PYRAMID BREWERIES INC - 10-K Annual Report

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second quarter, June 30, 2003, was $29,930,975.

The number of shares outstanding of the registrant’s common stock as of March 8, 2004, was 8,665,085.

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders (to be filed) to be held on May 12, 2004 are incorporated by reference into Part III of this Form 10-K.

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 and a line of six premium sodas produced under the Thomas Kemper Soda Company brand name. 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 high quality, full-flavored, batch brewed sodas. The Company has two main breweries, one in Seattle, Washington (Seattle Brewery) which opened in March 1995, and one in Berkeley, California (Berkeley Brewery), which opened in February 1997. The Company’s third and fourth breweries which are located in Walnut Creek and Sacramento, California produce products primarily for on-site consumption. 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. In 2003, the Company sold approximately 159,000 barrels of its beer and soda products.

The Company was incorporated as Hart Brewing in Washington in March 1984 and changed its name to Pyramid Breweries Inc. in May 1996 and is headquartered in Seattle, Washington. The Company’s headquarters mailing address is 91 South Royal Brougham Way, Seattle, Washington, 98134, and the telephone number at that location is (206) 682-8322. The Company’s website address is www.PyramidBrew.com.

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). Nationally, craft beers represented approximately 3% of total beer shipments in 2002 including imports. Craft beers are distinguishable from mass-produced beers by their wide range of fuller flavors and adherence to traditional European styles and higher quality ingredients. Industry experts estimate that total beer shipments, including imports, increased approximately 1% in 2002, craft beer shipments were estimated to have increased 3.4%, and imports represented a 6% increase.

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 higher 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 82% of the Company’s 2003 beer sales.

The Company participates in the craft soda category with a line of full flavored, batch brewed sodas sold under the Thomas Kemper Soda Company label. Thomas Kemper Soda Company’s premium soft drinks include root beer, cream soda, orange cream, black cherry, grape and ginger ale. The Company distributes its soda products in supermarkets, independent food stores, convenience stores and restaurants, taking advantage of distribution channels established for beer products. 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 and the Sacramento and Walnut Creek Alehouses with the brewery situated within the restaurant. The restaurants are operated under the Pyramid Alehouse brand name. In 2003, the restaurants contributed sales of $12,420,000 including approximately $4,050,000 in the Company’s beers and sodas and $221,000 in branded clothing and other merchandise. The restaurants have a total of over 1,300 seats, including outdoor eating areas, and are situated in highly visible, high traffic locations. The Alehouses had approximately 744,000 guest visits during 2003.

The Company’s beverage operations (sales to third party distributors) contributed 64% of net sales in 2003, with beer comprising 48% and soda 16%. Alehouse operations contributed 36% of net sales in 2003.

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 segment through the development of new properties in that same geography, 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 97% of the Company’s beer sales and 73% of the Company’s beverage sales in 2003. 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 a website located at www.PyramidBrew.com. 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 25% of beverage sales in 2003, and 16% of total net sales. 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.

In addition to providing sampling and educational opportunities to Alehouse customers, the Company’s breweries and restaurants are 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 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 2003, the Company distributed its products through 163 wholesalers in 32 states and Canada. Consolidation in the distribution industry has resulted in a decrease in the number of distributors to which the Company ships. The Company expects this trend to continue as additional industry consolidation is expected.

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 and state alcohol regulations. 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 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 1,300 craft brewers in the United States at the end of 2003. 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

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 brewed ales, lagers and sodas will differentiate the Company’s products and allow it to obtain good market share in those markets adjacent to its breweries and Alehouses.

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.

The Company’s soda products compete in the non-alcoholic beverages segment of the commercial beverage industry. That segment is highly competitive, consisting of numerous firms including firms that compete in multiple geographic areas as well as those that are primarily local in operation, many of which are marketed by companies with substantially greater financial resources than the Company. Competitive products include other carbonated drinks, packaged water, fruit juices, fruit drinks and other beverages sold to customers in a ready to drink form.

Competitive factors with respect to the Company’s nonalcoholic beverages include pricing, promotion programs, production efficiency, access to shelf space in retail outlets and consumer acceptance. The Company competes by providing a higher quality, full flavored soda product which requires fresh and natural ingredients, whereas many of the Company’s competitors, utilizing low cost concentrates, compete more on providing a low cost product.

The restaurant industry is highly competitive. There are a substantial number of restaurant operations that compete directly and indirectly with the Company, many of which have significantly greater financial resources, higher revenues and greater economies of scale. The restaurant business is often affected by changes in consumer tastes and discretionary spending patterns; national and regional economic and public safety conditions; demographic trends; the cost and availability of raw materials, labor and energy; purchasing power; governmental regulations and local competitive factors. Any change in these or other related factors could adversely affect the Company’s restaurant operations. Accordingly, the Company must constantly evolve and refine the critical elements of the restaurant concepts over time to protect its longer-term competitiveness. Multi-unit foodservice operations such as the Company’s can also be substantially affected by adverse publicity resulting from food quality, illness, injury, health concerns or operating issues stemming from a single restaurant. The Company attempts to manage these factors, but the occurrence of any one of these factors

could cause the entire Company, beverage and alehouse operations, to be adversely affected. Management believes that the restaurant operations compete favorably with consumers on the critical attributes of quality, variety, taste, service, consistency and overall value.

The Company maintains internal controls for each of its restaurants and breweries through the use of accounting and management information systems. Each restaurant has the ability to compile its sales and labor information on a daily basis through the utilization of point-of-sale terminals. Cash is controlled through daily deposits of sales proceeds into the Company’s principal depository account, maintained in Seattle, Washington. The Company stresses the interaction with restaurant management to ensure accurate, efficient and timely reporting. Brewery facilities also have time collection computer payroll systems that have allowed management to manage and control labor costs efficiently as well as transmit payroll information directly to the Company.

The Company’s Alehouse facilities are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to environmental, building and zoning requirements, the preparation and sale of food and alcoholic beverages, designation of non-smoking and smoking areas and accessibility of restaurants to disabled customers. Various federal and state labor laws govern the Company’s relationship with its employees, including minimum wage requirements, overtime, working conditions and immigration requirements. Significant additional government-imposed increases in minimum wages, paid leaves of absence and mandated health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, could have an adverse effect on the Company’s results of operations. Delays or failures in obtaining the required construction and operating licenses, permits or approvals could delay or prevent the opening of new restaurants. Management believes the Company is operating in substantial compliance with applicable laws and regulations governing its operations.

The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. The Company’s operations are subject to more restrictive regulations and increased taxation by federal, state, and local governmental entities than are those of non-alcohol related beverage businesses. Federal, state, and local laws and regulations govern the production and distribution of beer, including permitting, licensing, trade practices, labeling, advertising, marketing, alcohol content, distributor relationships, and related matters. Federal, state, and local governmental entities also levy various taxes, license fees, and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure by the Company to comply with applicable federal, state, or local laws and regulations could result in penalties, fees, suspension, or revocation of permits, licenses, or approvals. There can be no assurance that other or more restrictive laws, regulations or higher taxes will not be enacted in the future.

The Company produces and sells its alcoholic beverages to distributors pursuant to a federal wholesaler’s basic permit and a federal brewer’s notice. Brewery and wholesale operations require various federal, state, and local licenses, permits, and approvals. In addition, some states prohibit wholesalers and/or retailers from holding an interest in any supplier, such as the Company or the Company owning any interest in a distributor or retailer. Violation of such regulations can result in the loss or revocation of existing licenses by the wholesaler, retailer, and/or the supplier. The loss or revocation of any existing licenses, permits or approvals, and/or the failure to obtain any additional or new licenses, could have a material adverse effect on the ability of the Company to conduct its business.

On January 24, 2003 (60 days after the Homeland Security Act became law), the Bureau of Alcohol Tobacco and Firearms (BATF) was divided into two new bureaus, the BATF and the Alcohol and Tobacco Tax Trade Bureau (TTB). The BATF, part of the Department of Justice, will oversee the firearms, explosives and arson programs and the TTB, Department of Treasury, will handle the regulatory aspects of the alcohol and tobacco industries.

On the federal level, brewers are required to file an amended notice with the TTB in the event of a material change in the production process, production equipment, the brewery’s location, the brewery’s management, or the brewery’s ownership. The Company’s operations are subject to audit and inspection by the TTB at any time.

On the state and local level, some jurisdictions merely require notice of any material change in the operations, management or ownership of the permit or licensee. State and local laws and regulations governing the sale of beer within a particular state by an out-of-state brewer or wholesaler vary from locale to locale.

The TTB permits and registrations can be suspended, revoked or otherwise adversely affected for failure to pay tax, keep proper accounts, pay fees, bond premises, abide by federal alcoholic beverage production and distribution regulations, and to notify the TTB of any change (as described above). Permits, licenses, and approvals from state regulatory agencies can be revoked for many of the same reasons.

Because of the many and various state and federal licensing and permitting requirements, there is a risk that one or more regulatory agencies could determine that the Company has not complied with applicable licensing or permitting regulations or has not maintained the approvals necessary for it to conduct business within its jurisdiction. There can be no assurance that any such regulatory action would not have a material adverse effect upon the Company or its operating results. Management believes the Company is operating in substantial compliance with applicable laws and regulations governing its operations.

The federal government and all of the states levy excise taxes on alcoholic beverages, including beer. For brewers producing no more than 2.0 million barrels of beer per calendar year, the federal excise tax is $7.00 per barrel on the first 60,000 barrels of beer removed for consumption or sale during a calendar year, and $18.00 per barrel for each barrel in excess of 60,000. For brewers producing more than 2.0 million barrels of beer for domestic consumption in a calendar year, the federal excise tax is $18.00 per barrel. The Company has been able to take advantage of this reduced tax on the first 60,000 barrels of its beers produced. Individual states also impose excise taxes on alcoholic beverages in varying amounts, which have also been subject to change. The determination of the party responsible, between the Company or the distributor, to bear the liability of these taxes varies by state. Federal and state legislators routinely consider various proposals to impose additional excise taxes on the production and distribution of alcoholic beverages. Further increases in excise taxes on beer could result in a general reduction in sales for the affected products and/or in the profit realized from the sales of the affected products.

The Company is subject to “dram-shop” laws in most states where it currently operates and will potentially be subject to such statutes in certain other states for future sites. These laws generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to such person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance which it believes is consistent with coverage carried by other entities in the restaurant industry. However, a judgment against the Company under a dram-shop statute in excess of the Company’s liability coverage could have a material adverse effect on the Company.

The Company has obtained United States Trademark Registrations for several trademarks, including but not limited to Pyramid®, Pyramid Ales®, Pyramid Alehouse®, Pyramid Breweries® and Thomas Kemper® as

well trademarks and pending trademark applications on individual products and design logos. The Company regards its “Pyramid” family of trademarks and other trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any trademark infringements that could materially affect its current business or any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company’s policy is to pursue registration of its trademarks whenever possible and to vigorously oppose any infringement of its trademarks.

The Company’s operations are subject to a variety of extensive and changing federal, state, and local environmental laws, regulations, and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations, or ordinances may impose liability for the cost of remediation of, and for certain damages resulting from sites of past releases of hazardous materials. The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that any cost arising from existing environmental laws will not have a material adverse effect on the Company’s financial condition or results of operations. However, there can be no assurance that environmental laws will not become more stringent in the future or that the Company will not incur costs in the future in order to comply with such laws.

The Company’s operations are subject to certain hazards and liability risks faced by all producers of alcoholic beverages, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. While the Company has never experienced a contamination problem in its products, the occurrence of such a problem could result in a costly product recall and cause serious damage to the Company’s reputation for product quality, as well as give rise to product liability claims. The Company maintains insurance which the Company believes is sufficient to cover any product liability claims which might result from a contamination problem in its products.

At December 31, 2003, the Company employed 395 people, including 43 in the Brewery Operations, 298 in the Alehouse Segment, 32 in sales and marketing and 22 in administration capacities (including home office, administrative and executive personnel). No employee is covered by a collective bargaining agreement, and the Company has never experienced an organized work stoppage, strike or labor dispute. The Company believes it maintains a good working relationship with its employees and has no reason to believe that a good working relationship will not continue.

We maintain an Internet site at http://www.PyramidBrew.com. We make available free of charge on or through our Internet site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We will voluntarily provide electronic copies of our filings free of charge upon request.

The Company currently owns and operates four breweries, each with an adjacent restaurant: one in Seattle, Washington, one in Berkeley, California, one in Sacramento, California and one in Walnut Creek, California. The estimated total annual beer capacity of the four breweries was approximately 204,000 barrels at the end of 2003.

In March 1995, the Company completed the Seattle Brewery, Alehouse and corporate offices near downtown Seattle. This brewery and 340 seat restaurant plus an outdoor seating area, 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 2003. 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. The Company exercised the options to renew the Seattle facility leases in 2004.

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 2003. 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 350 plus an outdoor seating area. The building was leased commencing in 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 fair market value.

Completed and opened in May 2002, the Walnut Creek Alehouse is 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 2,600 barrels. The Walnut Creek Alehouse has seating for 275 plus an outdoor seating area. The building was leased commencing in 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.

Completed and opened in July 2003, the Sacramento Alehouse is located in a leased building of approximately 9,500 square feet. The restaurant has a small, on-site brewery with an estimated beer production capacity of 1,600 barrels. The Sacramento Alehouse is designed with seating for 295, plus an outdoor seating area. The building lease was entered into April 2002, commencing in July 2003 for an initial 10-year and 8-month term, with options to extend the lease term for two five-year periods.

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.

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

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, 2003 and 2002.

On March 8, 2004, the Company had approximately 4,377 stockholders. The last reported sale price per share on March 8, 2004, was $3.10. The Company had no sales of unregistered securities during 2003.

On December 15, 1999, the Company announced a new dividend policy and declared its first quarterly cash dividend. The Company paid approximately $1,502,000, or $0.176 per common share, of cash dividends during the fiscal year ended December 31, 2003. On March 5, 2004, the Board of Directors declared a quarterly cash dividend of $0.044 per common share to shareholders of record on March 31, 2004. 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.

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.

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 four restaurants, under the Pyramid Alehouse name. The restaurants in Seattle, Washington and Berkeley, California are located adjacent to the main production facilities. The other two restaurants, located in Walnut Creek and Sacramento, California are primarily restaurants with a brewery capable of providing products for on-site consumption. For the year ended December 31, 2003, the Company had gross revenues of $36,378,000, an increase of 2% from 2002. 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, 2003 and 2002, approximately 64% and 69% of the Company’s net sales were sales of beer and soda to third party distributors. Total retail alehouse sales accounted for 36% and 31% of total net sales in 2003 and 2002, 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 2003 and 2002, approximately 55% of the Company’s sales of craft beers were bottled products.

On January 26, 2004 the Company and Portland Brewing Company, an Oregon corporation, announced that they had entered into an asset purchase agreement. Per the asset purchase agreement, Pyramid Breweries Inc. will acquire Portland Brewing Company’s brewery and alehouse assets for total consideration of approximately $4.2 million, consisting of a combination of assumed liabilities, cash and, at the Company’s sole option, shares of the Company’s unregistered common stock. The terms of the transaction also include a 5-year earn out which may result in additional payments to Portland Brewing based on sales of Portland Brewing brands during the earn-out period. The transaction is subject to approval by the shareholders of Portland Brewing, and other customary closing conditions. However, shareholders representing at least 74% of Portland Brewing’s outstanding voting power are committed to vote in favor of the transaction pursuant to a voting agreement. The transaction is expected to close in the second quarter of 2004.

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 in the Risk

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

Long-Lived Assets Impairment. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company’s evaluation is based on an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less the estimated costs to sell. Long-lived assets are written down to their estimated net fair value calculated using a discounted future cash flow analysis in the event of an impairment. Beginning in the fiscal year 2002, the Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If circumstances related to the Company’s long-lived assets change, the Company’s valuation of the long-lived assets could materially change.

Realization of Deferred Tax Assets. The Company evaluates the realizability of its deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. The evaluation of the realizability of the deferred tax assets is based on existing deferred tax liabilities and an assessment of the Company’s ability to generate future U.S. taxable income. Results of operations in recent years are considered in the assessment. The Company records a valuation allowance for the portion of its deferred tax assets that do not meet the recognition criteria of SFAS No. 109, “Accounting for Income Taxes.” If circumstances related to the Company’s ability to generate future U.S. taxable income change, the Company’s evaluation of the realizability of its deferred tax assets could materially change.

Stock-Based Compensation. The Company follows Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees”, in accounting for its employee stock options and employee stock purchase plan using the fair value based method. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company’s Statements of Operations. The Company is required under SFAS No. 123, “Accounting for Stock-Based Compensation”, to disclose pro forma information regarding option grants made to its employees based on specific valuation techniques that produce estimated compensation charges. The Black-Scholes option pricing model is used by the Company in estimating the fair value of options. If the Company changes the accounting for stock-based compensation, the Company’s results of operations could materially change.

Gross Sales. Gross sales increased 2.4% to $36,378,000 in the year ended December 31, 2003 from $35,523,000 for 2002. The sales increase was driven primarily by a 20.3% or $2,093,000 increase in Alehouse Segment sales to $12,420,000 offset by a 4.9% or $1,238,000 decrease in Beverage Segment sales. The alehouse sales increase was primarily the result of the new Sacramento Alehouse location which contributed $1,760,000 in sales since the opening date in July 2003. The additional increase in alehouse sales is attributed to a full year of operation in 2003 from the Walnut Creek Alehouse location which was only open for eight months of 2002, the first year of its operation. Total beverage shipments in 2003 decreased 2.6% to 159,000 barrels. Beer shipments decreased 1.4% across various products, while soda decreased 5.7% driven by a 27.4% decrease in the soda sampler pack. Wholesale beverage sales (beer and soda combined) in Washington, Oregon and California decreased by 4.1% in 2003 compared to 2002 sales. Sales in Washington, Oregon and California accounted for 82.2% and 83.2% of the Company’s beverage sales in 2003 and 2002, respectively. Sales in the Southern California region, which is the Company’s second largest in terms of barrel shipments behind Washington State, increased 4.9% to 34,000 barrels over 2002.

Excise Taxes. Excise taxes were 4.8% of gross sales in 2003 and 2002. The weighted average excise tax per barrel of beer sold was $15.20 and $14.62 for the years ended December 31, 2003 and 2002, respectively. The per barrel increase is the result of a greater mix of beer shipments to California which bear a higher state excise tax than the Company’s other primary states of business.

Gross Margin. Gross margin decreased 17.4% to $6,985,000 in 2003 from $8,452,000 in 2002. This decrease was due in part to (1) lower sales volumes, (2) lower net selling prices, including increased promotional activities on the beverage side of the business, (3) increased insurance and benefit costs of approximately $402,000, (4) $100,000 of pre-opening costs for the Sacramento Alehouse and (5) Alehouse Segment labor cost increases. The following table represents the gross margin comparisons and changes by segment:

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 2.1% to $8,492,000 in 2003 from $8,678,000 in 2002. Selling, general and administrative expenses as a percent of net sales also decreased to 24.5% in 2003 from 25.7% in the prior year. This decrease was due primarily to a decrease in incentive compensation expense during the year as a result of the Company’s 2003 performance.

Other Income, net. Other income, net decreased to $312,000 in 2003 from $380,000 in 2002 or a 17.9% decrease. Both lower investment balances and lower rates of interest earned on cash equivalents and short-term investments caused the decline in interest income. Interest income was $56,000 and $102,000 for the years ended December 31, 2003 and 2002, respectively. Parking income was $216,000 and $234,000 for the years ended December 31, 2003 and 2002, respectively.

Income Taxes. As of December 31, 2003, the Company had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. 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, “Accounting for Income Taxes”. 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 the valuation allowance.

Net (Loss) Income. The Company generated a net loss of $1,198,000 for 2003 compared with a net income of $252,000 in 2002. The $1,450,000 reduction was due to lower beverage operation sales volumes and lower operating margins.

Gross Sales. Gross sales increased 11.0% to $35,523,000 in the year ended December 31, 2002 from $31,995,000 for 2001. The sales increase was primarily the result of a 7.0% increase in beverage sales to $25,196,000 in 2002 from $23,539,000 in 2001 and the new Walnut Creek Alehouse location which contributed $2,091,000 in sales since the opening date in May 2002. Alehouse same store sales were down $220,000 or 2.6% for the year, primarily resulting from reduced July and October sales in the Seattle Alehouse which benefited from the All-Star Game and additional Seattle Mariners (Major League Baseball) playoff games in 2001, held directly across the street from the alehouse. Total beverage shipments in 2002 increased 4.4% to 163,700 barrels from 156,800 barrels in 2001. Beer shipments increased 5.7% to 117,100 barrels, driven by the Company’s top selling product, Pyramid Hefeweizen, which was up 6% and the newer Coastline Pilsner which contributed 4.7% of the increase over 2001 shipments. Soda shipments increased 1.3% to 46,600 barrels in 2002 from 46,000 in 2001 primarily due to increased sales of the soda sampler pack, which includes

all six of the Company’s soda products. Thomas Kemper beer shipments decreased 25.4% to 4,400 barrels in 2002 from 5,900 in 2001. Wholesale beverage sales (beer and soda combined) in Washington, Oregon and California increased by 5.5% in 2002 compared to 2001 sales. Sales in Washington, Oregon and California accounted for 83.2% and 84.2% of the Company’s beverage sales in 2002 and 2001, respectively. Sales in the Southern California region, which is the Company’s second largest in terms of barrel shipments behind Washington State, increased 22.8% to 32,300 barrels over 2001.

Excise Taxes. Excise taxes were 4.8% and 4.9% of gross sales in 2002 and 2001, respectively. Excise taxes were slightly lower as a percentage of gross sales in 2002 due to a greater proportion of alehouse sales in 2002 compared to 2001, which do not bear excise taxes.

Gross Margin. Gross margin increased 12.0% to $8,452,000 in 2002 from $7,546,000 in 2001. Gross margin as a percentage of net sales also increased to 25.0% in 2002 from 24.8% in 2001. The increase in gross margin was due primarily to volume growth in core products such as Pyramid Hefeweizen and Coastline Pilsner, strategic price increases on selected beverages and increased production efficiencies primarily in the Seattle brewing facility, being only partially offset by the start up costs of the new Walnut Creek Alehouse.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 4.9% to $8,678,000 in 2002 from $9,128,000 in 2001. Selling, general and administrative expenses as a percent of net sales also decreased to 25.7% in 2002 from 30.0% in the prior year. This decrease was due primarily to a decrease in selected advertising expenses and a decrease of $103,000 for a non-cash stock-based compensation expense related to the equity arrangement with the Company’s CEO announced in the second quarter of 2001.

Other Income, net. Other income, net decreased to $380,000 in 2002 from $542,000 in 2001. The 29.9% decrease was due mainly from the lower interest earned on cash equivalents and short-term investments. Both lower investment balances and lower rates of interest caused the decline in interest income. Parking income also decreased as there were fewer Seattle Mariners games across the street from the Seattle Alehouse location in 2002 versus 2001. Interest income was $102,000 and $271,000 for the years ended December 31, 2002 and 2001, respectively. Parking income was $234,000 and $257,000 for the years ended December 31, 2002 and 2001, respectively.

Income Taxes. During 2002, the Company was able to recognize a $98,286 tax refund resulting from the Job Creation and Worker Assistance Act of 2002. This Act provided for an increase to the limit on net operating loss deductions for alternative minimum tax (AMT) purposes from 90% of AMT income to 100% for net operating losses generated in tax years ending in 2001. As of December 31, 2002, the Company had deferred tax assets arising from deductible temporary differences and tax loss carryforwards offset against certain deferred tax liabilities. 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 the valuation allowance.

Net Income (Loss). The Company earned net income of $252,000 for 2002 compared with a net loss of $1,615,000 in 2001. The $1,867,000 improvement was due to improved operating margins, lower selling, general and administrative expenses and the AMT tax refund in 2002 versus the increase in the tax valuation allowance recorded in 2001.

The Company had $2,050,000 of cash, cash equivalents and short-term investments at December 31, 2003. At December 31, 2003, the Company’s working capital was $1,745,000 compared to $3,783,000 at December 31, 2002. Net cash provided by operating activities for the year ended December 31, 2003 increased to $2,583,000 from $1,620,000 for the prior year. The increase was primarily due to the collection timing of accounts receivable and the $800,000 tenant improvement credit received from the landlord of the Sacramento Alehouse facility.

Net cash used in investing activities for the year ended December 31, 2003 was $392,000 compared to $366,000 for the prior year. The cash used in investing activities in 2003 included approximately $3,142,000 in capital spending, including $2,293,000 for the development of the Sacramento Alehouse, $515,000 for equipment improvements in the breweries with the balance going to the existing alehouse and various marketing projects. The cash used for capital spending was funded primarily with proceeds related to the sales and maturities, net of purchases, of short-term investments which was $2,750,000. The Company’s long term investments purchased in the fourth quarter of 2001 have maturity dates in 2004 and therefore are classified as short-term investments, at December 31, 2003. The Company currently has no other long-term investments.

At December 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 is 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 year ended December 31, 2003 the Company declared per share dividends of $0.176 and paid out $1,502,000 in cash dividends. Any future declaration of dividends will depend, among other things, on the Company’s results of operations, capital requirements and financial condition, and on other such factors as the Company’s Board of Directors may in its discretion consider relevant.

On December 15, 1999, the Company also announced a stock buyback plan to repurchase up to $2,000,000 of the Company’s common stock from time to time on the open market. Stock purchases are at the discretion of management and depend, among other things, on the Company’s results of operations, capital requirements and financial condition, and on such other factors as the Company’s management may consider relevant. As of December 31, 2003, 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, 2003, the Company did not purchase any shares.

On February 26, 2004, the Company announced that Martin Kelly is stepping down as Chairman and Chief Executive Officer. In connection with Mr. Kelly’s termination, there are amounts due to him related to salary continuation payments under his employment agreement. Additionally, Mr. Kelly has the right to sell his shares of Company stock back to the Company, which would result in acceleration of repayment of the notes due to the Company related to his original purchase of those shares. The net cash impact of Mr. Kelly selling his shares to the Company would be a function of the then current market price of the Company’s stock, reduced by the balance of the notes outstanding at that time. The Company estimates that the net cash requirements on the Company related to Mr. Kelly selling his shares would be in the range of $300,000 to $400,000.

The Company believes that during the first half of 2004, there is the potential that the acquisition of Portland Brewing Company, the uncertainty of payments related to the termination of the former CEO, and the ongoing operational needs of the Company may exceed its current level of available working capital. If

required, the Company intends to seek a line of credit from a financial institution to meet these additional working capital needs. While the Company is confident in its ability to obtain the necessary financing, there can be no assurance that such financing will be available, or that it will be available at commercially acceptable terms to the Company.

Future capital requirements may vary depending on such factors as the cost of acquisition of businesses, brands and real estate costs in the markets selected for future expansion, whether such real estate is leased or purchased and the extent of improvements necessary. While there can be no assurance that current expectations will be realized and plans are subject to change upon further review, the Company believes that its cash balances, together with cash from operations and, to the extent required and available, bank borrowings, will be sufficient for the Company’s working capital needs.

In June 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 was effective for the 2003 fiscal year. The adoption of SFAS 143 did not have a material impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires recording of a liability for the fair value of the guarantee at the inception of certain guarantees issued or modified after December 31, 2002. FIN 45 also requires disclosures about a guarantor’s obligations under certain guarantees. Adoption of the interpretation did not have a material impact on the Company’s financial position or results of operations.

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 national brewers, and underutilized craft brewing capacity. The Company anticipates that intensifying competition from craft beer and imported beer producers and excess capacity in the craft beer segment may adversely impact the Company’s operating margins. In addition, the larger national brewers have developed brands to compete directly with craft beers. These national competitors have advantages such as lower production costs, larger marketing budgets, greater financial and other resources and more developed and extensive distribution networks than the Company. There can be no assurance that the Company will be able to grow its volumes or be able to maintain its selling prices in existing markets or as it enters new markets.

Access to Markets. Most of the Company’s independent distributors are also distributors of national brewers, some of whom have used their greater influence and marketing resources to persuade those distributors to exclude the products of other breweries from their portfolios. Such actions by national brewers have the effect of reducing distribution options for the Company’s products. In addition, many independent distributors are moving towards consolidation to improve profit margins. Although the Company has not yet been negatively impacted by such events, it is possible that the Company could effectively be denied access to a market or markets by the tactics of the national brewers and further consolidation of independent distributors. In the states that comprise the majority of its sales, the Company has the option to distribute its

products directly to retailers and the Company has previous experience in doing so. However, there is no assurance that self-distribution can be done in an economic manner over large territories.

Government Regulations. The Company’s business is highly regulated at the federal, state and local levels, and its brewery and restaurant operations require various licenses, permits and approvals. The loss or revocation of any existing licenses, permits or approvals, or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where the Company intends to do business could have a material adverse effect on the ability of the Company to conduct its business. Further, federal regulations prohibit, among other things, the payment of slotting allowances to retailers for beer products. These regulations have the effect of preventing competitors with greater financial resources from excluding smaller brewers from retailers. If these regulations were repealed or substantially modified, there would likely be a material adverse effect on the Company’s business and operating results.

Selling Prices. The future selling prices the Company charges for its craft beer and other specialty beverages may decrease from historical levels due to increasing competitive pressures. The Company has and will continue to participate in price promotions with its wholesalers and their retail customers. Management believes that the number and frequency of the Company’s promotions may increase during 2004.

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.

Acquisitions. The acquisition of existing brewery and or restaurant facilities may have unanticipated consequences that could harm our business and financial condition. The Company may seek to selectively acquire existing facilities which requires identification of suitable acquisition candidates, negotiating acceptable acquisition terms and obtaining appropriate financing. Any acquisition pursued may involve risks including material adverse effects on operating results, costs of integrating the acquired business into the Company operations, risks associated with entering into new markets, conducting operations where the Company has limited experience or the diversion of management’s attention from other business concerns. Future acquisitions, which may be accomplished through a cash purchase transaction or the issuance of equity securities, or a combination or both, could result in potentially dilative issuances of securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm the business and financial condition.

Results of operations in any period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company’s common stock. In future quarters, the Company’s operating results may not meet the expectations of public market analysts or investors. In such an event, the market price of the common stock could be materially adversely affected.

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

The Company has not and does not currently have any intention to hold any derivative instruments or engage in hedging activities. Also, the Company does not have any outstanding variable rate debt and does not enter into significant transactions denominated in foreign currency. The Company’s direct exposure to risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk sensitive instruments is not material.

The Company does maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available for sale and, consequently, are recorded on the balance sheets at fair value. At any time, a rise or decrease in interest rates could have a material impact on interest earnings of the investment portfolio. The Company currently does not hedge interest rate exposures.

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

The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There were no changes in the Company’s internal control over financial reporting in connection with this evaluation that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

George Hancock has been a director of the Company since 1989. Mr. Hancock served as Chief Executive Officer from May 1992 until his retirement in December 1999 and as Chairman of the Board of the Company from January 1997 to December 1999. Mr. Hancock previously served as Chairman of the Board of the Company from July 1989 until July 1995. He was President of Penknife Computing, Inc., a computer software company, from 1988 to May 1992. Mr. Hancock was previously employed by the international accounting firm of Coopers & Lybrand, where he was primarily responsible for management consulting projects. Mr. Hancock was also the founder of two startup software companies in England and the United States. He was awarded a Masters in Business Administration by Cranfield Institute of Technology, England in 1981. He qualified as an accountant in England in 1967.

Mr. Kelly was appointed Chief Executive Officer (CEO) 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, from 1994 to 1999, 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.

On February 26, 2004 the Company announced that Martin Kelly is stepping down as Chairman and Chief Executive Officer. The Company has appointed Pyramid founder and director George Hancock as non-executive Chairman and has immediately commenced the process of recruiting a new CEO. Mr. Hancock was formerly Chairman of the Board and served as CEO from 1992 through 1999. Until a successor CEO has been named, Mr. Hancock will oversee the Company’s day to day operations.

Mr. Hilger was appointed as Vice President — Finance, Chief Financial Officer and Secretary in September 2003. Mr. Hilger came to the Company from WorldCatch, Inc., a Seattle, Washington based seafood importing company which developed e-commerce solutions for the seafood industry. As Chief Executive Officer, Mr. Hilger had primary responsibility for all financial and operational aspects of the company, which serviced large retailers, food service distributors and seafood processing companies. Mr. Hilger also held Chief Financial Officer positions with WorldCatch, American Gem Seafoods, The Albert Fisher Group, and Profish International. Mr. Hilger earned a Business Administration degree from Gonzaga University, and a MBA from Pacific Lutheran University. He is a registered CPA in the state of Washington.

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 from 1994 to 1999. 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 held numerous sales and operating positions with Pepsi Cola USA, 7UP and Oscar Mayer. Mr. McGrath received his Bachelors Degree from Fredonia State University in New York and his Graduate Degree from Harvard University.

Mr. Coll was appointed as Vice President — Alehouse Operations in September 2002. Mr. Coll is responsible for directing the operational performance of the three existing alehouses as well as successfully opening and directing additional sites as they are developed. Mr. Coll has over 15 years of experience in the restaurant industry ranging from Chef to Opening Project Manager. Most recently, he held the position of Managing Partner with Essential Food Group, a restaurant consulting company, from 2001 to 2002, and Director of Food Service Operations for the Old Navy Division of Gap Inc, from 1998 to 2001. Prior to Gap Inc., Mr. Coll was with the Real Restaurant Group in Sausalito, California, responsible for the successful development and opening of restaurant concepts.

Mr. House was appointed as Vice President — Brewery Operations in July 2001. Mr. House is responsible for directing the performance of the four existing breweries as well as purchasing, transportation, 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 the Company in 1996 as Manager of Distribution/ Production. Prior to joining the Company, Mr. 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.

Other information required by this Item is incorporated herein by reference to Pyramid Breweries Inc. definitive Proxy Statement for its Annual Meeting of Shareholders, to be held on May 12, 2004, to be filed with the Commission pursuant to Regulation 14A.

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 12, 2004, to be filed with the Commission pursuant to Regulation 14A.

The information required by this Item is incorporated herein by reference to Pyramid Breweries Inc. definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on May 12, 2004, to be filed with the Commission pursuant to Regulation 14A.


	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.

	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.

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.


	By	/s/ JAMES K. HILGER



	James K. Hilger
	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.

We have audited the accompanying balance sheets of Pyramid Breweries Inc. as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2003. 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. The financial statements of Pyramid Breweries Inc. as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. Those auditors’ expressed an unqualified opinion on those financial statements, before the revision described in Note 1 to the financial statements, in their report dated January 25, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 provides a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the financial position of Pyramid Breweries Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed above, the financial statements of Pyramid Breweries Inc. as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 financial statements of Pyramid Breweries Inc. other than with respect to such disclosures and accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

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.

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Company’s filing on Form 10-K for the fiscal years ended December 31, 2001 and 2000. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K. For further discussion, see Exhibit 23.2(b) to the Form 10-K of which this report forms a part. The financial statements of Pyramid Breweries Inc. to which this report relates have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, as described in Note 1 to the financial statements. These revisions are not covered by the copy of the report of Arthur Andersen LLP. See the report of KPMG regarding these revisions.

Pyramid Breweries Inc. (the Company), a Washington corporation, was incorporated in 1984 and is engaged in the brewing, marketing and selling of craft beers and sodas. The Company operates breweries and restaurants in Seattle, Washington and Berkeley, Walnut Creek, and Sacramento California. The Company sells its products through a network of selected independent distributors primarily in Washington, Oregon and California under the Pyramid and Thomas Kemper brands. The Company also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label.

In March 1995, the Company opened the Seattle, Washington Brewery near downtown Seattle. This brewery and 340-seat alehouse has an estimated annual production capacity of 50,000 barrels as of December 31, 2003.

In December 1995, the Company sold 2,000,000 shares of common stock in an initial public offering (the Offering). Net proceeds from the Offering amounted to approximately $34,156,000 and have been used to fund the Company’s growth and expansion plans.

In February 1997, the Company opened the Berkeley Brewery in Berkeley, California. This brewery and 350-seat alehouse has an estimated annual beer production capacity of 150,000 barrels as of December 31, 2003.

In March 1997, the Company acquired substantially all of the operating assets and assumed certain liabilities of the Thomas Kemper Soda Company. This acquisition expanded the Company’s product line to include a range of premium soft drinks, including root beer and cream soda.

In May 2002, the Company opened the Walnut Creek Alehouse and Brewery in Walnut Creek, California. The alehouse has seating for 275 plus an outdoor patio seating area and an estimated annual brewing capacity of 2,600 barrels as of December 31, 2003.

In July 2003, the Company opened the Sacramento Alehouse and Brewery in Sacramento, California. The alehouse has seating for 295 plus an outdoor patio seating area and an estimated annual brewing capacity of 1,600 barrels as of December 31, 2003.

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with multiple financial institutions.

The Company’s investments are primarily comprised of fixed rate certificates of deposit and taxable variable rate notes with maturity dates of less than one year. Investments are custodied with major financial institutions. The specific identification method is used to determine the cost basis of investments sold or matured. At December 31, 2003 and December 31, 2002, substantially all of the Company’s short-term investments were classified as available for sale. These investments are recorded on the balance sheet at fair value. During the years ended December 31, 2003 and 2002, the Company realized cash proceeds, net of purchases, on the sales and maturities of short-term investments in the amount of $2,750,000 and $1,900,000, respectively. There were no unrealized or realized gains or losses during the years ended December 31, 2003, 2002 and 2001.

The Company’s accounts receivable balance includes balances from trade sales and other miscellaneous receivables. As December 31, 2002, $98,000 related to a tax refund was included in the accounts receivable balance. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance for doubtful accounts based on historical write-off experience. Account balances that are deemed uncollectable, are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis and market represents the lower of replacement cost or estimated net realizable value. The Company adjusts its inventory carrying values downward to market values based on the existence of excess and obsolete inventories determined primarily by seasonal demand forecasts and branding changes.

Fixed assets are stated at cost less accumulated depreciation and amortization. Significant additions and improvements are capitalized. Repairs and maintenance are expensed as incurred. Upon disposition of fixed assets, gains and losses are recorded in the statements of operations. Depreciation is provided using the straight-line method over lives ranging from three to 25 years. Leasehold improvements are amortized under the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the lease.

Returnable containers (primarily kegs) are capitalized at cost, depreciated over the estimated useful life of five to ten years, and are included in fixed assets. Refundable deposits represent the Company’s liability for deposits charged to customers for returnable containers. Estimated useful lives are as follows:

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company’s evaluation is based on an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less the estimated costs to sell. Long-lived assets are written down to their estimated net fair value calculated using a discounted future cash flow analysis in the event of an impairment. Beginning in the fiscal year 2002, the Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If circumstances related to the Company’s long-lived assets change, the Company’s valuation of the long-lived assets could materially change.

The Company accounts for preopening costs related to new restaurants in accordance with Statement of Position 98-5, “Recording the Cost of Start-Up Activities” and accordingly, there were no unamortized preopening costs at December 31, 2003 and 2002. All preopening costs are expensed as incurred.

Website design costs related to developing, programming, and customizing applications of the Company’s website, www.PyramidBrew.com, are capitalized in other assets and amortized over a two-year period. Net unamortized website design costs totaled approximately $25,000 and $52,000 at December 31, 2003 and 2002, respectively. Amortization of website design costs totaled approximately $27,000, $49,000 and $40,000 respectively, for the years ended December 31, 2003, 2002 and 2001. Website design costs relating to developing, programming and customizing applications are capitalized and amortized in accordance with Emerging Issues Task Force (EITF) 00-2, “Accounting for Website Development Costs.” Costs of operating and maintaining the website are expensed as incurred.

The excess of cost over fair value of the net assets of businesses acquired was capitalized as goodwill and amortized on a straight-line basis over 10 years, prior to the 2002 fiscal year. Amortization of goodwill totaled approximately $80,000 for the year ended December 31, 2001. Accumulated amortization at December 31, 2003 and 2002 was approximately $388,000 and relates entirely to the Company’s previous acquisition of Thomas Kemper Soda. The goodwill is included in the Beverage Operations segment.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Effective January 1, 2002, the Company adopted SFAS No. 142. The Company would recognize an impairment charge for the amount by which the carrying amount of an identified reporting unit’s goodwill exceeds its fair value. Based on the transitional impairment test and the annual impairment tests performed, there was no impairment of goodwill during the years ended December 31, 2003 and 2002. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

The annual amortization of existing goodwill of approximately $80,000 ceased on December 31, 2001. The following table presents the impact of SFAS No. 142 on net loss and net loss per share had the accounting standard been in effect for the year ended December 31, 2001:

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, and are recognized at the time of sale.

Shipping and handling amounts paid to the Company by customers are included in gross sales. The actual costs of shipping and handling paid by the Company are included in cost of sales.

As represented on the statement of operations, gross sales of the Company represents billed to customer activities. Excise taxes are taxes paid by the Company to state and federal government agencies. Net sales represent revenues to the Company net of applicable state and federal excise taxes.

Advertising costs are expensed as incurred. Total advertising expense was approximately $228,000, $252,000 and $560,000 in 2003, 2002 and 2001, respectively.

The Company engages in cooperative advertising programs and buy-down programs with resellers. The expenditures associated with buy down programs are included as an offset in gross sales. The costs of cooperative advertising programs are included in the selling, general and administrative expenses category. The costs of cooperative advertising amounts for the years ended December 31, 2003, 2002 and 2001 totaled approximately $89,000, $76,000 and $91,000, respectively. EITF No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”, addresses the timing, recognition and classification in the income statement of certain promotional costs paid to a retailer or wholesaler by a vendor in connection with the sale of the vendor’s products or promotion of sales of the vendor’s products by the retailer or wholesaler. The Company adopted EITF 01-9 in the first quarter of the fiscal year 2002. The advertising costs meet the requirements of EITF 01-9 to be included in expenses rather than as an offset to revenues and therefore, the adoption of EITF 01-9 did not have an effect on the results of operations of the Company.

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

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Realization of the deferred tax assets is dependent on the Company’s ability to generate future U.S. taxable income. Management has established a valuation allowance for the portion of the deferred tax assets that do not meet the recognition criteria of SFAS No. 109, “Accounting for Income Taxes”. The Company will continue to evaluate the realizability of deferred tax assets quarterly by assessing the need for and amount of a valuation allowance.

Basic earnings (loss) per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares outstanding, excluding shares subject to repurchase, during the year. Options outstanding as of December 31, 2003 totaling approximately 758,000 are not included in the diluted earnings per share calculation because their effects are anti-dilutive. Approximately 261,000 options outstanding as of December 31, 2002 are 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. Options outstanding as of December 31, 2001 totaling approximately 810,000 are not included in the diluted earnings per share calculation because their effects are anti-dilutive. Diluted earnings (loss) per share is calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options. The following represents a reconciliation from basic earnings per share to diluted earnings per share:

At December 31, 2003, the Company has stock-based compensation plans which are described more fully in Note 15. 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”, as amended by SFAS 148. 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 December 31, 2003, 2002 and 2001, would have been as follows:

The fair value of options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: 2003 risk-free interest rates ranging from 2.95% to 3.98%, 2002 risk-free rate of 4.76% and 2001 risk-free interest rates ranging from 2.13% to 6.87%; all other assumptions are consistent over the years presented, expected option lives of seven years; expected volatility of 51% and expected future dividends of $0.176 per share. The weighted-average fair value of options granted during the years 2003, 2002 and 2001 was $0.83, $0.63 and $1.46, respectively. The effect of applying SFAS No. 123 for providing pro-forma disclosures is not indicative of future results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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.

Total depreciation and amortization expense was approximately $2,365,000, $2,111,000 and $2,021,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

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 would become unrestricted over the next year. As of December 31, 2003, 50,000 shares remained restricted. Compensation expense on the shares is accounted for under the variable accounting method until the shares become unrestricted. During the years ended December 31, 2003, 2002 and 2001, the Company recorded approximately $88,000, $139,000 and $241,000, respectively, in compensation expense in connection with this arrangement, which is included in selling, general and administrative expenses.

In October 2001, the Company purchased assets of an alehouse in Walnut Creek, California for $268,000. In addition, the Company assumed the sublease of the location. The purchase was made by a $205,000 cash payment and the balance was financed through an $80,000 non-interest bearing note due in four annual equal payments beginning October 2002. The note payable was recorded using a 10% discount rate. As of December 31, 2003, a net balance of approximately $36,000 remained payable on the note.

In April 2002, the Company signed a lease with the County Supervisors Association of California to lease building space in Sacramento, California with payments commencing on July 2003. The Company spent approximately $1.9 million, net of an $800,000 incentive provided by the landlord, to build-out the alehouse and brewery facility. Completed and opened in July 2003, the Sacramento Alehouse is located in a leased building of approximately 9,500 square feet. The restaurant has a small, on-site brewery with an estimated beer production capacity of 1,600 barrels. The building was leased commencing in July 2003 for an initial 10-year and 8-month term, with options to extend the lease term for two five-year periods.

The (provision) benefit for income taxes included in the statements of operations consists of the following:

The (provision) benefit for income taxes differed from the amount obtained by applying the federal statutory income tax rate to (loss) income before income taxes, as follows:

Deferred income tax assets and liabilities are included in the balance sheet at December 31, 2003 and 2002, as follows:

At December 31, 2003, the Company had operating loss carryforwards for federal income tax purposes of approximately $7,728,000, which are available to offset future federal taxable income through 2023 and begin to expire in 2017. During 2003, 2002 and 2001 the valuation allowance against deferred tax assets increased by approximately $371,000, decreased by approximately $221,000, and increased by approximately $891,000, respectively. The Company does not believe that its net deferred tax assets meet the “more likely than not” realization criteria of SFAS No. 109. Accordingly, a valuation allowance has been established, to the extent deferred tax assets exceed deferred tax liabilities.

The Company leases its office, warehouse and plant facilities under operating leases in Seattle, Washington and Berkeley, Walnut Creek and Sacramento, California. Leases at December 31, 2003 were:

These lease agreements contain provisions for free rent periods, scheduled rent increases and tenant improvement reimbursements. Accordingly, the Company has recorded deferred rent liabilities of approximately $1,768,000 and $1,129,000 at December 31, 2003 and 2002, respectively, representing the pro rata rent which would have been due if equal payments had been required under the lease terms. During 2003 the Company received an $800,000 tenant improvement incentive related to the construction costs incurred in the build-out of the Sacramento Alehouse facility. The $800,000 cash receipt was recorded as a deferred rent

Total rent expense was approximately $1,027,000, $908,000 and $732,000 in 2003, 2002 and 2001, respectively.

The Board of Directors announced on November 13, 2003, the declaration of a $0.044 per common share dividend payable on January 16, 2004 to shareholders of record on December 31, 2003. The cash dividends declared in November 2003 totaled approximately $379,000 for all common stock outstanding as of the dates of record. During the years ended December 31, 2003, 2002 and 2001, the Company paid approximately $1,502,000, $1,469,000 and $1,391,000, or $0.176 per common share, of cash dividends, respectively.

On December 15, 1999, the Board of Directors authorized a stock buyback plan to repurchase up to $2,000,000 of the Company’s outstanding common stock on the open market. During the year ended December 31, 2001, the Company repurchased 11,726 shares of common stock at costs of approximately $25,000. No shares were repurchased during 2003 and 2002.

Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables, short-term investments and interest-bearing deposits. The Company’s short-term investments consist primarily of fixed rate certificates of deposit and taxable auction variable rate notes with 28 day reset periods. The Company’s interest-bearing deposits are placed with major financial institutions. Wholesale distributors account for substantially all accounts receivable; therefore, this concentration of risk is limited due to the number of distributors, their geographic dispersion and state laws regulating the financial affairs of distributors of alcoholic beverages.

During the years ended December 31, 2003, 2002 and 2001, one customer comprised approximately 18%, 21% and 24% of the Company’s revenue, respectively. Accounts receivable at December 31, 2003 and 2002 include approximately $228,000 and $498,000, respectively, due from this customer.

As of December 31, 2003 and 2002, the carrying amounts for cash and cash equivalents, short term investments, notes receivable and notes payable approximate their fair values.

The Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, and reports segment information in the same format as reviewed by the Company’s management (the Management Approach), which is organized around differences in products and services.

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 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.

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.

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. 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.

Other consists of interest income, general and administrative expenses, 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 specific to a segment.

In May 2003, the Company adopted and its shareholders approved, an Employee Stock Purchase Plan (the 2003 Purchase Plan) which allows eligible employees to acquire shares of common stock of the Company at a discount. Eligible employees may contribute up to 10% of their base earnings toward the quarterly purchase of the Company’s common stock. The employee’s purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the quarterly offering period. A total of 500,000 shares of common stock are available under the 2003 Purchase Plan. Generally, all of the Company’s officers and employees who have been employed by the Company for at least six months and who are regularly scheduled to work more than twenty hours per week are eligible to participate in the 2003

Purchase Plan. The 2003 Purchase Plan will generally operate in successive three month periods, or offering periods, commencing on each January 1, April 1, July 1 and October 1 of each year and end on the next March 31, June 31, September 31 and December 31, respectively, occurring thereafter. The 2003 Purchase Plan expires February 5, 2013. There were 11,016 shares issued under the 2003 Purchase Plan during 2003 at a weighted-average price of approximately $2.45 per share. Under the previous employee stock purchase plan, which expired, there were 29,356 and 25,344 shares issued during 2002 and 2001 at a weighted-average price of approximately $1.90 and $1.78 per share, respectively. Fair value assumptions of the Employee Stock Purchase Plan are based on the same assumptions used in the stock option plans.

The Company’s Amended and Restated 1995 Employee Stock Option Plan (the Employee Plan) permits the granting of options to employees. A total of 1,565,000 shares have been reserved under the Employee Plan. The options are granted at the fair market value of the Company’s common stock at the date of grant. Each outstanding option has a term of 10 years from the date of grant and vests over a period of three years. Shares available for future grants at December 31, 2003 totaled 354,000.

The Company’s Non-Employee Director Stock Option Plan (the Director Plan) provides for the granting of stock options covering 5,000 shares of common stock to be made automatically on the date of each annual meeting of stockholders to each non-employee director of the Company, so long as shares of common stock remain available under the Director Plan. A total of 250,000 shares have been reserved under the Director Plan. As of December 31, 2003, 155,000 options were available for future grants. Each outstanding option granted under this plan has a term of 10 years from the date of grant and vests immediately.

The Company had options exercisable of 401,000, with a weighted-average exercise price of $3.00 and options exercisable of 493,000 with a weighted-average exercise price of $2.87 as of December 31, 2002 and 2001, respectively.

The Company has a 401(k) plan for all eligible employees. Employees who are at least age 21 become eligible to participate following the first plan quarter in which they perform at least 250 hours of service. Employees can elect to contribute up to 50% of their eligible compensation to the 401(k) plan subject to Internal Revenue Services limitations. The Company generally matches employee contributions (that do not exceed 6% of the employee’s compensation) at the rate of 50%. The Company may also make additional discretionary contributions. The Company’s matching contributions for the years ended December 31, 2003, 2002 and 2001, totaled approximately $80,000, $77,000 and $93,000, respectively.

In June 1999, the Board of Directors adopted a shareholder rights agreement (the “Rights Agreement”) and declared a distribution of one preferred share purchase right (a “Right”). Under certain conditions, each Right may be exercised to purchase a unit equal to 1/1000 of a share of Series RP Preferred Stock at a purchase price of $12.00 (the “Purchase Price”), subject to adjustment. The rights are evidenced by our common stock certificates and automatically trade with our common stock. The rights are not exercisable unless a person or group acquires, or commences (or announces an intention to commence) a tender or

exchange offer to acquire 20% or more of our common stock without the approval of our Board of Directors. If a person or group acquires more than 20% of the then outstanding shares of common stock, each Right will entitle its holder (other than such acquiring person or group) to receive, on exercise, common stock (or, in certain circumstances, other Pyramid securities) having a value equal to two times the then-applicable Purchase Price of the Right. In addition, if we are thereafter acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase that number of the acquiring company’s common shares having a market value of twice the Right’s exercise price. We will be entitled to redeem the Rights at $0.001 per Right at any time prior to the earlier of the expiration of the Rights in June 2009 or the time that a person has acquired a 20% position.

The Board of Directors announced on March 5, 2004, the declaration of a $0.044 per common share dividend payable on April 12, 2004 to shareholders of record on March 31, 2004.

The following table presents the results of operations for each of the four quarters in 2003 and 2002. This quarterly information is unaudited, has been prepared on the same basis as the annual financial information and, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. A variety of factors may lead to significant fluctuations in the Company’s quarterly results of operations, including timing of new product introduction, seasonality of demand, any decrease in the demand for craft beers and general economic conditions. As a result, the Company’s results of operations for any quarter are not necessarily indicative of results for any future period.

The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number, which follows the description of the exhibit, indicates the document to which cross reference is made. See the end of this exhibit index for a listing of cross-referenced documents.


(1)	Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-1 of Pyramid Breweries Inc. (File No. 33-97834).


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the year ended December 31, 2003

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to .


Washington		91-1258355
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


		Page

PART I
Item 1.	Business		1
	General		1
	Industry Background		1
	Business Strategy		2
	Products		3
	Competition		3
	Internal Controls		5
	Government Regulations		5
	Trademarks		6
	Environmental Regulations and Operating Considerations		7
	Employees		7
	Available Information		7
Item 2.	Properties		7
Item 3.	Legal Proceedings		8
Item 4.	Submission of Matters to a Vote of Security Holders		8
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		8
Item 6.	Selected Financial Data		10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		17
Item 8.	Financial Statements		18
Item 9.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure		18
Item 9A.	Controls and Procedures		18
PART III
Item 10.	Directors and Executive Officers of the Company		18
Item 11.	Executive Compensation		20
Item 12.	Security Ownership of Certain Beneficial Owners and Management		20
Item 13.	Certain Relationships and Related Transactions		20
Item 14.	Principal Accountant Fees and Services		20
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		20
	Signatures		21
EXHIBIT 10.19
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 32.3


						Dividend
		High		Low		Paid

Calendar Quarters — 2003
	First Quarter	$	2.93	$	2.61	$	0.044
	Second Quarter		3.58		2.82		0.044
	Third Quarter		3.47		2.81		0.044
	Fourth Quarter		3.44		2.96		0.044
Calendar Quarters — 2002
	First Quarter		2.49		2.25		0.044
	Second Quarter		2.48		2.26		0.044
	Third Quarter		2.40		2.19		0.044
	Fourth Quarter		2.99		2.11		0.044



	Years Ended December 31,

	2003			2002			2001			2000			1999

Income Statement Data:
Gross sales	$	36,378		$	35,523		$	31,995		$	30,275		$	28,811
Less excise taxes		1,753			1,711			1,572			1,704			1,735

Net sales		34,625			33,812			30,423			28,571			27,076
Cost of sales		27,640			25,360			22,877			20,802			20,053

Gross margin		6,985			8,452			7,546			7,769			7,023
Selling, general and administrative expenses		8,492			8,678			9,129			8,370			8,375
Impairment charge		—			—			—			—			3,288

Operating loss		(1,507	)		(226	)		(1,583	)		(601	)		(4,640	)
Other income, net		312			380			542			586			494

(Loss) income before income taxes		(1,195	)		154			(1,041	)		(15	)		(4,146	)
(Provision) benefit for income taxes		(3	)		98			(574	)		—			—

Net (loss) income	$	(1,198	)	$	252		$	(1,615	)	$	(15	)	$	(4,146	)

Basic net (loss) income per share	$	(0.14	)	$	0.03		$	(0.20	)	$	(0.00	)	$	(0.50	)

Weighted average basic shares outstanding		8,452			8,203			7,987			7,940			8,231

Diluted net (loss) income per share	$	(0.14	)	$	0.03		$	(0.20	)	$	(0.00	)	$	(0.50	)

Weighted average diluted shares outstanding		8,452			8,243			7,987			7,940			8,231

Cash dividends declared per share	$	0.176		$	0.176		$	0.176		$	0.160		$	0.04

Balance Sheet Data:
Working capital	$	1,745		$	3,783		$	4,728		$	7,026		$	6,981
Fixed assets, net		21,406			20,682			20,523			21,126			22,739
Total assets		27,784			29,295			29,605			32,270			33,719
Stockholders’ equity		22,203			24,536			25,224			27,938			29,861
Operating Data (in barrels):
Beer barrels shipped		115,000			117,000			111,000			110,000			108,000
Soda barrels shipped		44,000			47,000			46,000			38,000			30,000

Total barrels shipped		159,000			164,000			157,000			148,000			138,000

Beer production capacity at year-end		204,000			203,000			200,000			200,000			172,000


	*Building Brand Awareness and Sales through Company-Owned Restaurants*


	*Maintaining a Direct Store Delivery (DSD) System through Independent Distributors*


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


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*



	Twelve Months Ended December 31,

			% of				% of
			Segment				Segment
	2003		Net Sales		2002		Net Sales		$ Change			% Change

Beverage Segment	$	6,047,000		27.2%	$	7,311,000		31.1%	$	(1,264,000	)		-17.3%
Alehouse Segment		938,000		7.6%		1,141,000		11.0%		(203,000	)		-17.8%

Total	$	6,985,000		20.2%	$	8,452,000		25.0%	$	(1,467,000	)		-17.4%


	*Year Ended December 31, 2002 Compared to Year Ended December 31, 2001*


			Less Than						More Than
	Total		1 Year		1 - 3 years		3 - 5 years		5 years

Operating leases	$	8,878,000	$	1,238,000	$	2,140,000	$	2,220,000	$	3,280,000
Note payable(1)		40,000		20,000		20,000		—		—


	Page

Report of Independent Public Accountants		22
Report of Former Independent Public Accountants		23
Balance Sheets as of December 31, 2003 and 2002		24
Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001		25
Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001		26
Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001		27
Notes to Financial Statements		28


	*George Hancock (59) — Interim Chief Executive Officer*


	*Martin Kelly (49) — President and Chief Executive Officer*


	*Building a Strong Portfolio of Craft Beer Brands*


	*Craft Beers*


	*Sodas*


	*Alehouses*


	*Jim Hilger (42) — Vice President — Finance, Chief Financial Officer and Secretary*


	*Patrick Coll (41) — Vice President — Alehouse Operations*


	*Mark House (45) — Vice President — Brewery Operations*



By	/s/ GEORGE HANCOCK	March 10, 2004

	George Hancock Interim Chief Executive Officer Chairman of the Board Director and Founder

By	/s/ JAMES K. HILGER	March 10, 2004

	James K. Hilger Vice President and Chief Financial Officer

By	/s/ JASON W. REES	March 10, 2004

	Jason W. Rees Controller and Chief Accounting Officer

By	/s/ SCOTT S. BARNUM	March 10, 2004

	Scott S. Barnum Director

By	/s/ KURT DAMMEIER	March 10, 2004

	Kurt Dammeier Director

By	/s/ NANCY MOOTZ	March 10, 2004

	Nancy Mootz Director

By	/s/ SCOTT SVENSON	March 10, 2004

	Scott Svenson Director



			December 31,

			2003			2002

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	1,558,000		$	596,000
	Short-term investments			492,000			2,750,000
	Accounts receivable, net of allowance for doubtful accounts of $20,000 as of December 31, 2003 and 2002			1,281,000			1,944,000
	Inventories			1,654,000			1,590,000
	Prepaid expenses and other			756,000			626,000

		Total current assets		5,741,000			7,506,000
	Long term investments			—			492,000
	Note receivable — related party			81,000			94,000
	Fixed assets, net			21,406,000			20,682,000
	Goodwill			415,000			415,000
	Other			141,000			106,000

		Total assets	$	27,784,000		$	29,295,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	1,349,000		$	952,000
	Accrued expenses			1,562,000			1,747,000
	Refundable deposits			487,000			506,000
	Note payable — current			20,000			20,000
	Deferred rent — current			199,000			124,000
	Dividends payable			379,000			374,000

		Total current liabilities		3,996,000			3,723,000
	Note payable, net of current			16,000			31,000
	Deferred rent, net of current			1,569,000			1,005,000

		Total liabilities		5,581,000			4,759,000

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
	Preferred stock, 10,000,000 shares authorized, none issued			—			—
	Common stock, $.01 par value; 40,000,000 shares authorized, 8,620,000 and 8,504,000 shares issued and outstanding			86,000			85,000
	Additional paid-in capital			36,374,000			36,041,000
	Note receivable — related party			(764,000	)		(782,000	)
	Deferred stock-based compensation			(27,000	)		(47,000	)
	Accumulated deficit			(13,466,000	)		(10,761,000	)

		Total stockholders’ equity		22,203,000			24,536,000

		Total liabilities and stockholders’ equity	$	27,784,000		$	29,295,000


										Note
		Common Stock					Additional			Receivable-			Deferred						Total
							Paid-in			Related-			Stock-Based			Accumulated			Stockholders’
		Shares			Amount		Capital			Party			Compensation			Deficit			Equity

Balance, December 31, 2000			7,863,000		$	79,000	$	34,338,000		$	—		$	—		$	(6,479,000	)	$	27,938,000
	Net loss		—			—		—			—			—			(1,615,000	)		(1,615,000	)
	Dividends declared		—			—		—			—			—			(1,442,000	)		(1,442,000	)
	Shares issued		32,000			—		63,000			—			—			—			63,000
	Exercised stock options		416,000			4,000		841,000			(787,000	)		—			—			58,000
	Stock-based compensation		—			—		186,000			—			60,000			—			246,000
	Deferred compensation		—			—		246,000			—			(246,000	)		—			—
	Shares repurchased and retired		(11,000	)		—		(25,000	)		—			—			—			(25,000	)

Balance, December 31, 2001			8,300,000		$	83,000	$	35,649,000		$	(787,000	)	$	(186,000	)	$	(9,536,000	)	$	25,223,000
	Net income		—			—		—			—			—			252,000			252,000
	Dividends declared		—			—		—			—			—			(1,477,000	)		(1,477,000	)
	Shares issued		35,000			—		71,000			—			—			—			71,000
	Exercised stock options		169,000			2,000		315,000			—			—			—			317,000
	Stock-based compensation		—			—		6,000			—			139,000			—			145,000
	Note repayment		—			—		—			5,000			—			—			5,000

Balance, December 31, 2002			8,504,000		$	85,000	$	36,041,000		$	(782,000	)	$	(47,000	)	$	(10,761,000	)	$	24,536,000
	Net loss		—			—		—			—			—			(1,198,000	)		(1,198,000	)
	Dividends declared		—			—		—			—			—			(1,507,000	)		(1,507,000	)
	Shares issued		25,000			—		58,000			—			—			—			58,000
	Exercised stock options		91,000			1,000		203,000			—			—			—			204,000
	Stock-based compensation		—			—		72,000			—			20,000			—			92,000
	Note repayment		—			—		—			18,000			—			—			18,000

Balance, December 31, 2003			8,620,000		$	86,000	$	36,374,000		$	(764,000	)	$	(27,000	)	$	(13,466,000	)	$	22,203,000


1.	Nature of Operations and Significant Accounting Policies


Brewery and retail equipment		5 to 25 years
Furniture and fixtures		3 to 5 years
Leasehold improvements		Shorter of lease term or life of 3 to 25 years


		Year Ended
		December 31,
		2001

Net loss as reported		$	(1,615,000	)
Adjustments:
	Amortization of goodwill		80,000

Net loss as adjusted		$	(1,535,000	)

Basic and diluted net loss per share as reported		$	(0.20	)
Basic and diluted net loss per share as adjusted		$	(0.19	)



	Year Ended December 31,

	2003			2002			2001

Interest income	$	56,000		$	102,000		$	271,000
Interest expense		(5,000	)		(7,000	)		—
Parking income		216,000			234,000			257,000
(Loss) gain on sale of assets		(3,000	)		4,000			(10,000	)
Other income		48,000			47,000			24,000

Other income, net	$	312,000		$	380,000		$	542,000


	*Quantitative and Qualitative Disclosures about Market Risk*


	Expiration
Location	Year		Extension Options

Berkeley, California		2010	Two additional five year periods
Sacramento, California		2014	Two additional five year periods
Seattle, Washington		2004	Three additional five year periods
Walnut Creek, California		2012	Three additional five year periods and one additional four year period


2004		1,238,000
2005		1,033,000
2006		1,107,000
2007		1,109,000
2008		1,111,000
Thereafter		3,280,000

	$	8,878,000


		Beverage
		Operations		Alehouse		Other			Total


		(Dollars in thousands)
Year ended December 31, 2003
	Gross revenues from external customers	$	23,958	$	12,420	$	—		$	36,378
	Net revenues from external customers		22,205		12,420		—			34,625
	Intersegment revenues		442		—		(442	)		—
	Interest income		—		—		56			56
	Depreciation and amortization		1,564		668		211			2,443
	Operating income (loss)		1,915		719		(4,141	)		(1,507	)
	Capital expenditures		515		2,496		131			3,142
	Total assets		17,509		6,736		3,539			27,784
Year ended December 31, 2002
	Gross revenues from external customers	$	25,196	$	10,327	$	—		$	35,523
	Net revenues from external customers		23,485		10,327		—			33,812
	Intersegment revenues		359		—		(359	)		—
	Interest income		—		—		102			102
	Depreciation and amortization		1,601		439		162			2,202
	Operating income (loss)		1,671		975		(2,872	)		(226	)
	Capital expenditures		421		1,605		256			2,282
	Total assets		18,952		4,871		5,472			29,295
Year ended December 31, 2001
	Gross revenues from external customers	$	23,539	$	8,456	$	—		$	31,995
	Net revenues from external customers		21,967		8,456		—			30,423
	Intersegment revenues		292		—		(292	)		—
	Interest income		—		—		271			271
	Depreciation and amortization		1,582		414		145			2,141
	Operating income (loss)		257		944		(2,784	)		(1,583	)
	Capital expenditures		354		533		192			1,079
	Total assets		19,220		3,642		6,743			29,605


		Share Subject			Option Price		Average
		to Option			Range		Exercise Price

Options outstanding at December 31, 2000			1,212,000		$	1.56 - 12.25	$	2.56
	Granted		260,000		$	2.13 - 2.67	$	2.33
	Forfeitures		(246,000	)	$	1.82 - 10.75	$	3.25
	Exercised		(416,000	)	$	1.56 - 2.67	$	2.03

Options outstanding at December 31, 2001			810,000		$	1.56 - 12.25	$	2.55
	Granted		380,000		$	2.19 - 2.48	$	2.30
	Forfeitures		(189,000	)	$	1.70 - 12.25	$	2.29
	Exercised		(169,000	)	$	1.70 - 2.00	$	1.87

Options outstanding at December 31, 2002			832,000		$	1.56 - 10.75	$	2.63
	Granted		165,000		$	2.96 - 3.10	$	2.99
	Forfeitures		(148,000	)	$	2.33 - 10.75	$	2.95
	Exercised		(91,000	)	$	1.70 - 2.56	$	2.24

Options outstanding at December 31, 2003			758,000		$	1.56 - 10.75	$	2.69


		Weighted-
		Average				Weighted-
Options		Remaining		Options		Average
Outstanding		Contractual Life		Exercisable		Exercise Price

	22,500		29 Months		22,500	$	10.75
	5,000		36 Months		5,000	$	4.75
	6,000		38 Months		6,000	$	4.13
	66,000		54 Months		66,000	$	2.56
	1,700		57 Months		1,700	$	1.56
	50,000		70 Months		50,000	$	2.00
	10,000		72 Months		10,000	$	1.82
	10,000		76 Months		10,000	$	1.75
	11,200		77 Months		11,200	$	1.82
	16,500		79 Months		16,500	$	1.82
	100,000		83 Months		100,000	$	2.00
	15,000		88 Months		15,000	$	2.67
	75,000		90 Months		60,900	$	2.57
	5,000		96 Months		3,300	$	2.45
	10,000		98 Months		4,800	$	2.30
	14,600		98 Months		5,600	$	2.29
	25,000		100 Months		25,000	$	2.48
	49,500		100 Months		49,500	$	2.33
	100,000		105 Months		46,000	$	2.19
	25,000		112 Months		25,000	$	3.10
	120,000		117 Months		—	$	2.96
	20,000		120 Months		—	$	3.02

	758,000				554,000	$	2.69



	2003 Quarters Ended												2002 Quarters Ended

	December 31			September 30			June 30			March 31			December 31			September 30		June 30		March 31


	(in thousands except per share amounts)
Gross sales	$	8,755		$	10,765		$	9,882		$	6,976		$	8,641		$	9,871	$	10,177	$	6,834
Less excise taxes		426			493			481			353			434			463		472		342

Net sales		8,329			10,272			9,401			6,623			8,207			9,408		9,705		6,492
Cost of sales		7,189			8,082			6,901			5,468			6,255			6,947		7,021		5,136

Gross margin		1,140			2,190			2,500			1,155			1,952			2,461		2,684		1,356
Selling, general and administrative expenses		2,145			2,264			2,160			1,923			2,149			2,135		2,220		2,175

Operating (loss) income		(1,005	)		(74	)		340			(768	)		(197	)		326		464		(819	)
Other income, net		44			118			106			44			61			137		130		52

(Loss) income before income taxes		(961	)		44			446			(724	)		(136	)		463		594		(767	)
(Provision) benefit for income taxes		—			—			(2	)		(1	)		98			—		—		—

Net (loss) income	$	(961	)	$	44		$	444		$	(725	)	$	(38	)	$	463	$	594	$	(767	)
Basic and diluted net (loss) income per share	$	(0.11	)	$	0.01		$	0.05		$	(0.09	)	$	(0.00	)	$	0.06	$	0.07	$	(0.09	)

Weighted average basic shares outstanding		8,492			8,456			8,443			8,417			8,292			8,235		8,173		8,112

Weighted average diluted shares outstanding		8,492			8,655			8,665			8,417			8,292			8,294		8,242		8,112


Exhibit
No.			Description

	3	.1(1)	Amended and Restated Articles of Incorporation of Registrant
	3	.2(1)	Form of Amended and Restated Bylaws of Registrant
	3	.3	Rights Agreement between ChaseMellon Shareholder Services LLC and the Registrant dated June 14, 1999. (Incorporated by reference to the Current Report on Form 8-K dated June 17, 1999.)
	4	.1(1)	Form of Common Stock Certificate
	4	.4	Directors Compensation Plan (Incorporated by reference to the Registrant’s Form S-8 dates June 26, 2002)
	10	.1(1)	Lease between Harold W. Hill and the Registrant dated April 13, 1994
	10	.2(1)	Addendum of Lease between Harold W. Hill and the Registrant dated November 28, 1994
	10	.3(1)	Second Addendum of Lease between 1201 Building L.L.C. and the Registrant dated June 26, 1995
	10	.4(1)	Distribution Agreement between the Registrant and Western Washington Beverage dated August 24, 1995
	10	.5(1)	Registrant’s 1995 Employee Stock Option Plan
	10	.6(1)	Registrant’s Non-Employee Director Stock Option Plan
	10	.7(1)	Form of Non-Qualified Stock Option Agreement
	10	.8(1)	Commercial Lease between Esther Podlesak, Trustee of the John A. and Esther Podlesak 1990 Family Trust and Pyramid Breweries California, Inc. dated November 1, 1995
	10	.9(1)	Assignment, Assumption and Consent Agreement between Esther Podlesak, Trustee of the John A. and Esther Podlesak 1990 Family Trust, Pyramid Breweries California, Inc. and Pyramid Breweries Inc. dated November 17, 1995
	10	.10	Amended and Restated Employment Agreement between the Registrant and Martin Kelly dated June 19, 2001 (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
	10	.11	Employment Agreement between the Registrant and Gary McGrath (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.)
	10	.12	Assignment, Assumption and Consent Agreement between KLP Properties, Inc., Faultline Brewing Company, Inc., and the Registrant dated October 26, 2001. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.)
	10	.13	Sublease between KLP Properties, Inc. and Faultline Brewing Company, Inc. dated April 3, 1996 (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.)
	10	.14	Lease between Peter Vasconi and the James and Maura Belka Trust dated December 28, 1995. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.)
	10	.15	Stock Purchase Agreement and Promissory Notes between the Company and Martin Kelly (Incorporated by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2001.)
	10	.16	Commercial Lease between County Supervisors Association of California and Pyramid Breweries, Inc. dated April 15, 2002. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.)
	10	.17	Registrant’s 2003 Employee Stock Purchase Plan. (Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.)