    
    (7
    )Parking income
    
    
    188
    
    
    
    216
    
    
    
    234(Loss) gain on sale of assets
    
    
    (10
    )
    
    
    (3

    )
    
    
    4Amortization  Loan fee
    
    
    (46
    )
    
    
    
    
    
    
    Other income
    
    
    14
    
    
    
    48
    
    
    
    47Other income, net
    
    $
    34
    
    
    $
    312
    
    
    $
    380
 Income Taxes 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 Companys 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. 12




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##### Table of Contents



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 computations 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: Years ended December 31,2004
    
    
    2003
    
    
    2002Net (loss) income
    
    $
    (2,729,000
    )
    
    $
    (1,198,000
    )
    
    $
    252,000Shares:Weighted average shares outstanding
    
    
    8,578,000
    
    
    
    8,502,000
    
    
    
    8,363,000Shares subject to repurchase
    
    
    
    
    
    
    (50,000
    )
    
    
    (160,000
    )Weighted average basic shares outstanding
    
    
    8,578,000
    
    
    
    8,452,000
    
    
    
    8,203,000Basic earnings per
share
    
    $
    (0.32
    )
    
    $
    (0.14
    )
    
    $
    0.03Stock option dilution
    
    
    
    
    
    
    
    
    
    
    40,000Weighted average diluted shares outstanding
    
    
    8,578,000
    
    
    
    8,452,000
    
    
    
    8,243,000Diluted earnings per
share
    
    $
    (0.32
    )
    
    $
    (0.14
    )
    
    $
    0.03
 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 Companys net loss and
net loss per share for the years ended December 31, 2004, 2003 and 2002, would have been as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Net (loss) income as reported
    
    $
    (2,729,000
    )
    
    $
    (1,198,000
    )
    
    $
    252,000Add: Employee stock-based compensation cost as reported
    
    
    56,000
    
    
    
    92,000
    
    
    
    145,000Less: Employee stock-based compensation cost determined
under the fair value based method
    
    
    (158,000
    )
    
    
    (206,000
    )
    
    
    (304,000
    )Net (loss) income pro forma
    
    $
    (2,831,000
    )
    
    $
    (1,312,000
    )
    
    $
    93,000Basic and diluted net (loss) income per share as reported
    
    $
    (0.32
    )
    
    $
    (0.14
    )
    
    $
    0.03Basic and diluted net (loss) income per share pro forma
    
    $
    (0.33
    )
    
    $
    (0.15
    )
    
    $
    0.01
 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 13




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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 Companys 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
Companys 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. 2. Liquidity During the year ended December 31, 2004, as a result of the acquisition of the Portland
Brewing Company assets, the Companys 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 Companys operations.
These initiatives include 1) consolidating the majority of the Companys 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 Companys breweries. Management believes that these
initiatives will have a meaningful and positive impact on the Companys 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 Companys performance and cash position in the second half of the 2005. 14




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##### Table of Contents



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 Companys line of
credit will provide adequate cash to meet the Company operating needs. However, it is possible that
some or all of the Companys 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
Companys 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 Pyramids 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: 2004
    
    
    2003Net sales
    
    
    45,834
    
    
    
    42,213Net loss
    
    $
    (3,752
    )
    
    $
    (1,890
    )Basic and diluted net loss per share
    
    $
    (0.44
    )
    
    $
    (0.22
    )Weighted average basic and diluted shares
outstanding
    
    
    8,578
    
    
    
    8,452
 15




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##### Table of Contents



The following represents the allocation of the purchase price to the acquired assets of
Portland Brewing Company. (in thousands)Net tangible assets acquired:Cash
    
    $
    3Accounts receivable
    
    
    978Inventories
    
    
    559Property, plant and equipment
    
    
    2,730Other long-term assets
    
    
    24Total tangible assets
    
    
    4,294Net intangible assets acquired
    
    
    228Total purchase price
    
    $
    4,522
 Net tangible assets consists of cash, accounts receivable, inventories, property plant and
equipment and other assets. Portland Brewing Companys 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. 4. Inventories Inventories consist of the following: December 31,(in thousands)2004
    
    
    2003Raw materials
    
    $
    905
    
    
    $
    664Work in process
    
    
    191
    
    
    
    155Finished goods
    
    
    1,033
    
    
    
    835$
    2,129
    
    
    $
    1,654
 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: December 31,(in thousands)2004
    
    
    2003Land
    
    $
    6,181
    
    
    $
    Buildings
    
    
    11,895
    
    
    
    Brewery and retail equipment
    
    
    19,328
    
    
    
    16,402Furniture and fixtures
    
    
    1,106
    
    
    
    952Leasehold improvements
    
    
    5,899
    
    
    
    17,587Construction in progress
    
    
    208
    
    
    
    10144,617
    
    
    
    35,042Less accumulated depreciation and amortization
    
    
    (15,758
    )
    
    
    (13,636
    )$
    28,859
    
    
    $
    21,406
 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. 16




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##### Table of Contents



6. Note Receivable  Related Party In June 2001, the Company issued a $787,000 full recourse note to Martin Kelly, the Companys
Chief Executive Officer (CEO) in connection with 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 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.
Kellys 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 Banks prior approval. The line of credit revolves through December 31,
2005. The line of credit expires December 31, 2005. 9. Debt 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 Companys 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 Companys 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
Companys 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: 17




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##### Table of Contents



2005
    
    $
    83,0002006
    
    
    99,0002007
    
    
    105,0002008
    
    
    110,0002009
    
    
    118,000Thereafter
    
    
    7,335,000$
    ,850,000
 10. Accrued Expenses Accrued expenses consist of the following: December 31,(in thousands)2004
    
    
    2003Salaries, wages and related accruals
    
    $
    978
    
    
    $
    529Barrel taxes
    
    
    157
    
    
    
    100Other accruals
    
    
    1,547
    
    
    
    933$
    2,682
    
    
    $
    1,562
 11. Income Taxes The (provision) benefit for income taxes included in the statements of operations consists of
the following: December 31,(in thousands)2004
    
    
    2003
    
    
    2002Current
    
    $
    (4
    )
    
    $
    (3
    )
    
    $
    98Deferred
    
    
    
    
    
    
    
    
    
    
    $
    (4
    )
    
    $
    (3
    )
    
    $
    98
 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: December 31,2004
    
    
    2003
    
    
    2002Federal statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    (34.0
    %)State taxes, net of federal income tax benefit
    
    
    3.6
    
    
    
    2.1
    
    
    
    (2.1
    )Meals and entertainment
    
    
    (3.1
    )
    
    
    (5.2
    )
    
    
    (41.1
    )Valuation allowance
    
    
    (34.4
    )
    
    
    (30.6
    )
    
    
    141.20.1
    %
    
    
    0.3
    %
    
    
    64.0
    %
 18




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##### Table of Contents



Deferred income tax assets and liabilities are included in the balance sheet at December 31,
2004 and 2003, as follows: December 31,(in thousands)2004
    
    
    2003Accelerated depreciation
    
    $
    (1,457
    )
    
    $
    (1,569
    )Package design costs
    
    
    127
    
    
    
    165Accrued vacation
    
    
    118
    
    
    
    73Deferred rent
    
    
    259
    
    
    
    350Net operating loss carryforwards
    
    
    3,827
    
    
    
    2,792Other, net
    
    
    183
    
    
    
    174Valuation allowance
    
    
    (3,057
    )
    
    
    (1,985
    )$
    
    
    
    $
    
 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: Location
    
    Year
    
    OptionsSacramento, California
    
    
    2014
    
    
    Two additional five year periodsSeattle, Washington
    
    
    2009
    
    
    Two additional five year periodsWalnut Creek, California
    
    
    2012
    
    
    Three additional five year periods
and one addional four year periodPortland, Oregon (2730)
    
    
    2014
    
    
    Two additional five year periodsPortland, Oregon (2750)
    
    
    2008
    
    
    One additional three year period and two additional five year periods
 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: 2005
    
    $
    1,300,0002006
    
    
    1,302,0002007
    
    
    1,311,0002008
    
    
    1,247,0002009
    
    
    930,000Thereafter
    
    
    2,246,000$
    8,336,000
 Total rent expense was approximately $1,211,000, $1,027,000 and $908,000 in 2004, 2003 and
2002, respectively. 19




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##### Table of Contents



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 Companys
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 Companys positive cash flow back into
the business. Any future declaration of dividends will depend, among other things, on the Companys
results of operations, capital requirements and financial condition, and on such other factors as
the Companys 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 Companys 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 Companys
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 Companys 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 Companys 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 Companys management (the Management Approach), which is organized around differences in
products and services. Products and Services The Companys reportable segments include beverage operations and alehouses. Beverage
operations include the production and sale of Pyramid ales and lagers, MacTarnahans 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 Companys beer and soda products as well as
food and certain merchandise. Factors used to identify reportable segments The Companys 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. 20




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##### Table of Contents



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: (in thousands)BeverageOperations
    
    
    Alehouse
    
    
    Other
    
    
    TotalYear ended December 31, 2004Gross revenues from external customers
    
    $
    28,172
    
    
    $
    14,004
    
    
    $
    
    
    
    $
    42,176Net revenues from external customers
    
    
    26,080
    
    
    
    14,004
    
    
    
    
    
    
    
    40,084Intersegment revenues
    
    
    546
    
    
    
    
    
    
    
    (546
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22Depreciation and amortization
    
    
    1,607
    
    
    
    841
    
    
    
    240
    
    
    
    2,688Operating income (loss)
    
    
    2,082
    
    
    
    438
    
    
    
    (5,279
    )
    
    
    (2,759
    )Capital expenditures
    
    
    555
    
    
    
    250
    
    
    
    197
    
    
    
    1,002Total assets
    
    
    19,469
    
    
    
    6,584
    
    
    
    8,263
    
    
    
    34,316Year ended December 31, 2003Gross revenues from external customers
    
    $
    23,958
    
    
    $
    12,420
    
    
    $
    
    
    
    $
    36,378Net revenues from external customers
    
    
    22,205
    
    
    
    12,420
    
    
    
    
    
    
    
    34,625Intersegment revenues
    
    
    442
    
    
    
    
    
    
    
    (442
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    56Depreciation and amortization
    
    
    1,564
    
    
    
    668
    
    
    
    211
    
    
    
    2,443Operating income (loss)
    
    
    1,915
    
    
    
    719
    
    
    
    (4,141
    )
    
    
    (1,507
    )Capital expenditures
    
    
    515
    
    
    
    2,496
    
    
    
    131
    
    
    
    3,142Total assets
    
    
    17,509
    
    
    
    6,736
    
    
    
    3,539
    
    
    
    27,784Year ended December 31, 2002Gross revenues from external customers
    
    $
    25,196
    
    
    $
    10,327
    
    
    $
    
    
    
    $
    35,523Net revenues from external customers
    
    
    23,485
    
    
    
    10,327
    
    
    
    
    
    
    
    33,812Intersegment revenues
    
    
    359
    
    
    
    
    
    
    
    (359
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    102Depreciation and amortization
    
    
    1,601
    
    
    
    439
    
    
    
    162
    
    
    
    2,202Operating income (loss)
    
    
    1,671
    
    
    
    975
    
    
    
    (2,872
    )
    
    
    (226
    )Capital expenditures
    
    
    421
    
    
    
    1,605
    
    
    
    256
    
    
    
    2,282Total assets
    
    
    18,952
    
    
    
    4,871
    
    
    
    5,472
    
    
    
    29,295
 Other 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 PlansEmployee Stock Purchase Plan 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 Companys common stock. The employees 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 Companys 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, 21




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##### Table of Contents



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 Companys 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 Companys 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: Share Subject
    
    
    Option
    
    
    Averageto Option
    
    
    Price Range
    
    
    Exercise PriceOptions outstanding at December 31,
2001
    
    
    810,000
    
    
    $
    1.56 - 12.25
    
    
    $
    2.55Granted
    
    
    380,000
    
    
    $
    2.19 - 2.48
    
    
    $
    2.30Forfeitures
    
    
    (189,000
    )
    
    $
    1.70 - 12.25
    
    
    $
    2.29Exercised
    
    
    (169,000
    )
    
    $
    1.70 - 2.00
    
    
    $
    1.87Options outstanding at December 31, 2002
    
    
    832,000
    
    
    $
    1.56 - 10.75
    
    
    $
    2.63Granted
    
    
    165,000
    
    
    $
    2.96 - 3.10
    
    
    $
    2.99Forfeitures
    
    
    (148,000
    )
    
    $
    2.33 - 10.75
    
    
    $
    2.95Exercised
    
    
    (91,000
    )
    
    $
    1.70 - 2.56
    
    
    $
    2.24Options outstanding at December 31, 2003
    
    
    758,000
    
    
    $
    1.56 - 10.75
    
    
    $
    2.69Granted
    
    
    387,000
    
    
    $
    0.00 - 2.26
    
    
    $
    0.22Forfeitures
    
    
    (89,000
    )
    
    $
    2.13 - 10.75
    
    
    $
    2.85Exercised
    
    
    (21,000
    )
    
    $
    1.82 - 2.56
    
    
    $
    2.04Options outstanding at December 31, 2004
    
    
    1,035,000
    
    
    $
    1.56 - 10.75
    
    
    $
    1.67
 22




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##### Table of Contents



Information about options outstanding at December 31, 2004 follows: Weighted-Average
    
    
    
    
    
    Weighted-Options
    

    
    Remaining
    
    Options
    
    
    AverageOutstanding
    

    
    Contractual Life
    
    Exercisable
    
    
    Exercise Price18,000
    
    17 Months
    
    
    18,000
    
    
    $
    10.755,000
    
    24 Months
    
    
    5,000
    
    
    $
    4.7541,000
    
    42 Months
    
    
    41,000
    
    
    $
    2.562,000
    
    45 Months
    
    
    2,000
    
    
    $
    1.5650,000
    
    58 Months
    
    
    50,000
    
    
    $
    2.0010,000
    
    60 Months
    
    
    10,000
    
    
    $
    1.8210,000
    
    64 Months
    
    
    10,000
    
    
    $
    1.756,000
    
    65 Months
    
    
    6,000
    
    
    $
    1.826,000
    
    67 Months
    
    
    6,000
    
    
    $
    1.82100,000
    
    71 Months
    
    
    100,000
    
    
    $
    2.0015,000
    
    76 Months
    
    
    15,000
    
    
    $
    2.6775,000
    
    78 Months
    
    
    75,000
    
    
    $
    2.574,000
    
    84 Months
    
    
    4,000
    
    
    $
    2.4510,000
    
    86 Months
    
    
    9,000
    
    
    $
    2.3011,000
    
    86 Months
    
    
    10,000
    
    
    $
    2.2925,000
    
    88 Months
    
    
    25,000
    
    
    $
    2.48100,000
    
    93 Months
    
    
    79,000
    
    
    $
    2.1925,000
    
    100 Months
    
    
    25,000
    
    
    $
    3.10120,000
    
    102 Months
    
    
    50,000
    
    
    $
    2.9615,000
    
    108 Months
    
    
    5,000
    
    
    $
    3.0220,000
    
    113 Months
    
    
    20,000
    
    
    $
    2.20350,000
    
    115 Months
    
    
    
    
    
    $
    17,000
    
    116 Months
    
    
    
    
    
    $
    2.261,035,000
    

    
    
    
    
    
    565,000
    
    
    $
    3.21
 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 employees compensation) at the rate of 50%.
The Company may also make additional discretionary contributions. The Companys 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 23




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##### Table of Contents



Right will entitle its holder to purchase that number of the acquiring companys common shares
having a market value of twice the Rights 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 Companys 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 Companys 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 Companys 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
Banks prior approval. 24




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##### Table of Contents



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 Companys 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 Companys results of operations for any quarter are not necessarily indicative of
results for any future period. 2004 Quarters Ended
    
    
    2003 Quarters EndedDecember 31
    
    
    September 30
    
    
    June 30
    
    
    March 31
    
    
    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31(in thousands except per share amounts)
    
    
    (in thousands except per share amounts)Gross sales
    
    $
    11,205
    
    
    $
    11,745
    
    
    $
    10,936
    
    
    $
    8,290
    
    
    $
    8,755
    
    
    $
    10,765
    
    
    $
    9,882
    
    
    $
    6,976Less excise taxes
    
    
    617
    
    
    
    532
    

    
    
    534
    
    
    
    409
    
    
    
    426
    
    
    
    493
    
    
    
    481
    
    
    
    353Net sales
    
    
    10,588
    
    
    
    11,213
    
    
    
    10,402
    
    
    
    7,881
    
    
    
    8,329
    
    
    
    10,272
    
    
    
    9,401
    
    
    
    6,623Cost of sales
    
    
    9,072
    
    
    
    8,898
    
    
    
    7,829
    
    
    
    6,494
    
    
    
    7,189
    
    
    
    8,082
    
    
    
    6,901
    
    
    
    5,468Gross margin
    
    
    1,516
    
    
    
    2,315
    
    
    
    2,573
    
    
    
    1,387
    
    
    
    1,140
    
    
    
    2,190
    
    
    
    2,500
    
    
    
    1,155Selling, general and
administrative expenses
    
    
    2,909
    
    
    
    2,738
    
    
    
    2,507
    
    
    
    2,396
    
    
    
    2,145
    
    
    
    2,264
    
    
    
    2,160
    
    
    
    1,923Operating (loss) income
    
    
    (1,393
    )
    
    
    (423
    )
    
    
    66
    
    
    
    (1,009
    )
    
    
    (1,005
    )
    
    
    (74
    )
    
    
    340
    
    
    
    (768
    )Other income, net
    
    
    (64
    )
    
    
    3
    
    
    
    81
    
    
    
    14
    
    
    
    44
    
    
    
    118
    
    
    
    106
    
    
    
    44(Loss) income before
income taxes
    
    
    (1,457
    )
    
    
    (420
    )
    
    
    147
    
    
    
    (995
    )
    
    
    (961
    )
    
    
    44
    
    
    
    446
    
    
    
    (724
    )(Provision) benefit for
income taxes
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )Net (loss) income
    
    $
    (1,458
    )
    
    $
    (420
    )
    
    $
    145
    
    
    $
    (996
    )
    
    $
    (961
    )
    
    $
    44
    
    
    $
    444
    
    
    $
    (725
    )Basic and diluted net
(loss) income per
share
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    0.02
    
    
    $
    (0.12
    )
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.09
    )Weighted average basic
shares outstanding
    
    
    8,776
    
    
    
    8,615
    
    
    
    8,391
    
    
    
    8,599
    
    
    
    8,492
    
    
    
    8,456
    
    
    
    8,443
    
    
    
    8,417Weighted average diluted
shares outstanding
    
    
    8,776
    
    
    
    8,615
    
    
    
    8,492
    
    
    
    8,599
    
    
    
    8,492
    
    
    
    8,655
    
    
    
    8,665
    
    
    
    8,417
 25




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##### Table of Contents



PART IV 
 Item 15  Exhibits, Financial Statement Schedules (a) Documents filed as part of this report are as follows:  1.
    Financial Statements: PageReport of
Independent Registered Accounting Firm
    
    
    3Report of Independent Registered Public Accounting Firm
    
    
    4Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    5Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
    
    
    6Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003
and 2002
    
    
    7Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    8Notes to Consolidated Financial Statements
    
    
    9
  2.
    Financial Statement Schedules: None.3.
    Exhibits: The required exhibits are included at the end of the Annual Report on
Form 10-K and are described in the Exhibit Index immediately preceding the first
exhibit. 26




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##### Table of Contents



SIGNATURES 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. April 8, 2005Pyramid Breweries Inc.(Registrant)By

    
    /s/ JAMES K. HILGERJames K. HilgerVice President and Chief Financial Officer
 27




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##### Table of Contents



EXHIBIT INDEX 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. EXHIBITNO.
    
    DESCRIPTION3.1
    
    Amended and Restated Articles of Incorporation of Registrant (9)3.2
    
    Form of Amended and Restated Bylaws of Registrant (9)3.3
    
    Rights Agreement between ChaseMellon
Shareholder Services LLC and the Registrant dated June 14, 1999 (2)4.1
    
    Form of Common Stock Certificate (1)4.4*
    
    Directors Compensation Plan (5)10.1
    
    Lease between Harold W. Hill and the Registrant dated April 13, 1994 (1)10.2
    
    Addendum of Lease between Harold W. Hill and the Registrant dated November 28, 1994 (1)10.3
    
    Second Addendum of Lease between 1201 Building L.L.C. and the Registrant dated June 26, 1995 (1)10.4
    
    Distribution Agreement between the Registrant and Western Washington Beverage dated August 24,
1995 (1)10.5*
    
    Registrants Non-Employee Director Stock Option Plan (1)10.6*
    
    Form of Non-Qualified Stock Option Agreement (1)10.7*
    
    Employment Agreement between the Registrant and Gary McGrath (3)10.8
    
    Assignment, Assumption and Consent Agreement between KLP Properties, Inc., Faultline Brewing
Company, Inc., and the Registrant dated October 26, 2001 (4)10.9
    
    Sublease between KLP Properties, Inc. and Faultline Brewing Company, Inc. dated April 3, 1996 (4)10.10
    
    Lease between Peter Vasconi and the James and Maura Belka Trust dated December 28, 1995 (4)10.11
    
    Commercial Lease between County Supervisors Association of California and Pyramid Breweries,
Inc. dated April 15, 2002 (6)10.12*
    
    Registrants 2003 Employee Stock Purchase Plan (6)10.13*
    
    Registrants Non-Employee Director Stock Compensation Plan. (6)10.14
    
    Asset Purchase Agreement between Pyramid Breweries Inc., Portland Brewing Company and PBC
Acquisition, LLC dated January 26, 2004 (7)10.15*
    
    Employment Agreement between Registrant and John Lennon +10.16
    
    Registrants 2004 Equity Incentive Plan (8)10.17
    
    Promissory Note from Pyramid Gilman Street Property, LLC to Morgan Stanley Capital Inc. +10.18
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing between
Pyramid Gilman Street Property, LLC and Morgan Stanley Mortgage Capital Inc +10.19
    
    Reserve and Security Agreement between Pyramid Gilman Street Property, LLC and Morgan Stanley
Mortgage Capital Inc. +10.20
    
    Guaranty of Recourse Obligations of Borrower from Pyramid Breweries, Inc. to Morgan Stanley
Mortgage Capital Inc. +10.21*
    
    Amended and Restated Employment Agreement between Registrant and Martin Kelly dated June 19,
2001 (10)10.22
    
    Commercial Lease between Esther Podlesak, Trustee of the John A. and Esther Podlesak 1990 Family
Trust and Pyramid Breweries California, Inc. dated November 1, 1995 (1)10.23
    
    Assignment, Assumption and Consent Agreement between Esther Podlesak, Trustee of the John A. and
Esther Podlesak 1990 Family Trust, Pyramid Breweries California, Inc. and Pyramid Breweries Inc.
dated November 17, 1995 (1)10.24*
    
    2005 Officer Incentive Compensation Plan Policy +10.25*
    
    Amended and Restated Employment Agreement between Registrant and John Lennon +23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of KPMG LLP31.1
    
    Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: John J. Lennon, President and Chief Executive Officer
 28




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##### Table of Contents



EXHIBITNO.
    
    DESCRIPTION31.2
    
    Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: James K. Hilger, Vice-President and Chief Financial Officer31.3
    
    Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: Jason W. Rees, Controller and Chief Accounting Officer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: John Lennon, President and Chief Executive Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: James K. Hilger, Vice-President and Chief Financial Officer32.3
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Jason W. Rees, Controller and Chief Accounting Officer
   *
    
    Indicates management contract or compensatory plan or arrangement+
    
    Previously filed.(1)
    
    Incorporated by reference to the exhibits filed as part of the Registration Statement on Form
S-1 of Pyramid Breweries Inc. (File No. 33-97834).(2)
    
    Incorporated by reference to the Current Report on Form 8-K dated June 17, 1999.(3)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 1999.(4)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2001.(5)
    
    Incorporated by reference to the Registrants Form S-8 dated June 26, 2002(6)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2002.(7)
    
    Incorporated by reference to the Current Report on Form 8-K January 28, 2004.(8)
    
    Incorporated by reference to the Registrants Form S-8 dated July 22, 2004.(9)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K/A for the year ended
December 31, 2003, as amended December 10, 2004.(10)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001. 29