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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-27116

Pyramid Breweries Inc.

91 So. Royal Brougham Way,

Registrant’s telephone number, including area code: (206) 682-8322

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

      The aggregate market value of the voting stock held by non-affiliates of the registrant at February 19, 2002, was $19,188,592.

      The number of shares outstanding of the registrant’s common stock as of February 19, 2002, was 8,306,750.

      Portions of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 2, 2002 are incorporated by reference into Part III of this Form 10-K.

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PYRAMID BREWERIES INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001

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PART I

Item 1 — Business

      Pyramid Breweries Inc. (the Company) is one of the leading brewers of fresh, full-flavored specialty beers, generally known as craft beers. The Company produces and markets over 20 styles of beer under the Pyramid and Thomas Kemper brand names. In 1997, Pyramid added a line of hand crafted sodas, including root beer and other premium flavors, to its business when it acquired the Thomas Kemper Soda Company. The Company also operates restaurants adjacent to its breweries, under the Pyramid Alehouse brand name.

      The Company’s breweries produce high quality, full-flavored beers in small batches using traditional brewing methods. The Company also produces old-fashioned, full-flavored, hand crafted sodas. The Company’s two breweries, one in Seattle, Washington (Seattle Brewery) and one in Berkeley, California (Berkeley Brewery), had an estimated total annual beer production capacity of 200,000 barrels as of the end of 2001. The Seattle Brewery opened in March 1995 with an initial estimated annual beer capacity of 92,000 barrels. During 2000, ten fermenting vessels were moved from Seattle to the Berkeley Brewery which reduced the Seattle Brewery annual beer production capacity to 50,000 barrels. The Berkeley Brewery was completed in February 1997 with an initial estimated annual beer production capacity of 80,000 barrels and was expanded during 2000 to a total beer capacity of 150,000 barrels. The primary beer production capacity limitation is fermentation capacity. This limitation does not apply to soda production. The Company believes that the breweries and adjacent alehouses provide increased consumer awareness and loyalty for the Company’s brands by increasing opportunities for sampling and local product promotion.

      The Company’s Pyramid and Thomas Kemper beer brands compete primarily in the craft beer category, and secondarily in the larger “specialty” category (which includes craft beers, imports and super premium beers). Craft beers are a small segment of the estimated $50 billion dollar brewing industry. Craft beers are distinguishable from mass-produced beers by their wide range of fuller flavors and adherence to traditional European styles and ingredients. Industry experts estimate that total beer shipments, including imports, increased 1% in 2000, while craft beer shipments, which comprise approximately 3% of the total, were estimated to have increased by 3-5%.

      The Company has been successful in marketing a full line of flavorful ales and lagers. Under the Pyramid brand, Pyramid Hefeweizen, Pyramid Apricot Ale and Pyramid Snowcap are the Company’s best selling beer styles. Thomas Kemper Weizenberry is currently the Company’s best selling beer within the Thomas Kemper brand.

      Craft beers generally sell for retail prices ranging from $5.99 to $7.99 per six pack. Retail prices are set independently by distributors and retailers. The Company’s retail prices are usually at the high end of this range. Increased consumer demand for high quality, full-flavored beers allows for a price premium relative to mass-produced domestic beers. This price premium results in higher profit margins, which can motivate distributors and retailers to offer and promote craft beers. The Company’s craft beers are sold primarily in Washington, Oregon and California, which accounted for approximately 84% of the Company’s 2001 beer sales.

      The Company participates in the craft soda category with a line of old-fashioned, hand crafted sodas sold under the Thomas Kemper Soda Company label. Thomas Kemper Soda Company’s premium soft drinks include root beer, cream soda, orange cream soda and black cherry soda. During March 2001, the Company introduced two new flavors, grape and ginger ale, to the Thomas Kemper Soda Company portfolio. The Company distributes its soda products in supermarkets, independent food stores, convenience stores and restaurants. Craft sodas typically sell for $3.99 to $5.49 per six pack, with prices being set independently by distributors and retailers. The prices for craft sodas are substantially higher than the mass-produced brands, due to their flavor profile, unique and upscale packaging and flavors, and strong consumer demand.

      The Company currently operates restaurants adjacent to its Seattle and Berkeley breweries. The restaurants are operated under the Pyramid Alehouse brand name. In 2001, the restaurants contributed sales of $8,456,000 including approximately $2,600,000 in the Company’s beers and sodas and $150,000 in branded

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      The Company’s beverage operations contributed 72% of net sales in 2001, with beer comprising 53% and soda 19%. Alehouse operations contributed 28% of net sales in 2001.

Business Strategy

      The Company has developed a balanced internal and external growth strategy which includes growing the Company’s beverage portfolio in its core western markets; expanding the Alehouse division through the development of new properties and new acquisitions; and continuing to improve the Company’s cost structure. Key elements of the Company’s strategy are: (i) building a strong portfolio of craft beer brands, (ii) increasing the focus on the craft soda business, (iii) building brand awareness and sales through company-owned restaurants, and (iv) maintaining a direct store delivery (DSD) distribution system.

      The Company is committed to producing a portfolio of high quality craft beers to appeal to a variety of discerning consumer tastes. The Company currently markets over 20 styles of beer under the Pyramid and Thomas Kemper brands. The Pyramid brand accounted for 95% of the Company’s beer sales and 72% of the Company’s beverage sales in 2001. The Company continues to seek opportunities to develop or acquire other distinctive regional brands, which may help broaden the Company’s product portfolio and strengthen the Company’s presence geographically. The wide range of styles enables the Company to obtain better market penetration through greater shelf space for its packaged products in retail stores and additional tap handles in draft beer outlets.

      The Company brews its beers and specialty beverages in company-operated breweries providing direct control of the entire production process from purchase of ingredients to packaging and shipment. The proximity of the Company’s breweries to its key West Coast markets helps optimize product freshness, reduces freight costs and minimizes the inventory of kegs required to service draft accounts.

      The Company focuses on local sales and marketing strategies to build its brands. It uses targeted advertising and promotions, event marketing, sponsorships, local fairs and festivals and targeted charitable donations of its products to assist in developing its market presence. The Company also has an award-winning website and an active public relations program. The Company does not compete directly with the national brands in terms of mass-media advertising.

      The Company acquired the Thomas Kemper Soda Company in 1997. Since that time, the brand has added significant revenues to the Company. The soda business represented 24% of beverage sales in 2001, and 19% of total net sales. During March 2001, the Company introduced two new flavors, grape and ginger ale, to the Thomas Kemper Soda portfolio. The craft soda category possesses many characteristics that are similar to the craft beer category, and the Company believes it can leverage its experience and existing infrastructure to further develop the Thomas Kemper Soda brands. The Company will also seek opportunities to expand the craft soda portfolio within its core western markets.

      The Company’s breweries and restaurants are focal points for marketing, creating brand awareness, and generating sampling opportunities for the Company’s products. Initially, the breweries provided the attraction to introduce consumers to the Company’s craft products. However, the restaurants have now become popular and a significant source of revenues.

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      In addition to providing sampling and educational opportunities to Alehouse customers, the Company’s breweries and restaurants are extensively used to entertain the beverage trade and build relationships with distributors. The breweries’ and restaurants’ highly knowledgeable employees are an important source of education and training for the Company’s distributors and retailers.

      The Company intends to further develop the Alehouse concept via new developments or acquisitions of existing brewpubs. These sites would not be full-scale production breweries, but rather would produce beer for local consumption and sales. Experience has shown that the “local status” of a brand is an important determinant of success, and also provides clear differentiation versus other specialty beers.

      The Company distributes its products through a network of selected independent distributors who deliver directly to local grocery stores, convenience stores, restaurants and taverns. The Company feels that this type of distribution system is best suited for developing local distribution of Company products, particularly in draft beer accounts, where there are important sampling and brand building opportunities. The Company has not aligned itself with the distribution system of a single larger brewer. This approach allows the Company to select distributors in each market that it believes will focus the greatest attention on its products and best promote its high quality craft beers and sodas. Additionally, the ability to change distribution arrangements for performance related issues is an important advantage. During 2001, the Company distributed its products through 155 wholesalers in 32 states and Canada.

Products

      The Company produces over 20 authentic, full-flavored, European beer styles using traditional ingredients and brewing methods. Eight of these styles are available on a seasonal basis, and others are available only in certain geographic areas in accordance with the Company’s regional marketing strategy. Each unique beer style is brewed with malted barley and wheat grains, hops and, where appropriate, natural fruit extracts and spices. The Company avoids the use of less expensive ingredients due to its belief that quality is supremely important to success in the craft beer segment.

      A similar philosophy is adopted with regard to the Company’s soda products. Each batch of soda is made from high quality ingredients, rather than from diluting mass-produced syrups. The sodas are characterized by much more pronounced flavors. The Company’s beverages are not pasteurized and are currently distributed only in bottles and kegs.

      The Company will continue to innovate, develop and test new products in order to meet the varying and changing tastes of its consumers.

Competition

      Competition within the craft beer and soda markets is based on product quality, taste, consistency, freshness, distribution, price, ability to differentiate products, promotional methods and other product support. Statistics from the latest study of the Institute of Brewing Studies indicate there were approximately 1,500 craft brewers in the United States at the end of 2001. Approximately two thirds of these brewers are brewpubs that sell all of their production at retail on the brewery premises. The remaining brewers market their products through similar channels to those utilized by the Company and, although many have limited geographic distribution, the result is significantly increased competition in all markets.

      The Company’s past sales growth was achieved predominantly through increasing penetration in Washington, Oregon and California, which the Company believes comprise one of the largest and most competitive craft and specialty beer markets in the United States. As this market has matured, the Company has experienced intensified competition, increased seasonal product offerings and aggressive price promotions. Although certain competitors distribute their products nationally and may have greater sales and financial resources than the Company, the Company believes that being a local supplier of high quality, traditionally

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      The Company also competes against producers of imported specialty beers. Although imported beers currently account for a much greater share of the U.S. beer market than craft beers, the Company believes that craft brewers have a number of competitive advantages over specialty beer imports, including lower transportation costs, no importation duties, proximity to and familiarity with local consumers, a higher degree of product freshness and eligibility for lower federal excise taxes.

      In response to the growth of the craft beer segment in prior years, all of the national domestic brewers have introduced full-flavored beers. National brewers, with their greater financial resources, access to raw materials and their influence over their established national distribution networks, have increased competition for market share and increased price competition within the craft beer segment. The Company is aware that certain national brewing companies are using their considerable influence over their independent distributors to induce them to exclude competing products from their portfolios. There is also awareness that distributors are consolidating to improve profit margins. These factors could have the effect of reducing the distribution options for the Company’s products. While such actions have not at this time denied access to any market for the Company’s products, there can be no guarantee that this will not happen in the future.

Item 2 — Properties

      The Company currently owns and operates two breweries, each with an adjacent restaurant; one in Seattle, Washington and one in Berkeley, California. During October 2001, the Company signed an agreement to lease a third restaurant property in Walnut Creek, California which is scheduled to open during the second quarter of 2002. The estimated total annual beer capacity of the two breweries was 200,000 barrels at the end of 2001. During August 2000, ten fermenting vessels were moved from the Seattle Brewery to the Berkeley Brewery and soda equipment was then added to the Seattle Brewery. This redistribution of production equipment and change in production mix of beer and soda resulted in increased company-wide brewing capacity.

      In March 1995, the Company completed the Seattle Brewery, Alehouse and corporate offices near downtown Seattle. This brewery and 340 seat restaurant, operated as the Pyramid Alehouse, consists of approximately 33,000 square feet of leased building area. The estimated annual beer production capacity was 50,000 barrels at the end of 2001. The Seattle building lease expires in 2004, with options to extend the lease term for three five-year periods. The Company has also leased approximately 11,250 square feet of warehouse and additional outside storage space adjacent to the Seattle Brewery and Alehouse for a period of seven years, also expiring in 2004, and has options to extend the lease term for three additional five-year periods.

      Completed and opened in February 1997, the Berkeley Brewery and its adjacent Pyramid Alehouse are housed in a leased building of approximately 93,000 square feet. During January 2000, the Company exercised an option to lease an additional 29,000 square feet of adjacent space and is currently subleasing that space. The brewery had an estimated beer production capacity of 150,000 barrels at the end of 2001. During 2000, fermentation capacity was added which increased the estimated annual beer capacity to 150,000 barrels from 80,000 barrels. The Berkeley Brewery has a designed maximum potential capacity in excess of 200,000 barrels, which can be achieved by adding more fermentation capacity. The Berkeley Alehouse has seating for 380 plus an outdoor seating area. The building was leased commencing November 1995 for a 15-year term, with options to extend the lease term for two five-year periods. The Company also has the option to purchase the entire building during the lease term at its then fair market value.

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      Scheduled to open in April 2002, the Walnut Creek Pyramid Alehouse will be located in a leased building of approximately 7,800 square feet. The restaurant has a small, on-site brewery with an estimated beer production capacity of 10,000 barrels. The Walnut Creek Alehouse has seating for 275 plus an outdoor seating area. The building was leased commencing October 2001 for an initial 11-year term, with options to extend the lease term for three five-year periods and one final option for a four-year period.

Item 3 — Legal Proceedings

      The Company is involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.

Item 4 — Submission of Matters to a Vote of the Security Holders

      The Company’s annual meeting is scheduled for 9 a.m. on May 2, 2002 at the Berkeley Pyramid Alehouse, 901 Gilman Street, Berkeley, California 94710. Matters to be voted on will be included in the Company’s proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting.

Item 4A — Executive Officers of the Company

      Mr. Kelly was appointed Chief Executive Officer in December 1999. Mr. Kelly joined Pyramid Breweries Inc. in August 1999 as President and Chief Operating Officer. Mr. Kelly has over 20 years of food and beverage industry experience, earned at Miller Brewing Company (Miller), Borden, Inc. (Borden), and Coca-Cola Enterprises (Coca-Cola). At Miller, he served as Regional Vice President for twenty-three western states and was responsible for the operations of the Jacob Leinenkugel Brewing Company, a regional specialty brewer, and a wholly owned subsidiary of Miller. Prior to joining Miller, Mr. Kelly was a Vice President of Marketing and Sales Development at Borden. At Coca-Cola, Mr. Kelly held a variety of sales, marketing and general management positions, and most recently was Division Vice President and General Manager of the Mid Atlantic Division. Mr. Kelly earned a Masters Degree in Business Administration and a Bachelor of Science Degree in Commerce from the University of Virginia.

      Mr. Drury was appointed as Vice President — Finance, Chief Financial Officer and Secretary in July 2000. Mr. Drury is responsible for all finance and administration, including strategic planning, investments and acquisitions, risk management and investor relations. Mr. Drury has an extensive management and financial background. He most recently served as Chief Financial Officer at Azteca Restaurant Enterprises (Azteca), a Seattle based company with 31 locations. Prior to joining Azteca, Mr. Drury was Chief Financial Officer at Country Harvest Restaurants, Corporate Controller at Perkins Family Restaurants and Kindercare, as well as Director of Planning and Analysis at KFC International. He began his career as an accountant for Coopers & Lybrand. Mr. Drury earned both a Bachelor of Science Degree in Accounting and a Masters Degree in Business Administration from the University of Kentucky. He is a certified public accountant.

      Mr. McGrath was appointed as Vice President — Sales in November 1999. Mr. McGrath has over 15 years of experience in the alcohol and non-alcohol beverage industry. Most recently, he held the position of General Manager for Miller’s northwest region, responsible for growing sales, market share and profit in a seven-state area. Also at Miller, Mr. McGrath worked as Director of National Accounts, accountable for setting strategy and developing sales in the convenience and mass merchandise channels. Prior to Miller, he

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      Mr. Walpert was appointed as Vice President/ Chief Operating Officer — Alehouse Division, in March 2000. Mr. Walpert is responsible for directing the performance of the two existing alehouse restaurants as well as expanding the concept through both acquisition and internal development. Mr. Walpert has an extensive management and restaurant background. Most recently, Mr. Walpert was Chief Operating Officer of CAL-Group Holdings, a multi-concept restaurant and hotel operator with nearly 300 Wendy’s Restaurants, Bob’s Big Boys, and Fairfield Hotel locations. Prior to CAL-Group Holdings, Mr. Walpert spent over five years as Regional Manager for Godfather’s Pizza which included 62 units throughout the Pacific Rim. Mr. Walpert has an undergraduate degree from San Diego State University and a Masters Degree in Business Administration from the University of Southern California.

      Mr. House was appointed as Vice President — Brewery Operations, in July 2001. Mr. House is responsible for directing the performance of the two existing breweries as well as purchasing, transportation, quality assurance, product development, forecasting, and facility issues. Mr. House had been Director of Corporate Operations since 1999, responsible for quality assurance, product development, forecasting and distribution. He joined Pyramid in 1996 as Manager of Distribution/ Production. Prior to joining Pyramid, House had 14 years of brewing industry experience with the G. Heileman Brewing Co (Heileman). As Distribution Manager for Heileman, House was responsible for warehousing/distribution, production planning, and customer service for both the Rainier Brewery in Seattle, Washington and Henry Weinhards Brewery in Portland, Oregon. Mr. House has an undergraduate degree from Washington State University.

PART II

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters

      Trading in Pyramid Breweries Inc.’s common stock began on December 14, 1995, and is quoted on the NASDAQ Stock Market’s National Market under the ticker symbol “PMID”.

      The following table sets forth the high and low sales prices and the cash dividends paid per share of Pyramid Breweries Inc.’s common stock for the years ended December 31, 2000 and 2001.

      On February 19, 2002, the Company had 316 stockholders of record. The last reported sale price per share on February 19, 2002, was $2.31. The Company had no sales of unregistered securities during 2001.

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DIVIDEND POLICY

      On December 15, 1999, the Company announced a new dividend policy and declared its first quarterly cash dividend. The Company paid $1,391,000, or $0.172 per common share, of cash dividends during the fiscal year ended December 31, 2001. On February 12, 2002, the Board of Directors declared a quarterly cash dividend of $.044 per common share to shareholders of record on March 29, 2002. 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.

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SELECTED FINANCIAL AND OPERATING DATA

Item 6 — Selected Financial Data

      The following selected financial data should be read in conjunction with the Company’s Financial Statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

Selected Financial Data

(1)	The company changed the accounting method for package design costs to reflect the expensing of these costs as incurred rather than capitalizing and amortizing over twelve months. This change has been accounted for as prior period adjustment in accordance with Accounting Principals Board Opinion

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	No. 20. The financial statements for all periods presented have been restated to reflect this change. The impact on the 1997 retained earnings beginning balance as a result of the restatement was an approximate $185,000 decrease to $2,561,000.

Impact of Restatement on Prior Periods — Increase (Decrease) in Amounts

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

      Pyramid Breweries Inc. was incorporated in 1984 and is engaged in the brewing and sale of specialty beers and sodas and in restaurant operations. The Company currently sells its beverage products primarily in Washington, Oregon and California under the Pyramid and Thomas Kemper brand names and operates two restaurants, under the Pyramid Alehouse name, each adjacent to its Seattle, Washington and Berkeley, California breweries. The Company’s revenues consist of sales of beer and soda to third-party distributors and retail sales of beer, soda, food, apparel and other items in its restaurants. For the years ended December 31, 2001 and 2000, approximately 72% and 73% of the Company’s net sales were sales of beer and soda to third party distributors. Total retail alehouse sales accounted for 28% and 27% of total net sales in 2001 and 2000, respectively.

      The Company’s sales volumes and selling prices are affected by several factors such as level of consumer demand in existing markets, sales in new distribution areas, availability of beer distributors in new and existing markets, and competitive factors, including the increase or decrease in the number of competing craft beers, new product introductions and promotional pricing. Sales in the craft beer industry generally reflect a significant degree of seasonality with the second and third calendar quarters reflecting stronger sales than in the first and fourth calendar quarters.

      The Company’s operating results are subject to quarterly fluctuations due to a variety of factors and the Company anticipates that its operating margin will fluctuate as a result of many factors, including (i) lower sales volumes due to changes in demand and lower selling prices due to increased product availability, (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 capacity, (iii) sales seasonality and competition, (iv) increased raw material or packaging costs, and (v) changes in the sales mix. Increased selling and promotional costs incurred as the Company protects its business in existing markets and develops its business in new geographic areas may also cause operating margins and operating income to decrease.

      The Company sells its craft beers in bottles and kegs. Although bottled products normally sell for a higher per barrel selling price, gross margin on the Company’s draft products are typically higher as a percentage. Changes in the proportion of sales of bottled and draft products therefore will affect the Company’s gross margin. For 2001 and 2000, approximately 58% and 60%, respectively, of the Company’s sales of craft beers were bottled products.

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      The company changed the accounting method for package design costs to reflect the expensing of these costs as incurred rather than capitalizing and amortizing over twelve months. This change has been accounted for as a prior period adjustment in accordance with Accounting Principals Board Opinion No. 20 “Accounting Changes.” The financial statements for all periods presented have been restated to reflect this change. The impact of the restatement on cost of sales for 2000 and 1999 was a decrease of approximately $210,000 and $432,000, respectively. The restatement impact on selling, general and administrative expenses for 2000 and 1999 was an increase of approximately $258,000 and $227,000, respectively. The restatement impact on the net loss for 2000 was a $48,000 increase in net loss and for 1999 a $205,000 decrease in net loss. The restatement impact on net loss per share was no change for 2000 and a $0.03 decrease for 1999. The impact on the 1999 retained deficit beginning balance as a result of the restatement was an approximately $195,000 increase in the retained deficit to a $728,000 beginning balance.

      This report contains 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. These forward-looking statements include, but are not limited to, statements concerning future revenues, operating margins, expenses and cash needs. The Company’s actual future results could differ materially from those projected in the forward-looking statements. Some factors, which could cause future actual results to differ materially from the Company’s recent results or those projected in the forward-looking statements, are described below. The Company assumes no obligation to update the forward-looking statements for such factors.

Critical Accounting Policies

      The Company believes that its critical accounting policies include the following:

	•	Long-lived assets impairment
	•	Valuation of returnable containers
	•	Realization of deferred tax assets

      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 flows analysis in the event of an impairment. Effective in the fiscal year 2002, the Company will account for long-lived assets in accordance with Statement of Financial Accounting Standards 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.

      Returnable Containers. The accounting for returnable containers (primarily kegs) requires management to make judgments and estimates of physical quantities and valuation as of each balance sheet date. Containers held by the Company are counted as part of the Company’s annual physical inventory count procedures. The number of kegs held by distributors is primarily based on annual confirmation with distributors. Kegs are capitalized at their purchased cost as part of fixed assets and are depreciated over their estimated useful economic life based on historical experience, which currently ranges from five to ten years. In the period it is identified the Company recognizes a loss for the average remaining undepreciated cost for lost and obsolete containers. The Company also collects a deposit from customers for containers shipped to them and recognizes a liability for the deposits collected. The recorded liability is adjusted as necessary to be consistent with the estimate of the number of containers held by distributors. If circumstances related to the Company’s returnable container physical quantities or estimated valuation change, the Company’s recorded assets containers and related deposit liabilities for returnable containers 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

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Results of Operations

      Gross Sales. Gross sales increased 5.7% to $31,995,000 in the year ended December 31, 2001 from $30,275,000 for 2000. The sales increase was primarily the result of a 19.5% increase in soda sales in 2001 to $5,735,000 from $4,800,000 in 2000 and a 9.3% increase in alehouse sales in 2001 to $8,456,000 from $7,737,000 in 2000. Total beer sales in 2001 increased slightly to $17,804,000 from $17,738,000 in 2000. Soda shipments increased 19.8% to 46,000 barrels in 2001 from 38,400 in 2000 primarily due to increased sales of root beer, orange cream soda, the soda sampler pack, which includes all four of the soda products, and the introduction of two new flavors. Alehouse sales increased mainly as a result of increased sales prices and patronage at both alehouse restaurants. Beer shipments increased 0.8% to 110,800 barrels in 2001 from 109,900 in 2000. Of wholesale beer shipments, Pyramid beer increased 2.9% to 104,900 barrels while Thomas Kemper beer shipments decreased 26.3% to 5,900 barrels for 2001 compared to 2000. Wholesale beverage sales (beer and soda combined) in Washington, Oregon and California increased by 4.1% in 2001 compared to 2000 sales. Sales in Washington, Oregon and California accounted for 84.2% and 85.0% of the Company’s beverage sales in 2001 and 2000, respectively.

      Excise Taxes. Excise taxes were 4.9% and 5.6% of gross sales in 2001 and 2000, respectively. Excise taxes were slightly lower as a percentage of gross sales in 2001 due to a greater proportion of alehouse and soda sales in 2001 compared to 2000, which do not bear excise taxes.

      Gross Margin. Gross margin decreased 2.9% to $7,546,000 in 2001 from $7,769,000 in 2000. Gross margin as a percentage of net sales also decreased to 24.8% in 2001 from 27.2% in 2000. The decrease in gross margin was due primarily to increased utility and material costs and a shift in product mix with increasing sales of 12-pack products in the beverage division.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 9.1% to $9,128,000 in 2001 from $8,370,000 in 2000. Selling, general and administrative expenses as a percent of net sales also increased to 30.0% from 29.3% in the prior year. This increase was due primarily to increased advertising expense, selling expense and a non-cash stock compensation charge of $241,000 related to the new equity arrangement with the Company’s CEO announced in the second quarter of 2001.

      Other Income, net. Other income, net decreased to $542,000 in 2001 from $586,000 in 2000. The 7.5% decrease was due mainly from the interest earned on cash equivalents. Both lower investment balances and lower rates of interest income caused the decline in interest income. This was partially offset by increased parking income and decreased losses on sales of assets. Interest income was $271,000 and $418,000 for the years ended December 31, 2001 and 2000, respectively. Parking income was $257,000 and $219,000 for the years ended December 31, 2001 and 2000, respectively.

      Income Taxes. As of December 31, 2001, the Company had deferred tax assets arising from deductible temporary differences, tax loss carry forwards and tax credits offset against certain deferred tax liabilities. During 2001, the Company determined that its deferred tax assets no longer meet the recognition criteria of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and therefore increased the valuation allowance by $575,000 to meet this requirement. Realization of the deferred tax asset representing tax loss and credit carryforwards is dependent on the Company’s ability to generate future U.S. taxable income. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.

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      Net Loss. The Company incurred a net loss of $1,615,000 for 2001 compared with net loss of $15,000 in 2000. The $1,600,000 increase in net loss was due to higher brewery operating costs, higher selling, general and administrative expenses and the increase in the tax valuation allowance mentioned above.

      Gross Sales. Gross sales increased 5.1% to $30,275,000 in the year ended December 31, 2000 from $28,811,000 for 1999. The sales increase was primarily the result of a 26.3% increase in soda sales in 2000 to $4,800,000 from $3,800,000 in 1999 and a 6.7% increase in alehouse sales in 2000 to $7,737,000 from $7,251,000 in 1999. Soda shipments increased 29.7% to 38,400 barrels in 2000 from 29,600 in 1999 primarily due to increased sales of root beer, orange cream soda and the soda sampler pack, which includes all four of the soda products. Alehouse sales increased mainly as a result of increased sales prices and patronage at both alehouse restaurants. Beer shipments increased 1.4% to 109,900 barrels in 2000 from 108,400 in 1999. Of wholesale beer shipments, Pyramid beer increased 6.6% to 101,900 barrels while Thomas Kemper beer shipments decreased 32.9% to 8,000 barrels for 2000 compared to 1999. Wholesale beverage sales (beer and soda combined) in Washington, Oregon and California increased by 5.3% in 2000 compared to 1999 sales. Sales in Washington, Oregon and California accounted for 85.0% and 84.4% of the Company’s beverage sales in 2000 and 1999, respectively.

      Excise Taxes. Excise taxes were 5.6% and 6.0% of gross sales in 2000 and 1999, respectively. Excise taxes were slightly lower as a percentage of gross sales in 2000 due to a greater proportion of alehouse and soda sales in 2000 compared to 1999, which do not bear excise taxes.

      Gross Margin. Gross margin increased 10.6% to $7,769,000 in 2000 from $7,023,000 in 1999. Gross margin as a percentage of net sales also increased to 27.2% in 2000 from 25.9% in 1999. The increase in gross margin was due primarily to increased sales and improved operating efficiencies in both the alehouse and beverage divisions.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses remained flat at $8,370,000 for the years ended 2000 from $8,375,000 in 1999. Excluding the $480,000 severance accrual recorded in the fourth quarter of 1999, selling, general and administrative expenses increased by approximately $485,000. This increase was due primarily to increased marketing expense for the development of a brand awareness campaign. As a percentage of net sales, selling, general and administrative expenses increased slightly to 29.3% of net sales in 2000 from 29.2% of net sales in 1999 (excluding the effect of the 1999 severance charge).

      Impairment Charge. During fiscal year 1999, the Company wrote down approximately $3,288,000 of impaired long-lived assets. The write-down included $2,545,000 of brewing machinery and equipment and $743,000 of leasehold and other equipment. The Company reviews assets for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Based on the Company’s expectation of future undiscounted net cash flows, these assets were written down to their estimated net fair value.

      Other Income, net. Other income, net increased to $586,000 in 2000 from $494,000 in 1999. The 18.6% increase was due mainly to higher interest rates earned on cash equivalents. Interest income was $418,000 and $322,000 for the years ended December 31, 2000 and 1999, respectively.

      Income Taxes. As of December 31, 2000, the Company had deferred tax assets arising from deductible temporary differences tax loss carry forwards and tax credits offset against certain deferred tax liabilities. During 2000 and 1999, a valuation allowance was recorded against the deferred tax asset for the benefits of tax losses which may not be realized which resulted in no income tax benefit being recorded for the years ended December 31, 2000 and 1999. Realization of the deferred tax asset representing tax loss and credit carryforwards is dependent on the Company’s ability to generate future U.S. taxable income. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance.

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      Net Loss. The Company recorded net loss of $15,000 for 2000 compared with net loss of $4,146,000 in 1999. Excluding the effect of the asset impairment charge and severance accruals recorded in 1999 of $3,288,000 and $480,000, respectively, the adjusted net loss would have been $378,000 or 1.4% of 1999 net sales. The decrease in net loss for the year was primarily the result of the increased sales and improved margins for the year ended December 31, 2000.

Liquidity and Capital Resources

      Net cash provided by operating activities for the year ended December 31, 2001 decreased to $1,589,000 from $2,528,000 for the prior year. The decrease was primarily due to the decrease from the results of operations partially offset by an increase from net operating assets. At December 31, 2001, the Company’s working capital decreased to $5,235,000 compared to $7,392,000 at December 31, 2000.

      Net cash used in investing activities for the year ended December 31, 2001 was $1,556,000 compared to $465,000 for the prior year. The cash used in investing activities in 2001 included long-term investments in certificates of deposit, equipment and facility upgrades in the Berkeley and Seattle Breweries, expansion of the Seattle Alehouse and the purchase of and improvements to the new Walnut Creek Alehouse. Those investments and the Company’s quarterly dividend payments to shareholders impacted working capital. Cash used in investing activities during 2000 included the upgrade of production equipment at the Berkeley Brewery, remodel of the Seattle Alehouse and various upgrades of computer equipment, net of proceeds from the sale of equipment and proceeds from a long-term receivable.

      On December 15, 1999, the Company 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 December 31, 2001, the Company has purchased 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. During the year ended December 31, 2001 the Company expended a total of $25,000 to purchase shares.

      The Company had a $5,000,000 line of credit (the Line of Credit) for short-term operating needs which expired on July 31, 2001. The Company had never borrowed on the Line of Credit.

      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. Capital expenditures during 2001 were approximately $1,079,000, which includes equipment and facility upgrades in the Berkeley and Seattle Breweries, expansion of the Seattle Alehouse and improvements to the new Walnut Creek Alehouse. Capital expenditures for 2002 are estimated to be $1,500,000. The Company’s future cash requirements and cash flow expectations are closely related to its expansion plans. 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 reserves, together with cash from operations, will be sufficient for the Company’s working capital needs.

Risk Factors and Forwarding 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.

      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

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      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, there is evidence that 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.

      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 will increase during 2002.

      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 and the California state excise tax is $6.20 per barrel annually.

      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.

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Impact of Inflation

      Although the Company has not attempted to calculate the effect of inflation, management does not believe inflation has had a material adverse effect on the Company’s results of operations. In the future, increases in costs and expenses, particularly energy, packaging, raw materials and labor costs may have a significant impact on the Company’s operating results to the extent that such cost increases cannot be passed along to its customers.

Item 8 — Financial Statements

      Financial statements of Pyramid Breweries Inc. are as follows:

Item 9 — Change in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

PART III

Item 10 — Directors and Executive Officers of the Company

      For information with respect to the executive officers of the Registrant, see Item 4A — “Executive Officers of the Company” at the end of Part I of this report. The information required by this Item concerning the Directors and nominees for Director of the Company is incorporated herein by reference to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2002, to be filed with the Commission pursuant to Regulation 14A.

Item 11 — Executive Compensation

      The information required by this Item is incorporated herein by reference to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2002, to be filed with the Commission pursuant to Regulation 14A.

Item 12 — Security Ownership of Certain Beneficial Owners and Management

      The information required by this Item is incorporated herein by reference to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2002, to be filed with the Commission pursuant to Regulation 14A.

Item 13 — Certain Relationships and Related Transactions

      The information required by this Item is incorporated herein by reference to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2002, to be filed with the Commission pursuant to Regulation 14A.

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PART IV

Item 14 — Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a) Documents filed as part of this report are as follows:

	1.     Financial Statements: See listing of Financial Statements included as a part of this Form 10-K on Item 8 of Part II.
	2.     Financial Statement Schedules — None.

      (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report.

	3.     Exhibits: The required exhibits are included at the end of the Form 10-K Annual Report and are described in the Exhibit Index immediately preceding the first exhibit.

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SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

February 28, 2002

	PYRAMID BREWERIES INC.
	(Registrant)

	By	/s/ WAYNE DRURY

	Wayne Drury
	Vice President and Chief Financial Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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PYRAMID BREWERIES INC.

INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Pyramid Breweries Inc.:

      We have audited the accompanying balance sheets of Pyramid Breweries Inc. as of December 31, 2001 and 2000 and the related statements of operations, stockholders’ equity and cash flows for each of the three years ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pyramid Breweries Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

      As explained in Note 1 to the financial statements, the Company has restated the 2000 and 1999 financial statements for the change in accounting for package design costs.

	/s/ ARTHUR ANDERSEN LLP

Seattle, Washington,

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PYRAMID BREWERIES INC.

BALANCE SHEETS

The accompanying notes are an integral part of these balance sheets.

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PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY