UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the transition period from            to             .

Commission file number 0-27116

PYRAMID BREWERIES INC.

91 South Royal Brougham Way,
Seattle, WA 98134
(Address of principal executive offices) (Zip Code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ.

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

     Common stock, par value of $.01 per share: 8,782,840 shares of Common Stock outstanding as of April 30, 2005

PYRAMID BREWERIES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

TABLE OF CONTENTS

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PART I

Item 1 — FINANCIAL STATEMENTS

PYRAMID BREWERIES INC.

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

The accompanying notes are an integral part of these statements.

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PYRAMID BREWERIES INC.

1. Basis of Presentation:

     Pyramid Breweries Inc. (the “Company”), a Washington corporation, is engaged in the brewing, marketing and selling of craft beers and premium sodas and in restaurant operations. The Company operates breweries in Seattle, Washington, Portland, Oregon and in Berkeley, Walnut Creek and Sacramento, California. The Company sells its beer through a network of selected independent distributors and alehouse locations primarily in Washington, Oregon and California. The Company’s core brands include Pyramid, MacTarnahans and Thomas Kemper Soda, its other smaller product lines are reported under the Allied Brand designation and include Thomas Kemper Beer, Saxer, and Nor’Wester. The Company also manufactures a line of gourmet sodas under the Thomas Kemper Soda Company label. As of March 31, 2005, the Company’s products were distributed in approximately 35 states and Canada. As of March 31, 2005, the Company also operated five restaurants adjacent to its breweries under the Pyramid Alehouse and MacTarnahans Taproom brand names.

     The Company established an entity, PBC Acquisition LLC, for the express purpose of acquiring certain assets from Portland Brewing Company. The Company also established Gilman Street Property LLC as a single purpose entity to act as the legal owner of the Berkeley Alehouse and Brewery property located at 901 Gilman Street, Berkeley, California. The assets of these entities are consolidated into the Company’s unaudited condensed consolidated financial statements for financial reporting purposes.

     Effective July 23, 2004, the Company completed its purchase of the Berkeley Brewery and Alehouse facility located at 901 Gilman Street, Berkeley, California 94710. Previously the Company had leased this facility. The Company’s lease obligations terminated with its purchase of the facility.

     The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. For a presentation including all disclosures required by generally accepted accounting principles, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004, included in the Annual Report on Form 10-K.

Stock Based Compensation

     At March 31, 2005, the Company has stock-based compensation plans which are described more fully in Note 18 of the Consolidated Audited Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock-Based Compensation.” Accordingly, no compensation cost has been recognized for the fair value of options issued under the Employee and Director Plans (the Plans) except that the Company is committed to granting 175,000 shares of restricted stock, and an additional 175,000 shares if certain performance criteria are met, to its CEO over a six year period as per the terms of his employment agreement. The Company has recorded $16,000 in stock based compensation on the fair value at the date of grant for options awarded under the Plans, the pro forma amounts of the Company’s net loss and net loss per share for the quarters ended March 31, 2005 and 2004, would have been as follows:

     The fair value of options granted in the first quarter of 2005 was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.9%; expected option lives of five years and expected volatility of 51%. There were no options granted in the first quarter of 2004.

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Revenue Recognition

     The Company recognizes revenue from the sale of wholesale beer and soda products at the time of shipment, when the title of the Company’s products passes to the customer, in accordance with distributor sales agreements, and collectibility is probable. The Company’s revenue from its alehouses is comprised of food, beverage and merchandise, and is recognized at the time of sale.

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2. Liquidity

     During the three month period ended March 31, 2005, the Company’s working capital decreased $685,000 to a negative $2,852,000. This decrease in working capital is the result of normal seasonality in its operating divisions, as the first quarter of the year is historically the slowest for the Company, as well as a result of the acquisition of the Portland Brewing Company assets and the addition of a third underutilized brewing facility. The Company’s operating activities used $644,000 in cash during the quarter. This cash utilization was the result of the reported net operating loss and also net cash used in investing activities of $288,000. The Company’s investment activities were primarily directed toward replacing and/or overhauling production equipment in the Portland Brewery. The cash used in operating and investing activities were principally funded by $1,125,000 in additional borrowings on the Company’s line of credit. As of March 31, 2005 the Company’s line of credit balance was $1,525,000 out of a maximum availability of $2,000,000.

     Management has announced several initiatives designed to improve operating results, increase working capital, and enhance production efficiencies in the Company’s operations. These initiatives include 1) consolidating the majority of the Company’s Seattle brewery production into the recently acquired Portland brewery in order to meet rising demand for its Pyramid branded products and to reduce production costs; 2) reductions in non-critical and redundant overhead costs throughout the Company; 3) elimination of unprofitable and low volume products to help streamline production; and 4) seeking major contract brewing arrangements with third parties for the purpose of increasing the utilization of the Company’s breweries.

     As of March 31, 2005 the Company had no cash and a working capital deficit of $2,852,000. However, because the Beverage Segment of the Company operates with short accounts receivable terms and the Alehouse Segment operates as a cash business, the Company typically tends to collect within 30 days of a sale or immediately upon sale. Therefore, the Company generally does not require a significant cash on hand balance to meet operating needs and Management believes that the Company has adequate financing to conduct its operations.

     The first quarter of the calendar year does tend to be the slowest season for the Company, followed by a strong season during the second and third quarter. As a result of seasonality, cash during the first quarter is needed to build inventory levels in preparation for second quarter sales activities. Company expects that the initiatives to improve operating results, the cash provided by operating activities and the funds available through the Company’s line of credit will provide adequate cash to meet the Company operating needs. The Company expects to implement these initiatives throughout 2005 with the majority of the changes being completed by mid-year. The impact of these changes are expected to improve the Company’s performance and to improve the Company’s cash position in the second half of the 2005. However, it is possible that some or all of the Company’s cash requirements may not be met by these activities which may require the Company to seek additional capital from other sources, which may or may not be available to the Company.

3. Inventories:

     Raw materials primarily include ingredients, flavorings and packaging. Work in process includes beer held in fermentation prior to the filtration and packaging processes. Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Inventory levels experience fluctuations in carrying levels and values based largely on seasonality.

4. Fixed Assets:

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5. Accrued Expenses

     Accrued expenses consist of the following:

6. Other (Expense) Income, net

     Other (Expense) Income, net consists of interest income and parking fee income, and other non-operating income and expenses as follows:

7. Loss per Share

     Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the quarter. The effect of stock options has not been included in the calculation of diluted net loss per share as the effect is antidilutive. Options to purchase approximately 1,061,000, and 628,000 shares of common stock were outstanding as of March 31, 2005 and 2004, respectively, but were not included in the computation of EPS because their effects are antidilutive.

8. Line of Credit

     The Company has a $2 million line of credit agreement with its bank. In February 2005, the Company modified its line of credit with its bank from 75% of accounts receivable to 80%, temporarily increasing the availability of funds during the first half of the year ending June 30, 2005. Under the revised terms of this agreement, the interest rate charged on the amounts outstanding has increased to prime plus 2% and a fee of ¹/2 percent has been charged by the Bank. The Company has also agreed to adhere to certain financial performance covenants and future dividends payments are subject to the Bank’s prior approval. The Company was in compliance with these covenants as of March 31, 2005. The line of credit revolves through December 31, 2005. The line of credit expires December 31, 2005.

9. Debt

     On January 27^th, 2005, the Company announced that it has entered into a long-term $7,850,000 securitized financing arrangement with Morgan Stanley Mortgage Capital Inc., for the purpose of refinancing the Company’s existing $7,200,000 short term note with Sugar

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Mountain Capital, LLC. The Company was required, as a term of the financing, to establish a wholly owned subsidiary as a single purpose entity, named Pyramid Gilman Street Property, LLC (the “Subsidiary”), to act as the legal owner of the property. The Subsidiary subsequently entered into a long-term promissory note, dated January 27, 2005, which has been secured by a deed of trust against the Company’s Berkeley, California Brewery and Alehouse facility. The terms of the long-term financing, include monthly payments of principal and interest for a period of ten years, interest charged at an annual rate of 5.77%, and a loan amortization period of thirty years. The promissory note is assumable and it generally does not allow for prepayments of principal other than through the regularly scheduled monthly payments. The loan is guaranteed by the Company and the financial statements of the Subsidiary are consolidated into the Company’s financial reports and filings. Other important terms of the financing include the requirement to place $500,000 of the proceeds of the loan in an interest bearing restricted reserve account and to deposit an additional $10,000 per month into an additional restricted reserve account until the balance of the second reserve account is at least $750,000. Additionally, the Company and its Subsidiary are required to create and fund a replacement reserve account for the purpose of funding capital repairs and replacements to the subject property. The replacement reserve account is funded by monthly payments of $1,729 until the total amount of the replacement reserve is at least $62,500. The restricted reserve replacement reserve account balances are recorded as long-term other assets on the balance sheet.

At March 31, 2005, future minimum payments are as follows:

10. Commitments and Contingencies:

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

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11. Cash Dividend

     The Board of Directors announced on November 3, 2004, the declaration of a $0.022 per common share dividend payable on January 14, 2005 to shareholders of record on December 31, 2004. The cash dividends declared in November 2004 totaled approximately $193,000 for all common stock outstanding as of the dates of record.

     On February 9, 2005, the Company also announced that its Board of Directors has determined to cease paying dividends at this time in order to reinvest the Company’s positive cash flow back into the business. 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.

12. Segment Information:

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

     Products and Services

     The Company’s reportable segments include beverage operations and alehouses. Beverage operations include the production and sale of Company beverage products including both beer and soda. The alehouse segment consists of five full-service alehouses, which market and sell the full line of the Company’s beer and soda products as well as food and certain merchandise.

     Factors used to identify reportable segments

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

     Measurement of segment profit and segment assets

     The accounting policies of the segments are the same as those described in the summary of critical accounting policies included in the notes to the financial statements included in the Company’s most recent Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. The Company records intersegment sales at cost.

Segment profit and segment assets are as follows:

Other

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

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain selected unaudited operating data, expressed as a percentage of net sales.

SELECTED UNAUDITED OPERATING DATA

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QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004

     Gross Sales. Gross sales increased 26.1%, to $10,457,000, in the first quarter ended March 31, 2005 from $8,290,000 in the same quarter of 2004. Wholesale beverage sales increased 35.0%, to $7,103,000, in the first quarter ended March 31, 2005 from $5,261,000 in the same quarter of 2004. Total beverage barrel shipments increased 34.8% compared to prior year. Pyramid beer brand shipments increased 4.3% to 27,000 barrels. Total beer shipments, including Allied beer and MacTarnahan’s, increased by 39.6% to 37,000 barrels. Gross Beverage segment sales per barrel increased slightly to $152.10 in the first quarter ended March 31, 2005 from $152.05 in the same quarter of 2004. The increase in the per barrel sales in the result of a shift in package mix between draft and bottled products from 50% bottled products in the first quarter of 2004 to 54% bottled in the first quarter of 2005. The shift in package mix is the result of the addition of the MacTarnahans family of brands and the growth of the Thomas Kemper Soda, both of which have a higher bottle to draft mix ratio. Shipments of Thomas Kemper Soda increased by 20.0%, to 9,700 barrels, from 8,100 barrels in the same quarter of the prior year. All five sales regions increased shipment volumes over the first quarter of 2004 with the Northwest and Southwest regions, the Company’s two largest, leading the way with 10.0% and 5.0% volume increases respectively. Alehouse sales increased 10.7%, to $3,354,000, in the first quarter ended March 31, 2005 from $3,029,000 in the same quarter of 2004 primarily due to the addition of the Portland Taproom, which was acquired on July 31, 2004 and contributed $460,000 in revenues for the quarter. On a same store basis, alehouse sales decreased $135,000 or 4.4% primarily due to decreased patronage at the Sacramento, California Alehouse.

     Excise Taxes. Excise taxes totaled 7.8% and 7.7% of gross beverage sales for the quarters ended March 31, 2005 and 2004, respectively. The increase in excise taxes as a percentage of gross sales was due mainly to an increase in beer sales volumes. Per beer barrel shipped excise taxes decreased slightly to $15.80 per beer barrel from $16.21 per barrel. This decrease is the result of a greater portion of the beverage sales to less taxed states and states where distributors pay the excise tax in the first quarter of 2005 compared to the first quarter of 2006. The Company calculates a weighted average cost per barrel for the year based on the tax rates in order to allocate excise tax costs throughout the year.

     Gross Margin. Gross margin increased 8.4%, or $117,000, to $1.5 million, driven primarily by the 34.8% increase in Beverage segment sales. Beverage segment cost of goods sold as a percentage of sales increased from 73.3% in the first quarter of 2004 to 76.1% in the first quarter of 2005, while beverage segment gross margin dollars increased $268,000 to $1,564,000. Beverage segment gross margin percentages decreased to 23.9% from 26.7% for the first quarter ended March 31, 2005. The decrease in beverage margins as a percentage of sales is the result of consolidating production operations from Seattle into the recently acquired Portland brewery, increasing freight costs which added $170,000 in cost, a 27.2% increase compared to the same quarter in 2004 and an increase in lower margin contract brewing production for third parties. Alehouse margin decreased to a loss of $60,000 compared to an $11,000 loss in 2004. The increase in the alehouse segment loss is the result of a focus on alehouse repairs and maintenance during the quarter ended March 31, 2005 in preparation for the higher volume spring and summer seasons as well as additional promotional activities. Alehouse repair and maintenance costs and promotional activities increased $30,000 and $36,000, respectively, over the same period in 2004.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the first quarter increased $173,000 over the same period in 2004. The additional expense was attributed to a $535,000 increase in selling and marketing expenses, related to additional marketing of the MacTarnahan family of brands acquired in July 2004, as well as increased selling efforts related to the acquired brands and growing the Pyramid brand family. Selling expenses for the quarter ended March 31, 2005 totaled $1,319,000, 20.2% of net beverage segment sales, compared to $948,000 and 19.5% of net beverage segment sales in the first quarter of 2004. General and administrative expenses for the first quarter of 2004 included $260,000 related to the change of the Company’s CEO in the first quarter of 2004. The Company incurred no similar costs during the first quarter of 2005.

     Other Income (Expense), net. Other income (expense), net decreased to an expense of $64,000 in the first quarter of 2005 from a $14,000 income in the first quarter of 2004. The primary change is interest expense associated with the Berkeley facility mortgage. For the first quarter of 2005 interest expense increased to $133,000 compared to $1,000 in the first quarter of 2004 partially offset by sublease income of $54,000 recorded for the Berkeley facility during the first quarter of 2005.

     Income Taxes. The Company recorded approximately $2,000 of income tax expense in the first quarter of 2005 related to certain state tax expense. For the most part, however, the Company recorded no income tax for the quarters ended March 31, 2005 and 2004. A valuation allowance was recorded against the deferred tax asset for the benefits of tax losses which may not be realized. Realization of the deferred tax assets is dependent on the Company’s ability to generate future U.S. taxable income. The Company does not believe that its net deferred assets meet the “more likely than not” realization criteria of SFAS No. 109. Accordingly, a full valuation allowance has been

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established. The Company will continue to evaluate the realizability of the deferred tax assets each quarter by assessing the need for and amount of a valuation allowance.

     Net Loss. The Company reported a net loss of $1,130,000 for the first quarter ended March 31, 2005 compared to a net loss of $996,000 in the same quarter of 2004. The increase in net loss is the result of increases in selling, general and administrative expenses as well as other expenses as described above partially offset by improvements in gross margin.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had a zero balance of cash, cash equivalents and short-term investments at March 31, 2005 and at December 31, 2004. At March 31, 2005 the Company’s working capital was a negative $2,852,000 compared to a negative $2,167,000 at December 31, 2004. Net cash used in operating activities for the quarter ended March 31, 2005 increased to $644,000 from $2,000 for quarter ended March 31, 2004. The increase in cash used in operating activities was primarily due to the $1,131,000 in net loss for the quarter offset by an increase in accounts payable in the quarter when compared to the first quarter of 2004. The elimination of the quarterly dividend also resulted in a $193,000 decrease in accrued dividends payable as of the quarter-end.

     Net cash used in investing activities for the quarter ended March 31, 2005 was $288,000 compared to net cash used in investing activities of $192,000 for the same period of the prior year. The cash used in investing activities in 2005 included approximately $85,000 used to replace and/or overhaul production equipment in the Portland Brewery and approximately $94,000 in various Alehouse projects.

     At March 31, 2005, the Company’s commitments to make future payments under contractual obligations were as follows:

     On February 9, 2005, the Company announced that its Board of Directors had determined to cease paying dividends in order to reinvest the Company’s positive cash flow back into the business. 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.

     On December 15, 1999, the Company also announced a stock buyback plan to repurchase up to $2,000,000 of the Company’s common stock from time to time on the open market. Stock purchases are at the discretion of management and depend, among other things, on the Company’s results of operations, capital requirements and financial condition, and on such other factors as the Company’s management may consider relevant. As of March 31, 2005, the Company has purchased and retired a total of 457,724 shares at an average price of $1.94 per share for a total of $892,000 since the inception of the program. The Company has not repurchased any shares since November 2001.

     During the quarter ended March 31, 2005, the Company’s working capital decreased $685,000 to a negative $2,852,000. This decrease in working capital is the result of normal seasonality in its operating divisions, as the first quarter of the year is historically the slowest for the Company, as well as a result of the acquisition of the Portland Brewing Company assets and the addition of a third underutilized brewing facility. The Company’s operating activities used $644,000 in cash during the quarter. This cash utilization was the result of the reported net operating loss and also net cash used in investing activities of $288,000. The Company’s investment activities were primarily directed toward replacing and/or overhauling production equipment in the Portland Brewery. The cash used in operating and investing activities were principally funded by $1,125,000 in additional borrowings on the Company’s line of credit. As of March 31, 2005 the Company’s line of credit balance was $1,525,000 out of a maximum availability of $2,000,000.

     Management has announced several initiatives designed to improve operating results, increase working capital, and enhance production efficiencies in the Company’s operations. These initiatives include 1) consolidating the majority of the Company’s Seattle brewery production into the recently acquired Portland brewery in order to meet rising demand for its Pyramid branded products and to reduce production costs; 2) reductions in non-critical and redundant overhead costs throughout the Company; 3) elimination of unprofitable and low volume products to help streamline production; and 4) seeking major contract brewing arrangements with third parties for the purpose of increasing the utilization of the Company’s breweries. Management believes that these initiatives will have a meaningful and positive impact on the Company’s future performance. The Company expects to implement these initiatives throughout 2005 with the majority of

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the changes being completed by mid-year. The impact of these changes are expected to improve the Company’s performance and to improve the Company’s cash position in the second half of the 2005.

     As of March 31, 2005 the Company had no cash and a working capital deficit. However, because the Beverage Segment of the Company operates with short accounts receivable terms and the Alehouse Segment operates as a cash business, the Company typically tends to collect within 30 days of a sale or immediately upon sale. Therefore, the Company generally does not require a significant cash on hand balance to meet operating needs and management believes that the Company has adequate liquidity to conduct its operations.

     The first quarter of the calendar year does tend to be the slowest season for the Company, followed by a strong season during the second and third quarter. As a result of seasonality, cash during the first quarter is needed to build inventory levels in preparation for second quarter sales activities. The Company expects that the initiatives to improve operating results, the cash provided by operating activities and the funds available through the Company’s line of credit will provide adequate cash to meet the Company operating needs. However, it is possible that some or all of the Company’s cash requirements may not be met by these activities which may require the Company to seek additional capital from other sources, which may or may not be available 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 from operations and, to the extent required and available, bank borrowings, will be sufficient for the Company’s working capital needs.

Critical Accounting Policies

To prepare financial statements that conform with accounting principles generally accepted in the United States, we must select and apply accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our accounting estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There are certain critical accounting estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

	•	it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate, and
	•	changes in the estimate or different estimates that we reasonably could have selected would have had a material impact on our financial condition or results of operations.

Our critical accounting policies are those that involve the most complex or subjective decisions or assessments. The Company believes that its critical accounting policies and estimates 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 its ability to realize 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 its ability to realize 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

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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.

     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective at the beginning of the reporting period of the next fiscal year. The Company intends to implement the provisions of SFAS No. 123R in the first quarter 2006.

     Promotional Activities Accrual. Throughout the year, the Company’s sales force engages in promotional activities with the Company’s distributor and retail customers. In connection with financial statement preparation and other financial reporting, management is required to make certain estimates and assumptions regarding the amount and timing of expenditures resulting from these activities. Actual expenditures incurred could differ from management’s estimates and assumptions. If management’s estimates and assumptions differ from the actual promotional activities incurred a timing difference could result either understating or overstating the actual promotional activity expense in a subsequent period. Because of the nature of promotional activities and the historical trends used in management analysis, management does not consider the potential timing differences to be a significant risk in the financial statement presentation.

     Allowance for Keg Deposits. The Company purchases kegs from vendors and records these assets in property, plant and equipment. When the kegs are shipped to the distributors, a keg deposit is collected. The deposit amount is based on, among other things, the size of the keg and the destination point. This deposit is refunded to the distributors upon return of the kegs to the Company. The keg deposit liability is recorded as a current liability. On a periodic basis, typically annually, management is required to make certain estimates regarding the physical count of kegs in the marketplace, estimated loss of kegs, expectations regarding keg returns and assumptions that affect the reported amounts of keg deposit liabilities and keg assets in property, plant and equipment at the date of the financial statements. Actual keg deposit liability could differ from the estimates. For the first quarter ended March 31, 2005, the allowance for keg deposits liability was approximately $584,000.

     RISK FACTORS AND FORWARD LOOKING STATEMENTS

     The Company does not provide forecasts of future financial performance. However this report does contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by that section. There are numerous important factors that could cause results to differ materially from those anticipated by some of the statements made by the Company. Investors are cautioned that all forward-looking statements involve a high degree of risk and uncertainty.

     Liquidity. The Company has no cash, a negative working capital and a net cash used in operating and investing activities for the quarter ended March 31, 2005. In addition, the Company's line of credit expires on December 31, 2005 and therefore must be paid in full at that time. At March 31, 2005, the total borrowing on the line of credit was $1,525,000. Although the Company expects the initiatives underway to drive additional sales and eliminate redundant costs, there is no guarantee that the savings will be sufficient to meet the cash operating and investing needs as the company as well as pay off the line of credit.

     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.

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     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 2005.

     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, Oregon state excise tax is $2.60 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 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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

ITEM 4. Controls and Procedures

Procedures

     Evaluation of disclosure controls and procedure

     The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report and

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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.

     Changes in internal controls

     There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 6. EXHIBITS

Items 1, 2, 3, 4 and 5 of PART II are not applicable and have been omitted

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SIGNATURE

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

DATE: May 16, 2005

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