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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2003

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

Commission file number 0-27116

PYRAMID BREWERIES INC.

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  No .

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  No

     Common stock, par value of $.01 per share: 8,523,167 shares of Common Stock outstanding as of March 31, 2003

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PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

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PART I

Item 1 – FINANCIAL STATEMENTS

PYRAMID BREWERIES INC.

BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

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 the third quarter of 2003. 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. Pyramid also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label. As of March 31, 2003, the Company’s products were distributed in 32 states and Canada. The Company also 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, 2002, included in the Annual Report on Form 10-K.

Stock Based Compensation

     At March 31, 2003, the Company has stock-based compensation plans which are described more fully in Note 15 of the 2002 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 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 years ended March 31, 2003 and 2002, would have been as follows:

     The fair value of options granted in the first quarter of 2002 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 5.13%; expected option lives of seven years; expected volatility of 52%; and expected future dividends. The weighted-average fair value of options granted during the first quarter ended March 31, 2002 was $0.65. There were no options granted in the first quarter of 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 are comprised of food, beverage and merchandise, recognized at the time of sale.

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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. Inventory levels experience fluctuations in carrying levels and values based on seasonality.

3.

FIXED ASSETS:

     Construction in progress includes leasehold improvements made to the Sacramento Alehouse which is scheduled to open mid-2003.

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 were unrestricted, except for being pledged as collateral for the loans, and the remaining 252,300 shares become unrestricted over the next two years. During the quarters ended March 31, 2003 and 2002, the Company recorded $2,470 and $32,000 in compensation expense, respectively, in connection with this equity arrangement, which is included in selling, general and administrative expenses.

5.

ACCRUED EXPENSES

     Accrued expenses consist of the following:

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6.

OTHER INCOME, NET

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

7.

EARNINGS PER SHARE

     Basic and diluted net loss per share was computed by dividing net loss by the weighted average number of shares of common stock outstanding during the quarter. The effect of stock options has not been included in the calculation of diluted net loss per share as the effect is antidilutive. Options to purchase approximately 794,200 and 756,900 shares of common stock were outstanding as of March 31, 2003 and 2002, respectively, but were not included in the computation of EPS because their effects are antidilutive.

8.

STOCKHOLDERS’ EQUITY

9.

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.

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10.

CASH DIVIDEND:

     The Board of Directors announced on February 11, 2003, the declaration of a $0.044 per common share dividend payable on April 11, 2003 to shareholders of record on March 31, 2003. The Board of Directors also announced, on May 8, 2003, the declaration of a $0.044 per common share dividend payable on July 11, 2003 to shareholders of record on June 30, 2003. The cash dividends declared totaled approximately $375,000 for all common stock outstanding as of each record date.

     Cash dividends declared per common share:

     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.

11.

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 (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 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 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, administrative and marketing 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 accounts receivable, inventory, goodwill and fixed assets, which are presented by segment.

     Certain 2002 operating income balances have been reclassified to conform to the 2003 presentation.

12.

NEW ACCOUNTING PRONOUNCEMENTS:

     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 is now effective. The adoption of SFAS 143 did not have a material impact on the Company’s financial position or results of operations.

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.

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SELECTED UNAUDITED OPERATING DATA

QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002

     Gross Sales. Gross sales increased 2.1% to $6,976,000 in the first quarter ended March 31, 2003 from $6,834,000 in the same quarter of 2002. Wholesale beverage sales decreased 7.2% to $4,622,000 in the first quarter ended March 31, 2003 from $4,983,000 in the same quarter of 2002. Total beverage barrel shipments decreased 6.8% compared to prior year. Pyramid beer brand shipments increased 0.9% to 22,300 barrels, while Thomas Kemper beer continued its expected decline. Total beer shipments, including Thomas Kemper beer, decreased by 0.9% to 23,000 barrels. Shipments of Thomas Kemper Soda decreased by 21.5% to 7,300 barrels from 9,300 barrels in the same quarter of the prior year. The reduction in soda volume is the result of softening demand for specialty sodas, as measured by Nielsen supermarket data, a reduction in Thomas Kemper Soda promotional activity during the first quarter, and distributor reductions in inventory carrying levels. Alehouse sales increased 27.2%, to $2,354,000 in the first quarter ended March 31, 2003, from $1,851,000 in the same quarter of 2002 due to the addition of the Walnut Creek Alehouse, which opened in May 2002, contributing $628,000 in revenues for the quarter. On a same store basis, alehouse sales decreased $125,000 or 6.8% largely due to decreased patronage at the Berkeley, California Alehouse which has been negatively impacted by the economic conditions of the San Francisco Bay region.

     Excise Taxes. Excise taxes totaled 5.1% and 5.0% of gross sales for the quarters ended March 31, 2003 and 2002, respectively. The increase in excise taxes as a percentage of gross sales was due mainly to a greater portion of beer sales.

     Gross Margin. Gross margin decreased $200,000 to $1,156,000, down 14.7%, and as a percentage of net sales decreased 3.5% to 17.4% in the first quarter ended March 31, 2003. This decrease as a percentage of net sales was due in part to increased alehouse sales as a percentage of the total, which has a lower gross margin than the beverage sales. In addition, the decrease in percentage margin was due to increasing operating costs such as insurance and benefit costs, which have increased 48%, and beverage material price increases of approximately 5.3%. Collectively, these two items reduced gross margins by 3.2%.

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 11.6% to $1,923,000 or 29.0% of net sales for the first quarter ended March 31, 2003 from $2,175,000 or 33.5% of net sales for the same quarter of 2002. This decrease as a percentage of net sales was due mainly to the receipt of a Washington State sales and use tax refund in the amount of $99,000 net of expenses, received during the first quarter of 2003.

     Other Income, net. Other income, net was approximately $44,000 and 0.7% of net sales for the first quarter ended March 31, 2003 compared to $52,000 and 0.8% of net sales in the same quarter of 2002. See footnote #6 – Other Income, Net for greater detail.

     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, 2003 and 2002. As of December 31, 2002, the Company had approximately $6.8 million in deferred tax assets arising from deductible temporary differences and tax loss carryforwards. 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 $725,000 for the first quarter ended March 31, 2003 compared to a net loss of $767,000 in the same quarter of 2002.

     Other. In April 2002, the Company announced plans for a new alehouse located in Sacramento, California. The 295 seat restaurant and brewery will occupy approximately 9,500 square feet on the first floor of a historical building. As of March 31, 2003 approximately $875,000 has been spent on the build-out of the new alehouse location.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had approximately $2,466,000 of cash, cash equivalents and short-term investments at March 31, 2003 compared to $3,346,000 at December 2002. At March 31, 2003, the Company had working capital of $2,475,000 compared to $3,783,000 at December 31, 2002. The $1,308,000 decrease in working capital is a result of the capital spending related to the build-out costs of the Sacramento Alehouse, reflected in an approximate $880,000 decrease in cash and short-term investments, and a $591,000 decrease in accounts receivable, offset by other various current asset and liability changes.

     Net cash provided by operating activities during the first quarter ended March 31, 2003 was approximately $217,000 compared to net cash used in operating activities of $478,000 for the same period of the prior year. The net cash provided by operating activities was due primarily to the decrease in accounts receivable resulting from the reduction in trade sales and related receivables between the fourth quarter of 2002 and the first quarter of 2003 and the Washington State sales and use tax refund in the amount of $99,000 net of expenses, received during the first quarter of 2003. Net cash used in investing activities for the quarter ended March 31, 2003 was $116,000 compared to net cash provided by investing activities of $93,000 for the same period of the prior year. The cash used in investing activities in 2003 included approximately $468,000 used to build-out the new Sacramento Alehouse which is scheduled to open in mid-2003. The cash used in investing activities in 2002 included approximately $621,000 used to build-out the new Walnut Creek Alehouse which opened in May 2002.

     At March 31, 2003, the Company’s commitment to make future payments under contractual obligations was as follows:

(1)

- The amounts are payments as stated in the non-interest bearing note. The note payable was recorded using a 10% discount rate on the    balance sheet.

     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, 2003 the Company declared per share dividends of $0.044 and paid out $374,000 in cash dividends. 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.

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