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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q  (Mark One)  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2004o
    
    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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 91 South Royal Brougham Way,
Seattle, WA 98134
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (206) 682-8322   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o. 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: 8,680,090 shares of Common
Stock outstanding as of March 31, 2004 1




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##### Table of Contents



PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 TABLE OF CONTENTS PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Balance Sheets March 31, 2004 and December 31, 2003
    
    
    3Statements of Operations Quarter Ended March 31, 2004 and 2003
    
    
    4Statements of Cash Flows Quarter Ended March 31, 2004 and 2003
    
    
    5Notes to Financial Statements
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    14PART II
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15SIGNATURE
    
    
    16EXHIBIT 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. 
 BALANCE SHEETS
(Unaudited) March 31,
    
    December 31,2004
    
    2003CURRENT ASSETS:Cash and cash equivalents
    
    $
    1,128,000
    
    
    $
    1,558,000Short term investments
    
    
    492,000
    
    
    
    492,000Accounts receivable, net
    
    
    1,570,000
    
    
    
    1,281,000Inventories
    
    
    1,771,000
    
    
    
    1,654,000Prepaid expenses and other
    
    
    598,000
    
    
    
    756,000Total current assets
    
    
    5,559,000
    
    
    
    5,741,000Note receivable related party
    
    
    79,000
    
    
    
    81,000Fixed assets, net
    
    
    20,949,000
    
    
    
    21,406,000Goodwill
    
    
    415,000
    
    
    
    415,000Other assets
    
    
    235,000
    
    
    
    141,000Total assets
    
    $
    27,237,000
    
    
    $
    27,784,000CURRENT LIABILITIES:Accounts payable
    
    $
    1,676,000
    
    
    $
    1,349,000Accrued expenses
    
    
    2,002,000
    
    
    
    1,562,000Refundable deposits
    
    
    464,000
    
    
    
    487,000Note payable-current
    
    
    20,000
    
    
    
    20,000Deferred rent  current
    
    
    199,000
    
    
    
    199,000Dividends payable
    
    
    382,000
    
    
    
    379,000Total current liabilities
    
    
    4,743,000
    
    
    
    3,996,000Note payable, net of current
    
    
    17,000
    
    
    
    16,000Deferred rent, net of current
    
    
    1,519,000
    
    
    
    1,569,000Total liabilities
    
    
    6,279,000
    
    
    
    5,581,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, 10,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000,000 shares authorized,
8,680,000 and 8,620,000 shares issued and outstanding
    
    
    87,000
    
    
    
    86,000Additional paid-in capital
    
    
    36,494,000
    
    
    
    36,374,000Note receivable  related party
    
    
    (763,000
    )
    
    
    (764,000
    )Deferred stock-based compensation
    
    
    (16,000
    )
    
    
    (27,000
    )Accumulated deficit
    
    
    (14,844,000
    )
    
    
    (13,466,000
    )Total stockholders equity
    
    
    20,958,000
    
    
    
    22,203,000Total liabilities and stockholders equity
    
    $
    27,237,000
    
    
    $
    27,784,000
 The accompanying notes are an integral part of these statements. 3




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PYRAMID BREWERIES INC. 
 STATEMENTS OF OPERATIONS
(Unaudited) Three Months Ended March 31,2004
    
    2003Gross sales
    
    $
    8,290,000
    
    
    $
    6,976,000Less excise taxes
    
    
    409,000
    
    
    
    353,000Net sales
    
    
    7,881,000
    
    
    
    6,623,000Cost of sales
    
    
    6,494,000
    
    
    
    5,468,000Gross margin
    
    
    1,387,000
    
    
    
    1,155,000Selling, general and administrative expenses
    
    
    2,396,000
    
    
    
    1,923,000Operating loss
    
    
    (1,009,000
    )
    
    
    (768,000
    )Other income, net
    
    
    14,000
    
    
    
    44,000Loss before income taxes
    
    
    (995,000
    )
    
    
    (724,000
    )Provision for income taxes
    
    
    (1,000
    )
    
    
    (1,000
    )Net loss
    
    $
    (996,000
    )
    
    $
    (725,000
    )Basic and diluted net loss per share
    
    $
    (0.12
    )
    
    $
    (0.09
    )Weighted average shares outstanding
    
    
    8,599,000
    
    
    
    8,417,000Cash dividend declared per share
    
    $
    0.044
    
    
    $
    0.044
 The accompanying notes are an integral part of these statements. 4




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PYRAMID BREWERIES INC. 
 STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended March 31,OPERATING ACTIVITIES:
    
    2004
    
    2003Net loss
    
    $
    (996,000
    )
    
    $
    (725,000
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    663,000
    
    
    
    555,000Stock-based compensation expense
    
    
    (10,000
    )
    
    
    4,000Interest expense
    
    
    1,000
    
    
    
    1,000Loss on sales of fixed assets
    
    
    10,000
    
    
    
    Deferred rent
    
    
    (50,000
    )
    
    
    (31,000
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (289,000
    )
    
    
    591,000Inventories
    
    
    (117,000
    )
    
    
    (181,000
    )Prepaid expenses and other
    
    
    42,000
    
    
    
    63,000Accounts payable and accrued expenses
    
    
    767,000
    
    
    
    (28,000
    )Refundable deposits
    
    
    (23,000
    )
    
    
    (32,000
    )Net cash provided by (used in) operating activities
    
    
    (2,000
    )
    
    
    217,000INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    
    
    
    
    (1,155,000
    )Proceeds from the sale and maturities of short-term
investments
    
    
    
    
    
    
    1,805,000Acquisitions of fixed assets
    
    
    (192,000
    )
    
    
    (766,000
    )Net cash used in investing activities
    
    
    (192,000
    )
    
    
    (116,000
    )FINANCING ACTIVITIES:Proceeds from the sale of common stock and option exercises
    
    
    141,000
    
    
    
    36,000Note receivable
    
    
    2,000
    
    
    
    7,000Cash dividends paid
    
    
    (379,000
    )
    
    
    (374,000
    )Net cash used in financing activities
    
    
    (236,000
    )
    
    
    (331,000
    )Decrease in cash and cash equivalents
    
    
    (430,000
    )
    
    
    (230,000
    )Cash and cash equivalents at beginning of period
    
    
    1,558,000
    
    
    
    596,000Cash and cash equivalents at end of period
    
    $
    1,128,000
    
    
    $
    366,000
 The accompanying notes are an integral part of these statements. 5




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PYRAMID BREWERIES INC. 
 NOTES TO FINANCIAL STATEMENTS
(Unaudited) 1. BASIS OF PRESENTATION: Pyramid Breweries Inc. (the Company), a Washington corporation, is
engaged in the brewing, marketing and selling of craft beers and premium sodas
and in restaurant operations. The Company operates breweries in Seattle,
Washington and in Berkeley, Walnut Creek and Sacramento, California. The
Company is also currently in the process of acquiring all the brewing and
restaurant assets of Portland Brewing Company located in Portland Oregon. The
Company sells its beer through a network of selected independent distributors
and alehouse locations primarily in Washington, Oregon and California under the
Pyramid and, to a lesser extent, the Thomas Kemper brand. The Company also
manufactures a line of gourmet sodas under the Thomas Kemper Soda Company
label. As of March 31, 2004, the Companys products were distributed in 32
states and Canada. The Company also operates four restaurants adjacent to its
breweries under the Pyramid Alehouse brand name. The accompanying condensed financial statements have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements contain
all material adjustments, consisting only of those of a normal recurring
nature, considered necessary for a fair presentation of the Companys financial
position, results of operations and cash flows at the dates and for the periods
presented. The operating results for the interim periods presented are not
necessarily indicative of the results expected for the full year. For a
presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2003,
included in the Annual Report on Form 10-K. Stock Based Compensation At March 31, 2004, the Company has stock-based compensation plans which
are described more fully in Note 15 of the 2003 Annual Report. The Company
accounts for those plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 Accounting for Stock-Based Compensation. Accordingly, no
compensation cost has been recognized for the fair value of options issued
under the Employee and Director Plans (the Plans) except as described in Note
4. Had compensation cost been recognized based on the fair value at the date of
grant for options awarded under the Plans, the pro forma amounts of the
Companys net loss and net loss per share for the quarters ended March 31, 2004
and 2003, would have been as follows: Three Months Ended March 31,2004
    
    2003Net income (loss) as reported
    
    $
    (996,000
    )
    
    $
    (725,000
    )Add: Stock-based compensation cost as reported
    
    
    (10,000
    )
    
    
    4,000Less: Stock-based compensation cost determined
under the fair value based method
    
    
    (37,000
    )
    
    
    (52,000
    )Net income (loss) pro forma
    
    $
    (1,043,000
    )
    
    $
    (773,000
    )Basic and diluted net loss per share as reported
    
    $
    (0.12
    )
    
    $
    (0.09
    )Basic and diluted net loss per share pro forma
    
    $
    (0.12
    )
    
    $
    (0.09
    )
 There were no options granted in the first quarter of 2004 and 2003. 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. 6




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2. INVENTORIES: March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    771,000
    
    
    $
    664,000Work in process
    
    
    146,000
    
    
    
    155,000Finished goods
    
    
    854,000
    
    
    
    835,000$
    1,771,000
    
    
    $
    1,654,000
 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. 3. FIXED ASSETS: March 31,
    
    December 31,2004
    
    2003Brewery and retail equipment
    
    $
    16,553,000
    
    
    $
    16,402,000Furniture and fixtures
    
    
    975,000
    
    
    
    952,000Leasehold improvements
    
    
    17,596,000
    
    
    
    17,587,000Construction in progress
    
    
    85,000
    
    
    
    101,00035,209,000
    
    
    
    35,042,000Less: accumulated depreciation
and amortization
    
    
    (14,260,000
    )
    
    
    (13,636,000
    )$
    20,949,000
    
    
    $
    21,406,000
 On March 25, 2004 the Company announced it had entered into an
agreement to purchase the Berkeley Brewery and Alehouse facility located
at 901 Gilman Street, Berkeley, California 94710 (the Property). Per
the purchase agreement, Pyramid Breweries Inc. will acquire the Property
for $7,000,000, payable at the close of escrow. The Company expects to
allocate the purchase price, net of the related deferred rent liability,
between land and building based on market rates, the Companys existing
investment in the building, and recent local area facility sales. The
Company will also reclassify current balance items such as leasehold
improvements to the building asset account. 4. NOTES RECEIVABLE RELATED PARTY In June 2001, the Company issued a $787,000 full recourse note to the
Companys Chief Executive Officer (CEO) in connection with for the exercise of
options for 387,400 shares of the Companys common stock. In addition, the
Company issued a $115,000 full recourse note to the CEO to fund his payment of
taxes on the exercise of the options. The notes are due on the earlier of June
30, 2011 or upon the sale of the stock and bear an annual interest rate of
5.6%. A total of 135,100 of those shares were unrestricted, except for being
pledged as collateral for the notes, and the remaining 252,300 shares become
unrestricted by December 2004. During the quarters ended March 31, 2004 and
2003, the Company recorded a benefit of $10,000 and $2,000 in compensation
expense, respectively, in connection with this equity-based compensation
arrangement, which is included in selling, general and administrative expenses. On February 26, 2004 the Company announced that Martin Kelly was stepping
down as Chairman and Chief Executive Officer. Mr. Kellys last official day was
March 10th, 2004. Per an agreement 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 with the balance
of $365,000 was paid to Mr. Kelly. 7




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5. ACCRUED EXPENSES Accrued expenses consist of the following: March 31,
    
    December 31,2004
    
    2003Salaries, wages and related accruals
    
    $
    923,000
    
    
    $
    529,000Barrel taxes
    
    
    223,000
    
    
    
    100,000Other accruals
    
    
    856,000
    
    
    
    933,000$
    2,002,000
    
    
    $
    1,562,000
 6. OTHER INCOME, NET Other Income, net consists of interest income and parking fee income, and
other non-operating income and expenses as follows: Three Months Ended March 31,2004
    
    2003Interest income
    
    $
    6,000
    
    
    $
    25,000Interest expense
    
    
    (1,000
    )
    
    
    (1,000
    )Parking income
    
    
    6,000
    
    
    
    8,000Loss on sale of assets
    
    
    (10,000
    )
    
    
    Other income (expense)
    
    
    13,000
    
    
    
    12,000Other income, net
    
    $
    14,000
    
    
    $
    44,000
 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,
excluding shares subject to repurchase. 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 628,000 and 794,000 shares of
common stock were outstanding as of March 31, 2004 and 2003, respectively, but
were not included in the computation of EPS because their effects are
anitdilutive. Three Months Ended March 31,2004
    
    2003Net loss
    
    $
    (996,000
    )
    
    $
    (725,000
    )Shares:Weighted average shares outstanding
    
    
    8,649,000
    
    
    
    8,517,000Shares subject to repurchase
    
    
    (50,000
    )
    
    
    (100,000
    )Weighted average shares outstanding
    
    
    8,599,000
    
    
    
    8,417,000Basic earnings per share
    
    $
    (0.12
    )
    
    $
    (0.09
    )
 8. 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. On
January 26, 2004, the Company and Portland Brewing Company, an
Oregon corporation, announced that they had entered into an asset purchase agreement.
Per the asset purchase agreement, Pyramid Breweries Inc. will acquire
Portland Brewing Companys brewery and alehouse assets for total consideration of
approximately $4.2 million, consisting of a combination of assumed liabilities,
cash and, at the Companys sole option, shares of the
Companys unregistered 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. The transaction is expected to close in
the second quarter. 9. CASH DIVIDENDS: The Board of Directors announced on March 5, 2004, the declaration of a
$0.044 per common share dividend payable on April 16, 2004 to shareholders of
record on March 31, 2004. The Board of Directors also announced, on April 28,
2004, the declaration of a $0.022 per common share dividend payable on July 16,
2004 to shareholders of record on June 30, 2004. The April 28th, 2004 dividend
declaration represents a decision the Board of Directors made to reduce the
dividend by 50%. The cash dividends declared in the first quarter of 2003 and 2004
totaled approximately $382,000 for all common stock outstanding as of each
record date. Although the Company has declared and paid a dividend every quarter since
the fourth quarter of 1999, continued 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 and in the
best long term interest of the shareholders. 8




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10. 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, Thomas Kemper beers and Thomas Kemper Soda Company products. The
alehouse segment consists of four 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 Annual Report on Form 10-K. The
Company evaluates performance based on profit or loss from operations before
income taxes and also considers nonrecurring gains and losses. The Company
records intersegment sales at cost. Segment profit and segment assets are as follows: BeverageOperations
    
    Alehouse
    
    Other
    
    Total(Dollars in thousands)Quarter 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
    
    
    
    27,237Quarter ended March 31, 2003Gross revenues from external customers
    
    $
    4,622
    
    
    $
    2,354
    
    
    $
    
    
    
    $
    6,976Net revenues from external customers
    
    
    4,269
    
    
    
    2,354
    
    
    
    
    
    
    
    6,623Intersegment revenues
    
    
    73
    
    
    
    
    
    
    
    (73
    )
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    25Depreciation and amortization
    
    
    388
    
    
    
    114
    
    
    
    53
    
    
    
    555Operating (loss) income
    
    
    (58
    )
    
    
    116
    
    
    
    (826
    )
    
    
    (768
    )Capital expenditures
    
    
    248
    
    
    
    487
    
    
    
    31
    
    
    
    766Total assets
    
    
    18,546
    
    
    
    5,249
    
    
    
    4,355
    
    
    
    28,150
 Other 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. 9




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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,% of
    
    
    
    
    
    % of2004
    
    Net Sales
    
    2003
    
    Net SalesGross sales
    
    $
    8,290,000
    
    
    
    
    
    
    $
    6,976,000Less excise taxes
    
    
    409,000
    
    
    
    
    
    
    
    353,000Net sales
    
    
    7,881,000
    
    
    
    100.0
    
    
    
    6,623,000
    
    
    
    100.0Cost of sales
    
    
    6,494,000
    
    
    
    82.4
    
    
    
    5,468,000
    
    
    
    82.6Gross margin
    
    
    1,387,000
    
    
    
    17.6
    
    
    
    1,155,000
    
    
    
    17.4Selling, general and administrative expenses
    
    
    2,396,000
    
    
    
    30.4
    
    
    
    1,923,000
    
    
    
    29.0Operating loss
    
    
    (1,009,000
    )
    
    
    (12.8
    )
    
    
    (768,000
    )
    
    
    (11.6
    )Other income, net
    
    
    14,000
    
    
    
    0.2
    
    
    
    44,000
    
    
    
    0.7Loss before income taxes
    
    
    (995,000
    )
    
    
    (12.6
    )
    
    
    (724,000
    )
    
    
    (10.9
    )Benefit for income taxes
    
    
    (1,000
    )
    
    
    (0.0
    )
    
    
    (1,000
    )
    
    
    (0.0
    )Net loss
    
    $
    (996,000
    )
    
    
    (12.6
    )
    
    $
    (725,000
    )
    
    
    (10.9
    )Basic and diluted net loss per share
    
    $
    (0.12
    )
    
    
    
    
    
    $
    (0.09
    )Weighted average shares outstanding
    
    
    8,599,000
    
    
    
    
    
    
    
    8,417,000Operating data (in barrels):Beer barrels shipped
    
    
    27,000
    
    
    
    
    
    
    
    23,000Soda barrels shipped
    
    
    8,000
    
    
    
    
    
    
    
    7,000Total barrels shipped
    
    
    35,000
    
    
    
    
    
    
    
    30,000Annual production capacity
    
    
    204,000
    
    
    
    
    
    
    
    203,000
 10




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##### Table of Contents



QUARTER ENDED MARCH 31, 2004 COMPARED TO QUARTER ENDED MARCH 31, 2003 Gross Sales.Gross sales increased 18.8% to $8,290,000 in the first
quarter ended March 31, 2004 from $6,976,000 in the same quarter of 2003.
Wholesale beverage sales increased 13.6% to $5,261,000 in the first quarter
ended March 31, 2004 from $4,622,000 in the same quarter of 2003. Total
beverage barrel shipments increased 14.2% compared to prior year. Pyramid beer
brand shipments increased 15.2% to 26,000 barrels. Total beer shipments,
including Thomas Kemper beer, increased by 15.5% to 27,000 barrels. Shipments
of Thomas Kemper Soda increased by 11.2% to 8,000 barrels from 7,000 barrels in
the same quarter of the prior year. All five sales regions increased shipment
volumes over the first quarter of 2003 with the Northwest and Southwest
regions, the Companies two largest, leading the way with 16.2% and 14.0% volume
increases respectively. Pyramid Hefeweizen, the Companys top selling product,
was up 13.2% in shipment volumes for the quarter. Alehouse sales increased
28.7%, to $3,029,000 in the first quarter ended March 31, 2004, from $2,354,000
in the same quarter of 2003 due to the addition of the Sacramento Alehouse,
which opened in July 2003, contributing $724,000 in revenues for the quarter.
On a same store basis, alehouse sales decreased $49,000 or 2.1% due to
decreased patronage at the Walnut Creek, California Alehouse which has been
negatively impacted by a high competition in the downtown Walnut Creek area. Excise Taxes.Excise taxes totaled 7.8% and 7.6% of gross beverage sales
for the quarters ended March 31, 2004 and 2003, respectively. The increase in
excise taxes as a percentage of gross sales was due mainly to a greater portion
of beer sales. Per beer barrel shipped excise taxes increased slightly to
$15.41 per beer barrel from $15.35 per barrel. This slight increase is the
result of the Company attaining increased shipment volumes over the 60,000
barrel threshold for the year resulting in incremental beer volume being taxed
at an $18 per barrel rate versus a $7 per barrel rate on production below
60,000 barrels. 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 $232,000 to $1,387,000, and as a
percentage of net sales increased slightly to 17.6% in the first quarter ended
March 31, 2004. The increase in gross margin was driven by the beverage
division which benefited from better capacity utilization (higher sales
volumes) and material loss improvements resulting from capital projects
completed in late 2003. The improved beverage segment gross margin was offset
by a reduction in the alehouse gross margin. The decrease in alehouse gross
margin was the result of lower same store sales and an increase in alehouse
administration costs. First Quarter Ended March 31,% of Div.
    
    
    
    
    
    % of Div.Gross Margin
    
    2004
    
    Net Sales
    
    2003
    
    Net Sales
    
    $ Change
    
    % ChangeBeverage Operations
    
    $
    1,296,000
    
    
    
    26.7
    %
    
    $
    986,000
    
    
    
    23.1
    %
    
    $
    310,000
    
    
    
    31.4
    %Alehouse Operations
    
    
    91,000
    
    
    
    3.0
    %
    
    
    169,000
    
    
    
    7.2
    %
    
    
    (78,000
    )
    
    
    -46.2
    %Total Operations
    
    $
    1,387,000
    
    
    
    17.6
    %
    
    $
    1,155,000
    
    
    
    17.4
    %
    
    $
    232,000
    
    
    
    20.1
    %
 Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $473,000 or 24.6% to $2,396,000 or 30.4% of
net sales for the first quarter ended March 31, 2004 from $1,923,000 or 29.0%
of net sales for the same quarter of 2003. This increase as a percentage of net
sales was due to CEO severance and recruitment costs of $324,000, additional
incentive costs of $58,000, and driven by one time benefits received in 2003
regarding the receipt of an Washington State sales and use tax refund in the
amount of $99,000 net of expenses, received during the first quarter of 2003
and recorded as a reduction to expenses. Other Income, net. Other income, net decreased to $14,000 in the first
quarter of 2004 from $44,000 in 2003, or a 68.2% decrease. Both lower
investment balances and lower rates of interest earned on cash equivalents and
short-term investments caused the decline in interest income. Interest income
was $6,000 and $25,000 for the quarters ended March 31, 2004 and 2003,
respectively. Loss on the disposal of fixed assets in the amount of $10,000 was
recorded during the first quarter of 2004 related to brewery production
equipment that was replaced. Income Taxes. The Company recorded approximately $1,000 of income tax
expense in the first quarter related to certain state tax expense. For the most
part, however, the Company recorded no income tax for the quarters ended March
31, 2004 and 2003. 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 established. The Company will
continue to evaluate the realizability of the deferred tax assets quarterly by
assessing the need for and amount of a valuation allowance. Net Loss. The Company reported a net loss of $996,000 for the first
quarter ended March 31, 2004 compared to a net loss of $725,000 in the same
quarter of 2003. 11




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Other.In January 2004, the Company announced an agreement to purchase
substantially all the assets of Portland Brewery Company in exchange for cash,
the assumption of certain liabilities, and at Pyramids sole option, common
stock. The transaction, which is subject to regulatory review and other
customary conditions is expected to be finalized around the middle of 2004. On March 25, 2004, the Company announced it had entered into an agreement
to purchase the Berkeley Brewery and Alehouse facility located at 901 Gilman
Street, Berkeley, California 94710 (the Property). Per the purchase
agreement, Pyramid Breweries Inc. will acquire the Property for $7,000,000,
payable at the close of escrow within 120 days. The Company expects to finance
the entire purchase price of the Property by obtaining a secured loan on the
Property at competitive market rates. The financing of the purchase is
expected to result in an annual net benefit to the Companys cash flows. Based
on current market interest rates, the Company expects that annual mortgage
payments related to the purchase of the Property will be less than the annual
rental payments the Company currently pays under its lease for the Property.
The annual benefit will be dependent upon the prevailing market rates and terms
for mortgage financing that the Company is able to secure. On April 28, 2004, the Company announced its Board of Directors has
declared a quarterly cash dividend of $0.022 per common share, payable on July
16, 2004 to shareholders of record on June 30, 2004. This represents the
nineteenth consecutive quarter of dividend declarations made by the Company.
The Board of Directors made the decision to reduce the dividend by 50% due to
the strategic shift of the Company with an increased focus on growth. During
the past two years the Company spent $3.5 million on new alehouse construction,
is currently in the process to purchase the assets of Portland Brewing Company
and has reached an agreement to purchase the Berkeley Brewery and Alehouse
facility. The strategic shift to a strategy of growth requires the Company to
position itself to take advantage of future opportunities as they come
available. The additional capital made available to the Company will assist in
achieving the strategy of continued growth. LIQUIDITY AND CAPITAL RESOURCES The Company had $1,620,000 of cash, cash equivalents and short-term
investments at March 31, 2004 compared to $2,050,000 at December 2003. At March
31, 2004, the Company had working capital of $816,000 compared to $1,745,000 at
December 31, 2003. The $929,000 decrease in working capital is a result of flat
operating cash for the quarter, $192,000 of capital spending related to various
brewery and alehouse projects, and $379,000 paid out in cash dividends, offset
by other various current asset and liability changes. Net cash used in operating activities during the first quarter ended March
31, 2004 was $2,000, compared to net cash provided by operating activities of
$217,000 for the same period of the prior year. The relatively flat net cash
used in operating activities was due primarily to the increase in accounts
receivable and inventory resulting from the increased production and trade
sales and related receivables between the fourth quarter of 2003 and the first
quarter of 2004 offset by the increases in accounts payable and accrued
expenses related to CEO transition costs and other various costs. Net cash used
in investing activities for the quarter ended March 31, 2004 was $192,000
compared to net cash used in investing activities of $116,000 for the same
period of the prior year. The cash used in investing activities in 2004
included approximately $72,000 used to replace and/or overhaul production
equipment in the Berkeley Brewery and approximately $91,000 in computer
hardware to replace outdated alehouse systems and update corporate software and
hardware requirements. At March 31, 2004, the Companys commitments to make future payments under
contractual obligations were as follows: Less Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    1 -3 years
    
    3 - 5 years
    
    5 yearsOperating leases (1)
    
    $
    8,718,000
    
    
    $
    888,000
    
    
    $
    2,140,000
    
    
    $
    2,220,000
    
    
    $
    3,470,000Operating leases (2)
    
    
    4,467,000
    
    
    
    456,000
    
    
    
    916,000
    
    
    
    922,000
    
    
    
    2,173,000Note payable (3)
    
    
    60,000
    
    
    
    20,000
    
    
    
    40,000
    
    
    
    
    
    
    
    
  (1)-
    
    The amounts include the current lease obligations associated with the
Berkeley facility. On March 25th the Company announced it had entered into an
agreement to purchase this facility for $7,000,000.(2)-
    
    Amounts excluding both the current lease obligations for the Berkeley facility and the
anticipated term loan payments associated with the purchase of the Berkeley facility.(3)-
    
    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. On December 15, 1999, the Company announced its first regular quarterly
cash dividend and has declared and paid a quarterly cash dividend each
consecutive quarter since the initial declaration. During the quarter ended
March 31, 2004 the Company declared per share dividends of $0.044 and paid out
$379,000 in cash dividends. During the second quarter the Board of Directors
made the decision to reduce the dividend by 50% due to the strategic shift of
the Company with an increased focus on growth. Although the Company has
declared and paid a dividend every quarter since the fourth quarter of 1999,
continued 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 and in the best long term interest of the
shareholders. 12




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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, 2004, 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. On January 26, 2004 the Company and Portland Brewing Company, an Oregon
corporation, announced that they had entered into an asset purchase agreement.
Per the asset purchase agreement, Pyramid Breweries Inc. will acquire Portland
Brewing Companys brewery and alehouse assets for total consideration of
approximately $4.2 million, consisting of a combination of assumed liabilities,
cash and, at the Companys sole option, shares of the Companys unregistered
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. On February 26, 2004, the Company announced that Martin Kelly is stepping
down as Chairman and Chief Executive Officer. In connection with Mr. Kellys
termination, there are amounts due to him related to salary continuation
payments under his employment agreement. Additionally, Mr. Kelly has the right
to sell his shares of Company stock back to the Company, which would result in
acceleration of repayment of the notes due to the Company related to his
original purchase of those shares. The net cash impact of Mr. Kelly selling
his shares to the Company was a function of the then current market price of
the Companys stock, reduced by the balance of the notes outstanding at that
time. On April 9, 2004 Mr. Kelly exercised his right requiring the Company to
repurchase his shares at the average market price of $3.18 per share. The
proceeds from the purchase will be used to reduce Mr. Kellys notes payable to
the company in the amount of $843,000, payoff interest balances owed on the
notes in the amount of $25,000 with net proceeds of $365,000 made payable to
Mr. Kelly. On March 25, 2004 the Company announced it had entered into an
agreement to purchase the Berkeley Brewery and Alehouse facility located
at 901 Gilman Street, Berkeley, California 94710 (the Property). Per
the purchase agreement, Pyramid Breweries Inc. will acquire the Property
for $7,000,000, payable at the close of escrow within 120 days. The
Company expects to finance the entire purchase price of the Property by
obtaining a secured loan on the Property at competitive market rates.
The financing of the purchase is expected to result in an annual net
benefit to the Companys cash flows. Based on current market interest
rates, the Company expects that annual mortgage payments related to the
purchase of the Property will be less than the annual rental payments
the Company currently pays under its lease for the Property. The annual
benefit will be dependent upon the prevailing market rates and terms for
mortgage financing that the Company is able to secure. The Company believes that during the first half of 2004, there is the
potential that the acquisition of Portland Brewing Company, the acquisition of
the Berkeley facility, the payments related to the termination of the former
CEO, and the ongoing operational needs of the Company may exceed its current
level of available working capital. If required, the Company intends to seek a
line of credit from a financial institution to meet these additional working
capital needs. While the Company is confident in its ability to obtain the
necessary financing, there can be no assurance that such financing will be
available, or that it will be available at commercially acceptable terms to the
Company. Future capital requirements may vary depending on such factors as the cost
of acquiring 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. Planned projects include the purchase of the
Berkley Brewery and Alehouse facility, the purchase of the Portland Brewing
Company assets and the upgrading of brewing equipment and alehouse facilities
in the Seattle, Berkeley and Walnut Creek locations. 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 balances,
together with 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 The Company believes that its critical accounting policies 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 13




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##### Table of Contents



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 the
realizability of 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 more likely than not 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 the realizability of 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 the date of grant, no compensation expense is recognized in the
Companys Statements of Operations, except for variable plans. 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. RISK FACTORS AND FORWARD LOOKING STATEMENTS The Company does not provide forecasts of future financial performance.
However, this report contains forward looking statements: discussions of a
number of matters and subject areas that are not historical or current facts
but that address potential future circumstances, operations, and prospects.
These forward-looking statements are subject to the safe harbor created by
Section 21E of the Securities Exchange Act of 1934, are qualified by the
inherent risks and uncertainties surrounding future expectations generally and
may differ materially from the Companys actual future experience as a result
of such factors as: the effects of increased competition from regional craft
brewers and major breweries, the Companys ability to gain and continue access
to the markets through independent distributors and chain stores, the effects
of governmental regulation and the Companys ability to obtain and maintain
necessary permits, licenses and approvals, the Companys ability to maintain or
increase the price of its products without decreasing demand and the Companys
ability to maintain or increase operating margins which may decline as a result
of lower sales volumes or selling prices and increased production,
transportation and promotions costs. Investors are cautioned that all
forward-looking statements involve a high degree of risk and uncertainty.
Additional information concerning those and other factors is contained in the
Companys Securities and Exchange Commission filings including its Form 10-K
for the year ended December 31, 2003. 
 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 and 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 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. Based on their evaluation as of March 31, 2004, the Companys Chief Executive Officer and Chief Financial Officer
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. 14




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##### Table of Contents



Changes in internal controls There were no changes in the Companys internal control over financial
reporting in connection with this evaluation that has materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting. 
 PART II  OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS The following exhibits are filed as part of this report.  3.1*
    
    Amended and Restated Articles of Incorporation3.2*
    
    Amended and Restated Bylaws31.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002: R. George Hancock, Interim Chief Executive Officer31.2
    
    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: George Hancock,
Interim Chief Executive Officer.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002: 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*
    
    Incorporated by reference to the exhibits filed as part of the
Companys Registration Statement on Form S-1 (File No. 33-97834). (B) REPORTS ON FORM 8-K Reports on Form 8-K were furnished during the quarter ended March 31, 2004
on January 28, February 5 and March 30, 2004. Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted 15




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SIGNATURE Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Seattle, State of Washington, on May 15, 2004. PYRAMID BREWERIES INC.By:
    /s/ GEORGE HANCOCKGeorge Hancock, Interim 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 OfficerDATE:  May 15, 2004 16