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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-27116

Pyramid Breweries Inc.

91 So. Royal Brougham Way,

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

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

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

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

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

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

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

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

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PYRAMID BREWERIES INC.

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

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PART I

Item 1 — Business

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

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

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

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

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

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

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

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

Business Strategy

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

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

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

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

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

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

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

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

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

Products

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

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

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

Competition

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

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

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

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

Item 2 — Properties

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

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

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

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

Item 3 — Legal Proceedings

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

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

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

Item 4A — Executive Officers of the Company

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

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

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

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

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

PART II

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

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

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

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

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DIVIDEND POLICY

      On December 15, 1999, the Company announced a new dividend policy and declared its first quarterly cash dividend. The Company paid $1,391,000, or $0.172 per common share, of cash dividends during the fiscal year ended December 31, 2001. On February 12, 2002, the Board of Directors declared a quarterly cash dividend of $.044 per common share to shareholders of record on March 29, 2002. Any future declaration of dividends will depend, among other things, on the Company’s results of operations, capital requirements and financial condition, and on such other factors as the Company’s Board of Directors may in its discretion consider relevant.

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SELECTED FINANCIAL AND OPERATING DATA

Item 6 — Selected Financial Data

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

Selected Financial Data

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

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

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

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

Overview

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

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

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

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

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

      This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by that section. These forward-looking statements include, but are not limited to, statements concerning future revenues, operating margins, expenses and cash needs. The Company’s actual future results could differ materially from those projected in the forward-looking statements. Some factors, which could cause future actual results to differ materially from the Company’s recent results or those projected in the forward-looking statements, are described below. The Company assumes no obligation to update the forward-looking statements for such factors.

Critical Accounting Policies

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

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

      Long-Lived Assets Impairment. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company’s evaluation is based on an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less the estimated costs to sell. Long-lived assets are written down to their estimated net fair value calculated using a discounted future cash flows analysis in the event of an impairment. Effective in the fiscal year 2002, the Company will account for long-lived assets in accordance with Statement of Financial Accounting Standards