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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(mark one)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

[   ]

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.
(Exact name of registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization)		91-1258355 (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  [X]    No  [   ].

     Common stock, par value of $.01 per share: 8,387,576 shares of common stock outstanding as of September 30, 2002

Pages 1 of 19 sequentially numbered pages.

Table of Contents

PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

						Page
PART I				FINANCIAL INFORMATION
Item 1.				Financial Statements (Unaudited)
				Balance Sheets September 30, 2002 and December 31, 2001			3
				Statements of Operations Three Month and Nine Month Periods Ended September 30, 2002 and 2001			4
				Statements of Cash Flows Nine Month Periods Ended September 30, 2002 and 2001			5
				Notes to Financial Statements			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.				Quantitative and Qualitative Disclosures about Market Risk			14
Item 4.				Controls and Procedures			14
PART II				OTHER INFORMATION
Item 6.				Exhibits and Reports on Form 8-K			15
				SIGNATURE			16

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PART I

Item 1 — FINANCIAL STATEMENTS

PYRAMID BREWERIES INC.

BALANCE SHEETS
(Unaudited)

				September 30,				December 31,
				2002				2001
CURRENT ASSETS:
	Cash and cash equivalents			$	4,571,444			$	5,075,454
	Accounts receivable, net				1,622,728				1,425,592
	Inventories				1,555,533				1,178,148
	Prepaid expenses and other				393,355				382,826
		Total current assets			8,143,060				8,062,020
Long term investments					491,742				491,742
Note receivable — related party					97,195				106,965
Fixed assets, net					20,711,666				20,222,560
Other assets					116,813				132,853
Goodwill					414,613				414,613
		Total assets		$	29,975,089			$	29,430,753
CURRENT LIABILITIES:
	Accounts payable			$	737,531			$	662,527
	Accrued expenses				2,468,659				1,312,641
	Refundable deposits				532,396				550,259
	Note payable-current				20,000				20,000
	Dividends payable				369,053				365,178
		Total current liabilities			4,127,639				2,910,605
	Note payable, net of current				49,032				43,397
	Deferred rent				1,159,896				1,252,650
		Total liabilities			5,336,567				4,206,652
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, 10,000,000 shares authorized, none issued					—				—
Common stock, $.01 par value; 40,000,000 shares authorized, 8,387,576 and 8,299,493 shares issued and outstanding					83,876				82,995
Additional paid-in capital					35,829,066				35,649,120
Note receivable — related party					(785,260	)			(786,818	)
Deferred stock compensation					(139,590	)			(185,486	)
Accumulated deficit					(10,349,570	)			(9,535,710	)
		Total stockholders’ equity			24,638,522				25,224,101
		Total liabilities and stockholders’ equity		$	29,975,089			$	29,430,753

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS
(Unaudited)

			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2002				2001				2002				2001
Gross sales			$	9,871,008			$	8,428,921			$	26,881,955			$	24,373,234
Less excise taxes				462,584				403,796				1,276,866				1,128,390
Net sales				9,408,424				8,025,125				25,605,089				23,244,844
Cost of sales				6,947,821				6,217,374				19,105,049				17,329,402
Gross margin				2,460,603				1,807,751				6,500,040				5,915,442
Selling, general and administrative expenses				2,134,552				1,999,370				6,529,259				6,791,440
Operating income (loss)				326,051				(191,619	)			(29,219	)			(875,998	)
Other income, net				136,868				200,496				318,621				463,596
Income (loss) before income taxes				462,919				8,877				289,402				(412,402	)
Provision for income taxes				—				—				—				—
Net income (loss)			$	462,919			$	8,877			$	289,402			$	(412,402	)
Basic and diluted net income (loss) per share			$	0.06			$	0.00			$	0.04			$	(0.05	)
Weighted average basic shares outstanding				8,234,838				8,079,760				8,173,398				7,826,916
Weighted average diluted shares outstanding				8,293,664				8,205,258				8,234,388				7,826,916
Cash dividend declared per share			$	0.044			$	0.044			$	0.132			$	0.132
	Beer barrels shipped			31,400				27,800				86,600				81,700
	Soda barrels shipped			13,100				12,600				37,300				37,500
	Total barrels shipped			44,500				40,400				123,900				119,200

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

					Nine Months Ended
					September 30,
					2002				2001
OPERATING ACTIVITIES:
	Net income (loss)				$	289,402			$	(412,402	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				1,649,832				1,598,181
		Stock compensation expense				50,054				214,159
		Interest expense				5,635				1,028
		Gain on disposal of fixed assets				(53	)			—
		Deferred rent				(92,754	)			35,929
Changes in operating assets and liabilities:
		Accounts receivable				(197,136	)			294,110
		Inventories				(377,385	)			(358,471	)
		Prepaid expenses and other				(190,968	)			(48,434	)
		Accounts payable and accrued expenses				972,104				(120,741	)
		Refundable deposits				(17,863	)			(99,996	)
			Net cash provided by operating activities			2,090,868				1,103,363
INVESTING ACTIVITIES:
		Acquisitions of fixed assets				(1,694,025	)			(581,480	)
		Proceeds from sales of fixed assets				10,537				15,147
			Net cash used in investing activities			(1,683,488	)			(566,333	)
FINANCING ACTIVITIES:
		Proceeds from the sale of common stock and exercise of options				176,669				111,628
		Notes receivable				11,328				(109,921	)
		Cash dividends paid				(1,099,387	)			(1,025,922	)
			Net cash used in financing activities			(911,390	)			(1,024,215	)
Decrease in cash and cash equivalents						(504,010	)			(487,185	)
Cash and cash equivalents at beginning of period						5,075,454				6,444,145
Cash and cash equivalents at end of period					$	4,571,444			$	5,956,960

The accompanying notes are an integral part of these statements.

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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, Berkeley, California, and Walnut Creek, California and is constructing a fourth alehouse and brewery in Sacramento, California which is expected to open in 2003. The Company sells its beer through a network of selected independent distributors primarily in Washington, Oregon and California under the Pyramid brand and to a lesser extent the Thomas Kemper brand. Pyramid also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label. As of September 30, 2002, the Company’s products were distributed in 32 states and Canada. The Company operates three 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, 2001, included in the Annual Report on Form 10-K.

Revenue Recognition

     Revenue from the sale of wholesale beer and soda product is recognized at the time of shipment, when the title of the Company product passes to the customer, in accordance with distributor sales agreements.

2. INVENTORIES:

     Raw materials primarily include ingredients, flavorings and packaging. Work in process includes beer held in fermentation prior to the filtration and packaging process. Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale.

3. FIXED ASSETS:

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4. NOTE RECEIVABLE — RELATED PARTY

     In June 2001, the Company issued a $787,000 full recourse note to the Company’s Chief Executive Officer (“CEO”) in exchange 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 are unrestricted, except for being pledged as collateral for the loans, and the remaining 252,300 shares become unrestricted over the next three and one-half years. During the quarter and nine months ended September 30, 2002, the Company recorded $3,000 and $46,000, respectively, in compensation expense in connection with this equity arrangement which is included in selling, general and administrative expenses.

5. OTHER INCOME, NET

     Other income, net consists of interest income and parking fee income, and other insignificant non-operating income and expenses.

6. EARNINGS PER SHARE

     Basic earnings per share was computed by dividing net income available to common shareholders by weighted average shares outstanding. Options outstanding as of September 30, 2002 and not included in the diluted earnings per share calculation because the exercise price of the options were greater than the average market price of the common shares were 511,000 and 486,000 for the quarter and nine months ended September 30, 2002, respectively. Options to purchase approximately 313,000 and 813,000 shares of common stock were outstanding as of September 30, 2001 but were not included in the diluted earnings per share calculation for the quarter and nine months ended September 30, 2001, respectively, because the exercise price of the options were greater than the average market price of the common shares and the effects of these options are anti-dilutive. Dilutive earnings per share was calculated as follows:

				Three Months Ended								Nine Months Ended
				September 30,								September 30,
				2002				2001				2002				2001
Earnings:
	Net income (loss)			$	462,919			$	8,877			$	289,402			$	(412,402	)
Shares:
	Weighted average shares outstanding				8,385,638				8,304,060				8,345,198				8,051,216
	Shares subject to repurchase				(150,800	)			(224,300	)			(171,800	)			(224,300	)
	Weighted average basic shares outstanding				8,234,838				8,079,760				8,173,398				7,826,916
		Basic earnings per share		$	0.06			$	0.00			$	0.04			$	(0.05	)
	Stock option dilution				58,826				125,498				60,990				—
	Weighted average diluted shares outstanding				8,293,664				8,205,258				8,234,388				7,826,916
		Diluted earnings per share		$	0.06			$	0.00			$	0.04			$	(0.05	)

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7. STOCKHOLDERS’ EQUITY

																			Deferred
			Common Stock								Additional								Stock								Total
											Paid-In				Note				Compen-				Accumulated				Stockholders'
			Shares				Amount				Capital				Receivable				sation				Deficit				Equity
Balance at December 31, 2001				8,299,493			$	82,995			$	35,649,120			$	(786,818	)		$	(185,486	)		$	(9,535,710	)		$	25,224,101
	Net income			—				—				—				—				—				289,402				289,402
	Shares issued			88,083				881				175,788				—				—				—				176,669
	Stock compensation including amortization of stock compensation			—				—				4,158				—				45,896				—				50,054
	Note repayment			—				—				—				1,558				—				—				1,558
	Dividends declared			—				—				—				—				—				(1,103,262	)			(1,103,262	)
Balance at September 30, 2002				8,387,576			$	83,876			$	35,829,066			$	(785,260	)		$	(139,590	)		$	(10,349,570	)		$	24,638,522

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 position or results of operations.

9. CASH DIVIDEND:

     The Board of Directors announced on August 15, 2002, the declaration of a $0.044 per common share dividend payable on October 11, 2002 to shareholders of record on September 30, 2002. The cash dividend declared totaled approximately $369,000 for all common stock outstanding as of the date of record. A summary of cash dividends declared follows:

     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.

10. SEGMENT INFORMATION:

     The Company follows the provisions of Statement of Financial Accounting Standards (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, 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 three full-service alehouses, which market and sell the full line of the Company’s beer and soda products as well as food and certain merchandise.

     Factors used to identify reportable segments

     The Company’s reportable segments are strategic business units that offer distinct and different products and services. These segments are managed separately because each business requires different production, management and marketing strategies.

     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 current Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. The Company records intersegment sales at cost.

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Segment profit and segment assets are as follows:

Other

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

11. NEW ACCOUNTING PRONOUNCEMENTS:

     Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The annual amortization of existing goodwill of approximately $80,000 ceased on December 31, 2001. SFAS No. 142 also established a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has determined that there was no impairment of goodwill upon the adoption of SFAS No. 142 and therefore has not recognized any impairment charge.

     In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The statement will be effective for the 2003 fiscal year, and early adoption is permitted. The adoption of SFAS 143 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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     Effective January 1, 2002, the Company also adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. SFAS No. 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amounts or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also expands the reporting of discontinued operations to include portions of an entity that have been or will be disposed of rather than limiting such discontinuance to a segment of a business. There was no impact on the Company’s financial position, results of operations or cash flows upon adoption of SFAS No. 144.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction.” SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The statement will be effective for the 2003 fiscal year, and early application is permitted. The Company does not anticipate a material impact on its results of operations from the adoption of SFAS No. 145.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of the statement is required at the beginning of the 2003 fiscal year. The statement will impact the timing of exit or disposal activities reported by the Company after adoption.

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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