##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTER ENDED MARCH 31, 2005o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to             . Commission file number 0-27116   PYRAMID BREWERIES INC.  Washington
    
    91-1258355(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 91 South Royal Brougham Way,
Seattle, WA 98134
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (206) 682-8322   Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).
Yes o No þ Common stock, par value of $.01 per share: 8,782,840 shares of Common Stock outstanding as of
April 30, 2005




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PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 TABLE OF CONTENTS PagePART IFINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets March 31, 2005 and December 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations Three Month Period Ended March 31, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows Three Month Period Ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART IIOTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    21SIGNATURE
    
    
    22EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.3
  2




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PART I 
 Item 1  FINANCIAL STATEMENTS PYRAMID BREWERIES INC. 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2005
    
    
    2004CURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable, net of $20 allowance
    
    
    2,541
    
    
    
    2,191Inventories
    
    
    2,136
    
    
    
    2,129Prepaid expenses and other
    
    
    391
    
    
    
    324Total current assets
    
    
    5,068
    
    
    
    4,644Fixed assets, net
    
    
    28,473
    
    
    
    28,859Goodwill
    
    
    415
    
    
    
    415Intangibles
    
    
    198
    
    
    
    209Other assets
    
    
    778
    
    
    
    189Total assets
    
    $
    34,932
    
    
    $
    34,316CURRENT LIABILITIES:Accounts payable
    
    $
    3,622
    
    
    $
    2,776Accrued expenses
    
    
    1,999
    
    
    
    2,682Refundable deposits
    
    
    584
    
    
    
    582Line of credit
    
    
    1,525
    
    
    
    400Current portion of long-term financing
    
    
    95
    
    
    
    83Note payable  current
    
    
    20
    
    
    
    20Deferred rent  current
    
    
    75
    
    
    
    75Dividends payable
    
    
    
    
    
    
    193Total current liabilities
    
    
    7,920
    
    
    
    6,811Long-term financing, net of current
    
    
    7,745
    
    
    
    7,117Deferred rent, net of current
    
    
    598
    
    
    
    615Total liabilities
    
    
    16,263
    
    
    
    14,543COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000,000 shares authorized,
8,782,000 and 8,776,000 shares issued and outstanding
    
    
    88
    
    
    
    88Additional paid-in capital
    
    
    37,225
    
    
    
    37,214Deferred stock-based compensation
    
    
    (368
    )
    
    
    (384
    )Accumulated deficit
    
    
    (18,276
    )
    
    
    (17,145
    )Total stockholders equity
    
    
    18,669
    
    
    
    19,773Total liabilities and stockholders equity
    
    $
    34,932
    
    
    $
    34,316
 The accompanying notes are an integral part of these statements. 3




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PYRAMID BREWERIES INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( )
 Three Months Ended March 31,(in thousands, except shares)2005
    
    
    2004Gross sales
    
    $
    10,457
    
    
    $
    8,290Less excise taxes
    
    
    557
    
    
    
    409Net sales
    
    
    9,900
    
    
    
    7,881Cost of sales
    
    
    8,396
    
    
    
    6,494Gross margin
    
    
    1,504
    
    
    
    1,387Selling, general and administrative expenses
    
    
    2,569
    
    
    
    2,396Operating loss
    
    
    (1,065
    )
    
    
    (1,009
    )Other (expense) income, net
    
    
    (64
    )
    
    
    14Loss before income taxes
    
    
    (1,129
    )
    
    
    (995
    )Provision for income taxes
    
    
    (2
    )
    
    
    (1
    )Net loss
    
    $
    (1,131
    )
    
    $
    (996
    )Basic and diluted net loss per share
    
    $
    (0.13
    )
    
    $
    (0.12
    )Weighted average shares outstanding
    
    
    8,782,000
    
    
    
    8,599,000Cash dividend declared per share
    
    $
    
    
    
    $
    0.044
 The accompanying notes are an integral part of these statements. 4




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PYRAMID BREWERIES INC. 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( )
 Three Months Ended March 31,(in thousands)2005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (1,131
    )
    
    $
    (996
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    673
    
    
    
    663Stock-based compensation expense
    
    
    16
    
    
    
    (10
    )Interest expense
    
    
    
    
    
    
    1Loss on sales of fixed assets
    
    
    
    
    
    
    10Deferred rent
    
    
    (17
    )
    
    
    (50
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (350
    )
    
    
    (289
    )Inventories
    
    
    (6
    )
    
    
    (117
    )Prepaid expenses and other
    
    
    39
    
    
    
    42Accounts payable and accrued expenses
    
    
    182
    
    
    
    767Refundable deposits
    
    
    (50
    )
    
    
    (23
    )Net cash provided by (used in) operating activities
    
    
    (644
    )
    
    
    (2
    )INVESTING ACTIVITIES:Proceeds from sale of assets
    
    
    33
    
    
    
    Acquisitions of fixed assets
    
    
    (321
    )
    
    
    (192
    )Net cash used in investing activities
    
    
    (288
    )
    
    
    (192
    )FINANCING ACTIVITIES:Proceeds from the sale of common stock and option exercises
    
    
    11
    
    
    
    141Principal payments on debt
    
    
    (11
    )
    
    
    2Net borrowings on line of credit
    
    
    1,125
    
    
    
    Cash dividends paid
    
    
    (193
    )
    
    
    (379
    )Net cash provided by (used in) financing activities
    
    
    932
    
    
    
    (236
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    (430
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,558Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    1,128
 The accompanying notes are an integral part of these statements. 5




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PYRAMID BREWERIES INC. 
 NOTES TO FINANCIAL STATEMENTS
 1. Basis of Presentation: Pyramid Breweries Inc. (the Company), a Washington corporation, is engaged in the brewing,
marketing and selling of craft beers and premium sodas and in restaurant operations. The Company
operates breweries in Seattle, Washington, Portland, Oregon and in Berkeley, Walnut Creek and
Sacramento, California. The Company sells its beer through a network of selected independent
distributors and alehouse locations primarily in Washington, Oregon and California. The Companys
core brands include Pyramid, MacTarnahans and Thomas Kemper Soda, its other smaller product lines
are reported under the Allied Brand designation and include Thomas Kemper Beer, Saxer, and
NorWester. The Company also manufactures a line of gourmet sodas under the Thomas Kemper Soda
Company label. As of March 31, 2005, the Companys products were distributed in approximately 35
states and Canada. As of March 31, 2005, the Company also operated five restaurants adjacent to
its breweries under the Pyramid Alehouse and MacTarnahans Taproom brand names. The Company established an entity, PBC Acquisition LLC, for the express purpose of acquiring
certain assets from Portland Brewing Company. The Company also established Gilman Street Property
LLC as a single purpose entity to act as the legal owner of the Berkeley Alehouse and Brewery
property located at 901 Gilman Street, Berkeley, California. The assets of these entities are
consolidated into the Companys unaudited condensed consolidated financial statements for financial
reporting purposes. Effective July 23, 2004, the Company completed its purchase of the Berkeley Brewery and
Alehouse facility located at 901 Gilman Street, Berkeley, California 94710. Previously the Company
had leased this facility. The Companys lease obligations terminated with its purchase of the
facility. The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company, without audit, in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all material adjustments, consisting only of
those of a normal recurring nature, considered necessary for a fair presentation of the Companys
financial position, results of operations and cash flows at the dates and for the periods
presented. The operating results for the interim periods presented are not necessarily indicative
of the results expected for the full year. For a presentation including all disclosures required by
generally accepted accounting principles, these financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2004, included in the Annual
Report on Form 10-K. Stock Based Compensation At March 31, 2005, the Company has stock-based compensation plans which are described more
fully in Note 18 of the Consolidated Audited Financial Statements contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. The Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No.
123 Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been
recognized for the fair value of options issued under the Employee and Director Plans (the Plans)
except 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 $16,000 in stock
based compensation 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 quarters ended March 31,
2005 and 2004, would have been as follows: Three Months Ended March 31,(in thousands)2005
    
    
    2004Net income (loss) as reported
    
    $
    (1,131
    )
    
    $
    (996
    )Add: Stock-based compensation cost as reported
    
    
    16
    
    
    
    (10
    )Less: Stock-based compensation cost determined under the fair value based method
    
    
    (34
    )
    
    
    (37
    )Net income (loss) pro forma
    
    $
    (1,149
    )
    
    $
    (1,043
    )Basic and diluted net loss per share as reported
    
    $
    (0.13
    )
    
    $
    (0.12
    )Basic and diluted net loss per share pro forma
    
    $
    (0.13
    )
    
    $
    (0.12
    )
 The fair value of options granted in the first quarter of 2005 was estimated using the
Black-Scholes option-pricing model with the following weighted average assumptions: risk-free
interest rate of 3.9%; expected option lives of five years and expected volatility of 51%. There
were no options granted in the first quarter of 2004. 6




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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 is comprised of food, beverage and merchandise, and is recognized at the time of sale. 7




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2. Liquidity During the three month period ended March 31, 2005, the Companys working capital decreased
$685,000 to a negative $2,852,000. This decrease in working capital is the result of normal
seasonality in its operating divisions, as the first quarter of the year is historically the
slowest for the Company, as well as a result of the acquisition of the Portland Brewing Company
assets and the addition of a third underutilized brewing facility. The Companys operating
activities used $644,000 in cash during the quarter. This cash utilization was the result of the
reported net operating loss and also net cash used in investing activities of $288,000. The
Companys investment activities were primarily directed toward replacing and/or overhauling
production equipment in the Portland Brewery. The cash used in operating and investing activities
were principally funded by $1,125,000 in additional borrowings on the Companys line of credit.
As of March 31, 2005 the Companys line of credit balance was $1,525,000 out of a maximum
availability of $2,000,000. Management has announced several initiatives designed to improve operating results, increase
working capital, and enhance 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. As of March 31, 2005 the Company had no cash and a working capital deficit of $2,852,000.
However, 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. Therefore, the Company generally does not require a
significant cash on hand balance to meet operating needs and Management believes that the Company
has adequate financing to conduct its operations. The first quarter of the calendar year does tend to be the slowest season for the Company,
followed by a strong season during the second and third 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 initiatives 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. 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 are expected to improve the Companys performance and to
improve the Companys cash position in the second half of the
2005. 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. Inventories: March 31,
    
    
    December 31,(in thousands)2005
    
    
    2004Raw materials
    
    $
    868
    
    
    $
    905Work in process
    
    
    255
    
    
    
    191Finished goods
    
    
    1,013
    
    
    
    1,033$
    2,136
    
    
    $
    2,129
 Raw materials primarily include ingredients, flavorings and packaging. Work in process
includes beer held in fermentation prior to the filtration and packaging processes. Finished goods
primarily include product ready for shipment, as well as promotional merchandise held for sale.
Inventory levels experience fluctuations in carrying levels and values based largely on
seasonality. 4. Fixed Assets: 8




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March 31,
    
    
    December 31,2005
    
    
    2004Land
    
    $
    6,181
    
    
    $
    6,181Buildings
    
    
    11,895
    
    
    
    11,895Brewery and retail equipment
    
    
    19,403
    
    
    
    19,328Furniture and fixtures
    
    
    1,102
    
    
    
    1,106Leasehold improvements
    
    
    6,033
    
    
    
    5,899Construction in progress
    
    
    271
    
    
    
    20844,885
    
    
    
    44,617Less: accumulated depreciation and amortization
    
    
    (16,412
    )
    
    
    (15,758
    )$
    28,473
    
    
    $
    28,859
 9




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5. Accrued Expenses Accrued expenses consist of the following: March 31,
    
    
    December 31,(in thousands)2005
    
    
    2004Salaries, wages and related accruals
    
    $
    678
    
    
    $
    978Barrel taxes
    
    
    280
    
    
    
    157Other accruals
    
    
    1,041
    
    
    
    1,547$
    1,999
    
    
    $
    2,682
 6. Other (Expense) Income, net Other (Expense) Income, net consists of interest income and parking fee income, and other
non-operating income and expenses as follows: Three Months Ended March 31,(in thousands)2005
    
    
    2004Interest income
    
    $
    
    
    
    $
    6Sublease income
    
    
    54
    
    
    
    Interest expense
    
    
    (133
    )
    
    
    (1
    )Parking income
    
    
    21
    
    
    
    6(Loss) Gain on sale of assets
    
    
    
    
    
    
    (10
    )Amortization - Loan fee
    
    
    (6
    )
    
    
    Other income (expense)
    
    
    
    
    
    
    13Other income, net
    
    $
    (64
    )
    
    $
    14
 7. Loss per Share Basic loss per share is computed by dividing net loss by the weighted average number of shares
of common stock outstanding during the quarter. The effect of stock options has not been included
in the calculation of diluted net loss per share as the effect is antidilutive. Options to purchase
approximately 1,061,000, and 628,000 shares of common stock were outstanding as of March 31, 2005
and 2004, respectively, but were not included in the computation of EPS because their effects are
antidilutive. Three Months Ended March 31,(in thousands, except shares)2005
    
    
    2004Net loss
    
    $
    (1,131
    )
    
    $
    (996
    )Shares:Weighted average shares outstanding
    
    
    8,782,000
    
    
    
    8,649,000Shares subject to repurchase
    
    
    
    
    
    
    (50
    )Weighted average shares outstanding
    
    
    8,782,000
    
    
    
    8,648,950Basic and
diluted earnings per share
    
    $
    (0.13
    )
    
    $
    (0.12
    )
 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 Company was in compliance with these
covenants as of March 31, 2005. 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 10




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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 the Company and
the financial statements of the Subsidiary are consolidated 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.
The restricted reserve replacement reserve account balances are recorded as long-term other assets
on the balance sheet. At March 31, 2005, future minimum payments are as follows: 2005
    
    $
    72,0002006
    
    
    99,0002007
    
    
    105,0002008
    
    
    110,0002009
    
    
    118,000Thereafter
    
    
    7,335,000$
    7,839,000
 10. 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 statements. 11




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11. 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. 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. 12. 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 Company beverage products including both beer and
soda. 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 different products
and services. These segments are managed separately because each business requires different
production, management and marketing strategies. Measurement of segment profit and segment assets The accounting policies of the segments are the same as those described in the summary of
critical accounting policies included in the notes to the financial statements included in the
Companys most recent Form 10-K. 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: BeverageOperations
    
    
    Alehouse
    
    
    Other
    
    
    Total(in thousands)Quarter ended March 31, 2005Gross revenues from external customers
    
    $
    7,103
    
    
    $
    3,354
    
    
    $
    
    
    
    $
    10,457Net revenues from external customers
    
    
    6,546
    
    
    
    3,354
    
    
    
    
    
    
    
    9,900Intersegment revenues
    
    
    131
    
    
    
    
    
    
    
    (131
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    414
    
    
    
    212
    
    
    
    47
    
    
    
    673Operating (loss) income
    
    
    246
    
    
    
    (60
    )
    
    
    (1,317
    )
    
    
    (1,131
    )Capital expenditures
    
    
    142
    
    
    
    94
    
    
    
    30
    
    
    
    266Total assets
    
    
    19,906
    
    
    
    7,026
    
    
    
    8,000
    
    
    
    34,932Quarter ended March 31, 2004Gross revenues from external customers
    
    $
    5,261
    
    
    $
    3,029
    
    
    $
    
    
    
    $
    8,290Net revenues from external customers
    
    
    4,852
    
    
    
    3,029
    
    
    
    
    
    
    
    7,881Intersegment revenues
    
    
    94
    
    
    
    
    
    
    
    (94
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Depreciation and amortization
    
    
    400
    
    
    
    218
    
    
    
    45
    
    
    
    663Operating (loss) income
    
    
    348
    
    
    
    (11
    )
    
    
    (1,346
    )
    
    
    (1,009
    )Capital expenditures
    
    
    83
    
    
    
    62
    
    
    
    47
    
    
    
    192Total assets
    
    
    17,619
    
    
    
    6,592
    
    
    
    3,026
    
    
    
    27,237
 Other 12




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Other consists of interest income, general, administrative and marketing expense, corporate
office assets and other reconciling items that are not allocated to segments for internal
management reporting purposes. Other total assets include all assets except for accounts
receivable, inventory, goodwill and fixed assets, which are presented by segment. 13




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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain selected unaudited
operating data, expressed as a percentage of net sales. SELECTED UNAUDITED OPERATING DATA Three Months Ended March 31,(in thousands, except barrel & shares)% of
    
    
    
    
    
    
    % of2005
    
    
    Net Sales
    
    
    2004
    
    
    Net SalesGross sales
    
    $
    10,457
    
    
    
    
    
    
    $
    8,290Less excise taxes
    
    
    557
    
    
    
    
    
    
    
    409Net sales
    
    
    9,900
    
    
    
    100.0
    
    
    
    7,881
    
    
    
    100.0Cost of sales
    
    
    8,396
    
    
    
    84.8
    
    
    
    6,494
    
    
    
    82.4Gross margin
    
    
    1,504
    
    
    
    15.2
    
    
    
    1,387
    
    
    
    17.6Selling, general and administrative expenses
    
    
    2,569
    
    
    
    25.9
    
    
    
    2,396
    
    
    
    30.4Operating loss
    
    
    (1,065
    )
    
    
    (10.8
    )
    
    
    (1,009
    )
    
    
    (12.8
    )Other (expense) income, net
    
    
    (64
    )
    
    
    (0.6
    )
    
    
    14
    
    
    
    0.2Loss before income taxes
    
    
    (1,129
    )
    
    
    (11.4
    )
    
    
    (995
    )
    
    
    (12.6
    )Benefit for income taxes
    
    
    (2
    )
    
    
    (0.0
    )
    
    
    (1
    )
    
    
    (0.0
    )Net loss
    
    $
    (1,131
    )
    
    
    (11.4
    )
    
    $
    (996
    )
    
    
    (12.6
    )Basic and diluted net loss per share
    
    $
    (0.13
    )
    
    
    
    
    
    $
    (0.12
    )Weighted average shares outstanding
    
    
    8,782,000
    
    
    
    
    
    
    
    8,599,000Operating data (in barrels):Beer barrels shipped
    
    
    37,000
    
    
    
    
    
    
    
    26,500Soda barrels shipped
    
    
    9,700
    
    
    
    
    
    
    
    8,100Total barrels shipped
    
    
    46,700
    
    
    
    
    
    
    
    34,600Annual production capacity
    
    
    334,000
    
    
    
    
    
    
    
    204,000
 14




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QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004 Gross Sales.Gross sales increased 26.1%, to $10,457,000, in the first quarter ended March
31, 2005 from $8,290,000 in the same quarter of 2004. Wholesale beverage sales increased 35.0%, to
$7,103,000, in the first quarter ended March 31, 2005 from $5,261,000 in the same quarter of 2004.
Total beverage barrel shipments increased 34.8% compared to prior year. Pyramid beer brand
shipments increased 4.3% to 27,000 barrels. Total beer shipments, including Allied beer and
MacTarnahans, increased by 39.6% to 37,000 barrels. Gross Beverage segment sales per barrel
increased slightly to $152.10 in the first quarter ended March 31, 2005 from $152.05 in the same
quarter of 2004. The increase in the per barrel sales in the result of a shift in package mix
between draft and bottled products from 50% bottled products in the first quarter of 2004 to 54%
bottled in the first quarter of 2005. The shift in package mix is the result of the addition of
the MacTarnahans family of brands and the growth of the Thomas Kemper Soda, both of which have a
higher bottle to draft mix ratio. Shipments of Thomas Kemper Soda increased by 20.0%, to 9,700
barrels, from 8,100 barrels in the same quarter of the prior year. All five sales regions increased
shipment volumes over the first quarter of 2004 with the Northwest and Southwest regions, the
Companys two largest, leading the way with 10.0% and 5.0% volume increases respectively. Alehouse
sales increased 10.7%, to $3,354,000, in the first quarter ended March 31, 2005 from $3,029,000 in
the same quarter of 2004 primarily due to the addition of the Portland Taproom, which was acquired
on July 31, 2004 and contributed $460,000 in revenues for the quarter. On a same store basis,
alehouse sales decreased $135,000 or 4.4% primarily due to decreased patronage at the Sacramento,
California Alehouse. Excise Taxes.Excise taxes totaled 7.8% and 7.7% of gross beverage sales for the quarters
ended March 31, 2005 and 2004, respectively. The increase in excise taxes as a percentage of gross
sales was due mainly to an increase in beer sales volumes. Per beer barrel shipped excise taxes
decreased slightly to $15.80 per beer barrel from $16.21 per barrel. This decrease is the result
of a greater portion of the beverage sales to less taxed states and states where distributors pay
the excise tax in the first quarter of 2005 compared to the first quarter of 2006. The Company
calculates a weighted average cost per barrel for the year based on the tax rates in order to
allocate excise tax costs throughout the year. Gross Margin. Gross margin increased 8.4%, or $117,000, to $1.5 million, driven primarily by
the 34.8% increase in Beverage segment sales. Beverage segment cost of goods sold as a percentage
of sales increased from 73.3% in the first quarter of 2004 to 76.1% in the first quarter of 2005,
while beverage segment gross margin dollars increased $268,000 to $1,564,000. Beverage segment
gross margin percentages decreased to 23.9% from 26.7% for the first quarter ended March 31, 2005.
The decrease in beverage margins as a percentage of sales is the result of consolidating
production operations from Seattle into the recently acquired Portland brewery, increasing freight
costs which added $170,000 in cost, a 27.2% increase compared to the same quarter in 2004 and an
increase in lower margin contract brewing production for third parties. Alehouse margin decreased
to a loss of $60,000 compared to an $11,000 loss in 2004. The increase in the alehouse segment
loss is the result of a focus on alehouse repairs and maintenance during the quarter ended March
31, 2005 in preparation for the higher volume spring and summer seasons as well as additional
promotional activities. Alehouse repair and maintenance costs and promotional activities
increased $30,000 and $36,000, respectively, over the same period in 2004. First Quarter Ended March 31,% of Div.
    
    
    
    
    
    
    % of Div.Gross Margin
    
    2005
    
    
    Net Sales
    
    
    2004
    
    
    Net Sales
    
    
    $ Change
    
    
    % ChangeBeverage Operations
    
    $
    1,564,000
    
    
    
    23.9
    %
    
    $
    1,296,000
    
    
    
    26.7
    %
    
    $
    268,000
    
    
    
    20.7
    %Alehouse Operations
    
    
    (60,000
    )
    
    
    0.9
    %
    
    
    91,000
    
    
    
    3.0
    %
    
    
    (151,000
    )
    
    
    -165.9
    %Total Operations
    
    $
    1,504,000
    
    
    
    15.2
    %
    
    $
    1,387,000
    
    
    
    17.6
    %
    
    $
    117,000
    
    
    
    8.4
    %
 Selling, General and Administrative Expenses. Selling, general and administrative expenses
for the first quarter increased $173,000 over the same period in 2004. The additional expense was
attributed to a $535,000 increase in selling and marketing expenses, related to additional
marketing of the MacTarnahan family of brands acquired in July 2004, as well as increased selling
efforts related to the acquired brands and growing the Pyramid brand family. Selling expenses for
the quarter ended March 31, 2005 totaled $1,319,000, 20.2% of net beverage segment sales, compared
to $948,000 and 19.5% of net beverage segment sales in the first quarter of 2004. General and
administrative expenses for the first quarter of 2004 included $260,000 related to the change of
the Companys CEO in the first quarter of 2004. The Company incurred no similar costs during the
first quarter of 2005. Other Income (Expense), net. Other income (expense), net decreased to an expense of $64,000 in
the first quarter of 2005 from a $14,000 income in the first quarter of 2004. The primary change
is interest expense associated with the Berkeley facility mortgage.
For the first quarter of 2005 interest expense increased to $133,000 compared to $1,000 in the first quarter of
2004 partially offset by sublease income of $54,000 recorded for the Berkeley facility during the
first quarter of 2005. Income Taxes. The Company recorded approximately $2,000 of income tax expense in the first
quarter of 2005 related to certain state tax expense. For the most part, however, the Company
recorded no income tax for the quarters ended March 31, 2005 and 2004. A valuation allowance was
recorded against the deferred tax asset for the benefits of tax losses which may not be realized.
Realization of the deferred tax assets is dependent on the Companys ability to generate future
U.S. taxable income. The Company does not believe that its net deferred assets meet the more
likely than not realization criteria of SFAS No. 109. Accordingly, a full valuation allowance has been 15




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established. The Company will continue to evaluate
the realizability of the deferred tax assets each quarter by assessing the need for and amount of a
valuation allowance. Net Loss. The Company reported a net loss of $1,130,000 for the first quarter ended March 31,
2005 compared to a net loss of $996,000 in the same quarter of 2004. The increase in net loss is
the result of increases in selling, general and administrative expenses as well as other expenses
as described above partially offset by improvements in gross margin. LIQUIDITY AND CAPITAL RESOURCES The Company had a zero balance of cash, cash equivalents and short-term investments at March
31, 2005 and at December 31, 2004. At March 31, 2005 the Companys working capital was a negative
$2,852,000 compared to a negative $2,167,000 at December 31, 2004. Net cash used in operating
activities for the quarter ended March 31, 2005 increased to $644,000 from $2,000 for quarter ended
March 31, 2004. The increase in cash used in operating activities was primarily due to the
$1,131,000 in net loss for the quarter offset by an increase in accounts payable in the quarter
when compared to the first quarter of 2004. The elimination of the quarterly dividend
also resulted in a $193,000 decrease in accrued dividends payable as of the quarter-end. Net cash used in investing activities for the quarter ended March 31, 2005 was $288,000
compared to net cash used in investing activities of $192,000 for the same period of the prior
year. The cash used in investing activities in 2005 included approximately $85,000 used to replace
and/or overhaul production equipment in the Portland Brewery and approximately $94,000 in various
Alehouse projects. At March 31, 2005, the Companys commitments to make future payments under contractual
obligations were as follows: Less Than 1
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    Year (2005)
    
    
    1 -3 years
    
    
    3 - 5 years
    
    
    5 yearsOperating leases
    
    $
    8,718,000
    
    
    $
    888,000
    
    
    $
    2,140,000
    
    
    $
    2,220,000
    
    
    $
    3,470,000Note payable (1)
    
    
    20,000
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Note payable (2)
    
    
    7,840,000
    
    
    
    73,000
    
    
    
    204,000
    
    
    
    228,000
    
    
    
    7,335,000
   (1)
    -
    The amounts are payments as stated in the non-interest bearing note. The
note payable was recorded using a 10% discount rate on the balance sheet.(2)
    -
    The amounts are principal only payments as
stated in the securitized financing arrangement for the
Berkeley facility purchase. On February 9, 2005, the Company announced that its Board of Directors had determined to cease
paying dividends 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. On December 15, 1999, the Company also announced a stock buyback plan to repurchase up to
$2,000,000 of the Companys common stock from time to time on the open market. Stock purchases are
at the discretion of management and 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 management may consider relevant. As of March 31, 2005, the Company has purchased and
retired a total of 457,724 shares at an average price of $1.94 per share for a total of $892,000
since the inception of the program. The Company has not repurchased any shares since November 2001. During the quarter ended March 31, 2005, the Companys working capital decreased $685,000 to a
negative $2,852,000. This decrease in working capital is the result of normal seasonality in its
operating divisions, as the first quarter of the year is historically the slowest for the Company,
as well as a result of the acquisition of the Portland Brewing Company assets and the addition of a
third underutilized brewing facility. The Companys operating activities used $644,000 in cash
during the quarter. This cash utilization was the result of the reported net operating loss and
also net cash used in investing activities of $288,000. The Companys investment activities were
primarily directed toward replacing and/or overhauling production equipment in the Portland
Brewery. The cash used in operating and investing activities were principally funded by $1,125,000
in additional borrowings on the Companys line of credit. As of March 31, 2005 the Companys
line of credit balance was $1,525,000 out of a maximum availability of $2,000,000. Management has announced several initiatives designed to improve operating results, increase
working capital, and enhance 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 16




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the changes being completed by mid-year. The impact of these changes are
expected to improve the Companys performance and to improve the Companys cash position in the
second half of the 2005. As
of March 31, 2005 the Company had no cash and a working capital deficit.
However, 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. Therefore, the Company generally does not require a
significant cash on hand balance to meet operating needs and management believes that the Company
has adequate liquidity to conduct its operations. The first quarter of the calendar year does tend to be the slowest season for the Company,
followed by a strong season during the second and third quarter. As a result of seasonality, cash
during the first quarter is needed to build inventory levels in preparation for second quarter
sales activities. The Company expects that the initiatives 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. Future capital requirements may vary depending on such factors as the cost of acquisition of
businesses, brands and real estate costs in the markets selected for future expansion, whether such
real estate is leased or purchased and the extent of improvements necessary. While there can be no
assurance that current expectations will be realized and plans are subject to change upon further
review, the Company believes that its cash from operations and, to the extent required and
available, bank borrowings, will be sufficient for the Companys working capital needs. Critical Accounting Policies To prepare financial statements that conform with accounting principles generally accepted in the
United States, we must select and apply accounting policies and make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We base our accounting estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form our basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. There are certain critical accounting estimates that we believe require significant judgment in the
preparation of our consolidated financial statements. We consider an accounting estimate to be
critical if:  
    it requires us to make assumptions because information was not available at the time
or it included matters that were highly uncertain at the time we were making the
estimate, and
    changes in the estimate or different estimates that we reasonably could have selected
would have had a material impact on our financial condition or results of operations. Our critical accounting policies are those that involve the most complex or subjective decisions or
assessments. The Company believes that its critical accounting policies and estimates include the
following: Long-Lived Assets Impairment.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. Realization of Deferred Tax Assets.The Company evaluates its ability to realize its deferred
tax assets quarterly by assessing the need for and amount of the valuation allowance. The
evaluation of the realizability of the deferred tax assets is based on existing deferred tax
liabilities and an assessment of the Companys ability to generate future U.S. taxable income.
Results of operations in recent years are considered in the assessment. The Company records a
valuation allowance for the portion of its deferred tax assets that do not meet the recognition
criteria of SFAS No. 109, Accounting for Income Taxes. If circumstances related to the Companys
ability to generate future U.S. taxable income change, the Companys evaluation of its ability to
realize its deferred tax assets could materially change. Stock-Based Compensation.The Company follows Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, in accounting for its employee stock options and
employee stock purchase plan using the fair value based method. Under APB 25, because the exercise
price of the Companys employee stock options equals the market price of the underlying stock on 17




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the date of grant, no compensation expense is recognized in the Companys Statements of Operations.
The Company is required under SFAS No. 123, Accounting for Stock-Based Compensation, to disclose
pro forma information regarding option grants made to its employees based on specific valuation
techniques that produce estimated compensation charges. The Black-Scholes option pricing model is
used by the Company in estimating the fair value of options. If the Company changes the accounting
for stock-based compensation, the Companys results of operations could materially change. 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 at the beginning of the reporting period of the next fiscal year. The Company intends to
implement the provisions of SFAS No. 123R in the first quarter 2006. Promotional Activities Accrual.Throughout the year, the Companys sales force engages in
promotional activities with the Companys distributor and retail customers. In connection with
financial statement preparation and other financial reporting, management is required to make
certain estimates and assumptions regarding the amount and timing of expenditures resulting from
these activities. Actual expenditures incurred could differ from managements estimates and
assumptions. If managements estimates and assumptions differ from the actual promotional
activities incurred a timing difference could result either understating or overstating the actual
promotional activity expense in a subsequent period. Because of the nature of promotional
activities and the historical trends used in management analysis, management does not consider the
potential timing differences to be a significant risk in the financial statement presentation. Allowance for Keg Deposits.The Company purchases kegs from vendors and records these assets
in property, plant and equipment. When the kegs are shipped to the distributors, a keg deposit is
collected. The deposit amount is based on, among other things, the size of the keg and the
destination point. This deposit is refunded to the distributors upon return of the kegs to the
Company. The keg deposit liability is recorded as a current liability. On a periodic basis,
typically annually, management is required to make certain estimates regarding the physical count
of kegs in the marketplace, estimated loss of kegs, expectations regarding keg returns and
assumptions that affect the reported amounts of keg deposit liabilities and keg assets in property,
plant and equipment at the date of the financial statements. Actual keg deposit liability could
differ from the estimates. For the first quarter ended March 31, 2005, the allowance for keg
deposits liability was approximately $584,000. RISK FACTORS AND FORWARD LOOKING STATEMENTS The Company does not provide forecasts of future financial performance. However this report
does contain forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, which are subject to the safe harbor created by that section. There are
numerous important factors that could cause results to differ materially from those anticipated by
some of the statements made by the Company. Investors are cautioned that all forward-looking
statements involve a high degree of risk and uncertainty. Liquidity.The Company has no cash, a negative working capital and a net cash used in
operating and investing activities for the quarter ended
March 31, 2005. In addition, the Company's
line of credit expires on December 31, 2005 and therefore must be paid in full at that time. At
March 31, 2005, the total borrowing on the line of credit was $1,525,000. Although the Company
expects the initiatives underway to drive additional sales and eliminate redundant costs, there is
no guarantee that the savings will be sufficient to meet the cash operating and investing needs as
the company as well as pay off the line of credit. Increasing Competition. The domestic market in which the Companys craft beers compete is
highly competitive for many reasons, including the continuing proliferation of new beers and brew
pubs, efforts by regional craft brewers to expand their distribution, the introduction of
fuller-flavored products by certain major national brewers, and underutilized craft brewing
capacity. The Company anticipates that intensifying competition from craft beer and imported beer
producers and excess capacity in the craft beer segment may adversely impact the Companys
operating margins. In addition, the larger national brewers have developed brands to compete
directly with craft beers. These national competitors have advantages such as lower production
costs, larger marketing budgets, greater financial and other resources and more developed and
extensive distribution networks than the Company. There can be no assurance that the Company will
be able to grow its volumes or be able to maintain its selling prices in existing markets or as it
enters new markets. Access to Markets.Most of the Companys independent distributors are also distributors of
national brewers, some of whom have used their greater influence and marketing resources to
persuade those distributors to exclude the products of other breweries from their portfolios. Such
actions by national brewers have the effect of reducing distribution options for the Companys
products. In addition, many independent distributors are moving towards consolidation to improve
profit margins. Although the Company has not yet been negatively impacted by such events, it is
possible that the Company could effectively be denied access to a market or markets by the tactics
of the national brewers and further consolidation of independent distributors. In the states that
comprise the majority of its sales, the Company
has the option to distribute its products directly to retailers and the Company has previous
experience in doing so. However, there is no assurance that self-distribution can be done in an
economic manner over large territories. 18




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Government Regulations. The Companys business is highly regulated at the federal, state and
local levels, and its brewery and restaurant operations require various licenses, permits and
approvals. The loss or revocation of any existing licenses, permits or approvals, or the failure to
obtain any additional licenses, permits or approvals in new jurisdictions where the Company intends
to do business could have a material adverse effect on the ability of the Company to conduct its
business. Further, federal regulations prohibit, among other things, the payment of slotting
allowances to retailers for beer products. These regulations have the effect of preventing
competitors with greater financial resources from excluding smaller brewers from retailers. If
these regulations were repealed or substantially modified, there would likely be a material adverse
effect on the Companys business and operating results. Selling Prices. The future selling prices the Company charges for its craft beer and other
specialty beverages may decrease from historical levels due to increasing competitive pressures.
The Company has and will continue to participate in price promotions with its wholesalers and their
retail customers. Management believes that the number and frequency of the Companys promotions may
increase during 2005. Variability of Margins and Operating Results. The Company anticipates that its operating
margins will fluctuate and may decline as a result of many factors, including (i) lower sales
volumes and selling prices, (ii) increased depreciation and other fixed and semi-fixed operating
costs as a percent of sales during periods when the Companys breweries are producing below
designed capacity, (iii) increased raw material and packaging costs, (iv) changes in product mix
and packaging, (v) increased transportation costs, (vi) increased sales from retail operations
which may have a lower gross margin (as a percentage of net sales) than beer sales, and (vii)
increased selling and promotional costs incurred as the Company protects its business in existing
markets. Increases in federal or state excise taxes and the impact of an increasing average federal
excise tax rate as production increases may also cause a decline in the Companys gross margins.
The Company pays federal excise taxes on all beer sales and pays state excise taxes on beer sales
occurring in various states at various tax rates. The federal excise tax is $7.00 per barrel on the
first 60,000 barrels and $18.00 per barrel exceeding 60,000 annually, as long as total annual sales
are less than two million barrels. The Washington state excise tax is $4.78 per barrel annually,
Oregon state excise tax is $2.60 per barrel annually and the California state excise tax is $6.20
per barrel annually. Acquisitions.The acquisition of existing brewery and or restaurant facilities may have
unanticipated consequences that could harm our business and financial condition. The Company may
seek to selectively acquire existing facilities which requires identification of suitable
acquisition candidates, negotiating acceptable acquisition terms and obtaining appropriate
financing. Any acquisition pursued may involve risks including material adverse effects on
operating results, costs of integrating the acquired business into the Company operations, risks
associated with entering into new markets, conducting operations where the Company has limited
experience or the diversion of managements attention from other business concerns. Future
acquisitions, which may be accomplished through a cash purchase transaction or the issuance of
equity securities, or a combination could result in potentially dilative issuances of securities,
the incurrence of debt and contingent liabilities and impairment charges related to goodwill and
other intangible assets, any of which could harm the business and financial condition. Results of operations in any period should not be considered indicative of the results to be
expected for future periods. Fluctuations in operating results may also result in fluctuations in
the price of the Companys common stock. In future quarters, the Companys operating results may
not meet the expectations of public market analysts or investors. In such an event, the market
price of the common stock could be materially adversely affected. 
 ITEM 3. 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, other than the bank line of credit which is tied to the prime rate, and the
Company does not enter into significant transactions denominated in foreign currency. Therefore,
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. The Company does, at times, maintain 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. 
 ITEM 4. Controls and Procedures Procedures Evaluation of disclosure controls and procedure The Company maintains a set of disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in its filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. The Companys Chief
Executive Officer and Chief Financial Officer have evaluated the Companys disclosure controls and
procedures as of the end of the period covered by this report and 19




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have concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Changes in internal controls There were no changes in the Companys internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 20




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PART II  OTHER INFORMATION 
 ITEM 6. EXHIBITS 10.17
    
    Promissory Note from Pyramid Gilman Street Property, LLC to Morgan Stanley Capital Inc. (1)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. (1)10.19
    
    Reserve and Security Agreement between Pyramid Gilman Street Property, LLC and Morgan
Stanley Mortgage Capital Inc. (1)10.20
    
    Guaranty of Recourse Obligations of Borrower from Pyramid Breweries, Inc. to Morgan
Stanley Mortgage Capital Inc. (1)10.24
    
    2005 Officer Incentive Compensation Plan Policy (1)*10.25
    
    Amendment No. 1 to Employment Agreement between Registrant and John Lennon (1)*31.1
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 , as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: John J. Lennon, Chief
Executive Officer31.2
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 , as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: James K. Hilger,
Vice-President and Chief Financial Officer31.3
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: 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 J. Lennon, 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(1)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for the
year ended December 31, 2004 filed March 31, 2005, as amended April 11, 2005 and May 4,
2005. Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted 21




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SIGNATURE Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PYRAMID BREWERIES INC.By:
    
    /s/ JOHN LENNONJohn Lennon, President and Chief Executive OfficerBy:
    
    /s/ JAMES K. HILGERJames K. Hilger, Vice-President and Chief Financial OfficerBy:
    
    /s/ JASON W. REESJason W. Rees, Controller and Chief Accounting Officer
 DATE: May 16, 2005 22